In: Accounting
Calculate the operating cash cycle in days if all sales are for cash, inventory is turned over 7 times a year and creditors are paid on average 5 times a year.
Select one:
a. -52.1 days
b. -20.9 days
c. 52.1 days
d. 20.9 days
Answer : Option (b) - 20.9 days
Proof :
Operating cycle in days = No. of days in a year / No of times inventory is turned over in a year
= 365 / 7
Operating cycle in days = 52.1 days
Average payment period :
Average payment period in days = No of days in year / No of times creditors payed
= 365 / 5
Average payment period indays = 73 days.
Operating cash cycle = operating cycle - Average payment period
= 52.1 - 73
Operating cash cycle = -20.9 days
Operating cash cycle indicates the performance of company, If operating cash cycle in days is less then efficiency of business is high.