Effects of an Operating cycle.
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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 go up
b. Credit payment time for customers are increased
c. Inventory turnover goes from 3 times to 7 times
d. Payables turnover goes from 6 times to 11 times
e. Receivables turnover goes from 7 to 9 times
f. Payment to suppliers are accelerated
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Solution Summary
The solution discusses the effect on the operating cycle of changes in receivables, credit payment time, inventory turnover, payables turnover, receivables turnover, acceleration of payment to suppliers.
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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.
Operating Cycle (OC) = Average Age of Inventory (AAI) + Average Collection Period (ACP)
Cash Conversion Cycle (CCC) = Average Age of Inventory (AAI) + Average Collection Period (ACP) - Average Payables Period (APP)
Or Cash Conversion Cycle (CCC) = Operating Cycle (OC) - Average Payables Period (APP)
Thus Operating Cycle is affected by Days in Inventory (AAI) and Days in Accounts ...
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