How is the operating cycle calculated, and what components does it include?

The operating cycle is calculated by adding the inventory conversion period and the average collection period. It includes the time taken to convert inventory into sales and the time taken to collect cash from those sales.

The operating cycle consists of two main components: the inventory conversion period, which measures how long it takes for a firm to turn its inventory into sales, and the average collection period, which indicates the time taken to collect cash from customers after a sale. The formula for the operating cycle is: Operating Cycle = Inventory Conversion Period + Average Collection Period.