Q5-3RQ - Horngren'S Financial And Managerial Accounting

Question

Describe the operating cycle of a merchandiser.

Step-by-Step Solution

Answer

The term operating cycle of a merchandiser refers to the process which includes the purchase of inventory, sale of the same, and collection of cash.

Meaning of Operating Cycle

The term operating cycle refers to the average time required for a business entity to purchase inventory and sell such inventories to generate cash for the smooth functioning of the business.

Operating cycle of a merchandiser

The operating cycle of a merchandiser passes through three major stages:

1. The first stage of the operating cycle includes the purchase of inventory from the vendor.

1. In the second stage, the company resells the purchased merchandise. 
2. In the final stage, it collects cash from the customers against the goods sold to them.