If a company’s DSO decreases over time, this most likely indicates:

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Multiple Choice

If a company’s DSO decreases over time, this most likely indicates:

Explanation:
Lower DSO means customers are paying faster on average, so receivables are converted to cash more quickly. That improves cash flow and overall liquidity because money that was tied up in outstanding invoices is freed sooner to meet obligations or reinvest in the business. Worsening liquidity would come from a rising DSO, not a falling one. DSO doesn’t measure payables or inventory directly, so higher average accounts payable or increased inventory turnover aren’t indicated by a change in DSO.

Lower DSO means customers are paying faster on average, so receivables are converted to cash more quickly. That improves cash flow and overall liquidity because money that was tied up in outstanding invoices is freed sooner to meet obligations or reinvest in the business.

Worsening liquidity would come from a rising DSO, not a falling one. DSO doesn’t measure payables or inventory directly, so higher average accounts payable or increased inventory turnover aren’t indicated by a change in DSO.

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