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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise 4-54 Operating Cycle and Current Receivables

a. Dither and Sly are attorneys-at-law who specialize in federal income tax law. The): complete their typical case in 6 months or less and collect from the typical client within 1 additional month.

b. Johnston’s Market specializes in fresh meat and fish. All merchandise must be sold within one week of purchase. Almost all sales are for cash and any receivables are generally paid by the end of the following month.

c. Mortondo’s is a women’s clothing store specializing in high-style merchandise. Merchandise spends an average of 7 months on the rack following purchase. Most sales are on credit and the typical customer pays within 1 month of sale.

d. Trees Inc. grows Christmas trees and sells them to various Christmas tree lots. Most sales are for cash. It takes 6 years to grow a tree.

Required:

For each of the businesses described above, indicate the length of the operating cycle.

To determine

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.

To Indicate:

The operating cycle for each of the given case.

Explanation

The operating cycle for each of the given case is explained as follows:

    CaseOperating Cycle
    a7 months Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period = 6+1-0 =7 months
    b

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