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Question:

A company is most likely faced with a drag on liquidity if its:

A weighted average collection period increases from 42 days to 46 days.
Explaination

An increase in the weighted average collection period indicates that customers are taking longer to pay their outstanding accounts. This represents a drag on the company’s liquidity. A vendor that changes its payment terms from “net 30" to "net 60” is allowing the company 60 days to pay instead of 30. This extension of trade credit is a source of liquidity for the company. An inventory turnover ratio that is increasing relative to the industry average is a sign of good inventory management, which can also be a source of liquidity for a company.