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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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Case 4-63 The Operating Cycle

There are two retail stores in Millersburgh‘ One is a full-service store that typically sells on credit to its customers; the other is a smaller discount store that usually sells for cash. Full-service stores typically charge higher prices than discount stores for identical items.

Required:

Does the operating cycle suggest some economic reason for a portion of [his price difference? Explain your answer.

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 effect of the operating cycle on the difference in the prices of given stores.

Explanation

The full service store has a longer operating cycle than the smaller discount store because it provides credit sales. Due to the longer operating cycle, the operating cost o...

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