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 2016 sales (all on credit) were $275000; its cost of goods sold is 80% of sales; and it earned a net profit of 8%, or $22000. It turned over its inventory 6 times during the year, and its DSO was 32.5 days. The firm had fixed assets totaling $40000. Chastain's payables deferral period is 35 days. Assume 365 days in year for your calculations. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

a. Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations.

b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places. Do not round intermediate calculations.

c. Suppose Chastain's managers believe that the inventory turnover can be raised to 9.3 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.3 for 2016? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

a). CCC = Days Inventory outstanding + Days Sales Outstanding - Days Payable outstanding

Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory

6 = [0.80 x $275,000] / Average Inventory

Average Inventory = [0.80 x $275,000] / 6 = $36,666.67

Days Inventory Outstanding = 365/Inventory turnover ratio = 365/ 6 = 60.83 days

Days Sales Outstanding = 32.5 days

Days Payable Outstanding = 35 days

CCC = 60.83 + 32.5 - 35 = 58.33 days

b). Total Receivables = Sales / [365 / DSO] = $275,000 / [365 / 32.5] = $24,486.30

Total Assets = Fixed Assets + Total Inventory + Total Receivables

= $40,000 + $36,666.67 + $24,486.30 = $101,152.97

Total Assets Turnover= Sales/Total Assets

= $275,000/$101,152.97 = 2.72 times

ROA= Net Income / Total Assets = $22,000 / $101,152.97 = 21.75%

c). CCC = [365/9.3] + 32.5 - 35 = 36.75 days

Total Assets = Fixed Assets + Total Inventory + Total Receivables

= $40,000 + [(0.80 x $275,000) / 9.3] + $24,486.30 = $88,142.22

Total Assets Turnover= Sales/Total Assets

= $275,000/$88,142.22 = 3.12 times

ROA= Net Income / Total Assets = $22,000 / $88,142.22 = 24.96%