Credit Sales = $175,000 COGS = $125,000
How many days are in the operating cycle?

Question

Quizplus · Accepted Answer

Operating cycle = DSI + DSO
DSI = (COGS/365) * Inventory Turnover Ratio 
Given COGS = $125,000
Inventory Turnover Ratio = COGS / Average Inventory = Credit Sales / Average Inventory
Average Inventory = Credit Sales / Inventory Turnover Ratio
Given Credit Sales = $175,000
Inventory Turnover Ratio = 125,000 / (175,000 / Inventory)
Inventory = (175,000 / Inventory Turnover Ratio)
Inventory = (175,000 / (125,000/175,000))
Inventory = $245,000
DSI = (125,000 / 365) * (245,000 / 175,000) = 47.26 days
DSO = (Credit Sales / 365) * (Accounts Receivable / Credit Sales) = (175,000 / 365) * (Accounts Receivable / 175,000)
Given Operating Cycle = DSI + DSO
Operating Cycle = 47.26 + [(175,000 / 365) * (Accounts Receivable / 175,000)]
Operating Cycle = 125.13 days (approx)
Therefore, the best choice is C.