Question

Working Capital Cash Flow Cycle

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $2,700,000 (all on credit), and its net profit margin was 4%. Its inventory turnover was 7.5 times during the year, and its DSO was 44 days. Its annual cost of goods sold was $1,500,000. The firm had fixed assets totaling $430,000. Strickler's payables deferral period is 50 days. Assume 365 days in year for your calculations. 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. Round your answer to two decimal places.
        x
   Calculate its ROA. Round your answer to two decimal places.
        %
   
3. Suppose Strickler's managers believe the annual inventory turnover can be raised to 11 times without affecting sale or profit margins. What would Strickler's cash conversion cycle have been if the inventory turnover had been 11 for the year? Round your answer to two decimal places.
        days
   What would Strickler's total assets turnover have been if the inventory turnover had been 11 for the year? Round your answer to two decimal places.
         x
   What would Strickler's ROA have been if the inventory turnover had been 11 for the year? Round your answer to two decimal places.
        %

Answer 1

a. Cash conversion cycle = DIO + DSO - DPO

DIO is days inventory outstanding; DSO is days sales outstanding; DPO is days payable outstanding

DSO and DPO have been given. we need to calculate DIO.

DIO = (inventory/cost of goods sold)*365

Inventory turnover = Sales/Inventory

7.5 = $2,700,000/Inventory

Inventory = $2,700,000/7.5 = $360,000

DIO = ($360,000/$1,500,000)*365 = 0.24*365 = 87.6

Cash conversion cycle = 87.6 + 44 - 50 = 81.60 days

b. Total asset turnover = Sales/Total assets = $2,700,000/$430,000 = 6.28

ROA = Net income/Total assets = ($2,700,000*4%)/$430,000 = $108,000/$430,000 = 0.2512 or 25.12%

c. Cash conversion cycle = DIO + DSO - DPO

DIO is days inventory outstanding; DSO is days sales outstanding; DPO is days payable outstanding

DIO = (inventory/cost of goods sold)*365

Inventory turnover = Sales/Inventory

11 = $2,700,000/Inventory

Inventory = $2,700,000/11 = $245,454.55

DIO = ($245,454.55/$1,500,000)*365 = 0.1636363666666667*365 = 59.73

Cash conversion cycle = 59.73 + 44 - 50 = 53.73 days

Total asset turnover have been the same as 6.28 because sales would have been remained the same as earlier if Inventory turnover had been 11 for the year.

ROA have been remained the same as 25.12% because net income would have been remained remain the same as earlier if Inventory turnover had been 11 for the year.