4. Changes in Cycles [LO1 ] Indicate the impact of the following on the cash and

Question

4. Changes in Cycles [LO1 ] Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change: a. The terms of cash discounts offered to customers are made less favorable. b. The cash discounts offered by suppliers are decreased; thus, payments are made earlier. c. An increased number of customers begin to pay in cash instead of with credit d. Fewer raw materials than usual are purchased. e. A greater percentage of raw material purchases are paid for with credit. f. More finished goods are produced for inventory instead of for order.

Explanation / Answer

This will not impact either cash or operating cycle as customers are not going to use it. Decrease in cash discount by supplier will reduce the cash balance as now we have to make more payment and it will have no impact on operating cycle. This will increase cash balance and reduce operating cycle. Now less raw will stuck in production and it will reduce cash investment and also reduce operating cycle. This will increase cash balance but will not have any impact on operating cycle. This is increase the stock and hence operating cycle will increase and cash balance will decrease.

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