Your firm currently has an operating cycle of 90 days. You are analyzing some operational changes which are expected to decrease the accounts receivable period by 4 days and decrease the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 8 to 9 times per year. If all of these changes are adopted, what will be your firm's new cash cycle?
New operating cycle |
New operating cycle = 90 Days - 4 Days - 5 Days |
New operating cycle = 81 Days |
Change in Accounts Payable Period |
Change in Accounts Payable Period = (365 Days / 8 Times) - (365 Days - 9 Times) |
Change in Accounts Payable Period = 46 Days - 41 Days |
Change in Accounts Payable Period = 76 Days |
Firm's new cash cycle |
Firm's new cash cycle = New operating cycle - Change in Accounts Payable Period |
Firm's new cash cycle = 81 Days - 5 Days |
Firm's new cash cycle = 76 Days |
Hence, the Firm's new cash cycle will be 76 Days |
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