On average a company has goods on hand for 120 days before they sell them.They buy their goods on credit with 30-day terms and they sell their goods by offering 20 days to pay.What is their inventory self-financing period?

Question

Quizplus · Accepted Answer

The inventory self-financing period is calculated by subtracting the days of credit received from the number of days inventory is held.

Days of inventory held = 120 days
Days of credit received = 20 days

Therefore, inventory self-financing period = 120 days - 20 days = 100 days

However, the question asks for the self-financing period, taking into account the fact that they buy the goods on credit with 30-day terms. This means that they have 30 days to pay their supplier before the supplier starts charging interest or taking action to collect the debt.

So, the company is effectively financing their inventory for 30 days before they have to pay for it.

So, the inventory self-financing period becomes:

Days of inventory held + Days of credit to supplier = 120 days + 30 days - 20 days = 130 days - 20 days = 110 days

Therefore, the best choice is B.

On Average a Company Has Goods on Hand for 120