Which equation represents the Working Capital Cycle?

The Working Capital Cycle is a crucial concept in understanding how efficiently a business manages its short-term assets and liabilities. It represents the time taken to convert net current assets and current liabilities into cash. The equation that aptly captures this cycle is the summation of Inventory Days and Receivable Days, reduced by Payable Days.

Inventory Days measures how long it takes for a company to sell its inventory. Receivable Days reflects the average time a company takes to collect payment from its customers. Payable Days indicates the time a company takes to pay its suppliers. By combining these three components as outlined in the correct equation, you can determine the overall time frame in which a business operates within its working capital cycle — giving insights into liquidity and working capital management.

In this context, the other options don't represent the Working Capital Cycle. Trade Payables relative to Cost of Sales over a specific period focuses on a different aspect of financial analysis, while the ratio of Current Assets to Current Liabilities is a measure of liquidity but does not illustrate the dynamic nature of the working capital cycle. The last option calculates a profitability ratio rather than offering insight into the operational efficiency concerning working capital. Thus, the chosen equation effectively captures the essence of the Working Capital Cycle, illustrating how these components interact