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CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A retailer's cash conversion cycle is currently 45 days. If the retailer negotiates longer payment terms with suppliers, with no other change, its cash conversion cycle will most likely:

The cycle will most likely shorten because days of payables outstanding increase. The cash conversion cycle equals days inventory plus days receivables minus days payables, so paying suppliers later means the firm finances operations with supplier credit for longer and needs less of its own cash.

  1. Alengthen because payables turnover rises
  2. Bshorten because days of payables outstanding increaseCorrect
  3. Cremain 45 days because supplier terms affect only profit

Explanation

Cash conversion cycle = days of inventory + days of receivables − days of payables. Longer supplier terms raise days of payables outstanding, which reduces the cycle. Payables turnover would fall, not rise.

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