Calculating Gross and Net Operating Cycle Periods

This article discusses the calculation of gross and net operating cycle periods. The gross operating cycle is the time it takes a company to acquire inventory, sell it, and collect payment from its customers. The net operating cycle is the gross operating cycle minus the time it takes a company to pay its suppliers.

Questions

1. What is the average collections period?
2. What is the average payment period?
3. What is the gross operating cycle?
4. What is the net operating cycle?

Answers

1. The average collections period is the number of days it takes a company to collect payment from its customers. It is calculated by dividing the average balance of sundry debtors by the average daily credit sales.
2. The average payment period is the number of days it takes a company to pay its suppliers. It is calculated by dividing the average balance of sundry creditors by the average daily credit purchases.
3. The gross operating cycle is the sum of the inventory period, the receivables period, and the payables period.
4. The net operating cycle is the gross operating cycle minus the payables period.