CFA Curriculum Vol 4 Page 218 Question 2 Credit sale 25,000 COGS 20,000 Account receivable 2,500 Inventory BEG balance 2,000 Inventory END balance 2,300 Account payable 1,700 Question abt Operating cycle My solution Inventory turnover = COGS / Average inventory = 20,000/[(2500+2000)/2] =8.889 Number of day inventory = 365/ inventory turnover = 41 days Receivable turnover = Credit sale / Average receivable =25000/2500=10 number of day Receivable =365/Receivable turnover= 365/10=36.5 days ==> Operating cycle = number of day Receivable + number of day inventory= 36.5+ 41 =77.56 But They give possible answer A 42.0 B.47.9 C.78.5 in stead of calculate Inventory turnover = COGS / Average inventory they calculate Inventory turnover = COGS / Ending balance inventory My question is when and why they calculate with Ending balance inventory and average inventory ?
According to Schweser, you should always use average balance if two periods’ data are given. If not, then use ending balance of corresponding period.
Isn’t the Operating cycle = number of day Receivable + number of day inventory - number of days payable?
Net Operating cycle(Cash Conversion Cycle) = number of day Receivable + number of day inventory - number of days payable
I definitely encountered this same question and was a bit confused. Schweser does tell you to use the averages which ends up giving you a calculation of roughly 77.56 which is close to Answer C. Knowing how to calculate the answer both ways should help. I find it unlikely that the CFAI would try to trap you on this type of question as you can see the other 2 answers are dramatically different. What they are really try to trick you on here is whether you know the difference between the operating cycle and the cash conversion cycle, where the operating cycle excludes days payable outstanding.
lol, i encountered this question last night, and according to elan books, it shoud be the average inventory. so i was confused as well that they just consider the EI and didnt use the BI
adq123: operating cycle is just DOH + DOS…you formula is the net operating cycle