Question

3. If your firm decides to it needs to pay its suppliers 7 days sooner than before, then: a) its payable turnover rate will decrease. b) its accounts receivable period will increase. c) it may require additional funds from other sources to fund the cash cycle. d) its cash cycle will decrease. PLEASE HELP WITH THE QUESTION

Answer 1

If firm decides to pay earlier to suppliers, the accounts payable period will decrease. This implies that cash conversion cycle will increase.

cash conversion cycle (CCC) = Accounts receivable period + Inventory conversion period - Accounts payable period  

so equation says that if we pay earlier, CCC will decrease

If CCC decrease, firm may require additional funds to support CCC.

Payables does not affect receivables, so Accounts receivable period will not change.

As we pay faster to suppliers, the payable turnover rate will increase.

so a), b) and d) are wrong

correct answer : c: it may require additional funds from other sources to fund the cash cycle. (Thumbs up please)