Question

Which of the following is the time span in which cash is paid for services and goods which ar sold to customers from whom the business collects cash

Answer 1

The time span in which cash is paid for services and goods which are sold to customers from whom the business collects cash is called Operating Cycle.

An operating cycle has been defined as the time gap between the spending money in operating activities and collecting money from the same operating activity. It focuses on the purchase and sale of assets .For example retailer’s Operating cycle starts with the buying of merchandise inventory and selling the same inventory. On the other hand manufacturer operating cycle starts when the company incurs expenses on purchasing the raw material for making a product and the Operating cycle continues until the product has been produced and sold to retailers or wholesaler. Therefore, it has the longest Operating cycle. Operating cycles are important because they determine cash flow. If the company’s Operating Cycle is short then this type of company doesn’t face any problem in collecting cash from its customers whereas companies with longest operating cycle have to face problems in collecting cash from its customers? As a result of it they have to borrow from bank in order to pay short term liabilities. These companies are often less profitable because of these extra loans.