Zervos Inc. had the following data for 2008 (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
B) 37.4
C) 41.2
D) 45.3
E) 49.8

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO). Reducing inventory and receivables decreases DIO and DSO, while increasing payables increases DPO. These changes reduce the cash conversion cycle by 34 days.