Chapter 16, Problem 5CTCR

Summary Introduction

To discuss: Whether the firm’s cash cycle can be longer than the operating cycle.

Introduction:

Operating cycle:

The phase, which takes time to complete the process from initial outlay of cash to produce, sell, receive money from customers are termed as operating cycle.

The formula to calculate operating cycle:

$\text{Operating cycle}=\text{Inventory period}+\text{Accounts receivable period}$

Cash cycle:

The phase that takes time to complete the process between the cash disbursement and cash collection is termed as cash cycle.

The formula to calculate cash:

$\text{Cash cycle}=\text{Operating cycle}-\text{Accounts payable period}$