1) Which of the following is the length of collection period if half of current
ID: 2745794 • Letter: 1
Question
1) Which of the following is the length of collection period if half of current sales are collected in the current quarter, and half of the previous quarter are collected in the current quarter? A. 30 days B. 45 days C. 60 days D. 90 days E. 120 days 2) Changes in which one of the following will not affect the operating cycle, all else equal? A. Inventory turnover rate B. Days sales in inventory C. Credit repayment times D. Payables period E. Accounts receivable period 3) A negative cash cycle is actually preferable to a positive cash cycle. A. True B. False
Explanation / Answer
Requirement 1:
Since half of the current sales are collected in same quarter and remaining half is collected in the next quarter, the accounts receivables equals half of the current sales.
Accounts Recceivable = Current Sales / 2
Number of days in the period = Number of days in a quarter = 360 * 1/4 = 90 days
Length of collecction period = Number of days in a period * Accounts receivables / Current sales
= [90 * Current Sales / 2] / Current sales
= 90 / 2
= 45 days
Correct Option is B) 45 days
Requirement 2:
Operating Cycle = DIO + DSO
= Days Inventory Outstanding + Days Sales Outstanding
= (365 * Average Inventory / COGS) + (365 * Average Accounts Receivables / Credit Sales)
= (365 / Inventory Turnover rate) + (365 / Accounts receivables turnover rate)
This implies, Operating Cycle is affected by the following:
1) Inventory Turnover rate
2) Days Sales in Inventory (Days Inventory Outstanding)
3) Credit repayment times (Accounts Receivables Turnover rate)
4) Accounts Receivables period (Days Sales Outstanding)
Hence the one factor not affecting the operating cycle is payable period. It affects the cash cycle since cash cycle equals operating cycle minus days payables outstanding (payables period).
Correct Option is D) Payables period
Requirement 3:
Cash cycle is the period required by the company to realise cash. Todays cash is more valuable than tomorrow's cash due to the time value of money.
Having positive cash cycle means realising the cash in future and negative cash cycle means cash realised in advance.
Hence negative cash cycle is preferable to a positive cash cycle.
Correct Option is A) True
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