CMA Part 2 · Financial Statement Analysis
Which of the following statements regarding a company's operating cycle and cash cycle is accurate?
- A.Extending supplier payment terms shortens the cash cycle while leaving the operating cycle unchanged.
- B.A lengthening operating cycle that inflates the current ratio indicates strengthening short-term liquidity.
- C.Accelerating cash collections from trade customers shortens the operating cycle but lengthens the cash cycle.
- D.Expanding trade credit received from inventory vendors increases the total duration of the cash cycle.
Show answer and explanation
Answer: A
The operating cycle equals Days Sales in Inventory (DSI) plus Days Sales Outstanding (DSO), reflecting the time needed to acquire inventory, sell it, and collect receivables. The cash cycle equals the operating cycle minus Days Payables Outstanding (DPO). Because supplier financing (DPO) is only deducted when calculating the cash cycle, negotiating longer vendor payment terms increases DPO, thereby shortening the cash cycle without altering the operating cycle.