Upper limit for the credit period
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Explain why the buyer's operating cycle considered to be an appropriate upper limit for the credit period. Define what the operating cycle is. Wouldn't the buyer's inventory period be a better target?
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The solution explains how to determine the upper limit for the credit period.
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Operating cycle is defined as the time duration from the purchase of raw materials till the collection of accounts receivable. It is calculated as inventory days + Receivable days
If we look at the buyers operating cycle, the buyer purchases material from the seller and is required to pay the seller for the purchase. The operating cycle of the buyer starts at the time of purchase of the material from the seller.
What should be the maximum credit ...
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