Zervos Inc.had the following data for 2008 The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made, by how many days would the cash conversion cycle be lowered?
A)34.0
B)37.4
C)41.2
D)45.3
E)49.8

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as the inventory conversion period plus the receivables collection period minus the payables deferral period. Reducing inventory and receivables decreases the cycle, while increasing payables also decreases it. The net effect of these changes results in a reduction of 34 days in the cash conversion cycle.