The complete question is as follows:
Which one of these actions will increase the operating cycle? Assume all else held constant.
A. Increasing the payables period.
B. Decreasing the average inventory level.
C. Increasing the inventory turnover rate.
D. Decreasing the receivables turnover rate.
E Decreasing the payables period.
Answer : Which one of these actions will increase the operating cycle? Assume all else held constant.
A. Increasing the payables period.
B. Decreasing the average inventory level.
C. Increasing the inventory turnover rate.
D. Decreasing the receivables turnover rate.
E Decreasing the payables period.
Answer : D. Decreasing the receivables turnover rate.
We can calculate the operating cycle with the following formula :
Operating cycle = Days' sales of Inventory + Day Sales outstanding
In the formula above, (Net credit Sales /Average accounts receivable) is known as the accounts turnover rate. A decrease in rate means that a company is taking more time to collect its receivables from its customers than ever before. This, in turn will result in an increase in day sales outstanding and hence, increase the operating cycle.