the below doesnt make any sense even with the suggested answer. Would appreciate if you could help to explain how the 24% is derived.
Many thanks
If a firm’s annual days sales in payables (DSP) was 60 days, and the annual cost of goods sold is expected to increase by 22% (and the number of days remain constant), which of the following changes in the end-of-period accounts payable balance will most likely improve (increase) the operating cash flow?
A 24% decrease. B 20% increase. C 24% increase
C is correct. If the accounts payable balance increases by 24%, the days sales payable (DSP) becomes 61 days = (60 days) × (1 + 24%) / (1 + 22%). Thus, the DSP has increased from 60 to 61 days, meaning the company has slowed its payments to vendors, increased accounts payable and thereby increased its operating cash flow. [DSP = (Accounts payable / Costs of goods sold) × (Number of days)].
The question is itself confusing; it says If a firm’s annual days sales in payables (DSP) was 60 days, and the annual cost of goods sold is expected to increase by 22% (and the number of days remain constant)
If the days are to remain constant, then even a/c Payable should increase by 22%. A 20% increase would decrease the DSP and 24% increase would increase the days sales payable
Regardless of where the question came from, I think you can solve it with logic, rather than calculations.
They ask which change to A/P will most likely increase OCF: A is incorrect, because increasing COGS and decreasing A/P balance would imply more cash paid out (to fund COGS and reduce payables). Choices B and C both suggest a higher OCF purely from the increase in A/P balance. Given the two choices of B and C, it seem most likely that a larger percentage increase in A/P will increase OCF (more). Answer C is the best choice.