Cash operating cycle - CM

Kelly7 · November 2012

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 · November 2012

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 · December 2012

Thank you, think I get that now. X x

Cash operating cycle - CM

Comments

Categories