if the accounts receivable balance on a firm\'s balance sheet decreases without

Question

if the accounts receivable balance on a firm's balance sheet decreases without any change in credit sales, the operating cycle will:

a. increase due to the increased receivables turnover rate.

b. decrease because the number of days' sales in receivables will decrease.

c. remain constant because credit sales are constant.

d. remain constant because the accounts receivable and inventory periods will be constant.

e. remain constant because cash collections affect the cash cycle, not the operating cycle

Explanation / Answer

Operating cycle is the average time required for a business to make an initial cash outlay to produce goods, sell the goods, recieve cash from the customers in exchange of the goods. Operating cycle is largely used to estimate the amount of working capital required for the company to maintain and grow the company.
Factors that influence the operating cycle of the company are:
1) Payment terms extended by the company to the suppliers
2) Order fulfillment policy
c) Credit policy and related payment terms.

Cash cycle is the number of days the company has taken to convert resources to cash i.e the time taken for the company to between the purchase of the inventory to the reciept of cash from customers.
SInce in this scenario, none of the factors of operating cycle have been affected and only cash has been realized(evident from reducion in accounts payable) the operating cycle will reman constant with cash cycle being affected.
So, the answer is Option E

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