{"id":2236,"date":"2019-09-12T17:42:00","date_gmt":"2019-09-12T17:42:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2236"},"modified":"2026-03-19T08:04:53","modified_gmt":"2026-03-19T08:04:53","slug":"operating-cash-conversion-cycles","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/operating-cash-conversion-cycles\/","title":{"rendered":"Operating and Cash Conversion Cycles"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Working Capital Management (2021 Level I CFA\u00ae Exam \u2013 Reading 35)\",\n  \"description\": \"This video lesson covers working capital management, focusing on liquidity sources, cash flow timing, key ratios, and the operating cycle. It explains how managing short-term assets and liabilities\u2014like receivables, payables, and inventory\u2014helps maximize shareholder wealth through effective liquidity, investment, and short-term financing decisions.\",\n  \"uploadDate\": \"2018-10-25T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/7ODf4zqxNxo\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=7ODf4zqxNxo\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/7ODf4zqxNxo\",\n  \"duration\": \"PT19M42S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What is the operating cycle for the company based on the provided financial data?\",\n    \"text\": \"You have been provided the following financial data about a firm: credit sales of 15,000; cost of goods sold of 12,000; accounts receivable of 1,800; beginning inventory of 1,650; ending inventory of 1,400; and average inventory of 1,525. What is the operating cycle for this company?\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The operating cycle is closest to 90.17 days. The operating cycle is calculated as the number of days of inventory plus the number of days of receivables. Days of inventory equal 1,525 divided by (12,000 divided by 365), which is approximately 46.37 days. Days of receivables equal 1,800 divided by (15,000 divided by 365), which is approximately 43.8 days. Adding these together gives an operating cycle of about 90.17 days.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/7ODf4zqxNxo\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n\n\n\n<p>A company\u2019s number of days of payables, number of days of receivables, and number of days of inventory may be combined to indicate its operating cycle and net operating cycle.<\/p>\n<p>The operating cycle and net operating cycle are two measures which help to evaluate how effective a company is in generating cash from the sale of inventory. A company which is able to generate cash in a timely manner will have less need for external financing.<\/p>\n<div style=\"text-align:center; margin: 25px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:10px 18px; border:2px solid #1a73e8; border-radius:999px; color:#1a73e8; text-decoration:none; font-weight:500; background-color:#f5f9ff; white-space:nowrap;\">\n    Master operating cycle and cash conversion cycle analysis\n  <\/a>\n<\/div>\n<h2><strong>Evaluating Working Capital Effectiveness<\/strong><\/h2>\n<h3><strong>Operating cycle<\/strong><\/h3>\n<p>The time that a company needs to convert its raw materials into cash from sales is known as its operating cycle.<\/p>\n<p>In the form of an equation,<\/p>\n<p><em>Operating cycle = No. of days of inventory + No. of days of receivables<\/em><\/p>\n<h3><strong>Net operating cycle<\/strong><\/h3>\n<p>A company can increase the cash that it has available by deferring the payments that it makes to its suppliers. This deferral is taken into consideration in determining the company\u2019s net operating cycle, otherwise referred to as its cash conversion cycle.<\/p>\n<p>The net operating cycle measures the time from a company pays its suppliers for raw materials to the time it collects cash from the subsequent sale of the goods produced from these supplies.<\/p>\n<p>In the form of an equation,<\/p>\n<p><em>Net operating cycle = Operating cycle &#8211; No. of days of&nbsp;payables<\/em><\/p>\n<p>Or<\/p>\n<p><em>Net operating cycle = No. of days of inventory + No. of days of receivables &#8211; No. of days of&nbsp;payables<\/em><\/p>\n<h2><strong>Peer Company Comparison \u2013 Working Capital Effectiveness<\/strong><\/h2>\n<p>The shorter a company\u2019s operating cycle and cash conversion cycle, the greater is its cash-generating ability and the less need it has for liquid assets or external financing. Therefore, a company which has a shorter operating cycle or cash conversion cycle relative to its peers is said to have a&nbsp;more effective management of its working capital than its peers.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>You have been provided the following financial data about a firm:<\/p>\n<p>\n$$ \\begin{array}{l|r}\n\\text{Credit sales}\t&amp; {15,000} \\\\ \\hline\n\\text{Cost of goods sold} &amp;\t{12,000} \\\\ \\hline\n\\text{Accounts receivable} &amp;\t{1,800} \\\\ \\hline\n{\\text{Inventory } \u2013 \\text{ Beginning balance}} &amp; {1,650} \\\\ \\hline\n{\\text{Inventory } \u2013 \\text { Ending balance}} &amp;\t{1,400} \\\\ \\hline\n{\\text{Inventory } \u2013 \\text { Average inventory}} &amp;\t{1,525} \\\\ \\hline\n\\text{Accounts payable} &amp; {1,200} \\\\ \n\\end{array} $$ <\/p>\n<p>The operating cycle for this company is <em>closest to<\/em>:<\/p>\n<p>A. 90.17 days.<\/p>\n<p>B. 74.521 days.<\/p>\n<p>C. 102.698 days.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is A.<\/p>\n<p>Operating cycle = No. of days of inventory + No. of days of receivables.<\/p>\n<p>Average Inventory = (1,650 + 1,400\/2) = 1,525<\/p>\n<p>No. of days of inventory = 1,525\/(12,000\/365) = 46.37 days<\/p>\n<p>No. of days of receivables = 1,800\/(15,000\/365) = 43.8 days<\/p>\n<p>Therefore, Operating cycle = 46.37 days + 43.8 days = 90.17 days<\/p>\n<\/blockquote>\n<p>&nbsp;<\/p>\n<p><em>Reading 35 LOS 35c:<\/em><\/p>\n<p><em>Evaluate working capital effectiveness of a company based on its operating and cash conversion cycles and compare the company\u2019s effectiveness with that of peer companies<\/em><\/p>\n<div class=\"notes_inv\"><hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/learning-sessions-curriculum-corporate-finance\/\"><em>Corporate Finance &#8211; Learning Sessions<\/em><\/a><\/p><\/div>\n<div style=\"text-align:center; margin: 40px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:12px 20px; border-radius:999px; background-color:#1a73e8; color:#ffffff; text-decoration:none; font-weight:600;\">\n    Start Free Trial \u2192\n  <\/a>\n  <p style=\"font-size:15px; margin-top:12px; color:#555;\">\n    Learn how to evaluate working capital efficiency using operating cycle and cash conversion cycle metrics, and apply these concepts to CFA Level I exam questions.\n  <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A company\u2019s number of days of payables, number of days of receivables, and number of days of inventory may be combined to indicate its operating cycle and net operating cycle. The operating cycle and net operating cycle are two measures&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"class_list":["post-2236","post","type-post","status-publish","format-standard","hentry","category-corporate-finance","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Operating &amp; Cash Conversion Cycles | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn how to calculate and interpret a company\u2019s operating and cash conversion cycles using payables, receivables, and inventory days.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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