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1. Suppose you manage a clothing retailer. You find out that the optimal time to keep inventory on hand is forty five days. This is the amount required to keep clothing on the shelf of all sizes, but not too much which you have to put items on discount at the end of season. You purchase on credit, and your creditors don’t charge interest till you are 45 days overdue. Therefore, you pay them every forty five days. To attract the highest sales, you let your customers to pay on credit. Half of customers pay with cash, and the other half pay on average over 60 days. What is your operating cycle and cash conversion cycle?

a) Operating cycle = 105; cash conversion cycle = 60
b) Operating cycle = 45; cash conversion cycle = 45
c) Operating cycle = 0; cash conversion cycle = 60
d) Operating cycle = 75; cash conversion cycle = 30
e) Operating cycle = 45; cash conversion cycle = -15

Financial Accounting, Accounting

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