On average,D & M sells its inventory in 37 days,collects on its receivables in 3.4 days,and takes 35 days to pay for its purchases.What is the length of the firm's operating cycle?
A)−1.4 days
B)5.4 days
C)33.6 days
D)40.4 days
E)41.6 days

Question

Quizplus · Accepted Answer

The operating cycle of a firm is the time taken to convert its inventory to receivables and then back into cash. It is calculated as the sum of the number of days it takes to sell inventory (days inventory outstanding) and the number of days it takes to collect on receivables (days sales outstanding), minus the number of days it takes to pay for purchases (days payables outstanding).

Operating cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding
Operating cycle = 37 + 3.4 - 35
Operating cycle = 5.4

Therefore, the length of the firm's operating cycle is 5.4 days, and the best choice is D.

On Average,D & M Sells Its Inventory in 37 Days,collects