Monday, November 23, 2009

Operating Cycle of a Merchandising firm

The operating cycle of a merchandising firm describes all the activities which are required by the firm to produce and sell goods to its customers. Value chain is also a good term to describe the activities undertaken by a firm to produce and market products for its customers. However, operating cycle is an accounting term which I read about in my accounting book. There are usually three activities which are undertaken by a merchandising firm. They are purchasing, sales and collection activity.
Purchasing Activity: Purchasing activity is carried out by the firm to purchase raw materials and other supplies in order to start the production process. Sometimes the firm may simply purchase finished goods in order to sell them at a profit.
Sales Activity: After the goods are produces by the firm, they are sold by the firm to its customers. The firm can sell its goods on cash or on credit. If the goods are sold on credit, then the operating cycle ends here. However, if the goods are sold on credit, then there is a further activity to be carried out by the firm.
Collection Activity: In this activity, the firm collects cash from all those customers which purchased goods on credit from the firm. Sometimes the customer may fail to pay the amount possibly due to cash flow problems or in some cases due to bankruptcy. Then, our firm will have to record the amount due as a bad debt expense.
So, this is the operating cycle of a merchandising firm. So, do you guys think that it resembles the value chain of a business?


Syed Ahmad Hashmi said...

This operating cycle would be more complex in manufacturing situation because there would be some more steps added to it. Good addition hassan. keep the good work going.