Let’s pretend your company makes glass souvenir mugs and your customer is Target stores.
Here’s the timeline:
2 days to produce a mug
6 days it sits on your warehouse shelf as unsold inventory. Target places an order after 6 days, you ring it up on your cash register, make a receipt, and you ship it immediately.
3 days it ships from your factory to the Target. It arrives after 3 days on a truck
45days after Target receives the mugs and signs off on it, you receive payment for the mugs.
What is the Operating Cycle in days?
Is it 2+6+3+45 because we’re counting the manufacturing time?
Or is it 6+3+45 because we’re only counting inventory + receivables as time?
Or it is 6+45 because the shipping days doesnt count and the production time doesnt count?
The operating cycle is the amount of time required by an organization to make an initial cash outlay for production of goods, selling the goods and finally reciept of cash from the customers in exchange for the goods.
So, the operating cycle in the given scenario will be 2+6+3+ 45= 56 days.
Hence, Operating cycle includes, the manufacturing time, shipping time , time for which the stocks remains in inventory.
FOB shipping or FOB destination?
Freight on board: it designates when the goods are deemed to have changed hands.
FOB shipping means that the goods change hands at the shipping point, so they are not the property of the seller during the three days of travel time; FOB destination means that the gooda change hands at the destination point, so they are the property of the seller during the three days travel time.
I just find it funny (i.e., irritating) that CFA Institute doesn’t clarify that.