Question

Suppose that Tucker Industries has annual sales of 5 million, cost of goods sold of 2.78 million, average inventories of 1,125,000, and average accounts receivable of 500,000. Assuming that all of Tucker's sales are on credit, what will be the firm's operating cycle?

Answer 1

Tucker Industries' operating cycle is approximately 184.5 days, which is the sum of the inventory turnover days (148 days) and the accounts receivable turnover days (36.5 days).

Step-by-step explanation:

To determine Tucker Industries' operating cycle, we need to calculate the inventory turnover days and the accounts receivable turnover days. The operating cycle is the sum of these two periods.

First, we'll calculate the inventory turnover days:

• Inventory Turnover Days = (Average Inventory / Cost of Goods Sold) × 365
• Inventory Turnover Days = ($1,125,000 / $2,780,000) × 365 ≈ 148 days

Next, we calculate the accounts receivable turnover days:

• Accounts Receivable Turnover Days = (Average Accounts Receivable / Annual Credit Sales) × 365
• Accounts Receivable Turnover Days = ($500,000 / $5,000,000) × 365 ≈ 36.5 days

Finally, we add the two periods to get the operating cycle:

• Operating Cycle = Inventory Turnover Days + Accounts Receivable Turnover Days
• Operating Cycle = 148 days + 36.5 days ≈ 184.5 days

Tucker Industries' operating cycle is approximately 184.5 days.