Asked by Daysi Antillo on Jul 04, 2024
Verified
If a company's operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.
Operating Cycle
The period of time it takes for a business to purchase inventory, sell products, and receive cash from sales.
Average Payment Period
The average amount of time it takes a company to pay off its accounts payable.
- Analyze the implications of operating cycle duration on company financing needs.
Verified Answer
SE
Sriram EthakotaJul 09, 2024
Final Answer :
True
Explanation :
If a company's operating cycle (the time it takes to convert inventory into cash) is longer than its average payment period for suppliers (the time it takes to pay its bills), then the company must pay for its inventory and other expenses before receiving payment from customers. This creates a temporary cash shortfall and may require the company to borrow money to finance its operations.
Learning Objectives
- Analyze the implications of operating cycle duration on company financing needs.
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