Cash operating cycle - CM

Kelly7

Hi guys
Wondered if anyone knew how to work out the answer to this type of question. It has come up twice on the practise assessments and I have got it wrong both times...

Identify the impact on the cash operating cycle if:
the average inventory holding period decreases by 5 days
the number of days taken to pay trade payables increases by 9 days

the average holding period decreases by 5 days and the number of days taken to pay trade payables increases by 9 days, the current cash operating cycle of 49 days will (increase / decrease) to _____ days.

I thought to do this I would take 49, minus the 5 days and add the 9 days so I got increase to 53 but the actual answer is decrease to 35.

Be really grateful if anyone can solve this for me.

Thanks in advance.
Kelly

SandyHood

the average inventory holding period decreases by 5 days - this decreases the cycle by 5 days

the number of days taken to pay trade payables increases by 9 days - this decreases the cycle by 9 days

So 49 -5-9 = 35

Remember trade payables is a minus value when you work out the cycle. So if your minus value is 9 days more then you should be taking off another 9

A very long period to pay suppliers could lead to a nil cycle.

Kelly7

Thank you, think I get that now. X x