Question 1

Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the following data:
- Cost of Goods Sold: $12,000,000
- Average Inventory: $2,000,000
- Net Credit Sales: $18,000,000
- Average Accounts Receivable: $1,500,000
- Purchases: $12,500,000
- Average Accounts Payable: $1,250,000

Management is considering a new vendor policy that would increase the average accounts payable to $1,800,000 without changing purchase volume or cost. Assuming all other factors remain constant, what would be the impact on Orion's Cash Conversion Cycle (CCC)?

Accepted Answer

Calculate the current Days Payable Outstanding (DPO) and the projected DPO. The difference represents the change in the Cash Conversion Cycle (CCC), noting that an increase in DPO reduces the CCC.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using COGS instead of Purchases for DPO calculation; confusing the direction of the impact (thinking higher DPO increases CCC).

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 4

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