A firm has an operating cycle of 120 days, an average collection period of 40 days, and an averagepayment period of 30 days. The firm's average age of inventory is_________ days.
A) 70
B) 80
C) 50
D) 90

Question

Quizplus · Accepted Answer

The formula for the operating cycle is:

Operating cycle = Inventory conversion period + Accounts receivable collection period

We are given that the operating cycle is 120 days, the collection period is 40 days, and the payment period is 30 days. We can use these values to solve for the inventory conversion period:

120 days = Inventory conversion period + 40 days
Inventory conversion period = 80 days

Therefore, the average age of inventory is 80 days. The best choice is B.

A Firm Has an Operating Cycle of 120 Days, an Average