CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company's treasurer is considering stretching accounts payable well beyond the agreed terms to conserve cash. The most likely risk of this action is:
The most likely risk is damaged supplier relationships and a weaker credit standing. Suppliers may tighten terms, raise prices or restrict supply, while payables timing has no direct effect on receivable collection days or inventory turnover.
- Aa lower inventory turnover ratio
- Ba higher reported days of sales outstanding
- Cdamaged supplier relationships and a weaker credit standingCorrect
Explanation
Paying late can lead suppliers to tighten terms, raise prices or withhold supply, and can harm the firm's credit reputation. Payables timing does not directly alter days of sales outstanding or inventory turnover.
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