ACCA Applied Knowledge · Financial Accounting · Ratios
Dale Co has inventory days of 60, receivables days of 45 and payables days of 30, all calculated on a 365-day year. Management plans to take 15 more days of credit from suppliers, with no other changes. What is the effect on the working capital (cash operating) cycle?
The cycle shortens from 75 days to 60 days. The cycle equals inventory days plus receivables days minus payables days. Originally 60 + 45 - 30 = 75; with payables at 45 days it is 60 + 45 - 45 = 60. Longer supplier credit reduces cash tied up.
- AIt lengthens from 75 days to 90 days
- BIt shortens from 75 days to 60 daysCorrect
- CIt shortens from 105 days to 90 days
- DIt lengthens from 60 days to 75 days
Explanation
Original cycle = 60 + 45 - 30 = 75 days. Payables days rise to 45, so the new cycle = 60 + 45 - 45 = 60 days, a shortening of 15 days. Adding payables days instead of deducting them is the error behind the lengthening options.
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