Chapter 19, Problem 1CC

Summary Introduction

Cash cycle: Cash cycle indicates that period of time which lies between the cash payment made by the firm to purchase inventory and cash received for cash sales of finished goods inventory which is produced by previously purchased inventory.

Operating cycle: It refers to the average passage of time between the initial inventory acquired and the cash received from the sale of that same inventory.

To Explain: The difference between cash cycle and operating cycle of a firm.

Answer to Problem 1CC

Solution:

The cash cycle and operating cycle both can be same or different, depends upon the mode of inventory purchase.

Explanation of Solution

The difference between cash cycle and operating cycle are mentioned below:

• The cash cycle starts with the outflow of cash to acquire inventory but operating cycle starts when inventory is actually acquired.
• The purpose of cash cycle is to indicate the management of cash flow and operating cycle indicates the efficiency of company in its operations.
• The cash cycle can be negative in nature but operative cycle cannot be negative.
• The time duration of cash cycle and operating cycle can be same if the inventory is purchased on cash.
• If inventory is purchased on credit and payment is made after some days then the cash cycle will be shorter than the operating cycle.

Conclusion

The cash cycle and operating cycle both can be same or different, depends upon the mode of inventory purchase.