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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

A firm's cash cycle is shortened when it collects receivables faster. Which of the following actions would lengthen the operating cycle of the firm?

Increasing the average inventory holding period lengthens the operating cycle, since the cycle is the sum of the inventory conversion period and receivable collection period. Lockboxes and early payment discounts shorten collection, and stretching payables affects only the cash cycle.

  1. AIncreasing the average inventory holding periodCorrect
  2. BUsing a lockbox system for collections
  3. CDelaying payment to suppliers within agreed terms
  4. DOffering a cash discount to debtors for early payment

Explanation

Operating cycle = inventory period + receivable period. Holding inventory longer increases it. Lockbox and cash discounts shorten the receivable period; delaying payables affects the cash cycle, not the operating cycle.

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