Your ﬁrm decides to increase the time allowed customers to pay their bills from 30 to 40 days. All else the same, this action will _____________ and _______________.
A) Increase the ﬁrm's operating cycle; increase the ﬁrm's cash cycle.
B) Increase the ﬁrm's cash cycle; increase the ﬁrm's inventory cycle.
C) Increase the ﬁrm's accounts payable period; increase the ﬁrm's operating cycle.
D) Increase the ﬁrm's inventory cycle; increase the ﬁrm's operating cycle.
E) Increase the ﬁrm's accounts receivable period; increase the ﬁrm's inventory cycle.

Question

Quizplus · Accepted Answer

Increasing the time allowed for customers to pay their bills will increase the accounts receivable period, which in turn increases the operating cycle (the time it takes to convert inventory to cash). However, it does not affect the inventory or accounts payable cycles, so option B and E can be eliminated. Increasing the accounts payable period refers to increasing the time the firm takes to pay its suppliers, which is not relevant in this scenario, so option C can also be eliminated. Option D states that it will increase the inventory cycle, which is not accurate.

Your ﬁRm Decides to Increase the Time Allowed Customers to Pay