The Eagle Corporation builds yachts All vessels are practica

The Eagle Corporation builds yachts. All vessels are practically identical and sell for more than $2 million. Production does not begin until the company has a contract to sell the vessel. The company has recently changed its production techniques to reduce the time for producing a yacht from 15 months to 9 months. What are the accounting method implications of the change

Solution

The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods.With the reduction in the production technique which shall reduce the production time, the operating cycle will improve. Along with it, many other ratios will also improve and give to the company the stability and better cash flows. There are two accounting methods: Cash and Accrual. In the given case, company might be using accrual method of accounting which is expected to be not changed because of change in production technique. However, for some of their production contracts materialised in 1st quarter of the financial year would be recorded as cash received in the current year only because the transaction would be completed during the year/