Final answer:
Actions such as altering cash discount terms, changing payment behaviors, and modifying inventory strategies can influence a company's cash and operating cycles. These cycles reflect the time it takes for a company's investment in inventory and resources to be converted back into cash.
Step-by-step explanation:
The impact of various actions on the cash and operating cycles can be determined using the following guide for each scenario provided:
- a. If the terms of cash discounts offered to customers are made less favorable, it may lead to customers taking longer to pay, thus the cash cycle might increase, and the operating cycle could potentially increase as well due to a lengthier accounts receivable period.
- b. When the cash discounts offered by suppliers are decreased and payments are made earlier, the company's cash cycle will likely decrease because they are paying out cash more quickly, but there would be no change in the operating cycle.
- c. An increased number of customers paying in cash instead of on credit would lead to a decrease in the cash cycle due to immediate cash receipts, and the operating cycle would also likely decrease as the accounts receivable period is shortened.
- d. Purchasing fewer raw materials than usual could result in a decrease in the cash cycle as less cash is being tied up in inventory, but it could increase, decrease, or have no change on the operating cycle depending on how it affects production and sales.
- e. A greater percentage of raw material purchases made on credit would lead to a increase in the cash cycle since cash outflow is delayed, and an increase in the operating cycle due to a longer accounts payable period.
- f. Producing more finished goods for inventory instead of for order could increase both the cash and operating cycles, as the company is tying up cash in inventory that is not immediately sold, increasing the inventory period.