Please answer fully Problem 16-7 Cash conversion cycle Christie Corporation is t
ID: 2448274 • Letter: P
Question
Please answer fully
Problem 16-7
Cash conversion cycle
Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie's 2012 sales (all on credit) were $169,000; its cost of goods sold is 80% of sales; and it earned a net profit of 2%, or $3,380. It turned over its inventory 6 times during the year, and its DSO was 35.5 days. The firm had fixed assets totaling $47,000. Christie's payables deferral period is 35 days. Assume 365 days in year for your calculations.
a. Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
___________ days
b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.
c. Suppose Christie's managers believe that the inventory turnover can be raised to 9.7 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.7 for 2012?
Explanation / Answer
a. Calculate Christie's cash conversion cycle. Round your answer to two decimal places. ___________ days Cash Conversion Cycle is calculated as DIO + DSO - DPO Where, DIO = Days Inventory Outstanding, DSO = Days Sales Outstanding and DPO = Days Payable Outstanding Since the inventory turnover is 6 times, the no. of days for the inventory outstanding will be 365/6 = 60.83 days DSO as given above is 35.5 days DPO is 35 days as given Hence, the Cash Conversion Cycle in no. of days 61.33 days b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places. Total Assets held by Christie (Fixed Assets) 47000 $ Turnover of Christie 169000 $ Net Profit of Christie 3380 $ Total Assets Turnover Total Assets/Turnover 0.28 times ROA Net Income/Total Assets 7.19% c. Suppose Christie's managers believe that the inventory turnover can be raised to 9.7 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.7 for 2012? In case the inventory turnover ratio is raised to 9.7 times, the DIO will be 37.63 days Thus the revised Cash Conversion Cycle will be (based on the formula in a above) 38.13 days The total assets turnover and ROA will not be affected on account of a change in the Cash Conversion Cycle