1. Indicate the impact of the following on the cash and operating cycles, respec
ID: 2815823 • Letter: 1
Question
1. 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 our customers are made less favorable. The cash discounts offered by our suppliers are decreased; thus, payments are made later b. c. An increased number of our customers begin to pay in cash instead of with credit. d. Fewer raw materials than usual are purchased e. More finished goods are produced for inventory instead of for order. f. Average receivables go up. g. Inventory turnover goes from 3 times to 7 times.Explanation / Answer
Given That:
Indicate the impact on the cash and operating cycles and use the letter I to indicate an increase, the letter D for a decrease and the letter N for no change.
a.Increase; Increase. If the terms of the cash discount are made less favorable to
customers, the accounts receivable period will lengthen. This will increase both the
cash cycle and the operating cycle.
b.Increase; No change. This will shorten the accounts payable period, which will increase
the cash cycle. It will have no effect on the operating cycle since the length of the
operating cycle is not affected by the payables period.
c.Decrease; Decrease. If more customers pay in cash, the accounts receivable period will
decrease. This will decrease both the cash cycle and the operating cycle.
d.Decrease; Decrease. Fewer raw materials purchased will reduce the inventory period,
which will decrease both the cash cycle and the operating cycle.
e.Increase; Increase. If more goods are produced for inventory, the inventory period will
increase. This will increase both the cash cycle and operating cycle.
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