Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

To speed up the cash conversion cycle, a company can:

Increase the average collection period

Extend longer credit terms to customers

Sell receivables to a factor

Delay payment to suppliers as long as possible

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Verified step by step guidance

Understand the cash conversion cycle (CCC): The CCC measures how efficiently a company converts its investments in inventory and other resources into cash flows from sales. It consists of three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).

Analyze the impact of selling receivables to a factor: Selling receivables to a factor allows the company to receive cash immediately instead of waiting for customers to pay. This reduces the Days Sales Outstanding (DSO), which is a key component of the CCC.

Evaluate why increasing the average collection period or extending longer credit terms to customers would not speed up the CCC: Both actions would increase the DSO, thereby lengthening the CCC rather than speeding it up.

Consider the effect of delaying payment to suppliers: Delaying payments increases the Days Payable Outstanding (DPO), which can reduce the CCC. However, this strategy must be balanced carefully to avoid damaging supplier relationships.

Conclude that selling receivables to a factor is the most effective option for speeding up the CCC: By converting receivables into immediate cash, the company improves liquidity and shortens the cash conversion cycle.