A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a(n)
A) decrease of 30 days in the cash conversion cycle.
B) decrease of 15 days in the cash conversion cycle.
C) increase of 15 days in the cash conversion cycle.
D) increase of 30 days in the cash conversion cycle.

Question

Quizplus · Accepted Answer

Increasing the payment period from 30 days to 45 days will lengthen the accounts payable period by 15 days. Since the cash conversion cycle is calculated by adding the accounts receivable period, inventory period, and accounts payable period, increasing the accounts payable period will decrease the cash conversion cycle by 15 days. Therefore, the correct option is B.

A Firm with a Cash Conversion Cycle of 175 Days