Question

Helena Furnishings wants to sharply reduce its cash conversion cycle. Which of the following steps would reduce its cash conversion cycle? Select one: a. The company increases its average inventory without increasing its sales. b. The company reduces its days sales outstanding (DSO). c. The company starts paying its bills sooner, which reduces its average accounts payable without reducing its sales. d. Statements a and b are correct. e. All of the statements above are correct.

Answer 1

Answer:

Option B. The company reduces its days sales outstanding (DSO).

Explanation:

As we know that:

Cash conversion Cycle = Receivable days + Inventory days - Payable days

Option A says that the increasing inventory without increasing sales will reduce the cash conversion then it is incorrect because increase in inventory keeping sales constant, increases the inventory days which will increase the cash conversion cycle. So the statement is incorrect.

Option B says that the reduction in Days Sales Outstanding which is also known as receivable days will result in decrease in cash conversion cycle then it is correct because we can see from the equation that reduction in receivable days will reduce the cash conversion cycle.

Option C says that the paying bills sonner by keeping the sales same will decreases the cash conversion cycle then it is again incorrect because reduction in payable days increases the cash conversion cycle.

Option D and E are incorrect because option B is the only statement that is correct.