Q) The operating cycle for RXV Corporation is 25% higher than the industry average. The most likely explanation is that, compared to the industry averages, RXV has:
Answer: A
Can you someone help to explain how the answer is A please?
If I’m remembering correctly: Operating cycle is Days Sales Outstanding (DSO) + Days Inventory on Hand (DOH). If the operating cycle is longer than the industry average, it must be from some combination of these ratios. More strict credit terms would decrease the DSO number, which would not likely be the cause for the operating cycle being longer (would actually shorten the cycle, ceteris paribus). Payables are not involved in the Operating Cycle, but rather in the NET Operating Cycle, so B is incorrect.
Choice A must be correct, because obsolete inventory builds up, which decreases inventory turnover. This decrease means DOH increases. This is a valid reason for the operating cycle being greater than the industry average.
Oh yes of course, thank you