Question

Describe the operating cycle and cash cycle? What does it mean to say that a firm has an inventory turnover ratio of 4?

Answer 1

Operating cycle involves inventory days and account receivable days. It involves the time involved in producing the goods and receiving cash from customers . Operating cycle =Inventory days+Days of Account Receivable.

Cash cycle of firm means cash to cash cycle or days when raw materials or inputs are converted to cash
Cash Conversion Cycle =Average Inventory days+Days of Account Receivable -Days of Account Payable

A inventory turnover of 4 means that the ratio of Cost of goods sold to inventory is 4. it shows that inventory is sold 4 times in a year or has been replaced 4 times a year. Higher the inventory turnover higher is the liquidity of the firm.