Defining the Operating and Cash Cycles

We can start with a simple case. One day, call it Day 0, we purchase $1,000 worth of inventory on credit. We pay the bill 30 days later, and, after 30 more days, someone buys the $1,000 in inventory for $1,400. Our buyer does not actually pay for another 45 days. We can summarize these events chronologically as follows:

operating cycle

The time period between the acquisition of inventory and the collection of cash from receivables.

inventory period

The time it takes to acquire and sell inventory.

accounts receivable period

The time between sale of inventory and collection of the receivable.

Day

Activity

Cash Effect

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