On average, Furniture & More is able to sell its inventory in 54.2 days and takes 65.3 days on average to pay for its purchases. Its average customer pays with a credit card which allows the company to collect its receivables in 2.9 days. Given this information, what is the length of the operating cycle?

The operating cycle of Furniture & More is 54.2+2.9 = 57.1 days

Explanation:

Operating cycle is amount of time required for the manufacturer's cash to be used to:

1. pay for the raw materials needed in its products

2. pay for the labor and overhead costs needed to convert the raw materials into products

3. hold the finished products in inventory until they are sold

4. wait for the customers' cash payments to be collected

In case of Furniture & More the operating cycle is the sum of the following:

the days' sales in inventory meaning how many days the inventory is kept (365 days/inventory turnover ratio) which is 54.2

plus

the average collection period meaning how many days it takes to collect from customers (365 days/accounts receivable turnover ratio) which is 2.9.

The 65.3 days on average to pay for its purchases is not relevant for the calculation of operating cycle