Question

Hello Tutor, I am looking to get an original answer to the following questions please. A complete answer will be appreciated.

*****Is it possible for a firm's cash cycle to be longer than its operating cycle? Explain why or why not. Give examples.

Answer 1

Operating cycle is the average time between acquisition of inventory and conversion into cash. Cash cycle is Operating cycle minus creditors collection period.

Operating Cycle is the sum of Raw Material Holding Period, Work in process Period, Finished Goods Holding Period and Receivable Collection Period while cash cycle = Operating cycle- Accounting payable. Hence the cash cycle will always be less than the Operating cycle.

For example if the Operating cycle of a firm is 127 days and its accounts payable payment period is 27 days, it will have a cash cycle of 127-27 = 100 days. Hence it will always be lower than the operating cycle.