The given circuit is a 4-bit Johnson counter (also known as a twisted ring counter or Moebius counter), where:
D0=Q3
For an n-bit Johnson counter, the main cycle consists of 2n distinct states. Here, n=4, so the cycle length is:
For example, starting with the initial state (Q0,Q1,Q2,Q3)=0000:
0000 (initial state)
0000 (returns to initial state)
Depending on the interpretation of the phrase *"distinct states the circuit will go through before returning back to the initial state"*:
If counting the intermediate distinct states visited after the start and strictly before the return state: 7 states.
If counting all distinct states visited in the cycle (including the initial state): 8 states.
Hence, both 7 and 8 are accepted according to the official key.