Your ﬁrm currently has an operating cycle of 64 days.You are analyzing some operational changes which are expected to decrease the trade receivables period by 3 days and decrease the inventory
Period by 2 days.The trade payables turnover rate is expected to increase from 7 to 9 times per
Year.If all of these changes are adopted, what will your ﬁrm's new operating cycle be?

Question

Quizplus · Accepted Answer

The operating cycle is calculated as the sum of the days inventory outstanding (DIO) and the days sales outstanding (DSO) minus the days payable outstanding (DPO). Initially, the operating cycle is 64 days. With a decrease in the trade receivables period by 3 days and a decrease in the inventory period by 2 days, the operating cycle is reduced by a total of 5 days (3 + 2). However, the increase in the trade payables turnover rate from 7 to 9 times per year implies an increase in the DPO, which would further reduce the operating cycle. Since the specific impact of the change in trade payables turnover on the operating cycle isn't provided in numerical terms, we focus on the immediate reduction: 64 days - 5 days = 59 days. Therefore, without specific DPO calculation details, the best estimate is a reduction to 59 days.

Your ﬁRm Currently Has an Operating Cycle of 64 Days