C and K\'s Corporation wants to determine the effect of its inventory and receiv

Question

C and K's Corporation wants to determine the effect of its inventory and receivables management on its cash flow cycle. C and K's sales last year (all on credit) was $200,000, and earned a net profit % of 10%. Inventory Turnover was 12, Days Sales Outstanding was 45, and Days Payable Outstanding were 30. Cost of Goods Sold was $120,000, and Fixed Assets were $50,000. a. Please calculate C and K's cash conversion cycle b. Assume C and K has no cash, no marketable securities and no other Long Term Assets. What is C and K's Total Asset Turnover and ROA? c. If C and K improves Inventory Turnover to 15, what is the new cash conversion cycle, Total Asset Turnover and ROA?

Explanation / Answer

Cash Conversion Cycle = 365/12 + 45 - 20 = 55.42 Part B Asset Turnover = 200000/(120000/12 (inventory) + 200000/8.11 (AR) + 50000) = 2.36 ROA = 200000*.10/(120000/12 (inventory) + 200000/8.11 (AR) + 50000) = 23.62% Part C Cash Conversion Cycle = 365/15 + 45 - 20 = 49.33 Asset Turnover = 200000/(120000/15 (inventory) + 200000/8.11 (AR) + 50000) = 2.42 ROA = 200000*.10/(120000/15 (inventory) + 200000/8.11 (AR) + 50000) = 24.20%

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