Question

Assume a firm's production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold. If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be?

Answer 1

Answer:

110

Explanation:

The operating cycle is the days for which inventory is held until the time of sale, that is, the days before finished goods are sold and the days in which cash from the sale of inventory is received which is the account receivable cycle.

Therefore, the formula for calculating operating cycle is

Inventory period + account receivable cycle

40 + 70 = 110

The operating cycle is 110

Answer 2

Based on the days required to go from raw materials to finished products and the other periods, the operating cycle would be 110 days.

The operating cycle can be found by the formula:

= Days in inventory + Days in Receivables - Days in payables

Further broken down this is:

= Days from raw materials to inventory + Time before inventory sold + Days in Receivables - Days in payables

= 80 + 40 + 70 - 80

= 110 days

In conclusion, this is 110 days.

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