1) Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs?
a. Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.
b. Current assets should be divided by sales, but current liabilities should be divided by the COGS.
2) Is there generally a positive or negative relationship between net working capital and the cash conversion cycle? (In other words, if a firm has a high level of net working capital, is it likely to have a high or low cash conversion cycle?)
a. There is a negative relationship between net working capital and the cash conversion cycle
b. There is a positive relationship between net working capital and the cash conversion cycle.