Concept Introduction:
Operating cycle:
Operating cycle is the chain of business activities performed in an organization. An organization can be manufacturing, servicing of merchandising type. For a merchandiser, the main business activities are the purchase, payment to the supplier, sales, and receipts from the customer. Hence the operating cycle of a merchandiser is limited as compared with the operating cycle of a manufacturer.
The Operating cycle mainly includes following activities:
•Purchases from the supplier (either cash or on account)
•Payment to suppliers
•Inventory
•Sales (either cash or on account)
•Collection from customer
The formula to calculate the operating cycle is as follows:
Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period.
Requirement-1:
To Indicate:
The correct match for each business with its operating cycle description.
Concept Introduction:
Operating cycle:
Operating cycle is the chain of business activities performed in an organization. An organization can be manufacturing, servicing of merchandising type. For a merchandiser, the main business activities are the purchase, payment to the supplier, sales, and receipts from the customer. Hence the operating cycle of a merchandiser is limited as compared with the operating cycle of a manufacturer.
The Operating cycle mainly includes following activities:
•Purchases from the supplier (either cash or on account)
•Payment to suppliers
•Inventory
•Sales (either cash or on account)
•Collection from customer
The formula to calculate the operating cycle is as follows:
Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period.
Requirement-2:
To Indicate:
The effect of longer operating cycle on financial needs of the company.
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Cornerstones of Financial Accounting
- Monitoring of Receivables The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on January 1. Its credit sales for the first 6 months of operations were as follows: Throughout this entire period, the firm’s credit customers maintained a constant payments pattern: 209b paid in the month of sale, 309b paid in the first month following the sale, and 509b paid in the second month following the sale. What was Fogler’s receivables balance at the end of March and at the end of June? Assume 90 days per calendar quarter. What were the average daily sales (ADS) and days sales outstanding (DSO) for the first quarter and for the second quarter? What were the cumulative ADS and DSO for the first half-year? Construct an aging schedule as of June 30. Use account ages of 0-30, 31-60, and 61-90 days. Construct the uncollected balances schedule for the second quarter as of June 30.arrow_forwardExercise 4-54 Operating Cycle and Current Receivables a. Dither and Sly are attorneys-at-law who specialize in federal income tax law. The): complete their typical case in 6 months or less and collect from the typical client within 1 additional month. b. Johnstons Market specializes in fresh meat and fish. All merchandise must be sold within one week of purchase. Almost all sales are for cash and any receivables are generally paid by the end of the following month. c. Mortondos is a womens clothing store specializing in high-style merchandise. Merchandise spends an average of 7 months on the rack following purchase. Most sales are on credit and the typical customer pays within 1 month of sale. d. Trees Inc. grows Christmas trees and sells them to various Christmas tree lots. Most sales are for cash. It takes 6 years to grow a tree. Required: For each of the businesses described above, indicate the length of the operating cycle.arrow_forwardArcher Electronics Company's actual sales and purchases for April and May are shown here along with forecast sales and purchases for June through September: April (actual) May (actual) June (forecast) July (forecast) August (forecast) September (forecast) Sales $ 370,000 350,000 325,000 325,000 340,000 380,000 Purchases $ 155,000 145,000 145,000 205,000 225,000 220,000 The company makes 20 percent of its sales for cash and 80 percent on credit. Of the credit sales, 50 percent are collected in the month after the sale and 50 percent are collected two months later. Archer pays for 20 percent of its purchases in the month after purchase and 80 percent two months after. Labor expense equals 15 percent of the current month's sales. Overhead expense equals $12,500 per month. Interest payments of $32,500 are due in June and September. A cash dividend of $52,500 is scheduled to be paid in June. Tax payments of $25,500 are due in June and September. There is a scheduled capital outlay of…arrow_forward
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