Assume all sales and purchases are on credit.Which one of the following statements is correct concerning the cash cycle?

Question

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The cash cycle is the time it takes a company to convert its investments in inventory back into cash. The longer the cash cycle, the more time it takes for a company to collect cash from customers and pay its suppliers, which can create a need for external financing. Option A is incorrect because the cash cycle begins when a company receives inventory, not when it purchases it. Option C is incorrect because increasing the accounts payable period will decrease the cash cycle since it delays the payment of cash for inventory. Option D is incorrect because a payables period of zero means the company pays for inventory immediately, which would decrease the cash cycle. Option E is incorrect because a more liberal accounts receivable policy means a company is offering customers easier credit terms, which can increase the cash cycle.

Assume All Sales and Purchases Are on Credit