Problem 16-12 Working Capital Cash Flow Cycle Strickler Technology is considerin
ID: 2623673 • Letter: P
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 $140,000 (all on credit), and it earned a net profit of 4%. Its inventory turnover was 7 times during the year, and its DSO was 40 days. Its annual cost of goods sold was $121,509. The firm had fixed assets totaling $25,000. Strickler's payables deferral period is 36 days. Assume 365 days in year for your calculations. Do not round intermediate calculations.
Explanation / Answer
DSO =40 days
DIO = Average inventory/COGS per day = 365/7 days
DPO = Average AP/COGS per day = 36 days
cash conversion cycle = 365/7+40-36= 56.14 days
DSO = Average AR / Revenue per day
Average AR = 40*140000/365=15342.47
COGS/ Average inventory= 7
Average inventory = 121509/7= 17,358.43
Total asset = fixed asset + Average AR+ Average inventory
Total asset = 25,000+ 17,358.43+15342.47= 57,700.89
Asset Turnover = 140000/57,700.89= 2.43
ROA = 4%*140000/57,700.89= 9.71%
DSO =40 days
COGS/ Average inventory =8
DIO = Average inventory/COGS per day = 365/8 days
DPO = Average AP/COGS per day = 36 days
cash conversion cycle365/8+40-36= 49.63 days
If inventory turnover can be raised to 8 times, inventory value will change
Average inventory = 121509/8 = 15,188.63
Total asset = 25,000+ 15,188.63 +15342.47= 55,531.09
Asset Turnover = 140000/55,531.09 = 2.52
ROA = 4%*140000/55,531.09= 10.08%