Suppose that Freddy's Fries has annual sales of $500,000, cost of goods sold of $375,000, average inventories of $9,000, and average accounts receivable of $25,000. Assuming that all of Freddy's sales are on credit, what will be the firm's operating cycle?
A) 27.01
B) 18.25
C) 8.76
D) 9.49

Question

Quizplus · Accepted Answer

The operating cycle is the sum of the inventory period and the accounts receivable period. First, calculate the inventory turnover ratio: Cost of Goods Sold / Average Inventory = $375,000 / $9,000 = 41.67. Then, calculate the inventory period: 365 / Inventory Turnover = 365 / 41.67 = 8.76 days. Next, calculate the accounts receivable turnover ratio: Sales / Average Accounts Receivable = $500,000 / $25,000 = 20. Then, calculate the accounts receivable period: 365 / Accounts Receivable Turnover = 365 / 20 = 18.25 days. Finally, add the inventory period and the accounts receivable period to get the operating cycle: 8.76 + 18.25 = 27.01 days.

Suppose That Freddy's Fries Has Annual Sales of $500,000, Cost