Which of the following is/are true about the cash conversion cycle?
I. It increases as the inventory turnover ratio decreases.
II. It decreases as inventory processing period decreases.
III. It is directly proportional to the payables payment period.
IV. It increases as the cash ratio decreases.
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A. B. C. D.D
The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. Therefore cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). Now, an increase in inventory ratio decreases inventory processing time, lowering the CCC. Also, an increase in the payables payment period decreases the CCC. However, CCC is independent of the cash ratio.