Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 26, Problem 8CQ
Summary Introduction
To explain: The effect of change in payable policy on operating cycle and on cash cycle.
Operating Cycle:
Operating cycle is a time period between the sale of product and the recovery of cash from the customer. Operating cycle is also known as the business cycle, it involves every quantitative business activity of the company.
Cash Cycle:
The time period between the payment of cash to the supplier for the purchase of raw material and the receipt of cash from customer for the sale of product is known as cash cycle of a business. If the cash cycle is shorter the amount of available cash is more and the company has no need to borrow cash from outsiders.
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Bulldogs Inc. has a normal operating cycle of 32 days and cash conversion cycle of 25 days. Which of the following must be true if the company wants to shorten its cash conversion cycle to 20 days?
Decrease the operating profit by 2%
Increase the age of inventory by 5 day
Increase the accounts payable deferral period by 2 days
Decrease the days sales outstanding by 5 days
Last month, Bluesky announced that it would stretch out its bill payments from 30days to 45days. The reason given was that the company wanted to “control costs and optimize cash flow”. The increased payables will be in effect for all of the company’s 4,000 suppliers.
a). Why don’t all firms simply increase their payables period to shorten their cash cycles?
b). Bluesky lengthened its payables period to “control costs and optimize cash flow”. Exactly what is the cash benefit to Bluesky from this change?
Bulldogs Inc. has a normal operating cycle of 32 days and cash conversion cycle of 25 days. Which of the following must be true if the company wants to shorten its cash conversion cycle to 20 days?
A. Decrease the operating profit by 2%
B. Increase the age of inventory by 5 day
C. Decrease the days sales outstanding by 5 days
D. Increase the accounts payable deferral period by 2 days
Chapter 26 Solutions
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