could anyone help me with the working cycle problem of cash management? Thanks!

the task is shown in the assessment practice on MY AAT.

current cash operating cycle 45 days,
then changes are: average stock holding period increases by 7 days and number of days taken to pay trade payable (creditors) decreases by 13 days.

my thoughts
Originally, Stock holding+Debtors days-Creditors days=45
then adjustments--(Stock holding+7)+Debtors days-(Creditors days-13)=45+7+13=65 days, which does agree with the answer supplied by AAT.

Could anyone explain how to tackle the problem?

Many thanks

Comments

  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    The working capital cycle is made up of:

    Inventory (stock) holding period
    + Receivables (debtors) period
    - Payables (creditors) period

    If this is currently 45 days

    Then apply the changes
    Inventory (stock) holding period 7 extra days
    + Receivables (debtors) period no change
    - Payables (creditors) period 13 fewer days - i.e add 13 on

    This means you have a total of 60 days after the changes


    Do you see that holding the stock longer increases the cycle
    and the quicker you pay your suppliers the longer the cycle
    Sandy
    [email protected]
    www.sandyhood.com
  • Luciana
    Luciana Registered Posts: 75 ? ? ?
    Thank you for your reply. According to your calculation, the adjusted cycle should be 65, isn't it? If so, I can understand it. But, The answer given by AAT was 39days, by adding 7 extra stock holding days and deducting 13 creditors days. I just don't get it.
  • Luciana
    Luciana Registered Posts: 75 ? ? ?
    Just passed the cash management! Thank you,sandy. The working cycle question was easy today.
  • anisurrahman
    anisurrahman Registered Posts: 130 ? ? ?
    Congratulations Luciana

    - Ronnie
  • Luciana
    Luciana Registered Posts: 75 ? ? ?
    Congratulations Luciana

    - Ronnie

    Thanks Ronnie. Next test will be the costs, before that I have my driving test booked. But my driving instructor may not let me have a go, worrying! How are your tests going?
  • anisurrahman
    anisurrahman Registered Posts: 130 ? ? ?
    Passed Indirect Tax - Costing & Revenues and AP 1 after x-mas. Good Luck with your driving test :)
    Ronnie
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