The cash conversion cycle is computed as:

• A. Days Sales Outstanding + Days Payables Outstanding - Days Inventory Outstanding
• B. Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding
• C. Days Inventory Outstanding + Days Payables Outstanding - Days Sales Outstanding
• D. Days Payables Outstanding + Days Inventory Outstanding + Days Sales Outstanding

Answer: (B)

Verified step by step guidance

1. Understand the concept of the cash conversion cycle (CCC): It measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. The formula involves three components: Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payables Outstanding (DPO).
2. Review the formula for the cash conversion cycle: CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO). This formula reflects the time taken to sell inventory and collect receivables, minus the time taken to pay suppliers.
3. Analyze the components: Days Inventory Outstanding (DIO) measures how long inventory is held before being sold. Days Sales Outstanding (DSO) measures the average time taken to collect payment after a sale. Days Payables Outstanding (DPO) measures the average time taken to pay suppliers after receiving inventory.
4. Compare the given options: The correct formula is DIO + DSO - DPO, as it aligns with the definition of the cash conversion cycle. Carefully eliminate options that do not follow this structure.
5. Verify the logic: Ensure that the formula makes sense conceptually. Adding DIO and DSO accounts for the time taken to sell inventory and collect receivables, while subtracting DPO accounts for the time taken to pay suppliers, which reduces the overall cycle duration.