Christie Corporation is trying to determine the effect of its inventory turnover

Question

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 $180,000; its cost of goods sold is 80% of sales; and it earned a net profit of 6%, or $10,800. It turned over its inventory 5 times during the year, and its DSO was 39.5 days. The firm had fixed assets totaling $41,000. Christie's payables deferral period is 45 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 9.7 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.7 for 2012?

Explanation / Answer

Cash Conversion cycle = Days inventory outstanding (DIO) + Days sales outstanding (DSO) – Days payable outstanding (DPO)

Days inventory outstanding (DIO) = Average stock / Cost of goods sold / Days

                                                             = 28800 / 144000 /365

                                                             = 28800 * 365 /144000

                                                             = 73 Days

(Working note 1) Average stock = Cost of goods sold / Inventory Turnover ratio

                                                         = 180000 * 80% / 5 = 28800

Cash conversion cycle = 73 +39.5 – 45 = 67.5

Average debtors = Days sales outstanding (DSO) * Total sales / 365

                              = 39.5 * 180000 / 365 = $ 19480 (approx)

Total assets = Fixed assets + inventory + Debtors

                      = 41000 + 28800 +19480 = $ 89280

Return on assets (ROA) = Net income / Total assets = 10800 /89280 = 12.097 % (approx)

Total assets turnover ratio = Net Sales / Total assets = 180000 / 89280 = 2.016 times

Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.7:-

Cash Conversion cycle = Days inventory outstanding (DIO) + Days sales outstanding (DSO) – Days payable outstanding (DPO)

Days inventory outstanding (DIO) = Average stock / Cost of goods sold / Days

                                                             = 14845 / 144000 /365

                                                             = 14845 * 365 /144000

                                                             = 38 Days (Approx)

(Working note 1) Average stock = Cost of goods sold / Inventory Turnover ratio

                                                         = 180000 * 80% / 9.7 = 14845 (approx)

Cash conversion cycle = 38 +39.5 – 45 = 32.5

Average debtors = Days sales outstanding (DSO) * Total sales / 365

                              = 39.5 * 180000 / 365 = $ 19480 (approx)

Total assets = Fixed assets + inventory + Debtors

                      = 41000 + 14845 +19480 = $ 75325

Return on assets (ROA) = Net income / Total assets = 10800 /75325     = 14.34% (approx)

Total assets turnover ratio = Net Sales / Total assets = 180000 / 75325 = 2.40 times (approx)

Note: - All the calculations are done approximately. There will be no change in concept. Fundamentals will be the same.

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