ExpertHard1 markMultiple Choice
CPA · Question 01 · Area I: Business Analysis
Orion Manufacturing is analyzing its working capital efficiency. For the current year, Orion reported the following average balances and income statement amounts:<br/><br/>- Average Inventory: $800,000<br/>- Average Accounts Receivable: $600,000<br/>- Average Accounts Payable: $450,000<br/>- Net Sales: $7,300,000<br/>- Cost of Goods Sold: $4,380,000<br/>- Purchases: $4,500,000<br/><br/>Assume a 365-day year. What is Orion's Cash Conversion Cycle (CCC)?
Orion Manufacturing is analyzing its working capital efficiency. For the current year, Orion reported the following average balances and income statement amounts:<br/><br/>- Average Inventory: $800,000<br/>- Average Accounts Receivable: $600,000<br/>- Average Accounts Payable: $450,000<br/>- Net Sales: $7,300,000<br/>- Cost of Goods Sold: $4,380,000<br/>- Purchases: $4,500,000<br/><br/>Assume a 365-day year. What is Orion's Cash Conversion Cycle (CCC)?
Answer options:
A.
60.2 days
B.
60.2 days
C.
96.7 days
D.
133.2 days
How to approach this question
Calculate Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO) separately. Then apply the formula: CCC = DIO + DSO - DPO.
Full Answer
B.60.2 days✓ Correct
The Cash Conversion Cycle measures the time between cash outflow for inventory and cash inflow from sales. <br/>1. DIO = (Average Inventory / COGS) × 365 = ($800,000 / $4,380,000) × 365 = 66.67 days.<br/>2. DSO = (Average AR / Net Sales) × 365 = ($600,000 / $7,300,000) × 365 = 30.00 days.<br/>3. DPO = (Average AP / Purchases) × 365 = ($450,000 / $4,500,000) × 365 = 36.50 days.<br/>4. CCC = DIO + DSO - DPO = 66.67 + 30.00 - 36.50 = 60.17 days (approx 60.2).
Common mistakes
Adding DPO instead of subtracting it; using Sales instead of COGS for DIO; using COGS instead of Purchases for DPO.
Practice the full CPA BAR Practice Exam 5
50 questions · hints · full answers · grading
More questions from this exam
Q02Vanguard Corp. uses a standard costing system. For the month of June, the following data is avail...HardQ03Titan Industries is evaluating a new project with the following projected cash flows:<br/>- Initi...MediumQ04Under ASC 606, which of the following scenarios BEST describes a performance obligation that is s...MediumQ05Blue City's General Fund reported the following for the fiscal year:<br/>- Property taxes levied:...HardQ06Alpha Corp. acquires 100% of Beta Inc. for $1,200,000 in cash. At the acquisition date, Beta's ne...Medium