Question

Springfield Cosmetics calculates that its operating cycle for last year was 76 days. The company had $230,000 in its accounts receivable account and had sales of $1.92 million. Approximately how many days does it take from the time raw materials are received at Springfield Cosmetics until the finished products they are used to produce are sold? .

Answer 1

Solution:

Calculation of firm's days sales in inventory

First we need to calculate company's average collection period as follow:

Accounts Receivable turnover=Net Credit sales/Average Accounts receivable

=$1920,000/$230,000

=8.35

Average collection period=365 days/Accounts Receivable turnover

=365/8.35

=43.71 days

Operating Cycle=Average collection period+days sales in inventory

76 days=43.71 days+days sales in inventory

days sales in inventory =76 days-43.71 days

=32.29 days

Thus it take 32.29 days(approx) from the time raw materials are received at Springfield Cosmetics until the finished products they are used to produce are sold.