Question

Problem 16-12
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 $2,357,500 (all on credit), and its net profit margin was 7%. Its inventory turnover was 5.5 times during the year, and its DSO was 43 days. Its annual cost of goods sold was $1,375,000. The firm had fixed assets totaling $397,500. Strickler's payables deferral period is 46 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 10 times without affecting sale or profit margins. What would Strickler's cash conversion cycle have been if the inventory turnover had been 10 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 10 for the year? Round your answer to two decimal places.
         x
   What would Strickler's ROA have been if the inventory turnover had been 10 for the year? Round your answer to two decimal places.
        %

Answer 1

A.

Days inventory outstanding = 365/Inventory Turnover Ratio

= 365/5.5 = 66.36

Cash Conversion Cycle = Days Inventory Outstanding (Dso) + Average Collection Period – Payable Deferral Period

= 66.36 + 43 - 46 = 63.36

b. Inventory = COGS/Inventory Turnover Ratio = 1,375,000 / 5.5 = 250,000

Total Assets = Fixed Assets + Inventory = 397,500 + 250000 = 647,500

Total Asset Turnover = Sales / Total Assets = 2,357,500/647,500 = 3.64

Net Income = Net Profit Margin * Sales = 7%*2,357,000 = 164,990

ROA = Net Income/Total Assets = 164,990/647500 = 25.47%

c.

Days inventory outstanding = 365/Inventory Turnover Ratio

= 365/10 = 36.5

Cash Conversion Cycle = Days Inventory Outstanding (Dso) + Average Collection Period – Payable Deferral Period

= 36.5+ 43 - 46 = 33.5

Inventory = COGS/Inventory Turnover Ratio = 1,375,000 / 10 = 137,500

Total Assets = Fixed Assets + Inventory = 397,500 + 137500 = 535,000

Total Asset Turnover = Sales / Total Assets = 2,357,500/535,000 = 4.406

Net Income = Net Profit Margin * Sales = 7%*2,357,000 = 164,990

ROA = Net Income/Total Assets = 164,990/647500 = 25.47%