1. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Operating Cycle
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store

2. + = = Days Sales in Inventory Days Sales in Receivables
Operating Cycle
Raw materials
Work-in- process (WIP)
Finished
goods
Days from purchase-> sell->collect =
Holding period
Collection period
Purchase
Sell
Collect
the number of days between when the company purchases inventory, through to sales and final collection of cash from customers.
Operating cycle:

3. + = + Days Sales in Inventory Days Sales in Receivables
Expanded operating cycle diagram + =
Days Sales in Inventory
Days Sales in Receivables
Operating Cycle
365 days per year
365 days per year +
Inventory Turnover Ratio
AR Turnover Ratio

4. Requirement #1:  a) Average Inventory: _____________
b) Days Sales In Inventory:  _____________
c) AR Turnover Ratio: _____________
d) Days Sales in Receivables:  _____________
e) Operating cycle: _____________
Requirement #2:  a) What areas should the nephew look into improving?
b) Give two recommendations that could possibly help your nephew improve his operating cycle.
Cost of Goods Sold $40,000
Inventory Turnover Ratio 2
Net Credit Sales $200,000
Average Accounts Receivable $125,000

5. Step #1 Requirement #1: a) Average Inventory: _____________
b) Days Sales In Inventory:  _____________
c) AR Turnover Ratio: _____________
d) Days Sales in Receivables:  _____________
e) Operating cycle: _____________
Requirement #2:  a) What areas should the nephew look into improving?
b) Give two recommendations that could possibly help your nephew improve his operating cycle.
Step #1
Cost of Goods Sold $40,000
Inventory Turnover Ratio 2
What we know
Net Credit Sales $200,000
What we need to know
Average Accounts Receivable $125,000

6. = + + Step #2 Step #3 Step #4 Days Sales in Inventory
Days Sales in Receivables
Operating Cycle
Step #2
365 days per year
365 days per year +
Inventory Turnover Ratio
AR Turnover Ratio
Step #3
Step #4

7. + = = Days Sales in Inventory Days Sales in Receivables
Requirement 2a: What areas should the nephew look into improving?
Days Sales in Inventory +
Days Sales in Receivables =
Operating Cycle
182.5
228.13
410.63
Days from purchase-> sell->collect =
Holding period
Collection period
Purchase
Sell
Collect
Operating cycle:

8. Days Sales in Inventory
Requirement 2b: Give two recommendations that could possibly help your nephew improve his operating cycle.
Days Sales in Inventory +
$17,808 inventory reduction
182.5
(COGS $40,000
/ 365 days)
* days 30
Holding period
Purchase
Sell
Operating cycle:

9. Days Sales in Receivables
Requirement 2a: What areas should the nephew look into improving? +
Days Sales in Receivables =
$108,564 receivables reduction
228.13
(Net credit sales $200,000
/ 365 days)
* days 30
Collection period
Sell
Collect
Operating cycle:

10. How do you use the operating cycle?
Days Sales in Inventory +
Days Sales in Receivables =
Operating Cycle
182.5
228.13
410.63
Days from purchase-> sell->collect =
Holding period
Collection period
Purchase
Sell
Collect
Operating cycle:

11. + = Days Sales of Inventory Days Sales in Receivables Operating Cycle
20X1
12.12
44.50
56.62
20X2
15.96
30.20
46.16
20X3
15.96
27.40
43.36
20X4
19.83
24.70
44.53
20X5
26.60
24.20
50.80
20X6
28.01
23.00
51.01
Why did the operating cycle improve up to 20X3 then worsen to 20X6?

12. Less free working capital Not enough inventory?
Too much inventory?
Inventory carrying costs
Less free working capital
Not enough inventory?
Inventory purchasing and selling
Increased financing costs
Missed sales
Uncollectible Receivables
Credit granting and collecting
Not strict enough
Too strict
Dissatisfied customers
Angry customers

13. Summary Be able to: define, compute and interpret the operating cycle
solve for unknown variables in the operating cycle
describe the positive and negative impacts of a short or long operating cycle

14. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Operating Cycle
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store