@Samuel, the explanation is rather long and confusing. I'll try my best in explaining. So WC= CA- CL. As stated, your original Inventory level is higher than AR. Let's say Inventory = 10 AR = 8 so your total original CA is 18… Then we know the inventory conversion period and receivable period went down while the deferral period constant..this relates to the conversion cycle but those two factors tells us about our CA.
Having your inventory conversion period decrease implies we are selling inventory faster and AR period goes down mean we collecting money faster. Put this into perspective when inventory are selling faster that means we lower inventory and AR collecting faster also lowers that.. We have less of both items. SO using those same number above we can say our inventory now = 9 (this went down because of conversion period) and AR = 7 (also went down because we collected more money). Add them up to a toal of 16 for CA. Since deferral period remain constant nothing happened to our CL.
Again Net WC = CA – CL.. now we have have total CA of 16 vs total “Original” CA of 18 so it went down. Therefore, A is the best answer.
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