Amazing Sound Source, Inc., has been in business for 30 years. It carries a large inventory so that it can offer customers a wide selection of merchandise and deliver purchases quickly. It accepts credit cards and checks but also provides 90 days’ credit to reliable customers who have made purchases in the past. It maintains good relations with suppliers by paying invoices quickly.
To pay bills during the past year, the company has had to borrow from its bank. An analysis of the company’s financial statements reveals that, on average, inventory is on hand for 70 days before being sold and that receivables are held for 90 days before being paid. Accounts payable are, on average, paid in 20 days.
What are the operating cycle and financing period? How long are Amazing Sound Source’s operating cycle and financing period? Describe three ways in which this company can improve its cash flow management.