From the course: Financial Accounting Part 2
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Days purchases in payable
From the course: Financial Accounting Part 2
Days purchases in payable
- A firm's operating cycle is measured as the time from when inventory is purchased to when cash is collected from the sale of that inventory. Let's continue with the Nike example. On average, it takes them across all their product lines about 91 days to turn raw materials into inventory and then sell it. Then they wait about 36 days before receiving payment from customers to whom they sold that inventory. Customers like Footlocker, for example. So their operating cycle is 127 days, 91 days to turn raw materials into inventory and then sell it and then 36 days to collect the cash from that sale. Now, that may seem like a long time from start to finish from raw materials to inventory to account receivable to cash. But hold on, we need to factor in one more variable. How long does Nike have before they have to pay for the inventory that they purchased? In other words, what's their days purchases in payables? If, for example,…
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