Asked by Barbara silva on May 12, 2024
Verified
Your firm decides to increase the time allowed customers to pay their bills from 30 to 40 days. All else the same, this action will _____________ and _______________.
A) Increase the firm's operating cycle; increase the firm's cash cycle.
B) Increase the firm's cash cycle; increase the firm's inventory cycle.
C) Increase the firm's accounts payable period; increase the firm's operating cycle.
D) Increase the firm's inventory cycle; increase the firm's operating cycle.
E) Increase the firm's accounts receivable period; increase the firm's inventory cycle.
Operating Cycle
The duration between the acquisition of inventory and the collection of cash from receivables.
Cash Cycle
The time period it takes for a company to convert its investments in inventory back into cash, through sales.
Accounts Receivable Period
The typical duration in days that a company requires to receive payments from its sales made on credit.
- Gain insights into how inventory levels, accounts receivable, and accounts payable influence a firm's cash flow and operating cycle.
- Acknowledge the effect of credit policies on cash flow and the nature of customer relationships.
Verified Answer
HS
Harry SinghMay 14, 2024
Final Answer :
A
Explanation :
Increasing the time customers are allowed to pay their bills from 30 to 40 days increases the firm's accounts receivable period, which is part of the operating cycle. Since the operating cycle includes the time to convert inventory and receivables to cash, extending the receivables period also increases the cash cycle, which is the time needed to convert inventory into cash minus the accounts payable period.
Learning Objectives
- Gain insights into how inventory levels, accounts receivable, and accounts payable influence a firm's cash flow and operating cycle.
- Acknowledge the effect of credit policies on cash flow and the nature of customer relationships.