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OBJ ECTWE 6
Exercise 4-53 Operating Cycle
A list of businesses is presented below:
Business Opening-Cycle Description
1. Tree nursery a. Very short-customers typically pay cash, and inventory is of um held
2. Fast food restaurant less than 1 day.
3. Appliance store I}. A few months-merchandise is typically on hand for several weeks,
4. Electric utility and some customers may use credit.
5. Clothing store c. More than 1 year-merchandise may be in inventory for several months. and most customers will pay for purchases after I or 2 years.
6. Several years-a number of years are required to prepare merchandise for sale, Customers probably pay cash for most items,
e. A few month-customers pay monthly. The current assets used to provide customer services are consumed within a few months.
Required:
1. Match each business with a description of the operating cycle for that business.
2. CONCEPTUAL CONNECTION How does a longer operating cycle (such as Description c or 6) change a company’s financing needs relative to a shorter operating cycle (such as Description a)?
Concept Introduction:
Operating cycle:
Operating cycle is the chain of business activities performed in an organization. An organization can be manufacturing, servicing of merchandising type. For a merchandiser, the main business activities are the purchase, payment to the supplier, sales, and receipts from the customer. Hence the operating cycle of a merchandiser is limited as compared with the operating cycle of a manufacturer.
The Operating cycle mainly includes following activities:
•Purchases from the supplier (either cash or on account)
•Payment to suppliers
•Inventory
•Sales (either cash or on account)
•Collection from customer
The formula to calculate the operating cycle is as follows:
Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period.
Requirement-1:
To Indicate:
The correct match for each business with its operating cycle description.
The correct match for each business with its operating cycle description is explained as follows:
| Business | Operating Cycle Description | |
| 1 | d. | Tree Nursery requires several years to grow trees and get them ready for sale |
| 2 | a. | Fast Food Restaurant has a very short operating cycle as they keep the inventory on daily basis... |
Concept Introduction:
Operating cycle:
Operating cycle is the chain of business activities performed in an organization. An organization can be manufacturing, servicing of merchandising type. For a merchandiser, the main business activities are the purchase, payment to the supplier, sales, and receipts from the customer. Hence the operating cycle of a merchandiser is limited as compared with the operating cycle of a manufacturer.
The Operating cycle mainly includes following activities:
•Purchases from the supplier (either cash or on account)
•Payment to suppliers
•Inventory
•Sales (either cash or on account)
•Collection from customer
The formula to calculate the operating cycle is as follows:
Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period.
Requirement-2:
To Indicate:
The effect of longer operating cycle on financial needs of the company.
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