Question

Indicate the effect that the following will have on the operating cycle. Use the letter "I" to indicate an increase, the letter "D" for a decrease, and the letter "N" for no change.
(a) average receivables goes up.
(b) credit repayment times for customers are increased
(c) inventory turnover goes from 3 times to 6 times.
(d) payable turnover goes from 6 times to 11 times.
(e) receivables turnover goes from 7 times to 9 times.
(f) payments to suppliers are accelerated.

Answer 1

Answer: a. Increase

b. Increase

c. Decrease

d. No change

e. Decrease

f. No change

Explanation:

The Operating cycle refers to the amount of time it will take a business to source or produce inventory, sell that inventory and then receive the money for the sold inventory.

a. If the Average Receivables goes up, then that means there are more people to collect money from. This will increase the amount of time it will take to collect thereby increasing the operating cycle.

b. If the credit repayment times for the customers are increased, this means that the time they have to take to pay the company increases and this will definitely increase the Operating cycle.

c. If the inventory turnover increases, it means that inventory is being purchased more times in the period. This means that the operating cycle has decreased because the company is having to replace inventory more to begin a new cycle.

d.  The Payables turnover rate does not feature in the operating cycle so no effect will be recorded.

e. If the Receivables turnover rate increases, it means that the company is getting paid by receivables faster. This will decrease the operating cycle because it means that the business is receiving its money faster.

f. Payments to suppliers is just another way of saying Account Payables and as stated already, it has nothing to do with the Operating Cycle so No effect will be recorded.