a)
To discuss: The difference between operating cycle and cash cycle.
Introduction:
Cash cycle is also termed as cash conversion cycle that measures the time taken to convert the cash into stocks, accounts payable by the way of sales and accounts receivables and again back to cash.
a)
Explanation of Solution
Operating cycle determines the average length of time taken from the initial cash to produce the item to the cash received from the customers. This includes various factors like payment terms and conditions a company gives its customers and the payment that the company receives from its suppliers.
Cash cycle is also known as cash conversion cycle. This is the time taken by the company to transfer its resources into cash. This involves cyclic effects from purchase of inventory to the amount recovered from the customers. The company’s position indicates positive when it has consistent cash and uses it in various companies’ activities.
b)
To discuss:
Increase in the inventory will affect the cash cycle of the firm, having remaining things, equal.
Introduction:
Cash cycle is also termed as cash conversion cycle that measures the time taken to convert the cash into stocks, accounts payable by the way of sales and accounts receivables and again back to cash.
b)
Explanation of Solution
If the firm’s inventory increases, the inventory days will also increase, having other things to remain the same. This will lead to increase the cash cycle of the firm.
c)
To think critically: The impact on cash cycle if the firm gets discounts from its suppliers.
Introduction:
Cash cycle is also termed as cash conversion cycle that measures the time taken to convert the cash into stocks, accounts payable by the way of sales and accounts receivables and again back to cash.
c)
Explanation of Solution
The impact on cash cycle is that if the firm gets discounts from its suppliers then the accounts payable days will automatically decrease and the rest remains the same. This will lead to the increase in the cash cycle of the firm.
Want to see more full solutions like this?
Chapter 26 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Your CFO tells you as finance manager that he feels much safer to have a larger inventory and cash level than before. What are trade-offs involved in the decision of how much inventory or cash the firm should carry. Answer for inventory levelarrow_forwardMaking changes to a firm’s credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm’s cash discount? Check all that apply. An increase in the cost of the discounts given An increase in the firm’s bad-debt expenses An increase in the firm’s credit sales, a speeding up of customer payments, and a reduction in the firm’s receivables investment An increase in the creditworthiness of the firm’s customersarrow_forward- How would a reduction in the cash conversion cycle increase profitability? What aresome actions a firm can take to shorten its cash conversion cycle?- Is it possible for a firm’s cash conversion cycle to be negative (or net operating workingcapital to be negative)? Explain why or why not. If there exists a firm with negativeCCC, give an example, what are characteristics of such company.arrow_forward
- Practice : a: The computation of return on average investment ignores one characteristic of the earnings stream, which is considered in discounting cash flows. What is this characteristic? Why is it important? b: What are the disadvantages of evaluating an investment using payback period? Why might a company use this methodology despite these disadvantages?arrow_forwardWhat contrasts are there between what is shown in cash flow statements and the need for firms to borrow at high rates and firms' income statements?arrow_forwardwhat determines the market value of a company are not profits, per se, but rather, cash flows?arrow_forward
- Which of the following is false? a. Baumol model helps firm to find out their desirable level of cash balance under certainty b. Any presence of a cash buffer affects the cost of holding cash and ultimately the annual cost of cash for a particular firm c. A higher average daily disbursement float than average daily collection float is more desirable for a firm d. Accounts payable increase the number of days a firm’s resources are tied up in the operating cyclearrow_forwardExplain how each of the following factors would probably affect a firm’starget cash balance if all other factors were held constant.a. The firm institutes a new billing procedure that better synchronizes itscash inflows and outflows.b. The firm develops a new sales forecasting technique that improves itsforecasts.arrow_forwardHow does a short-term cash flow crisis impact a firm's competitive strategy?arrow_forward
- Which of the following methods can NOT be used to improve the firm’s cash conversion cycle? Decrease the firm’s inventory conversion cycle. Decrease the firm’s receivables collection period. Decrease the firm’s payables deferral period. Increase the firm’s payables deferral period.arrow_forwardAssuming the firm’s sales volume remained constant, would you expect it tohave a higher cash balance during a tight-money period or during an easymoney period? Why?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning