Asked by Chelsie Bishop on May 10, 2024
Verified
Mycale's has always paid its suppliers in 30 days. The company just hired a new financial officer who is changing the policy such that suppliers will now be paid in 45 days. This change will ______ the accounts payable period and _______ the cash cycle.
A) Increase; not affect
B) Increase; increase
C) Increase; decrease
D) Decrease; increase
E) Decrease; decrease
Cash Cycle
The duration between the outlay of cash for purchasing inventory and the receipt of cash from customer sales, indicating liquidity.
Accounts Payable Period
The mean duration for a company to settle payments with its suppliers and vendors.
- Ascertain techniques to advance the effectiveness of the operating and cash cycles.
- Understand the effects of modifications in credit terms on the duration of accounts payable and the cash cycle.
Verified Answer
JD
Jaspreet DhaliwalMay 12, 2024
Final Answer :
C
Explanation :
Increasing the accounts payable period from 30 to 45 days allows the company to hold onto its cash longer, thus increasing the time it takes to pay suppliers. This action directly increases the accounts payable period. By delaying payments to suppliers, the company reduces the cash cycle, as it retains cash in its operations for a longer period before needing to pay out for its liabilities, effectively decreasing the cash cycle.
Learning Objectives
- Ascertain techniques to advance the effectiveness of the operating and cash cycles.
- Understand the effects of modifications in credit terms on the duration of accounts payable and the cash cycle.
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