ITPEC FE Morning April 2022 Question 80

Collecting accounts receivable sooner — cash flow improves when money comes in earlier or goes out later.

Sales on credit bring in cash only when the receivable is collected. Shortening the collection period turns sales into cash earlier, so the company holds more cash at any moment and needs less borrowing to cover the gap between paying suppliers and being paid by customers.

Answer (c)

Why not others:

• •(a) — paying notes payable on a shorter timeline sends cash out earlier, which worsens cash flow
• •(b) — collecting notes receivable on a longer timeline brings cash in later, which worsens cash flow
• •(d) — shortening the period for paying accounts payable also sends cash out earlier; improving cash flow means lengthening it

Key rule: To improve cash flow, collect receivables early and pay payables late; every option that speeds outflows or delays inflows does the opposite.

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