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.)
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 $790,000. Assume that all of Dunn’s sales are on credit.
Explanation / Answer
Operating Cycle- Ii is the time which an organisation take place to convert its inventory into cash.
Mathematically it is expressed as under.
Operating Cycle= Days of Inventory Outstanding (DIO) + Days of Sales Outstanding (DSO)
DIO=( Average Inventory x 365 ) / Cost of Goods Sold
DSO = (Average Credit Receivable x 365 )/ Credit Sales
Data in the question summarised as under.
Particulars
Amount ($)
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
Particulars
Amount ($)
Credit Sales
2,340,000
Cost of Goods Sold
1,690,000
Average Inventory
1,156,000
Average Accounts Receivable
790,000