A business's inventory days rise from 40 to 65 while its payables days stay at 30. What is the most likely consequence for the business?
Answer and explanation
Correct answer: D. A greater need for financing because cash is tied up in inventory for longer
- Step 1: Inventory days measure how long inventory is held before sale.
- Step 2: Moving from 40 to 65 means cash is locked up longer, while payables days (credit from suppliers) have not increased to compensate.
- Step 3: Therefore financing needs rise.
Answer
A greater need for financing because cash is tied up in inventory for longer.
Why not the others: Holding inventory for longer ties up more cash and increases the funding needed. Rising inventory days signal slower, not faster, sales of inventory. Inventory days are part of the operating cycle and therefore affect liquidity.
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