Question

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 $208,000, its cost of goods sold is 80% of sales, and it earned a net profit of 7%, or $14,560. It turned over its inventory 4 times during the year, and its DSO was 33 days. The firm had fixed assets totaling $44,000. Chastain's payables deferral period is 40 days. Assume 365 days in year for your calculations.

1. Calculate Chastain's cash conversion cycle. Do not round intermediate calculations. Round your answer to two decimal places.
   days
2. 
   
3. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Do not round intermediate calculations. Round your answers to two decimal places.
   

   Total assets turnover:
   ROA:		%

4. 
   
5. Suppose Chastain's managers believe that the inventory turnover can be raised to 9.9 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.9 for 2019? Do not round intermediate calculations. Round your answers to two decimal places.
   

   Cash conversion cycle:		days
   Total assets turnover:
   ROA:		%

Answer 1

a.Cash conversion cycle(CCC)=Days Inventory o/s(DIO)+Days sales o/s(DSO)-Days payables o/s(DPO)

Days Inventory o/s(DIO)=365/Inventory turnover (times in a year)

ie. 365/4=

91.25

days

DSO is given as 33 days

&

DPO , give as 40 days

So, CCC=DIO+DSO-DPO

ie.91.25+33-40=

84.25

84.25 days

c. Total assets turnover=Sales/ Total assets

Sales is given as $ 208000

We need to find the total assets

& we know fixed assets to be 44000

Now, we need to find the current assets , to get the total of assets

out of which

Cash and marketable securities are negligible

Inventory & receivables ---we calculate as follows:

ITO=COGS/Av. Inv

4=(208000*80%)/Inv.

Inv.=208000*80%/4=

41600

DSO=365/Accounts receivables turnover

ie.DSO=365/(Net credit sales/Av.Recivables)

ie.33=365/(208000/Av. Receivables)

so, Receivables=

18805.48

or 18805

So, now the total assets=Fixed assets+Inventory+Receivables

ie.44000+41600+18805=

104405

Now, the

Total assets turnover=Sales/ Total assets=

208000/104405=

1.99

times

ROA=Net Income/Total assets

14560/104405=

13.95%

e. If the inventory turnover can be raised to 9.9 times :

Cash conversion cycle=

ie.(365/9.9)+33-40=

29.87

days

Total assets turnover, and ROA

Calculating inventory again,

ITO=COGS/Av. Inv

9.9=(208000*80%)/Inv.

Inv.=208000*80%/9.9=

16808

Receivables & fixed assets will be the same as in c. above

So, now the total assets=Fixed assets+Inventory+Receivables

ie.44000+16808+18805=

79613

Now, the

Total assets turnover=Sales/ Total assets=

208000/79613=

2.61

times

ROA=Net Income/Total assets

14560/79613=

18.29%