Question

Raw materials=20000 work-in-process=14000 finished goods=21000 purchases=96000 cost of goods sold=140000 sales=160000 debtors=32000 creditors=16000 assume 360 days per year for computational purposes. compute the duration of operating cycle

Answer 1

The operating cycle is calculated by adding the Inventory Days to the Receivables Days and subtracting the Payables Days. It involves several steps including calculations for average inventory, receivables, and payables.

Step-by-step explanation:

The duration of a company's operating cycle is the average number of days required to turn purchases of inventory into cash proceeds from sales. It is typically calculated as the sum of the inventory days and the receivables days. Here is a step-by-step process for calculating the duration of the operating cycle based on the given data:

To find Inventory Days, first calculate the average inventory using the opening and closing inventories. In this case, the average inventory isn't directly provided. We use the formula: ((Raw Materials + Work In Progress + Finished Goods + Purchases - Finished Goods) / Cost of Goods Sold) * 360.

The operating cycle is the sum of Inventory Days and Receivables Days minus Payables Days.

Assuming the given opening inventories (Raw Materials and Work in Process) are the starting values and Purchases are added throughout the year, while Finished Goods are the closing inventory, one calculates the Inventory Days using the above formula, then computes the Receivables Days and Payables Days accordingly to determine the operating cycle.

Note that these calculations give an estimate of the time taken to convert the company's inventory into cash, taking into account the time required to collect receivables and the time allowed to pay creditors.