A. A metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales
B. The time it takes a company to buy goods, sell them and receive cash from the sale of said goods
C. The process of hiring personnel to conduct the daily operations of the business
D. Colective process of identifying, analysing, and recording the accounting events of a company
Correct Answer:B
Explanation:
An operating cycle, also known as the cash conversion cycle, refers to the period it takes for a business to purchase inventory, sell the inventory, and collect cash from the sale. It essentially measures the efficiency and effectiveness of a company’s operations and management.
The operating cycle can be broken down into three main components:
1. **Inventory Period:** The time it takes for a company to purchase inventory and then sell it. This includes the duration that the inventory is held before it is sold.
2. **Accounts Receivable Period:** The time it takes for the company to collect cash from customers after the sale of inventory. This period starts when the inventory is sold and ends when the payment is received from customers.
3. **Accounts Payable Period:** The time the company takes to pay its suppliers for the inventory purchased. This period starts when the inventory is purchased and ends when the payment is made to suppliers.
A shorter operating cycle indicates that a company is able to quickly turn its inventory into cash, which is generally a sign of efficiency and good management. Conversely, a longer operating cycle may indicate inefficiencies or potential liquidity issues.