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

Luciana
Luciana Feels At HomeRegistered Posts: 75
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 Font Of All Knowledge 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 Feels At Home 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 Feels At Home Registered Posts: 75
    Just passed the cash management! Thank you,sandy. The working cycle question was easy today.
  • anisurrahman
    anisurrahman Well-Known Registered Posts: 130
    Congratulations Luciana

    - Ronnie
  • Luciana
    Luciana Feels At Home 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 Well-Known 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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