Question

Which of the following items would cause the cash conversion cycle to decrease?

(a) Increasing days payable outstanding.
(b) Increasing the average collection period.
(c) Increasing the days inventory held.
(d) None of the above

Answer 1

Increasing days payable outstanding would decrease the cash conversion cycle as it allows the company to retain cash longer by extending the time it takes to pay suppliers.

Step-by-step explanation:

The cash conversion cycle (CCC) is a metric used in finance to measure the efficiency with which a company manages its cash flows related to production and sales processes. Specifically, the CCC measures the time elapsed between the outflow of cash for production expenses and the inflow of cash from sales to customers. To answer the student's question, among the provided options, increasing days payable outstanding would decrease the cash conversion cycle. This is because if a company takes longer to pay its suppliers, it retains cash longer, thereby shortening the CCC.

On the other hand, increasing the average collection period or increasing the days inventory held would actually increase the CCC, as both would imply a longer time to convert inventory and receivables into cash. Hence, the correct answer to the question is (a) Increasing days payable outstanding.