Question

Determine whether the following will INCREASE, DECREASE, or have NO EFFECT on the cash cycle:

Accounts payable goes up

Accounts receivable goes down

Customers take longer to pay for the goods

Payments to suppliers are accelerated

Inventory takes longer to get sold

Accounts Receivables Turnover ratio increases from 5 times to 7 times

Accounts Payable Turnover ratio increases from 5 times to 7 times

Inventory Turnover ratio increases from 5 times to 7 times

Answer 1

Solution:

Cash conversion cycle = Days receivable outstanding + days inventory outstanding - days creditors outstanding

1. Accounts payable goes up : Cash cycle will decrease (becomes smaller) as creditor are increasing

2. Account receivable goes down: Cash cycle will decrease as lowe receivable mean higher sale in cash

3. Customers take longer to pay for the goods : Account receivable will increase so cash cycle will increase or becomes longer

4. Payments to suppliers are accelerated: this means payable will go down so will creditors outstanding and it will lead to increase in cash cycle

5. nventory takes longer to get sold: Invetory outstanding will be higher so cash cycle will increase

6. Accounts Receivables Turnover ratio increases from 5 times to 7 times : Higher ratio is good and it means lower days outstanding as formula for days outstanding = 365/turnover

So cash cycle will decrease

7. Accounts Payable Turnover ratio increases from 5 times to 7 times- Cash cycle will increase as higher turnover means lower days outstanding

8. Inventory Turnover ratio increases from 5 times to 7 times -

Higher ratio is good and it means lower days outstanding as formula for days outstanding = 365/turnover

So cash cycle will decrease