The difference between a company’s operating cycle and its net operating cycle i
ID: 2791990 • Letter: T
Question
The difference between a company’s operating cycle and its net operating cycle is:
the number of days that it takes, on average, for the company to sell its inventory.
the number of days that it takes the company to pay on the accounts due its suppliers.
the number of days that it takes for the company’s cash investment in inventory to result in cash collections from customers.
the number of days that it takes, on average, for the company to sell its inventory.
the number of days that it takes the company to pay on the accounts due its suppliers.
the number of days that it takes for the company’s cash investment in inventory to result in cash collections from customers.
Explanation / Answer
Q. The difference between a company’s operating cycle and its net operating cycle is:
Answer: the number of days that it takes the company to pay on the accounts due its suppliers.
Explanation
Operating Cycle
Operating cycle is the number of days a company takes in realizing its inventories in cash. It equals the time taken in selling inventories plus the time taken in recovering cash from trade receivables.
Formula
Operating Cycle = Days' Sales of Inventory + Days Sales Outstanding
Net Operating Cycle
The net operating cycle, also called the cash conversion cycle, is the number of days it takes a company to generate revenues with assets.
Length of the cycle can be calculated with the following formula:
Net Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding
The net operating cycle is a measure of how long an investment is locked up in production before turning into cash.
While both cycles serve similar purposes, the operating cycle offers insight into a company's operating efficiencies, while the cash cycle offers insight as to how well a company is managing its cash flow. Additionally