Question

an increase in days’ sales outstanding would _____ the cash conversion cycle and _____ firm liquidity.

• increase, increase
• increase, decrease
• decrease, increase
• decrease, decrease

Explanation:

1. Recall the formula for the cash conversion cycle (CCC): \( \text{CCC} = \text{Days' Sales Outstanding (DSO)} + \text{Days' Inventory Outstanding} - \text{Days' Payable Outstanding} \). If DSO increases, and the other components remain constant, the CCC will increase because DSO is added in the formula.
2. Analyze firm liquidity: Days' sales outstanding represents the average number of days it takes to collect cash from credit sales. An increase in DSO means customers are taking longer to pay, so the firm has less cash available in the short - term, which decreases its liquidity.

Answer:

B. increase, decrease