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 selling on credit on the operating cycle.
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Cornerstones of Financial Accounting
- Effective credit management involves establishing credit standards for extending credit to customers, determining the company's credit terms, and setting up procedures for invoicing and collecting past-due accounts. The following statement refers to a credit management policy. Select the best term to complete the sentence. How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company's collection policy Consider the case of Mammoth Pictures Inc.: Mammoth Pictures Inc.'s CFO has decided to take a closer look at the company's credit policy. Mammoth Pictures Inc. has annual sales of $396.3 million, and it currently has an accounts receivable balance of $47.6 million. The first step in analyzing the firm's credit policy is to determine its days sales outstanding (DSO). Based on this information, Mammoth Pictures Inc.'s DSO is The average DSO for Mammoth Pictures Inc.'s industry is 51.2 days. Assuming that its sales…arrow_forward2.-Credit selection involves the application of techniques to determine which customers should receive credit from the company, according to its credit standards. True or false?arrow_forwardTrue or False: In the credit and operating cycle, the collection stage or cycle begins with the sale of a product or service.arrow_forward
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