In short
The operating cycle is the average time from paying cash for inventory or services to collecting cash from customers. Current assets are those expected to be realized within one year or the operating cycle, whichever is longer.
Key takeaways
- Businesses such as distilleries or tobacco growers can have cycles longer than a year.
- Current liabilities are those expected to be paid using current assets.
- Shorter cycles mean less cash tied up in working capital.
Where it's tested
FAR: Balance Sheet & Income Statement Preparation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has current assets of $400,000 and current liabilities of $250,000. It then reclassifies $60,000 of long-term debt as currently maturing. What is the effect on working capital?