BU127 Lecture Notes - Lecture 3: Retained Earnings, Weighted Arithmetic Mean, Gross Profit
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BU127 Full Course Notes
The long-term objective for business is to turn cash into more cash. This excess cash must be generated into operations. The length of time between the payment of cash to suppliers of inventory and to employees and the collection of cash from customers depends on the nature of the business. In some companies, inventory is paid for well before it is sold. Toys r us, builds it inventory for months prior to the year-end holiday season. It borrows funds from banks to pay for the inventory and repays the loans with interest when cash is received from customers. In other companies, cash is received from customers well after a sale takes place. Companies attempt to shorten the operating cycle by creating incentives to encourage customers to buy sooner or pay faster in order to improve company"s cash flows. Shortening the operating cycle means higher profits and faster grown.