Cash Conversion cycle & Net Operating Cycle

[rexthedog]

If a company increases its trade credit terms to its credit customers would this not result in an increase in operating cycle?
Does the statement above not imply that their customers now have more days to pay back therefore your Days receivables increase.
Therefore Operating cycle = DIO + DRO Increases?
The correct answer is that Cash conversion cycle decreases.

 

[adekunle]

You’re correct, as far as the info you’ve provided is correct. But make sure to not confuse operating cycle wth csh conversion cycle.

 

[rexthedog]

Q30 CFA Mock 2 am.
Can you take a look at it please?

 

[adekunle]

I don’t know which is mock 1 or 2. I did my mocks online. Not pdf.

 

[mkipa1]

Haha got that wrong my first time as well, didn’t read the question well enough. The question says:
A company extends its trade credit terms by four days to all its credit customers. The most
likely effect of this change to the company’s credit customers is a four-day:

The question is asking the effect of the change FOR THE CUSTOMERS.

So basically, the customers have a longer days payables, therefore a lower net operations cash flow since
Net Op CF = Cash conversion cycle = days receivable + days inventory - days payables

 

[rexthedog]

Ok but using your example:
If the CUSTOMERS payables have increased, then the COMPANIES Acc Rec have INCREASED? (takes longer for money to come in due to higher customer payables)
Therefore: is this still not DIO +DRO = Higher?
My confusion is in the days payables.
I assume days payable is the COMPANIES payable. Therefore this surely remains unchanged because we are looking t the CUSTOMERS payable???
Or are we looking at the Cycle from the viewpoint of the customer?
Sorry if ive made it more confusing haha

 

[mkipa1]

Yeah, the point of view here is the customers, the way the sentence is structured makes it very vague though lol
Hopefully the actual paper is clearer :/