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CASEBOOK

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Content
    Introduction to Accounting
    The Story Income Statement Balance Sheet Statement of Cash Flow
    Accounting Principles
    Introduction to Accounting Principles Accounting Principles & Guidelines (contd..) Accounting Principles & Financial Statements
    Accounting Basics
    Double Entry System of Accounting Debits & Credits Bank's Debit & Credit Chart of Accounts
    Financial Statements
    Introduction to Financial Statements Accrual v/s Cash basis of Accounting
    Income Statement
    Income Statement: An Introduction Revenue & Expenses; Gains & Losses Income Statement Formats Operating Income; EBITDA; Net Income; EPS
    Balance Sheet
    Balance Sheet: An Introduction Assets & Liabilities; Stockholders' Equity Relation: Balance Sheet & Income Statement
    Working Capital & Liquidity
    Operating Cycle Working Capital: An Introduction Working Capital v/s Liquidity
    Statement of Cashflow
    Cashflow Statement: An Introduction Preparing Cashflow Statement Preparing Cashflow Statement (Contd ... ) Preparing Cashflow Statement: Summary Relation: Balance Sheet & Cashflow Statement
    Adjusting Entries
    Introduction to Adjusting Entries Accrual Entries Deferral Entries Reversal Entries
    Preparing Financial Statements
    Financial Statements: Quarter 1 Financial Statements: Quarter 2 Financial Statements: Quarter 3 Financial Statements: Quarter 4
    Financial Ratios
    Introduction to Financial Ratios Profitability Ratios Liquidity & Solvency Ratios Activity & Valuation Ratios
    Capital Budgeting
    Need & Business Scenario Net Present Value (NPV) Present Value (PV) of an Annuity Present Value (PV) of a Perpetuity Rate of Return (IRR) & Payback Method
    Case Study Framework
    Introduction to Case Study Frameworks Growth Strategy Merger & Acquisition International Expansion Pricing Strategy

Working Capital vs Liquidity

OPERATING CYCLE

Operating cycle for an organization is defined as the average time duration which it takes to bring back capital invested in its business operations to its cash accounts. Operating cycle period varies from business to business.

For a manufacturing business, it would be the average time that the company takes to procure raw materials, manufacture & sell finished goods and receive cash from the sale of goods.

For a trading/reseller business, the operating cycle calculations will not include activities like raw material procurement & production of finished goods – it will be simply the duration starting from the procurement of goods (cash outflow) to point where revenue is received from the customer.

Companies prefer to maintain short operating cycles as it enables them to require less cash to maintain its operations and thus can grow with relatively small business margins as well. On the other hand, companies with unusually long operating cycle may require additional funds to grow at a modest pace even with fat margins.

Example. To illustrate, consider the below reseller/ trading business scenario:

  • The company uses cash to purchase inventory items
  • It takes on average 90 days to get the items sold
  • In general, the company offers a 30 days’ credit period to all its customers
  • The company receives the money from these customers on average of 45 days after the sales occurred (irrespective of the 30 days’ credit period)

Operating cycle for such a reseller business can be calculated to be 135 days, as illustrated below:

Familiarity with the concepts of operating cycle is necessary for a better understanding of working capital, current assets and current liabilities.

Table of Contents : Accounting Principles

Part 1: Introduction & Accounting Principles
  • Introduction
  • Accounting Principles & guidelines
    • Money Measurement
    • Economic Entity Assumption
    • The Going Concern Principle
    • The Cost Principle
    • The Dual Aspect Principle
Part 2 : Accounting Principles & Guidelines (Contd..)

Accounting Principles & guidelines

  • Time Period Assumption
  • Conservatism Principle
  • Revenue Recognition Principle
  • Full disclosure Principle
  • Matching Principle
  • Materiality
Part 3 : Effect of Accounting Principles on Financial Statements

Effect of Accounting Principles on Financial Statements

  • Income Statement
  • Balance Sheet
  • Notes to Financial Statements

Foundation section top picks

expert's choice

Standard Costing

Financial accounting

Working Capital & Liquidity

Evaluating business investments

Inventory & Cost of goods sold

Trending Topics

Featured

Accounting Basics

Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows.

Chart of accounts

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

Trending Topics

Break-even Point

Depreciation

Activity Based Costing

Credits & Debits

Bank Reconciliation

Manufacturing Overheads

Non-manufacturing Overheads

Improving Profits

standard costing

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

Advanced section top picks

expert's choice

Standard Costing

Financial accounting

Working Capital & Liquidity

Evaluating business investments

Inventory & Cost of goods sold

Trending Topics

Featured

Accounting Basics

Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows.

Chart of accounts

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

Trending Topics

Break-even Point

Depreciation

Activity Based Costing

Credits & Debits

Bank Reconciliation

Manufacturing Overheads

Non-manufacturing Overheads

Improving Profits

standard costing

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

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