Question

explain operating cycle in accounting

Answer 1

Operating cycle is the average time required by a business to convert its available cash into inventory, sells inventory to customers and collect cash for these. Hence an Operating cycle of business understands with these steps:
1. Purchase of inventory by available cash.
2. Sale of goods.
3. Receive cash in return from the selling of above inventory.

Operation cycle is calculated by the formula :

Operating Cycle = Average Sale Period + Average Collection Period

Factors affecting operating cycle:

1. Payment terms of Purchasing

2. Goods supply Policy

3. Credit Policy