ICANBusiness, Management and FinanceWorking Capital Management2021

Abuja Foods Limited purchases raw materials worth ₦54,000,000 annually on credit. The average trade payables balance is ₦7,500,000. The raw materials holding period is 60 days, work-in-progress period is 20 days, finished goods holding period is 30 days, and the receivables collection period is 45 days. What is the cash operating cycle? (Assume a 360-day year.)

A155 days
B105 daysCORRECT
C100 days
D95 days
AI
Toaster Teacher
Why the answer is B, and why the others tempt you.
Payables payment period = (₦7,500,000 ÷ ₦54,000,000) × 360 = 50 days. Cash operating cycle = 60 + 20 + 30 + 45 − 50 = 105 days. The gross operating cycle is 155 days, but subtracting the payables period of 50 days gives the net cash cycle of 105 days. A longer cash cycle indicates greater working capital funding requirements.
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