Question

4- Interior Designs has a days sales in inventory of 51 days, an average payment period of 38 days, and an average collection period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the average payment period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days. If new discount is taken then the cash operation cycle will be ____ days.

Answer 1

OPERATING CYCLE = INVENTORY CONVERSION PERIOD + AVERAGE COLLECTION PERIOD

OPERATING CYCLE = 51 DAYS + 32 DAYS = 83 DAYS

NOW AVERAGE PAYMENT PERIOD IS NOT A PART OF OPERATING CYCLE.

SO OPERATING CYCLE WILL NOT CHANGE. SO IT WILL BE SAME = 89 DAYS

BUT CASH OPERATION CYCLE INCLUDES AVERAGE PAYMENT PERIOD,

AVERAGE PAYMENT PERIOD DECLINES BY 26 DAYS,

SO AVERAGE PAYMENT PERIOD = 38 DAYS - 26 DAYS = 12 DAYS

SO CASH OPERATING CYCLE = OPERATING CYCLE - AVERAGE PAYMENT PERIOD = 83 DAYS - 12 DAYS = 71 DAYS

ANSWER 1 : 89 DAYS

ANSWER 2 : 71 DAYS (THUMBS UP PLEASE)