CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A retailer negotiates longer payment terms with its suppliers while all other working capital policies stay the same. The change will most likely:
Longer supplier payment terms will most likely shorten the cash conversion cycle. They increase days of payables, which is subtracted in the calculation, while the operating cycle, made of inventory days and receivables days, 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 operating cycle is DIO + DSO and is unaffected, while the cash conversion cycle falls because payables days are subtracted.
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