Chapter 2, Problem 1Q

What is meant by the term operating cycle?

To determine

Current Assets: Current assets are those assets that can be converted to cash, or used in the business operations within a period of one year, or the normal operating cycle of the business, whichever is longer in time period.

To Define: The term operating cycle of the business.

Explanation of Solution

The operating cycle refers to a time period, within which a business firm completes the cycle of cash to cash status, in the business operations. That is, use of cash in the first place to purchase inventory, sell them to customers on credit and creating accounts receivable, and finally collecting the cash back to the business from the customers. But few other type of business like Vineyard, the operating cycle extends to more than a year. Therefore most companies follow one year as the operating cycle barring few exceptional cases and determines their assets and liabilities to be classified as current and long-term.

Conclusion

Thus, operating cycle is the time period in which the business firm sustain their cash status through business operations.