1) Negus Enterprises has an inventory conversion period of 50 days, an average c
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Question
1) Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payable deferral of 25 days. Assume that cost of goods sold is 80% of sales.
a) What is the length of the firm's cash conversion cycle?
b) If Negus's annual sales are $4,380,000 and all sales are on fredit, what is the firm's investment in accounts receivable?
c) How many times per year does Negus Enterprises turn over its inventory?
2) Strickler Tecnology is considering changes in its working capital policies to improve its cash flow. Strickler's sales last year were $3,250,000 (all in credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. It's annual cost of goods sold was $1,800,000. The firm had fix assets totaling $535,000. Strickler's payables deferral period is 45 days
. a) Calculate Strickler's cash conversion cycle.
b) Assuming Strickler holds neglegible amounts of cash and marketable securities, calculate its total assets turnover and ROA
. C) Suppose Strickler's managers believe the annual inventory turnover can be raised to 9 times without affecting sales. What would Strickler's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?
Explanation / Answer
Negus Enterprises Details Days/Amt 1 Inventory conversion days 50 2 Average Collection days 35 3 Payable days 25 a Cash Conversion cycle= Inventory conversion days +average collection days -Payable deferral days =50+35-25 = 60 days So cash conversion cycle is 60days b Annual Credit sales 4,380,000 Average Collection days 35 Average creditors turnover 10.43 Investment in Accounts Receivable=4380000/10.43= $ 420,000 c Inventory conversion days = 50 Inventory turns in a year =365/50 = 7.30 Strickler Technology amt/days Credit Sale 3,250,000 DSO days 41 Payable days 45 COGS 1,800,000 Inventory TO 6 Inventory Conversion days 61 Average Inventory 300,000 Fixed Asset 535,000 Total Asset 835,000 Net Income @7% 227,500 a Cash Conversion cycle= Inventory conversion days +average collection days -Payable deferral days =61+41-45 = 57 days So cash conversion cycle is 57 days b Total Assets Turnover =Total sales/Total assets = 3.89 ROA =Net income/Total assets = 27.25% c If Inventory TO =9 , the Inventory days = 41 Average Inventory = 200,000 Fixed Asset 535,000 Total Asset 735,000 Cash coversion cycle= 41+41-45 = 37 days Total Asset TO 4.42 ROI = 30.95%
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