Question

1. An increase in Days Inventory Held, all other things equal, would ___________ the working capital cycle and reflect ________________ liquidity

2. 		decrease; increased
   		decrease; decreased
   		increase; decreased
   		increase; increased

Answer 1

The Working Capital Cycle can be calculated as follows:

Working Capital Cycle = Days of Inventory + Days of Sales Outstanding - Days of Payables Outstanding

Thus, an increase in days of inventory held would increase the working capital cycle.

The working capital cycle is a measure of liquidity indicating the amount of cash locked up in a firm's production and sales process. This means that a shorter working capital cycle (WCC) would mean that the firm receives its money faster and it thus more liquid. A longer WCC would lead to a decrease in liquidity.

Thus, to conclude, an increase in days inventory held , all other things equal, would increase the working capital cycle and reflect decreased liquidity. (Option 3)