If the average accounts receivable that a firm holds decreases without any decrease in credit sales, the operating cycle will:
A) stay the same because of no sales change.
B) stay the same because cash collections are sooner and it will affect the cash cycle only.
C) decreases because days sales outstanding decreases.
D) stay the same because accounts receivable are not in the operating cycle.

Question

Quizplus · Accepted Answer

The operating cycle includes the time it takes for a company to buy inventory, sell it, and collect the cash from the sale. If the average accounts receivable decreases without a decrease in credit sales, it means the company is collecting cash from its sales faster. This results in a decrease in the days sales outstanding (DSO), which is a component of the operating cycle, thus shortening the operating cycle.

If the Average Accounts Receivable That a Firm Holds Decreases