Natcher Corporation's accounts receivable at the end of Year 2 was $126,000 and its accounts receivable at the end of Year 1 was $130,000.The company's inventory at the end of Year 2 was $127,000 and its inventory at the end of Year 1 was $120,000.Sales,all on account,amounted to $1,380,000 in Year 2.Cost of goods sold amounted to $800,000 in Year 2.The company's operating cycle for Year 2 is closest to:
A) 44.7 days
B) 17.3 days
C) 62.8 days
D) 90.2 days

Question

Quizplus · Accepted Answer

Inventory turnover = Cost of goods sold ÷ Average inventory*
= $800,000 ÷ $123,500 = 6.48 (rounded)
*Average inventory =
($127,000 + $120,000) ÷ 2 = $123,500
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.48 = 56.3 days (rounded)
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,380,000 ÷ $128,000 = 10.78 (rounded)
*Average accounts receivable =
($126,000 + $130,000) ÷ 2 = $128,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 10.78 = 33.9 days (rounded)
Operating cycle = Average sale period + Average collection period
= 56.3 days + 33.9 days = 90.2 days

Natcher Corporation's Accounts Receivable at the End of Year 2