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Homework answers / question archive / A manufacturer of household appliances may incur a loss due to the discovery of a defect in one of its products
A manufacturer of household appliances may incur a loss due to the discovery of a defect in one of its products. The occurrence of the loss is reasonably possible, and the resulting costs can be reasonably estimated. This possible loss should be disclosed in the notes only accrued only accrued and disclosed in the notes O neither accrued nor disclosed in the notes Question 16 2 pts Which of the following statements best describes the operating cycle concept? An operating cycle is any 12-month period that a firm uses for its fiscal year. An operating cycle is the time between the purchase of inventory and the conversion of that inventory back into cash An operating cycle is the average number of days required to sell inventory. An operating cycle is the average number of days required to collect receivables.
Solution
Q15:
A manufacturer of household appliances may incur loss due to …
The correct option is – disclosed in the notes only.
Explanation –
The occurrence of loss is only likely possible, the manufacturer should not accrue the loss contingency. The same should be disclosed in the financial statement as footnotes.
Q16:
The statement that best describes the operating cycle concept is –
Correct option is - An operating cycle is the time between the purchase of inventory and the conversion of that inventory back into cash.
Explanation – operating cycle generally implies to the time duration during which a company invests cash in its operations and gets back the cash from operations.
A retailing company usually buys inventory, sells inventory and subsequently collects cash relating to the sale of inventory. The gap between the purchase of inventory and the collection of cash from customers is referred to as operating cycle.
The other options are incorrect for the following reasons –
The operating cycle normally spans to 12 months but is not truly confined to the 12-month period.
An operating cycle comprises period of not only selling inventory but also the period needed to collect cash from sales of inventory.
Also, the time needed to collect receivables forms part of operating cycle but this alone cannot be termed as operating cycle.
