Question

Which of the following would most likely result from an increase in DPO?

a) Lower daily CGS
b) Reduced firm liquidity
c) Decreased operating cash flow
d) Increased operating cash flow

Answer 1

Increasing DPO can result in reduced firm liquidity.

Step-by-step explanation:

Increasing DPO (Days Payable Outstanding) refers to the number of days it takes a company to pay its suppliers. An increase in DPO means that the company is taking longer to pay its suppliers. One of the effects of this increase is that it can result in a reduced firm liquidity. When a company delay paying its suppliers, it can free up cash and improve its liquidity position.

However, the increase in DPO does not directly impact the daily cost of goods sold (CGS) or the operating cash flow. It is important to note that while an increase in DPO can improve liquidity in the short term, it can also strain relationships with suppliers if the company delays payments for an extended period of time.