The operating cycle
A) measures the time elapsed between cash disbursement for inventory and cash collection of the sales price.
B) refers to the seasonal variations experienced by business enterprises.
C) should be used to classify assets and liabilities as current if it is less than one year.
D) cannot exceed one year.

Question

Quizplus · Accepted Answer

The operating cycle measures the time it takes for a company to convert its inventory into cash. This cycle begins with the purchase of inventory and ends with the collection of cash from the sale of that inventory. Therefore, it measures the time elapsed between cash disbursement for inventory and cash collection of the sales price, which is option A. The other choices are incorrect because the operating cycle can exceed one year, seasonal variations are not necessarily part of the operating cycle, and the length of the operating cycle does not dictate whether or not an asset or liability should be classified as current.

The Operating Cycle