The difference between the number of days resources are tied up in the operating cycle and the number of days a firm can use spontaneous financing before payment is made is the ________.
A) cash conversion cycle
B) average payment period
C) operating cycle
D) average age of inventory

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated by subtracting the average payment period from the operating cycle. The operating cycle measures the time it takes for a firm to convert inventory into cash, while the average payment period measures the time a firm takes to pay its suppliers. Therefore, the difference between these two represents the amount of time a firm can use spontaneous financing before it needs to pay its suppliers, which is the cash conversion cycle. Option B (average payment period) only measures how long it takes for a firm to pay its suppliers, while option C (operating cycle) only measures the time it takes for a firm to convert inventory into cash. Option D (average age of inventory) only measures the age of inventory, which doesn't include accounts payable or accounts receivable.

The Difference Between the Number of Days Resources Are Tied