A firm has arranged for a lockbox system to reduce the collection time of accounts receivable.Currently the firm has an average collection period of 43 days, an average age of inventory of 50days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by 3 days by reducing processing, mail, and clearing float. The firm's cash conversion cycle .
A) will not change
B) increases by 3 days
C) is 93 days
D) decreases by 3 days

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated by adding the average age of inventory to the average collection period and subtracting the average payment period. With the lockbox system reducing the average collection period by 3 days, the new average collection period would be 40 days. Therefore, the cash conversion cycle would decrease by 3 days, as the average collection period is a component of the cash conversion cycle formula.

A Firm Has Arranged for a Lockbox System to Reduce