If the average trade receivables that a ﬁrm holds decreases without any decrease in credit sales, the operating cycle will:
A)stay the same because of no sales change.
B)stay the same because cash collections are sooner, and it will affect the cash cycle only.
C)decreases because days sales outstanding decreases.
D)stay the same because trade receivables are not in the operating cycle.
E)have an unknown effect.

Question

Quizplus · Accepted Answer

The operating cycle is the time it takes for a firm to convert inventory into cash, including the time it takes to sell inventory on credit and collect the cash from the credit sales. If the average trade receivables held by the firm decrease without any decrease in credit sales, it means that the days sales outstanding (DSO) decreases. Since DSO is a part of the operating cycle, the operating cycle will decrease as well. Therefore, the correct choice is C.

If the Average Trade Receivables That a ﬁRm Holds Decreases