Question：Gorgie Co need to raise some short-term finance. The purchasing Director has suggested that reducing inventory levels will help.
Which of the following effects of reducing inventory levels will significantly improve cash flow in the short-term?
A. Initial running down of inventory reduces purchases.
B. Reduced use of stores facility.
C. Lower insurance costs.
D. Bulk discounts.
E. Settlement of payables.
The correct answers are:Initial running down of inventory reduces purchases; and Lower insurance costs.
解析：If inventory levels are reduced, order quantity required to meet demand in the short term will be reduced. Significantly lower inventory levels will require a lower insurance premium. It is unlikely, however, that a reduction in inventory levels will make significant stores running cost savings due to the fact that many of those costs are fixed. Reducing inventory will mean that bulk discounts will be lost, therefore making cash flow worse. Inventory levels will not affect the payables days.
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