Question

Which one of the following statements is correct? A) Cash management primarily involves determining the optimal level of liquidity that should be maintained. B) The longer the cash cycle, the more likely a company will need external financing. C) The cash cycle can exceed the operating cycle if the payables period is equal to zero. D) Offering early payment discounts to customers will tend to increase the cash cycle. E) Increasing the inventory turnover rate will increase the operating cycle, assuming all else held constant.

Answer 1

Answer:  B) The longer the cash cycle, the more likely a company will need external financing.

Explanation:

The cash cycle refers to the amount of time it would take a company to be able to convert the goods that it has in inventory to actual cash. If this cycle is long, then the company will have less cash than it needs because it is not raising cash fast enough.

To be able to fund operations therefore, the company might be forced to seek external financing.