Question

Problem 16-12
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 $2,357,500 (all on credit), and its net profit margin was 7%. Its inventory turnover was 5.5 times during the year, and its DSO was 43 days. Its annual cost of goods sold was $1,375,000. The firm had fixed assets totaling $397,500. Strickler's payables deferral period is 46 days. Assume 365 days in year for your calculations. Do not round intermediate calculations.

1. Calculate Strickler's cash conversion cycle. Round your answer to two decimal places.
        days
   
2. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover. Round your answer to two decimal places.
        x
   Calculate its ROA. Round your answer to two decimal places.
        %
   
3. Suppose Strickler's managers believe the annual inventory turnover can be raised to 10 times without affecting sale or profit margins. What would Strickler's cash conversion cycle have been if the inventory turnover had been 10 for the year? Round your answer to two decimal places.
        days
   What would Strickler's total assets turnover have been if the inventory turnover had been 10 for the year? Round your answer to two decimal places.
         x
   What would Strickler's ROA have been if the inventory turnover had been 10 for the year? Round your answer to two decimal places.
        %

Answer 1

a)

Cash conversion cycle is the time it takes for conversion of inventory to sales and then to receivables

Cash conversion cycle = Days inventory outstanding + DSO - Days payable outstanding

= 365 / 5.5 + 43 - 46

= 66.36 + 43 -46 = 63.36 days

b)

Total assets turnover = Sales / Average total assets

Total assets = Fixed assets + Current assets

Current assets = Account receivables + cash marketable securities + Inventory

Account receivables = Sales / Receivales turnover

= 2357500 / 45 * 365

= 277733

Inventory = Sales / Inventory turnover

= 2357500 / 5.5

= 428636

Total assets = 397500 + 277733 + 428636

= 1103869

Total assets turnover = 2357500 / 1103869

= 2.14

Return on assets = Net income / total assets

= 2357500 * 7% / 1103869

= 165025 / 1103869

= 14.95%

c

Cash conversion cycle with 10 days inventory turnover ratio

= 365/10 + 43 -46

= 36.5 + 43 - 46

=33.5 days