A firm has determined its cash-to-cash cycle time to be 60 days. The number of days' payables outstanding is 25, and number of days' sales outstanding is 35. If the firm reduces its inventory by 20%, the new cash-to-cash cycle time, in days, will be approximately:

Question

Quizplus · Accepted Answer

Cash-to-cash cycle time can be calculated by adding days of inventory outstanding (DIO) and days of sales outstanding (DSO) and deducting days of payables outstanding (DPO).

Cash-to-cash cycle time = DIO + DSO - DPO

Given:

Cash-to-cash cycle time = 60 days
DSO = 35 days
DPO = 25 days

We need to find DIO. Let's use the formula:

DIO = Cash-to-cash cycle time - DSO + DPO

DIO = 60 - 35 + 25 = 50 days

Now, if the firm reduces its inventory by 20%, the new DIO will be:

New DIO = 0.8 x 50 = 40 days

Therefore, the new cash-to-cash cycle time will be:

New cash-to-cash cycle time = DIO + DSO - DPO 
New cash-to-cash cycle time = 40 + 35 - 25 
New cash-to-cash cycle time = 50 days

Hence, the answer is B.

A Firm Has Determined Its Cash-To-Cash Cycle Time to Be