Question

When comparing two companies, we notice that they are very similar in setup (e.g., same costs, same profit margins, same inventory turnovers etc.). However, the time it takes company A to pay for raw materials is longer than it takes company B, while the time it takes customers of company A to pay for the finished goods is shorter than it takes company B's customers. Which of these companies has a shorter cash flow cycle?

a. Company B
b. They are both the same
c. Company A
d. Could be either, depending on the days in inventory

Answer 1

The correct answer is the option D: Could be either, depending on the days in inventory.

Step-by-step explanation:

To begin with, the term known as "Cash Flow Cycle" in the world of business refers specifically to the movement of cash inside the organization regarding the whole process of producing them and selling them to the target audience. It will obviously start with the purchase of the raw materials and everything needed for production and it will end with the complete sale of the final product.

Secondly, in this case the cash flow cycle will depend on the days that the products remain in inventory due to the fact that they both are even when it comes to the purchase and selling processes.