CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A distributor negotiates longer payment terms with its suppliers, with no change in inventory or receivables policies. All else equal, the change is most likely to:
Longer supplier payment terms most likely shorten the cash conversion cycle. Days of payables rise and are subtracted in the calculation, while the operating cycle, which excludes payables, stays unchanged.
- Alengthen the operating cycle
- Bshorten the cash conversion cycleCorrect
- Clengthen the cash conversion cycle
Explanation
Longer payment terms raise days of payables. The cash conversion cycle subtracts payables days, so it shortens. The operating cycle excludes payables and is unchanged, so the first option is wrong.
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