Guttery Corporation has provided the following financial data from its balance sheet:
Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.
-The company's operating cycle for Year 2 is closest to:
A) 71.2 days
B) 93.5 days
C) 18.6 days
D) 41.0 days

Question

Guttery Corporation has provided the following financial data from its balance sheet:
  Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.
-The company's operating cycle for Year 2 is closest to:
A) 71.2 days 
B) 93.5 days 
C) 18.6 days 
D) 41.0 days

Quizplus · Accepted Answer

Inventory turnover = Cost of goods sold ÷ Average inventory*
= $900,000 ÷ $162,000 = 5.56 (rounded)
*Average inventory =
($174,000 + $150,000) ÷ 2 = $162,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 5.56 = 65.6 days (rounded)
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,450,000 ÷ $111,000 = 13.06 (rounded)
*Average accounts receivable =
($112,000 + $110,000) ÷ 2 = $111,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 13.06 = 27.9 days (rounded)
Operating cycle = Average sale period + Average collection period
= 65.6 days + 27.9 days = 93.5 days

Guttery Corporation Has Provided the Following Financial Data from Its