Activity Ratios: Payables Turnover and Number of Days of Payables

A company's main supplier changed its credit policy from net 30 to 1/10. This change offers the company a 1% discount for payment within 10 days. What would be the _most likely_ impact of this change on the company's days of payables?

Incorrect. The new credit terms would likely cause the company to review when it pays its bills to the supplier. The issue is whether those terms would encourage the company to pay earlier or later.

Incorrect. If the company paid the bills more quickly, the days of payables would not increase.

Correct. These new credit terms offer a discount of 1% if the invoice is paid within 10 days, encouraging the company to pay the supplier within 10 days (rather than 30) to take advantage of the discount. Bills that are paid more quickly would lower days of payables.

Days of payables would stay the same to retain the company's cash reserves

Days of payables would increase since the company would pay bills more quickly

Days of payables would decrease since the company would pay bills more quickly