Which of the following would result in a negative cash conversion cycle?
A)A negative cash conversion cycle is not possible
B)Average collection period of 7 days, inventory conversion period of 30 days and payables deferral period of 30 days
C)Average collection period of 60 days, inventory conversion period of 30 days, payables deferral period of 7 days
D)Average collection period of 7 days, inventory conversion period of 30 days, payables deferral period of 60 days

Question

Quizplus · Accepted Answer

A negative cash conversion cycle occurs when a company can collect cash from customers, sell inventory and pay suppliers for goods or services received. This means that the cash is being received from customers before the company has to pay its suppliers. In option D, the average collection period is 7 days, while the inventory conversion period is 30 days and the payables deferral period is 60 days. This means that the company is collecting cash in 7 days, holding inventory for 30 days, and paying suppliers after 60 days. This results in a negative cash conversion cycle of 23 days (7 days + 30 days - 60 days). Therefore, option D is the best choice for a negative cash conversion cycle.

Which of the Following Would Result in a Negative Cash