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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Define a company’s operating cycle. How do you compute the length of a company’s operating cycle? What does it mean?

To determine

Define the term company’s’ operating cycle, explain the way in which the length of a company’s operating cycle is computed and state its meaning.

Explanation

Operating cycle:

Operating cycle measures the time period (number of days) taken to avail cash from the sale of inventory versus the time period taken for making its accounts payable (payment made for inventory)

To calculate the operating cycle, the three working capital turnover ratios are used to specify the total number of days in the operating cycle of the company, beginning from the payment of cash to purchase inventory to the collection of cash from sales, minus the number of days of financing from payables.

The formula used to compute length of operating cycle is as follows:

Operatingcycle=(

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