Asked by McKall Hulsey on Apr 29, 2024
Verified
Your key supplier has decided to change the terms of your credit arrangement from net 45 to net 30. This action will _____ your accounts payable period and _____ your cash cycle.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) decrease; not change
Cash Cycle
Also known as the cash conversion cycle, it measures the time it takes for a company to turn its inventory into cash flows from sales.
Accounts Payable Period
The Accounts Payable Period is the average time it takes for a business to pay off its creditors, indicating the efficiency of its payment process.
- Absorb the relationship between inventory levels, accounts receivable, accounts payable, and their impact on the cash flow and operational timing of an enterprise.
- Comprehend the implications of changes in credit terms on the accounts payable period and cash cycle.
Verified Answer
AA
Andrew AdamsomApr 29, 2024
Final Answer :
C
Explanation :
Changing the terms from net 45 to net 30 decreases the accounts payable period, as you now have less time to pay your invoices. This, in turn, increases your cash cycle because you have to pay out cash sooner, reducing the time your cash is available for other uses.
Learning Objectives
- Absorb the relationship between inventory levels, accounts receivable, accounts payable, and their impact on the cash flow and operational timing of an enterprise.
- Comprehend the implications of changes in credit terms on the accounts payable period and cash cycle.