Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $2,955,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 5 times during the year, and its DSO was 36 days. Its annual cost of goods sold was $1,750,000. The firm had fixed assets totaling $540,000. Strickler's payables deferral period is 41 days. Assume a 365-day year. 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 and ROA. Round your answers to two decimal places.

   Total assets turnover:  ×

   ROA:   % =

3. Suppose Strickler's managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Strickler's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year? Round your answers to two decimal places.

   Cash conversion cycle:   days =

   Total assets turnover:    ×

   ROA:    % =

Answer 1

Answer a.

Days Inventory Outstanding = 365/ Inventory Turnover
Days Inventory Outstanding = 365 / 5
Days Inventory Outstanding = 73 days

Days Sales Outstanding = 36 days
Days Payable Outstanding = 41 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 73 + 36 – 41
Cash Conversion Cycle = 68 days

Answer b.

Days Sales Outstanding = 365 * Accounts Receivable / Annual Sales
36 = 365 * Accounts Receivable / $2,955,000
Accounts Receivable = $291,452.05

Inventory Turnover = Cost of Goods Sold / Inventories
5 = $1,750,000 / Inventories
Inventories = $350,000

Total Assets = Accounts Receivable + Inventories + Fixed Assets
Total Assets = $291,452.05 + $350,000 + $540,000
Total Assets = $1,181,452.05

Net Income = Annual Sales * Profit Margin
Net Income = $2,955,000 * 7.00%
Net Income = $206,850

Total Assets Turnover = Annual Sales / Total Assets
Total Assets Turnover = $2,955,000 / $1,181,452.05
Total Assets Turnover = 2.50

Return on Assets = Net Income / Total Assets
Return on Assets = $206,850 / $1,181,452.05
Return on Assets = 0.1751 or 17.51%

Answer c.

Days Inventory Outstanding = 365/ Inventory Turnover
Days Inventory Outstanding = 365 / 9
Days Inventory Outstanding = 40.56 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 40.56 + 36 – 41
Cash Conversion Cycle = 35.56 days

Inventory Turnover = Cost of Goods Sold / Inventories
9 = $1,750,000 / Inventories
Inventories = $194,444.44

Total Assets = Accounts Receivable + Inventories + Fixed Assets
Total Assets = $291,452.05 + $194,444.44 + $540,000
Total Assets = $1,025,896.49

Total Assets Turnover = Annual Sales / Total Assets
Total Assets Turnover = $2,955,000 / $1,025,896.49
Total Assets Turnover = 2.88

Return on Assets = Net Income / Total Assets
Return on Assets = $206,850 / $1,025,896.49
Return on Assets = 0.2016 or 20.16%