Operating cycle

CFA Level I
#1

"On May 15, your firm receives 20 cases of designer pens. On June 30, your firm pays $3250 for the pens. On July 15, the pens are sold on credit for $10500. On September 10, your firm collects the receivable in full. If each transaction occurs at the end of the business day, how many days are in the operating cycle?"

As per the book, the operating cycle is: # of days of inventory + # of days of receivables

of days of inventory: Inventory / average day COGS

days of receivables: accounts receivable / average day sale on credit Unfortunately, I cannot for the life of me get the correct answer: Also, does inventory refer to the actual quantity of inventory, or to the value of said inventory?

Thanks!

#2

operating cycle = days A/R outstanding + days Inventories

Assuming 30 days per month :

days A/R outstanding = September, 10 - July, 15 = 55 days days Inventories = July, 15 - May, 15 = 60 days operating cycle = 115 days

To calculate the cash conversion cycle deduct the days of A/P outstanding:

days of A/P outstanding: June, 30 - May, 15 = 45 days cash conversion cycle = 55 days - 45 days = 10 days

Regards, Oscar