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/an ________.
A) decrease of 30 days in the cash conversion cycle
B) increase of 15 days in the cash conversion cycle
C) decrease of 15 days in the cash conversion cycle
D) increase of 30 days in the cash conversion cycle

Question

Quizplus · Accepted Answer

The cash conversion cycle (CCC) is calculated as follows:

CCC = Inventory conversion period + Receivables conversion period - Payables deferral period

If the firm's current CCC is 175 days and it increases its average payment period from 30 days to 45 days, then the Payables deferral period will increase from 30 days to 45 days.

This will lead to a decrease in the CCC as follows:

CCC = Inventory conversion period + Receivables conversion period - Payables deferral period

CCC = (same) + (same) - 15 days

Therefore, the new CCC will be 160 days (175 - 15), which is a decrease of 15 days. The correct answer is C.

A Firm with a Cash Conversion Cycle of 175 Days