Working Capital Cash Flow Cycle Strickler Technology is considering changes in i
ID: 2724796 • Letter: W
Question
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 5%. Its inventory turnover was 4.84432 times during the year, and its DSO was 30.5 days. Its annual cost of goods sold was $121,108. 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.
72.85 days (confirmed correct)
Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover. Round your answer to two decimal places.
2.24 x (confirmed correct)
Calculate its ROA. Round your answer to two decimal places.
11.21% (confirmed correct)
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This is the part I'm having trouble with. The answers I have below have been confirmed as incorrect:
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.
43.13 days (cengage states incorrect)
What would Strickler's total assets turnover have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.
3.32 x (cengage states incorrect)
What would Strickler's ROA have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.
16.62% (cengage states incorrect)
Explanation / Answer
1. CASH CONVERSIION CYCLE = DAYS INVENTORY OUTSTNDING (DIO)+DAYS SALES OUTSTANDING (DSO) - DAYS PAYBLE OUTSTNDING (DPO)
DAYS INVENTORY OUTSTANDING = AVERAGE INVENTORY/COST OF GOODS SOLD PER DAY
COST OF GOODS SOLD PER DAY = COST OF GOODS SOLD/NO. OF DAYS IN A YEAR
= $121,108/365 = $331.80
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD/AVERAGE INVENTORY
8 = 121,108/AVERAGE INVENTORY
AVERAGE INVENTORY = 121,108/8 = 15,138.50
DAYS INVENTORY OUTSTADING = 15,138.50/331.80 = 45.63 DAYS
DAYS SALES OUTSTANDIGN (GIVEN) = 30.5 DAYS
DAYS PAYABLE OUTSTANDING = 33 DAYS
CASH CONVERSION CYCLE = DIO + DSO - DPO = 45.63 +30.5 - 33 = 43.13 DAYS
2. TOTAL ASSETS TURNOVER RATIO = TURNOVER/TOTAL ASSETS
TURNOVER (GIVEN) = $160,000
TOTAL ASSETS = TOTAL FIXED ASSETS +TOTAL CURRENT ASSETS
TOTAL CURRENT ASSETS = INVENTORY + ACCOUNTS RECEIVABLES + CASH AND MARKETABLE SECURITIES
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD/AVERAGE INVENTORY
8 = 121,108/AVERAGE INVENTORY
AVERAGE INVENTORY = 121,108/8 = 15,138.50
DAYS SALES OUTSTANDING = AVERAGE RECEIVABLES/REVENUE PER DAY
30.5 = AVERAVE RECEIVABLES/160,000/365 = AVERAGE RECEIVABLE/438.36
AVERAGE RECEIVABLES = 438.36 x 30.5 = $13,369.98
TOTAL ASSETS = 33,000 +15,138.50 + 13,369.98 = $61,508.48
TOTAL ASSETS TURNOVER RATIO = 160,000/61,508.48 = 2.60
3. ROA = RETURN ON ASSETS = RETURN/TOTAL ASSETS
= 5% OF 160,000 /61,508.48
= 8000/61,508.48 = 13%
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