If the average accounts receivable that a firm holds decreases without any decrease in credit sales,the operating cycle will:
A)remain constant because sales remained constant.
B)remain constant because the change will only affect the cash cycle.
C)decrease because the days' sales outstanding will decrease.
D)increase because the accounts receivable turnover will decrease.
E)decrease because the accounts receivable turnover will decrease.

Question

Quizplus · Accepted Answer

EThe operating cycle includes the time it takes for a company to sell inventory and collect receivables. A decrease in average accounts receivable, without a decrease in credit sales, means the company is collecting its receivables more quickly. This would decrease the days' sales outstanding (C), indicating a more efficient collection process, and increase the accounts receivable turnover (E), showing that receivables are being converted into cash more frequently within a given period. Both of these effects lead to a shorter operating cycle.

If the Average Accounts Receivable That a Firm Holds Decreases