Operating cycle ? and confuse in Curriculum book book

whew1110

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 ?

chetan86

adq123: operating cycle is just DOH + DOS...you formula is the net operating cycle

dcfox83

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

Kiakaha

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.

ftwcfa

Net Operating cycle(Cash Conversion Cycle) = number of day Receivable + number of day inventory - number of days payable

Finalnub

Isn't the Operating cycle = number of day Receivable + number of day inventory - number of days payable?

JRossSter

According to Schweser, you should always use average balance if two periods' data are given. If not, then use ending balance of corresponding period.