Question

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 sales (all on credit) were $290,000; its cost of goods sold is 80% of sales; and it earned a net profit of 5%, or $14,500. It turned over its inventory 6 times during the year, and its DSO was 30.5 days. The firm had fixed assets totaling $45,000. Chastain's payables deferral period is 45 days. Assume 365 days in year for your calculations. Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations. days Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places. Do not round intermediate calculations. Total assets turnover ROA % Suppose Chastain's managers believe that the inventory turnover can be raised to 9.9 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.9 for 2016? Round your answers to two decimal places. Do not round intermediate calculations. Cash conversion cycle days Total assets turnover ROA %

Answer 1

a) CCC = DSO + DIO - DPO

= 30.5 +365 / 6 - 45

= 46.33 days

b) Inventory turnover = COGS / Inventory => Inventory = 290,000 x 80% / 6 = 38,667

DSO = 365 / (Sales / Receivables)

=> Accounts receivables = 30.5 x 290,000 / 365 = 24,233

Total Assets = 45,000 + 38,667 + 24,233 = 107,900

Asset turnover = Sales / Total Assets = 290,000 / 107,900 = 2.69

ROA = Net Profits / Assets = 14,500 / 107,900 = 13.44%

c) CCC = 30.5 +365 / 9.9 - 45 = 22.37 days

Inventory = 290,000 x 80% / 9.9 = 23,434

Total Assets = 45,000 + 23,434 + 24,233 = 92,667

Asset turnover = Sales / Total Assets = 290,000 / 92,667 = 3.13

ROA = Net Profits / Assets = 14,500 / 92,667 = 15.65%