Click here to read the eBook: The Cash Conversion Cycle CASH CONVERSION CYCLE Ch

Question

Click here to read the eBook: The Cash Conversion Cycle CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain's 2016 saies (al on credit) were S223,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or S6 690. It turned over its inventory 7 times during the year, and its DSO was 30 days. The firm had fixed assets totaling $25,000. Chastain's payables deferral period is 40 days. Assume 365 days in year for your calculations. a. Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations. days b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA, Round your answers to two deoimal places. Do not round intermediate calculations. t ory turnover can be raised to 9 times What would d Chastain's cash conversion cycle, total assets turnover, and ROA believe that the inventory turnover can be raised to 9 times. w turnover had been 9 for 2016? Round your answers to c. Suppose Chastain's managers two decinsal places·oo not round intermediate calculate have been if the Cash conversion cycle Total assets turnover MacBook Pro 20 s 5

Explanation / Answer

a. Calculate Christie’s cash conversion cycle.
ICP = 365 / Inventory turnover ratio
= 365 / 7 = 52.14 days
ACP = DSO = 30 days
CCC = 52.14 + 30 – 40.00 = 42.14 days

b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.
Inventory = Sales or COGS / Inventory conversion period = $223,000 / 7 = $31,857.14
Accounts receivable = (Sales / 365) × Average collection period
= ($223,000 / 365) × 30 = $18328.77
Total assets = Inventory + Accounts receivable + Fixed assets
= $31,857.14 + $18,328.77 + $25,000 = $75,185.91
Total asset turnover = Sales / Total assets = $223,000 / $75,185.91 = 2.96 times
ROA = Net profit / Total assets = $6,690 / $75,185.91
= 0.089 (8.9%) OR
ROA = Profit margin × Total asset turnover = 0.03 * 2.96 = 0.089 (8.9%)

c. Suppose Christie’s managers believe that the inventory turnover can be raised to 9 times. What would Christie’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for 2016?
New ICP = 365 / 9 = 40.56 days
New CCC = 40.56 + 30 – 40 = 30.56 days
Total assets = $223,000 / 9 + $18328.77 + $25,000 = $68106.55
Total asset turnover = $223,000 / $68,106.55 = 3.274 times
ROA = $6,690 / $68,106.55 = 0.098 or 9.8%
= 0.03 * 3.274 = 0.098 (9.8%)

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