30.03.2023 - 01:08

Which of the following actions should Reece Windows take, if it wants to reduce its cash conversion cycle? a. Take steps to reduce the DSO. b. Increase average inventory without increasing sales. c. S

Question:

Which of the following actions should Reece Windows take, if it wants to reduce its cash conversion cycle?

a. Take steps to reduce the DSO.

b. Increase average inventory without increasing sales.

c. Sell common stock to retire long-term bonds.

d. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.

e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

Answers (1)
  • iKS
    April 8, 2023 в 15:12

    The cash conversion cycle (CCC) is a financial metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. A shorter CCC indicates a more efficient use of capital and is generally preferred by investors and creditors.

    Among the given options, option a. Take steps to reduce the DSO (Days Sales Outstanding) is the most suitable action that Reece Windows should take to reduce its cash conversion cycle. DSO measures the average number of days it takes for a company to collect payments from its customers after a sale is made. By reducing DSO, the company can collect payments faster, which would increase the cash inflow and reduce the time it takes to convert inventory and other investments into cash.

    Option b. Increase average inventory without increasing sales, would increase the investment in inventory, which would increase the CCC. Therefore, it is not a suitable action for reducing the CCC.

    Option c. Selling common stock to retire long-term bonds does not affect the CCC directly. It may help to improve the company's financial position by reducing its debt, but it does not directly address the CCC.

    Option d. Starting to pay bills sooner would reduce the average accounts payable, but it may not necessarily lead to an improvement in the CCC since it does not address the issue of collecting payments faster.

    Option e. Selling an issue of long-term bonds and using the proceeds to buy back some of its common stock would not directly affect the CCC either. It may improve the company's financial position by reducing its equity, but it does not address the issue of converting inventory and investments into cash flow.

    In conclusion, the best action Reece Windows should take to reduce its CCC is to reduce its DSO by improving its collection process.

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