How to approach it
- Derive cost of sales from sales and mark-up, and purchases from cost of sales adjusted for the inventory movement.
- Inventory days = inventory ÷ cost of sales × 365; receivable days = receivables ÷ credit sales × 365; payable days = payables ÷ credit purchases × 365.
- Cycle = inventory days + receivable days − payable days. State whether you used closing or average balances.
- For window-dressing, give actions possible in the last week or two: they must be temporary and quick.
Key rules to apply
- Exclude cash sales from the receivables denominator.
- Payables relate to purchases, not cost of sales; adjust for the change in inventory.
- Window dressing: delaying payments to suppliers, chasing receivables or offering early-payment discounts, deferring purchases, running down inventory before the count.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Using total sales for receivable days or cost of sales for payable days (examiners' point).
- Suggesting long-term process improvements when the question asks for steps in the final week or two.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q6 without copying it.
Original practice question
Cash operating cycle
Sales Rs 800m, of which 20% cash; mark-up 25% on cost. Inventory: opening Rs 80m, closing Rs 100m. Closing receivables Rs 96m, closing payables Rs 70m. All purchases are on credit.
Required: Calculate the cash operating cycle on closing balances.
Worked solution
| Working | Value |
|---|---|
| Cost of sales: 800 ÷ 1.25 | Rs 640m |
| Credit sales: 800 × 80% | Rs 640m |
| Purchases: 640 + 100 − 80 | Rs 660m |
| Inventory days: 100 ÷ 640 × 365 | 57.0 |
| Receivable days: 96 ÷ 640 × 365 | 54.8 |
| Payable days: 70 ÷ 660 × 365 | (38.7) |
| Cash operating cycle | 73.1 days |
Answer: About 73 days.