Brown's Furniture Outlet has an accounts receivable period of 42 days and an accounts payable period of 96 days. The company turns over its inventory 2.8 times per year and marks up the inventory an average of 45 percent over its wholesale cost. What is the length of the firm's operating cycle?

Question

Quizplus · Accepted Answer

To calculate the operating cycle, we need to add the inventory period to the accounts receivable period and then subtract the accounts payable period.

Inventory period = 365 days ÷ inventory turnover = 365 ÷ 2.8 = 130.36 days

Operating cycle = inventory period + accounts receivable period – accounts payable period 
= 130.36 + 42 – 96 = 76.36 days

Therefore, the length of the firm's operating cycle is 76.36 days, which is closest to 172.36 days (option B).

Brown's Furniture Outlet Has an Accounts Receivable Period of 42