Question

If a company’s account payable period is longer than its operating cycle, then which of the following is most likely to be true:

A) the company can avoid paying corporate taxes on earnings retained as cash. B) the company’s future cash flows will increase at a steady rate. C) the company’s cash cycle is negative D) the company pays for its inventory before it receives payments for its sales E) the company’s cash cycle is longer than its operating cycle.

Answer 1

If you delay paying your supplier or vendor until after you sell your goods and collect cash, you have achieved negative Cash cycle. Accounts payable cycle is longer when you delay paying your supplier.

therefore,

when accounts payable cycle period is longer than operating cycle, cash cycle will be negative.

Option C is the correct answer.