In: Finance
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 2019 sales (all on credit) were $286,000, its cost of goods sold is 80% of sales, and it earned a net profit of 8%, or $22,880. It turned over its inventory 5 times during the year, and its DSO was 38 days. The firm had fixed assets totaling $43,000. Chastain's payables deferral period is 45 days. Assume 365 days in year for your calculations.
Total assets turnover: | ||
ROA: | % |
Cash conversion cycle: | days | |
Total assets turnover: | ||
ROA: | % |
Answer a.
Days Inventory Outstanding = 365/ Inventory Turnover
Days Inventory Outstanding = 365 / 5
Days Inventory Outstanding = 73 days
Days Sales Outstanding = 38 days
Days Payable Outstanding = 45 days
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales
Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 73 + 38 - 45
Cash Conversion Cycle = 66 days
Answer b.
Days Sales Outstanding = 365 * Accounts Receivable / Annual
Sales
38 = 365 * Accounts Receivable / $286,000
Accounts Receivable = $29,775.34
Cost of Goods Sold = 80% * Annual Sales
Cost of Goods Sold = 80% * $286,000
Cost of Goods Sold = $228,800
Inventory Turnover = Cost of Goods Sold / Inventories
5 = $228,800 / Inventories
Inventories = $45,760.00
Total Assets = Accounts Receivable + Inventories + Fixed
Assets
Total Assets = $29,775.34 + $45,760.00 + $43,000.00
Total Assets = $118,535.34
Total Assets Turnover = Annual Sales / Total Assets
Total Assets Turnover = $286,000 / $118,535.34
Total Assets Turnover = 2.41
Return on Assets = Net Income / Total Assets
Return on Assets = $22,880 / $118,535.34
Return on Assets = 0.1930 or 19.30%
Answer c.
Days Inventory Outstanding = 365/ Inventory Turnover
Days Inventory Outstanding = 365 / 9.5
Days Inventory Outstanding = 38.42 days
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales
Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 38.42 + 38 - 45
Cash Conversion Cycle = 31.42 days
Inventory Turnover = Cost of Goods Sold / Inventories
9.50 = $228,800 / Inventories
Inventories = $24,084.21
Total Assets = Accounts Receivable + Inventories + Fixed
Assets
Total Assets = $29,775.34 + $24,084.21 + $43,000.00
Total Assets = $96,859.55
Total Assets Turnover = Annual Sales / Total Assets
Total Assets Turnover = $286,000 / $96,859.55
Total Assets Turnover = 2.95
Return on Assets = Net Income / Total Assets
Return on Assets = $22,880 / $96,859.55
Return on Assets = 0.2362 or 23.62%