Chapter 26, Problem 1CQ

Summary Introduction

To explain: The characteristics of the firm having long operating cycle.

Operating Cycle:

Operating cycle is a time period between the sale of a product and the recovery of cash from the customer. Operating cycle is also known as the business cycle, it involves every quantitative business activity of the company.

Answer to Problem 1CQ

The following are the characteristics of the firm having long operating cycle.

• Store more inventory
• Pay supplier dues quickly.
• Accounts receivables are high.

Explanation of Solution

• The firm having long operating cycle always maintains a high storage of inventory. By keeping high storage of inventory the inventory turnover of such companies are very low.
• These companies pay cash to accounts payable quickly. As they maintain high storage of inventory, so they are able to sell product to customer every time and this is the reason they easily pay cash to suppliers.
• These companies believe to sell products on credit basis; by this strategy, they have more customer retention and loyalty. As by selling of product on credit basis the accounts receivable account automatically increases the long operating cycle of the company.

Conclusion

Thus, the long operating cycle companies are making a strong planning on the working capital components.