J&J Production Inc. has annual sales of $30 million and accounts receivables of $1.5 million. They have an inventory turnover of 4. How long is J &J's operating cycle? (Assume a 360-day year)
A)18 days
B)90 days
C)108 days
D)72 days

Question

Quizplus · Accepted Answer

Operating cycle = Inventory conversion period + Accounts receivable collection period

Inventory turnover = Cost of goods sold / Inventory
4 = Cost of goods sold / Inventory
Inventory = Cost of goods sold / 4

Inventory conversion period = Inventory / Cost of goods sold x 360
Inventory conversion period = (Cost of goods sold / 4) / Cost of goods sold x 360
Inventory conversion period = 90 days

Accounts receivable collection period = Accounts receivable / Annual credit sales x 360
Accounts receivable collection period = 1.5 million / 30 million x 360
Accounts receivable collection period = 18 days

Operating cycle = Inventory conversion period + Accounts receivable collection period
Operating cycle = 90 days + 18 days
Operating cycle = 108 days