CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of
ID: 2787501 • Letter: C
Question
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 sales (all on credit) were $187,000; its cost of goods sold is 80% of sales; and it earned a net profit of 396, or $5,610. It turned over its inventory 7 times during the year, and its DSO was 34 days. The firm had fixed assets totaling $29,000. Chastain's payables deferral period is 35 days. Assume 365 days in year for your calculations a. Calculat e 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 decimal places. Do not round intermediate calculations. Total assets turnover ROA C. Suppose Chastain's managers believe that the inventory turnover can be raised to 8.8 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.8 for 2016? Round your answers to two decimal places. Do not round intermediate calculations. days Cash conversion cycle Total assets turnover ROAExplanation / Answer
a.
Cash Conversion Cycle = DIO + DSO –DPO
DIO = Days Inventory Outstanding = 365/Inventory Turnover Times = 365/7 = 52.14286 days
DSO =Days Sales Outstanding = 34 days
DPO = Days Payable Outstanding = 35 days
CCC = 52.14286 + 34 – 35 = 86.14286 – 35 = 51.14286 or 51.14 days
b.
Total asset = Inventory + Account Receivable + Fixed Assets
Inventory = Sales/Inventory Turnover times = $ 187,000/7 = $ 26,714.2857
Account Receivable = Sales/365 x DSO = $ 187,000/365 x 34 = $ 512.3287671 x 34 = $ 17,419.1781
Fixed Assets = $ 29,000
Total Assets = $ 26,714.2857 + $ 17,419.1781 + $ 29,000 = $ 73,133.4638
Total Assets Turnover = Sales/ Total Asset = $ 187,000/$ 73,133.4638 = 2.556969 or 2.56 times
ROA = Net Profit/Total Assets = $ 5,610 / $ 73,133.4638 = 0.076709 or 7.67 %
c.
New DIO = 365/8.8 = 41.47727 days
New CCC = 41.47727 + 34 – 35 = 75.47727 – 35 = 40.47727 days or 40.48 days
Inventory = $ 187,000/8.8 = $ 21,250
Total Assets = $ 21,250 + 17,419.1781 + $ 29,000 = $ 67,669.178082
Total Assets Turnover = $ 187,000/$ 67,669.178082 = 2.763444 or 2.76 times
ROA = $ 5,610 /$ 67,669.178082 = 0.082903 or 8.29 %
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