There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Operating Cycle is the time between the acquisition of an asset for processing and its realization into Cash and cash equivalents.
Reason (R): Any product takes time to be converted into finished goods, i.e., before it is ready for sale. This time period involved in the activity is the period of the Operating Cycle.
Answer & explanation
Correct answer: option 1
The operating cycle in accounting is the period (number of days) from the moment the raw materials arrive at the warehouse until the receipt of payment for the products sold. This is an important part of running a business. You buy some goods and then you sell them and then you collect on that sale. From the time you spend the money necessary to acquire inventory to the time you get the money back from customers is called the operating cycle. The ability of leaders to understand and manage the company's operating cycle is one of the most important predictors of long-term business viability. Few things will put companies out of business quicker than spending cash faster than you collect it. The operating cycle measures how well you manage your cash. Before you can produce a product or service, you need to have the right materials and the right resources (equipment, people, etc.). Acquiring these resources and materials costs money, so you've spent cash before you've produced or sold anything.
The operating cycle breaks down into the following parts:
- Lead time: how long in advance you have to order the materials you need to produce the product or service.
- Production time: the amount of time it takes to make the product or deliver the service once all materials are received.
- Sales time: the amount of time it takes to sell the product once it's been produced.
- Delivery time: the amount of time it takes to deliver the product to the customer after it's sold.
- Cash collection time: the amount of time it takes to receive cash from the customer after the product is sold and delivered.