eBook Problem Walk-Through Problem 16-12 Working Capital Cash Flow Cycle Strickl
ID: 2539241 • Letter: E
Question
eBook Problem Walk-Through Problem 16-12 Working Capital Cash Flow Cycle Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $160,000 (all on credit), and it earned a net profit of 89%. Its inventory turnover was 10 times during the year and its DSO was 43.5 days. Its annual cost of goods sold was $121,139. The firm had fixed assets totaling $33,000. Strickler's payables deferral period is 33 days. Assume 365 days in year for your calculations. Do not round intermediate calculations. . Calculate Strickler's cash conversion cycle. Round your answer to two decimal places. days b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover. Round your answer to two decimal places. its ROA. Round your answer to two decimal places c. Suppose Strickler's managers believe that the inventory turnover can be raised to 8 times without affecting sales and cost of goods sold. What would Strickler's cash conversion cycle have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places What would Strickler's total assets turnover have been if the inventory tunover had been 8 for the year? Round your answer to two decimal place What would Strickler's ROA have been if the inventory turnover had been 8 for the year? Round your answer to tvo decimal places daysExplanation / Answer
a) Cash conversion cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
Days Inventory Outstanding = 365 / Inventory Turnover Ratio
= 365/10
= 36.5 days
Cash conversion cycle = 36.5+ 43.5 - 33
= 47 days
b) Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
10= 121,139 / Average Inventory
Average Inventory = 121,139/10 = 12113.9
Days Sales Outstanding = 365/ Receivable Turnovers Ratio
43.5= 365/Receivable Turnovers Ratio
Receivable Turnovers Ratio= 365/43.5 =8.39
Receivable Turnovers Ratio = Credit Sales/ Average Receivables
8.39 = 160,000/ Average Receivables
Average Receivables =160,000/8.39 = 19070.32
Total Assets = Fixed Assets + Inventory + Receivables
= 33,000 + 19070.32+ 12113.9
= 64184.22
Total Assets Turnover ratio = Sales / Total Assets
= 160,000 / 64184.22 = 2.49
Profit Margin = 160,000 * 8% = 12800
Return on Assets = Profit margin / Total Assets
= 12800/ 64184.22 = 0.1994 or 19.94%
c)
Days Inventory Outstanding = 365 / Inventory Turnover Ratio
= 365/8
= 45.63 days
Cash conversion cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
= 45.63+ 43.5-33
= 56.13 days
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