ExpertMedium2 marksMultiple Choice
ACCA · Question 35 · Interpretation of financial statements
Section A
Which of the following actions would directly improve a company's working capital cycle (i.e., shorten the cash conversion cycle)?
Section A
Which of the following actions would directly improve a company's working capital cycle (i.e., shorten the cash conversion cycle)?
Answer options:
A.
Offering extended credit terms to customers
B.
Increasing the level of buffer inventory held
C.
Negotiating longer payment terms with suppliers
D.
Paying suppliers early to receive a settlement discount
How to approach this question
Working Capital Cycle = Inventory Days + Receivable Days - Payable Days. To shorten the cycle, you need to decrease inventory days, decrease receivable days, or increase payable days.
Full Answer
C.Negotiating longer payment terms with suppliers✓ Correct
The working capital cycle is the time it takes to convert net current assets into cash. Formula: Inventory Days + Receivables Days - Payables Days. Negotiating longer payment terms increases Payables Days, which subtracts a larger number, thereby shortening the overall cycle.
Common mistakes
Thinking that paying suppliers early improves the cycle (it improves relationships/profit, but worsens cash flow timing).
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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