Question

Which one of the following defines the cash cycle?

a.Inventory period plus the accounts receivable period
b.Inventory period plus the accounts payable period
c.Operating cycle minus the inventory period
d.Operating cycle minus the accounts payable period
e.Operating cycle minus the accounts receivable period

Answer 1

Option (d), The cash cycle is the operating cycle minus the accounts payable period, indicating how fast a company converts products into cash and pays suppliers.

Step-by-step explanation:

The cash cycle is defined as the operating cycle minus the accounts payable period. The operating cycle is the total time it takes for a company to turn its inventory into cash. This involves the time to sell the inventory (inventory period) and the time it takes to collect on sales made on credit (accounts receivable period). The accounts payable period is the amount of time the company has to pay its suppliers without incurring penalties.

Therefore, the cash cycle measures how fast a company can convert its products into cash through sales, minus the time it can delay payment to its suppliers. To calculate the cash cycle you subtract the accounts payable period from the operating cycle, which itself is the sum of the inventory period and the accounts receivable period.