Which one of the following statements is correct concerning the cash cycle?
A)The longer the cash cycle, the more likely a firm will need external financing.
B)Increasing the accounts payable period increases the cash cycle.
C)A positive cash cycle is preferable to a negative cash cycle.
D)The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E)Offering early payment discounts to customers will tend to increase the cash cycle.

Question

Quizplus · Accepted Answer

The cash cycle is the amount of time it takes for a company to convert its investments in inventory and other resources into cash. A longer cash cycle means that a firm is taking longer to collect cash from the sale of its products or services, which increases the firm's need for external financing. Therefore, statement A is correct.

Statement B is incorrect as increasing the accounts payable period decreases the cash cycle since it allows the firm to delay paying its bills.

Statement C is incorrect as a negative cash cycle is preferable as it means that a company is collecting payments from its customers before it is required to pay its suppliers, resulting in a positive cash flow.

Statement D is incorrect as the cash cycle cannot exceed the operating cycle, which is the time it takes to convert resources into cash, including the time it takes to pay suppliers.

Statement E is incorrect as offering early payment discounts to customers encourages them to pay faster, which decreases the cash cycle.

Which One of the Following Statements Is Correct Concerning the Cash