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 $2,825,000 (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 $1,650,000. The firm had fixed assets totaling $495,000. 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 8 times without affecting sale or profit margins. What would Strickler's cash conversion cycle have been if the inventory turnover had been 8 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 8 for the year? Round your answer to two decimal places.
         x
   What would Strickler's ROA have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.
        %

Answer 1

Answer A: ICP (inventory conversion period)= 365 / inventory turnover ratio = 365 / 5.5 = 66.36 days

ACP = DSO = 43 days

Cash Conversion cycle = ICP + ACP - Deferral period = 43 + 66.36-46 = 63.36 days

Answer B: Inventory = Sales or COGS / Inventory conversion ratio = $2825000 / 5.5 = $513,636.4

Accounts receivable = Sales/365 * average collection period = 2825000/365 * 43 = $332808.2

Total Assets = Inventory + accounts receivable + Fixed assets

Total Assets : $513,636.4 + $332808.2 + $495000 = $1341445

Total Asset turnover = Sales / total Assets = 2825000/ 1341445 = 2.1059

Return on assets : Profit margin * Total asset turnover = 7% * 2.1059 = 0.1474 or 14.74%

Answer C:

New ICP = 365 / 8 = 45.625

New CCC = 45.625 +43 -46= 42.625

Inventory will change to $353125

Total Assets = $353125 + $332808.2 + $495000 = $1180933

Total Asset turnover = Sales / Total Assets = 2825000/1180933 = 2.3921

Return on assets = Profit margin * total asset turnover = 7% * 2.3921 = 0.1674 or 16.74%