Question

The operating cycle of a merchandiser with credit sales includes the following five activities. Starting with merchandise acquisition, identify the chronological order of these five activities.

a. Prepare merchandise for sale.

b. Collect cash from customers on account.

c. Make credit sales to customers.

d. Purchase merchandise.

e. Monitor and service accounts receivable.

Short answer

Sequence of Activity

Purchase merchandise.

Prepare merchandise for sale.

Make credit sales to customers.

Monitor and service accounts receivable.

Collect cash from customers on account.

Step-by-step solution

Definition of Operating Cycle

The total time spent by a business entity, from the initial activity of producing goods to collecting cash from the customer, is known as the operating cycle.

Purchase merchandise

In the first step of the operating cycle, the business entity purchases merchandise from the supplier.

Prepare merchandise for sale

In the second step of the operating cycle, the business entity prepares the purchased merchandise to get it ready for sale.

Make credit sales to customers

After getting the merchandise ready for sale, the business entity makes credit sales to its customers.

Monitor and service accounts receivable

In this step, the business entity assesses and monitors the accounts receivables generated from credit sales.

Collect cash from customers on account.

In the last step of the operating cycle, the business entity collects cash from the accounts receivables to whom credit sales were made.