The Breeze Hair Salon Inc. began operations six months ago. The salon's main business is hair styling and other hair treatment services. The salon also purchases and sells all of the products it uses, plus hair accessories such as hair extensions and jeweler. The sale of the products, while secondary to the salon's main business, still constitutes a significant amount of revenue. Most sales are paid by the salon's customers with cash, or paid for by debit and bank credit cards, which are considered to be equivalent to cash.

The salon purchases its products from a local wholesaler, on credit terms of n/30 days. Normally, the salon purchases a two-month supply of products at a time. Karen, the manager of the salon, is not comfortable with a high level of accounts payable so the salon pays the wholesaler much earlier than 30 days if it has cash on hand.

When the salon's accounting system was set up, a perpetual inventory system was established to track the products sold. Staff have been complaining to Karen that it is time-consuming to scan each product sold. Both the staff and customers are finding the additional time it takes to scan products to be frustrating, especially when the salon is busy.

Karen had a physical inventory count performed after the salon's first six months of operations. When the quantities of merchandise determined at the physical count were compared with the quantities per the perpetual system, there were a number of discrepancies.

Karen has noticed that the salon oft en runs out of the more popular products. She also noticed that while some items sell fast, others seem to collect dust. To get rid of these slow-moving products, the salon has to mark down the selling prices of its products, which is affecting the company's cash flow and gross profit.

Instructions

(a) Explain to Karen what an operating cycle is and why the salon is having problems with its cash flow and gross profit.

(b) Make a recommendation about what inventory system the salon should use and explain why.

(c) Explain to Karen the reasons for conducting an inventory count and advise her on the required frequency of counts.