Chapter 26.1, Problem 1CC

Summary Introduction

To discuss: The difference between the operating cycle and cash cycle.

Introduction:

Cash cycle is also termed as cash conversion cycle, that measures the time taken to convert the cash into stocks, accounts payable by the way of sales and accounts receivables and again back to cash.

Formula to calculate the cash conversion cycle is given below:

$\text{Cash conversion cycle}=\text{Accounts receivable days}+\text{Inventory days}-\text{Accounts payable days}$

Operating cycle determines the average length of time taken from the initial cash to produce the item to the cash received from the customers. This includes various factors like payment terms and conditions a company gives its customers and the payment that the company receives from its suppliers.