A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an average payment period of 30 days. The firm's operating cycle is _________days.
A) 135
B) 75
C) 90
D) 105

Question

Quizplus · Accepted Answer

The operating cycle is the sum of the inventory and receivables turnover periods:

Operating cycle = inventory turnover period + receivables turnover period

Operating cycle = 60 days + 45 days 
Operating cycle = 105 days

Then, subtract the payment period:

Operating cycle - payment period = 
105 days - 30 days = 
75 days

Therefore, the best choice is D: 105 days, because it represents both the total time to convert inventory into cash (operating cycle) and the time it takes to pay suppliers.

A Firm Has an Average Age of Inventory of 60