Question

Natcher Corporation’s accounts receivable at the end of Year 2 was $128,000 and its accounts receivable...

Natcher Corporation’s accounts receivable at the end of Year 2 was $128,000 and its accounts receivable at the end of Year 1 was $131,000. The company’s inventory at the end of Year 2 was $128,000 and its inventory at the end of Year 1 was $122,000. Sales, all on account, amounted to $1,382,000 in Year 2. Cost of goods sold amounted to $801,000 in Year 2. The company’s operating cycle for Year 2 is closest to:

  • A) 44.8 days

  • B) 67.7 days

  • C) 63.4 days

  • D) 91.1 days

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Answer #1

Answer option d) 91.1days

Inventory turnover = cost of goods sold/average inventory

Average inventory =opening+ending/2

=$122000+$128000/2

.= $125000

Inventory turnover = $801000/$125000 = 6.41

Average sales Period = 365/inventory turnover

= 365/6.41

= 56.9

Accounts receivable turnover = sales/average Accounts receivable

Average Accounts receivable = opening+ending/2

. = $131000+$128000/2

= $129500

Accounts receivable turnover = $1382000/$129500= 10.67

Average collection period = 365/Accounts receivable turnover

= 365/10.67 = 34.2

Operating cycle = average sales Period + average collection period

= 56.9+34.1 = 91.1 days

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