HELP - Operating Cycle Formulas

CFA Level I
#1

Hi everyone,

I’m either extremely confused or the schweser and CFA books give conflicting information. Right now I’m working on the working capital management chapter in the corporate finance chapter and trying understand the operating cycle formulas…

In the schweser notes Operating Cycle is calculated as Days of Inventory + Days of Receivables. The Days of inventory formula is given as (365/Inventory Turn) and the Days Receivable is (365/Receivable Turn).

This is easy enough to understand but I got all the Operating Cycle questions wrong when I went to the EOC questions in the CFA books because it looks like the formula given is quite different. In the CFA book Days of Inven = Inventory/(COGS/365) & Days Receivable = Accts Receivable/(Credit Sales/365)

Can anyone help clarify what is going here? Is this just simply two ways to get to the same place or is schweser just giving me the incorrect formula?

Thanks in advance

#2

both formulae are the same

Schweser

Days of inventory=(365/Inventory Turn)

Days Receivable=(365/Receivable Turn).

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CFA

Days of Inven = Inventory/(COGS/365) & Days Receivable = Accts Receivable/(Credit Sales/365)

Now dissect the CFA formulae

Days of Inven = Inventory/(COGS/365)

= Inventory / COGS * 365

= 365 / (COGS/Inventory)

So COGs/Inventory = Inventory Turn

and Credit Sales / Accts Receivable = Receivable Turn.

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Schweser never explained what those intermediate terms meant - or maybe because they gave you a formula - you missed the finer details.

The two formulae are the same.

#3

The two formulas will give you the same answer is applied appropriately.

#4

It appears that the reason I got different answers was because when I calculated Inventory Turnover I used Avg Inven Balance and the CFA EOC questions used Ending Inventory balance instead…

Are there specific scenarios to determine which is appriopriate? I was under the impression that any formula where a balance sheet entry was used that has beginning or ending balance, you should always average them. Is this not the case?

Thanks