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Company H has a seasonal business and the following liquidity ratios have been observed.
Maximum Minimum
Receivables days 65 35
Payables days 40 30
Inventory days 50 15If inventory levels are high at the same time as payables are high, and this coincides with periods of low receivables – what is the longest cash operating cycle that Company H can expect during the year?
I worked out as 45 days (high inv + low receivables – high payables), however, the correct answer is 50 days.
The model answer is: high receivables + low inventory – low payables = 65 + 15 – 30 = 50
But isn’t this completely in contrast with the assumption of the question?Can you please explain why?
Looking forward to your response,
Iniss.Where is this question from?
If inventory levels are high at the same time as payables are high, and this coincides with periods of low receivables – what is the longest cash operating cycle that Company H can expect during the year?
So what is the longest that they can expect so in essence 50 days is longer than 45 days
This question is from StaySharp (my online learning website)
The maximum operating cycle of 50 days is when inventory and payables are low while receivables is high, however, the question said inventory and payables are high while receivables is low, isn’t it?
I have answered this question
So what is the longest that they can expect so in essence 50 days is longer than 45 days
Ask them to clarify………
But the cash operating cycle is the time it takes for a company to convert its investment in inventory and other resources into cash flows from sales. It involves three major components: receivables days, inventory days, and payables days.
In this case
65 + 15 – 30 = 50 days
35 + 50 – 40 = 45 days
Which one is the LONGEST!!!!!!
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