A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by 3 days by reducing processing, mail, and clearing float. The firm's cash conversion cycle ________.
A) increases by 3 days
B) decreases by 3 days
C) increases by 6 days
D) decreases by 6 days

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as the average collection period plus the average age of inventory minus the average payment period. Reducing the average collection period by 3 days directly reduces the cash conversion cycle by the same amount, hence it decreases by 3 days.

A Firm Has Arranged for a Lockbox System to Reduce