Which one of these 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)Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.

Question

Quizplus · Accepted Answer

A longer cash cycle means that cash is tied up for a longer period of time in the operating cycle, which increases the likelihood that the firm will need external financing to meet its financial obligations.

B, C, D, and E are incorrect. Increasing the accounts payable period will decrease the cash cycle as it allows more time to pay suppliers, thus keeping cash in the business for longer. A positive cash cycle means that a business is receiving cash from customers before it needs to pay its suppliers and is desirable. The cash cycle cannot exceed the operating cycle, as the operating cycle includes the time taken to pay suppliers. A more liberal accounts receivable policy means that customers are given more time to pay, which can increase the cash cycle.

Which One of These Statements Is Correct Concerning the Cash