Chastain Corporation is trying to determine the effect of its inventory turnover
ID: 2614919 • Letter: C
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 $298000; its cost of goods sold is 80 % of sales, and it earned a net profit of 49 or $1192 It tu ed er its inventor 6 tí s during the year, and its DSO was 38.5 days. The firm had fixed assets totaling $27000. Chastain's payables deferral period is 50 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. 49.33 3 days 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 3.06 12.14* 96 Total assets turnover ROA C. Suppose Chastain's managers believe that the inventory turnover can be raised to 8 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8 for 2016? Round your answers to two decimal places. Do not round intermediate calculations Cash conversion cycle Total assets turnover ROA 34.13 days 3.38 13.510 %Explanation / Answer
(a). Cash conversion cycle = 49.33 days
(Note if we use 360 days in the year then answer will be different. So make sure that what number of days you use in year.)
Explanation;
Cash conversion cycle =
Days inventory outstanding + Days sales outstanding – Days payables outstanding
Days inventory outstanding (365 / 6) = 60.83 days
Days sales outstanding = 38.5 days
Days payables outstanding = 50 days
Now let’s put these values in above given formula;
Cash conversion cycle (60.83 days + 38.5 days – 50 days) = 49.33 days
(b).
Total assets turnover = 2.74
ROA = 10.96%
Explanation;
Total assets turnover = Sales / Total assets
So let’s calculate total assets;
Inventory ($238400 / 6) = $39733.33
Accounts receiveble ($398000 / 365) * 38.5 = $41980.82
Thus total assets will be ($39733.33 + $41980.82 + $27000) = $108714.15
Now Total assets turnover ratio will be ($298000 / $108714.15) = 2.74
ROA = Net profit / Total assets
Net profit = $11920
Total assets = $108714.15
Thus, ROA ($11920 / $108714.15) = 10.96%
(C).
Cash conversion cycle = 34.12 or 34.13 days
Total assets turnover = 3.02
ROA = 12.07%
Explanation;
Cash conversion cycle =
Days inventory outstanding + Days sales outstanding – Days payables outstanding
Days inventory outstanding (365 / 8) = 45.625 days
Days sales outstanding = 38.5 days
Days payables outstanding = 50 days
Now let’s put these values in above given formula;
Cash conversion cycle (45.625 days + 38.5 days – 50 days) = 34.12 or 34.13 days
Total assets turnover = Sales / Total assets
So let’s calculate total assets;
Inventory ($238400 / 8) = $29800
Accounts receiveble ($398000 / 365) * 38.5 = $41980.82
Thus total assets will be ($29800 + $41980.82 + $27000) = $98780.82
Now Total assets turnover ratio will be ($298000 / $98780.82) = 3.02
ROA = Net profit / Total assets
Net profit = $11920
Total assets = $98780.82
Thus, ROA ($11920 / $98780.82) = 12.07%