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) decrease because days' sales outstanding decreases.
D) stay the same because accounts receivable are not in the operating cycle.
E) have an unknown effect.

Question

Quizplus · Accepted Answer

The operating cycle is the time it takes for a firm to acquire inputs, produce goods or services, sell them, and collect the cash. The operating cycle is determined by the sum of the days' sales outstanding (DSO) and the days' inventory outstanding (DIO). If the average accounts receivable that a firm holds decreases without any decrease in credit sales, then the DSO will decrease. As a result, the operating cycle will decrease because the sum of DSO and DIO will be lower.

If the Average Accounts Receivable That a Firm Holds Decreases