Indicate the impact of the following on the cash and operating cycles, respectiv
ID: 2665124 • Letter: I
Question
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
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.Decrease; No change. If more raw materials are purchased on credit, the accounts
payable period will tend to increase, which would decrease the cash cycle. We should
say that this may not be the case. The accounts payable period is a decision made by
the company’s management. The company could increase the accounts payable
account and still make the payments in the same number of days. This would leave the
accounts payable period unchanged, which would leave the cash cycle unchanged. The
change in credit purchases made on credit will not affect the inventory period or the
accounts receivable period, so the operating cycle will not change.
f.Increase; Increase. If more goods are produced for inventory, the inventory period will
increase. This will increase both the cash cycle and operating cycle.