Receivables Outstanding

A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most likely conclude that the firm: A) may have credit policies that are too strict. B) has better credit controls than its peer companies. C) has a lower cash conversion cycle than its peer companies A is correct. I know this Qbank question has been discussed before, but I just wanted to make sure. Is A correct because it uses the word “may”?

Yes. Days of receivables should generally be around the same as the industry average. On a sidebote, why is © incorrect? Having a days of receivables of 22 WOULD lower the CCC as compared to the industry average of 29?

C is obvious. Analyst’s input is not required. A is more an intuition, an analyst would use for analysis.

^ Yeah but come on, it’s kind of dumb to ask a question on the exam where you’re supposed to sit and judge what is something an analyst would think about

I thought C was incorrect because a lower days receivable would only mean a lower cash conversion cycle if the days payable outstanding and days inventory were the same or better than industry peers. This can’t be assumed. So C would only be correct if it said “… may have…” Again, it comes down to “may” and “does”

^ Yeah good point, that’s probably it.

Agreed, the context of the question (may vs does) would determine an A vs C response.

Bad question. I would think is was C, but it is what it is. I think that concluding to strick of credit is a big assumption. To strick for who?

what about B? also B is correct in the context.

raduandrei21 Wrote: ------------------------------------------------------- > what about B? also B is correct in the context. Not true. Tighter credit controls does not mean imply better credit controls as they may be giving up sales. I concluded A is correct using the same reasoning Nbyz did- A/P or inventory could be very high or low as well, therefore the CCC could be anything.

i feel A is d right answer since b is def nt the 1…and c says its cash conv cycle is lower than peer co. bt it more often cannot be since der are oder factors also that constitute a cash conversion cycle.

I think it should be A for C we cant say cash conversion cycle is bigger or not, since we dont have number of days of payable and number of days of inventory given.