Detailed Answer
Answer (C) is correct. The operating cycle is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash. For a retailer, it is the time from purchase of inventory to collection of cash. Thus, the operating cycle of a retailer is equal to the sum of the number of days’ sales in inventory and the number of days’ sales in receivables. Inventory turnover equals cost of goods sold divided by average inventory The days’ sales in inventory equals 365 (or another period chosen by the analyst) divided by the inventory turnover. Accounts receivable turnover equals net credit sales divided by average receivables The days’ sales in receivables equals 365 (or other number) divided by the accounts receivable turnover.
