Suppose that Dunn Industries has annual sales of $2.34 million, cost of goods so

ID: 2772576 • Letter: S

Question

Suppose that Dunn Industries has annual sales of $2.34 million, cost of goods sold of $1,690,000, average inventories of $1,156,000, and average accounts receivable of $790,000. Assume that all of Dunn’s sales are on credit.

What will be the firm’s operating cycle? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Operating Cycle- Ii is the time which an organisation take place to convert its inventory into cash.

Mathematically it is expressed as under.

Operating Cycle= Days of Inventory Outstanding (DIO) + Days of Sales Outstanding (DSO)

DIO=( Average Inventory x 365 ) / Cost of Goods Sold

DSO = (Average Credit Receivable x 365 )/ Credit Sales

Data in the question summarised as under.

Particulars

Amount ($)

Credit Sales

2,340,000

Cost of Goods Sold

1,690,000

Average Inventory

1,156,000

Average Accounts Receivable

790,000

DIO = 249.66864 days

DSO = 123.22650 days

Operating Cycle = 372.90 Days

Short operating cycle is considered is good as it shows that an organisation takes short period to covert its inventory into cash.

In the question operating cycle is 372.90 days which is not good enough.

When we deduct Days Payable Outstanding (DPO) from operating cycle we will get Net Operating Cycle. Net Operating Cycle is also called Cash Conversion Ratio