The operating cycle of a manufacturer is the length of time between the
a. purchase of raw materials and the sale of the goods.
b. sale of the goods and the collection of any outstanding receivables from the sale of the product.
c. purchase of raw materials and collection of any outstanding receivables from the sale of the product.
d. purchase of raw materials and the production of goods.
Raw material (RM) is the primary source or thing from which an item or finished product is made. For an organization, RM is the natural source and is directly purchased from other entities. The RM is the inventory and current assets of a company.
Answer and Explanation: 1
The correct option is c.
a. No, the operating cycle (OC) does not refer to the time between the purchase of raw materials (RM) and the sale of finished products. It is the total time taken by an entity to convert inventory into sales or revenue.
b. The time between the sale of goods and the collection of outstanding cash from credit sales of products is known as the average collection period.
c. Yes, the OC of a producer is the total time in between the purchase RM and the collection of outstanding payments from the credit sale of the goods. OC is considered the average time taken by an entity to purchase material, convert it into finished goods, and collect cash from selling products.
d. The time between purchasing the RM and converting that material into finished goods is the total conversion time taken by an entity to produce the goods.
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fromChapter 22 / Lesson 42
Explore the operating cycle in accounting. See the operating cycle definition and understand how to calculate the operating cycle. Find the operating cycle formula.