Impact of Extending Payment Terms on Cash Flow

Medium Working Capital Management Accounts Payable Management

ABC Corporation is evaluating its working capital management practices, especially regarding its accounts payable policies. The firm currently has an accounts payable turnover ratio of 6, which means it takes the company about 60 days to pay its suppliers. ABC is considering extending its payment terms from 60 days to 90 days to improve its cash flow position. Which of the following statements best describes the potential impact of this decision on ABC Corporation?

Extending payment terms will likely increase the accounts payable turnover ratio.

Extending payment terms may improve cash flow but could also strain relationships with suppliers.

Extending payment terms will reduce the cost of goods sold for ABC Corporation.

Hint

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