Answer-first summary for fast verification
Answer: deteriorated.
The cash conversion cycle (CCC) is calculated as: \[ CCC = \text{Days of Inventory on Hand (DOH)} + \text{Days of Sales Outstanding (DSO)} - \text{Number of Days of Payables} \] **Calculation for Year 1:** - Number of Days of Payables = 365 / Payables Turnover = 365 / 18 ≈ 20.2778 - CCC = 13 (DOH) + 22 (DSO) - 20.2778 ≈ 14.7222 **Calculation for Year 2:** - Number of Days of Payables = 365 / 36 ≈ 10.1389 - CCC = 11 (DOH) + 24 (DSO) - 10.1389 ≈ 24.8611 **Analysis:** The CCC increased from 14.7222 in Year 1 to 24.8611 in Year 2, indicating a longer cycle. A longer CCC suggests lower liquidity, meaning the company's liquidity position deteriorated. **Why B and C are Incorrect:** - **B** ignores the change in the number of days of payables, leading to an incorrect conclusion of unchanged liquidity. - **C** incorrectly uses the payables turnover directly in the CCC calculation, resulting in a misleading improvement in liquidity.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
An analyst gathers the following information about a company: Year 2 Year 1 Days of inventory on hand 11 13 Days of sales outstanding 24 22 Payables turnover 36 18 Based solely on the cash conversion cycle, the company's liquidity position from Year 1 to Year 2 has:
A
deteriorated.
B
remained unchanged.
C
improved.