Chapter 5, Problem 2Q

To determine

Operating cycle

Operating cycle refers to the average period of time a business takes to purchase inventory, convert it into sales, and then collect revenue from sales, in the form of accounts receivable.

In a merchandising company, the primary source of revenue is the sale of merchandise. This is termed as either sales revenue or sales.

Unlike expenses for a service-based company, expenses for a merchandising company include cost of goods sold and operating expenses. Cost of goods sold is the total cost of merchandise sold in a period. Operating expenses include selling and advertising expenses.

To determine: The reason why the normal operating cycle for a merchandising company is likely to be longer than for a service company.