Question

Markus Company’s common stock sold for $2.75 per share at the end of this year. The company paid a common stock dividend of $0.55 per share this year. It also provided the following data excerpts from this year’s financial statements:     

	Ending Balance		Beginning Balance
Cash	$	35,000	$	30,000
Accounts receivable	$	60,000	$	50,000
Inventory	$	55,000	$	60,000
Current assets	$	150,000	$	140,000
Total assets	$	450,000	$	460,000
Current liabilities	$	60,000	$	40,000
Total liabilities	$	130,000	$	120,000
Common stock, $1 par value	$	120,000	$	120,000
Total stockholders’ equity	$	320,000	$	340,000
Total liabilities and stockholders’ equity	$	450,000	$	460,000

     

	This Year
Sales (all on account)	$	700,000
Cost of goods sold	$	400,000
Gross margin	$	300,000
Net operating income	$	140,000
Interest expense	$	8,000
Net income	$	92,400

11. What is the company’s operating cycle? (Round your intermediate and final answer to 2 decimal places.)

Answer 1

Answer :

The operating cycle ( OC) formula is as follows:

Operating Cycle = Inventory Period + Accounts Receivable Period

Where:

Inventory Period is the amount of time inventory sits in storage until sold.
Accounts Receivable Period is the time it takes to collect cash from the sale of the inventory.

Using the Operating Cycle formula above:

i)The Inventory Period is calculated as follows:

Inventory Period = 365 / Inventory Turnover

Where the formula for Inventory Turnover is:

Inventory Turnover = Cost of Goods Sold / Average Inventory

ii)The Accounts Receivable Period is calculated as follows:

Accounts Receivable Period = 365 / Receivables Turnover

Where the formula for Receivables Turnover is:

Receivables Turnover = Credit Sales / Average Accounts Receivable

Working :

Calculating the OC with the data provided :

Inventory Turnover: $4,00,000 / $57,500 = 6.96

Inventory Period: 365 / 6.96 = 52.44

Receivables Turnover: $7,00,000 / $55,000 = 12.73

Accounts Receivable Period: 365 / 12.73 = 28.67

Operating Cycle = 52.44 + 28.67 = 81.11 = 81.11 days