The effect of change in payable policy on operating cycle and on cash cycle. Operating Cycle: Operating cycle is a time period between the sale of product and the recovery of cash from the customer. Operating cycle is also known as the business cycle, it involves every quantitative business activity of the company. Cash Cycle: The time period between the payment of cash to the supplier for the purchase of raw material and the receipt of cash from customer for the sale of product is known as cash cycle of a business. If the cash cycle is shorter the amount of available cash is more and the company has no need to borrow cash from outsiders.

Question

Want to see the full answer?

Answer 1

Question

Chapter 26, Problem 8CQ

Summary Introduction

To explain: The effect of change in payable policy on operating cycle and on cash cycle.

Operating Cycle:

Operating cycle is a time period between the sale of product and the recovery of cash from the customer. Operating cycle is also known as the business cycle, it involves every quantitative business activity of the company.

Cash Cycle:

The time period between the payment of cash to the supplier for the purchase of raw material and the receipt of cash from customer for the sale of product is known as cash cycle of a business. If the cash cycle is shorter the amount of available cash is more and the company has no need to borrow cash from outsiders.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Calculate the average collection period, average payment period, inventory turnover period and cash conversion cycle for the following firm (1Year = 360 Days): Income statement data: Sales 10000, COGS 9000 Balance sheet data: Inventory 1100, Accounts receivable 400, Accounts payable 600 What effect will all the following activities have on the cash conversion cycle? the company reduces the level of inventory by 10%, the company changes the terms of sale and 60% of customers pay after 5 days while the remaining pay after 30 days (with sales on the same level) and the company has extended its own payment conditions by one week.

Ingraham Inc. currently has $500,000 in accounts receivable, and its days sales outstanding (DSO) is 44 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 10%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent

4. On average it takes Acme Tool Company 80 days to collect on its sales receivables, and its operating cycle is 290 days. a. How long is cash typically tied up in inventories? (Show computations) b. What would be the likely effect to Acme's operating cycle if the company changes its current policy that sales upon credit must be paid within 3 months, instead requiring payment within 2 months? (No calculations needed, just describe the likely effect on Acme's operating cycle.)