Problem 16-7 Cash conversion cycle Christie Corporation is trying to determine t
ID: 2711580 • Letter: P
Question
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 $209,000; its cost of goods sold is 80% of sales; and it earned a net profit of 5%, or $10,450. It turned over its inventory 5 times during the year, and its DSO was 38.5 days. The firm had fixed assets totaling $43,000. Christie's payables deferral period is 40 days. Assume 365 days in year for your calculations.
Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
days
Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.
Suppose Christie's managers believe that the inventory turnover can be raised to 8.9 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.9 for 2012?
Explanation / Answer
a)
Cash conversion Cycle = DSO + Average Inventory Days - Deferral period
Cash conversion Cycle = 38.5 + 365/5 - 40
Cash conversion Cycle = 71.5 days
b)
Total Asset = Fixed Asset + Account Recievable + Inventory
Total Asset = 43000+ 38.5/365*209000 + 209000*80%/5
Total Asset = 98485.21
Total Asset Turnover = Sales/Total Assets
Total Asset Turnover = 209000/98485.21
Total Asset Turnover = 2.12
ROA = Net Profit/Total Asset
ROA = 10450/98485.21
ROA = 10.61%
c )
Cash conversion Cycle = DSO + Average Inventory Days - Deferral period
Cash conversion Cycle = 38.5 + 365/8.9 - 40
Cash conversion Cycle = 39.51 days
Total Asset = Fixed Asset + Account Recievable + Inventory
Total Asset = 43000+ 38.5/365*209000 + 209000*80%/8.9
Total Asset = 83,831.72
Total Asset Turnover = Sales/Total Assets
Total Asset Turnover = 209000/ 83831.72
Total Asset Turnover = 2.49
ROA = Net Profit/Total Asset
ROA = 10450/83831.72
ROA = 12.47%