Cash conversion cycle Christie Corporation is trying to determine the effect of
ID: 2638680 • Letter: C
Question
Cash conversion cycle
Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie's 2012 sales (all on credit) were $157,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $4,710. It turned over its inventory 4 times during the year, and its DSO was 36 days. The firm had fixed assets totaling $40,000. Christie's payables deferral period is 35 days. Assume 365 days in year for your calculations.
Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
days
Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.
Suppose Christie's managers believe that the inventory turnover can be raised to 9.8 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.8 for 2012?
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Total assets $ ROA %Explanation / Answer
1. Cash Conversion Cycle: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
Inventory Conversion Period = 365 / 4 = 91.25 Days
Accounts Receivables Period = 36 Days, Payable Deferral Period = 35 Days
CCC = 91.25 + 36 - 35 = 92.25 Days
Asset Turnover Ratio = Sales / Total Assets
Asset Turnover Ratio = 157,000 / 40,000 = 3.93 Times
ROA = 4,710 / 40,000 = 11.78%
2. Cash Conversion Cycle: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period
Inventory Conversion Period = 365 / 9.80 = 37.24 Days
Accounts Receivables Period = 36 Days, Payable Deferral Period = 35 Days
CCC = 37.24 + 36 - 35 = 38.24 Days
Asset Turnover Ratio = Sales / Total Assets
Asset Turnover Ratio = 157,000 / 40,000 = 3.93 Times
ROA = 4,710 / 40,000 = 11.78%
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