Zervos Inc. had the following data for 2012 (in millions). 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 days
B) 37.4 days
C) 41.2 days
D) 45.3 days
E) 49.8 days

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as (Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding). If inventory is reduced by $4,000, receivables are reduced by $2,000, and accounts payable are increased by $2,000, then the cash conversion cycle will be lowered by 34.0 days.