Assuming no change in days sales outstanding and days of inventory on hand, an issuer in need of cash flow that forgoes the discount offered by its vendor for payments within 10 days and chooses to pay on the due date in 30 days is:
A. shortening its cash conversion cycle.
B. lengthening its cash conversion cycle.
C. not affecting its cash conversion cycle.
In CFA website it says B is correct, why? I just don’t get it.
Not to me. I think A
CCC = DSO + DOI - DOP
If DOP increases
CCC reduces
I take it as how many sold inventory they can make in a year if they entirely use credit. So with longer payment time, they will be able to make less round inventory by credit → DOP decreases → CCC increases.
The other way to put it is the formula, which is 365 : COGS/ payable. Avg payable should increase since they dont get discount → DOP decreases → CCC increases.
Average payables = 100
COGS = 1000
DOP = (100 / 1000 ) x 365 = 36.5 days
They take longer to payables increase
Average payables = 200
COGS = 1000
DOP = (200 / 1000 ) x 365 = 73 days
If inventory would change then inventory of hand would change but it has not.
Yeah I used division and forgot payable was the denominator