Question

Question 19.19. Which of the following is/are TRUE?

I. A firm's cash conversion cycle is equal to its operating cycle minus its payables deferrable period.

II. Under a conservative approach to working capital management, a firm tends to hold a relatively large proportion of its total assets in the form of current assets.
(Points : 3.4)

       I only
       II only
       Both I and II
       Neither I nor II

Answer 1

Hello

The correct answer is BOTH I and II

I.

Cash Conversion Cycle = Days of Inventory Outstanding + Days of sales outstanding - Days of Payables outstanding.

Operating Cycle = Days of Inventory Outstanding + Days of Sales Outstanding

Hence Difference betweem cash conversion and operating cycle is the payable defferable period.

Hence, I is true.

II.

Under conservative approach of working capital management, entity undertakes a risk-free approach and funds a large proportion of its capital requirements using long term sources and maintain a higher level of current assets.

Hence, II is true.

I hope you this clears your query.

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