The operating cycle in days is defined as which of the following?

• A. Days Inventory Outstanding + Days Payables Outstanding
• B. Days Inventory Outstanding + Days Sales Outstanding
• C. Days Sales Outstanding + Days Payables Outstanding
• D. Inventory days + Receivables days

Answer: (B)

The operating cycle measures how long cash is tied up in the process from purchasing inventory to collecting cash from customers. It is calculated by adding the time inventory sits before it is sold to the time it takes to collect payment after a sale. In practice, that means Days Inventory Outstanding plus Days Sales Outstanding. For example, if inventory sits for 40 days before sale and receivables take 30 days to collect after a sale, the operating cycle is 70 days. The other options mix in payables or use terms that aren’t part of the basic operating cycle; Days Payables Outstanding relates to when you pay suppliers (affecting the cash conversion cycle, not the operating cycle itself). The final choice expresses a similar idea but uses less standard terminology, whereas the common definition is DIO plus DSO.