Q6Managerial Economics & Financial Accounting
Question
2 marks
Write down the steps of operating cycle.
Answer
The operating cycle involves converting cash to inventory, processing it, selling it, and collecting receivables back into cash.
The Operating Cycle (or Working Capital Cycle) outlines the time it takes for a company to convert its cash back into cash through operations. The steps for a manufacturing firm are:
1. Cash is used to purchase... 2. Raw Materials, which are processed into... 3. Work-in-Progress (WIP), which is completed to become... 4. Finished Goods, which are sold on credit, creating... 5. Accounts Receivable (Debtors), from whom cash is eventually collected, returning to step 1.