CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of
ID: 2796367 • 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 $246,000; its cost of goods sold is 80% of sales; and it earned a net profit of 8%, or $19,680. It turned over its inventory 4 times during the year, and its DSO was 33 days. The firm had fixed assets totaling $49,000. Chastain's payables deferral period is 50 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.
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.
c) Suppose Chastain's managers believe that the inventory turnover can be raised to 8.3 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.3 for 2016? Round your answers to two decimal places. Do not round intermediate calculations.
Explanation / Answer
a)
Cash Conversion Cycle = Days in Inventory + Days Sales outstanding - Days Payable outstanding
Days in Inventory = 365/4 = 91.25 days
So CCC= 91.25 + 33 - 50 = 74.25 days
b)
Assets Turn Over = Sales/ Total Assets = 246,000/(Fixed Assets + Current Assets)
Current Assets = Inventory + Account receivables
Inventory = COGS/Inventory turnover = 80% * 246,000/ 4= $ 49,200
Account receivable = Sales * DSO/365 = 246,000* 33/ 365 = $ 22,241.09
CA= $ 49,200 + $ 22,241.09= $71,441.09
Total Assets = $71,441.09 + 49000= $ 120,441.09
Asset Turnover = 246,000/120441.09 = 2.04
ROA = 19680/120441.09 = 16.34 %
c)
New Inventory turnover = 8.3 times
Inventory days = 365/8.3 = 43.97 days
CCC = DSO + DIO - DPO = 33 + 43.97 - 50 = 26.97 days
Inventory = COGS/ Inventory turnover =196800/8.3 = $ 23,710.84
Total Assets= $ 23,710.84 + $ 22,241.09 + $ 49,000= $ 94,951.93
Asset Turnover =246,000/94,951.93 = 2.59
ROA = 19680/ 94,951.93= 20.72 %
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