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?
(A) 190 days From receiving raw material to finished product + sales period + A/R period
(B) 270 days
(C) 110 days
(D) 130 days

Answer 1

Answer:

(C) 110 days

Explanation:

The computation of the operating cycle is shown below:

= Average days of process from raw materials to finished products + another days before the finished goods are sold + average days of accounts receivable -  average days of accounts payable

=  80 days + 40 days + 70 days -  80 days

= 110 days

While calculating the operating cycle we add the inventory days, accounts receivable and deduct the account payable days.