The operating cycle is typically defined as the sum of which two components?

• A. Days sales outstanding and days inventory outstanding
• B. Days payable outstanding and days sales outstanding
• C. Days inventory outstanding and days payable outstanding
• D. Cash conversion cycle components only

Answer: (A)

The operating cycle measures how long cash is tied up from buying inventory to collecting cash from customers. It consists of two parts: how long inventory sits before it’s sold (days inventory outstanding) and how long it takes to collect payment after a sale (days sales outstanding). Adding these two days gives the total time from cash outlay for inventory to cash recovery from customers.

The other metric, days payable outstanding, is about how long you delay paying suppliers and is not part of the operating cycle itself. When you subtract it, you get the cash conversion cycle, which adjusts the operating cycle for payment terms. So the operating cycle is the sum of days inventory outstanding and days sales outstanding. For example, if DIO is 60 days and DSO is 40 days, the operating cycle is 100 days. If DPO is 30 days, the cash conversion cycle would be 70 days (100 − 30).