Carmen and Vanessa\'s Corporation wants to determine the effect of its inventory
ID: 2722325 • Letter: C
Question
Carmen and Vanessa's Corporation wants to determine the effect of its inventory and receivables management on its cash flow cycle. Carmen and Vanessa's sales last year (all on credit) was $200,000, and earned a net profit % of 10%. Inventory Turnover was 12, Days Sales Outstanding was 45, and Days Payable Outstanding were 30. Cost of Goods Sold was $120,000, and Fixed Assets were $50,000. a. Please calculate Carmen and Vanessa's cash conversion cycle (preferably using my methodology, not the text's ) b. Assume Carmen and Vanessa has no cash, no marketable securities and no other Long Term Assets. What is Carmen and Vanessa's Total Asset Turnover and ROA? c. If Carmen and Vanessa improves Inventory Turnover to 15, what is the new cash conversion cycle, Total Asset Turnover and ROA? Carmen and Vanessa's Corporation wants to determine the effect of its inventory and receivables management on its cash flow cycle. Carmen and Vanessa's sales last year (all on credit) was $200,000, and earned a net profit % of 10%. Inventory Turnover was 12, Days Sales Outstanding was 45, and Days Payable Outstanding were 30. Cost of Goods Sold was $120,000, and Fixed Assets were $50,000. a. Please calculate Carmen and Vanessa's cash conversion cycle (preferably using my methodology, not the text's ) b. Assume Carmen and Vanessa has no cash, no marketable securities and no other Long Term Assets. What is Carmen and Vanessa's Total Asset Turnover and ROA? c. If Carmen and Vanessa improves Inventory Turnover to 15, what is the new cash conversion cycle, Total Asset Turnover and ROA?Explanation / Answer
Sales ( credit) 200000 Net profit 10% Inventory turnover 12 Days sales outstanding 45 Days payable outstanding 30 Cost of goods sold 120000 Fixed assets 50000 a) Cash conversion cycle = Days Inventory o/s + Days sales outstanding - days payable outstanding Days inventory outstanding = Inventory / cost of goods sold Inventory turnover = Cost of goods sold/ inventory Inventory = Cost of goods sold / Inventory turnover = 120000/ 12 = 10000 Days inventory outstanding = 10000 / 120000 * 365 = 30.42 Cash conversion cycle = 30.42 + 45 - 30 = 45.42 b) Days sales outstanding = Accounts receivable / Net credit sales*365 Accounts receivable = (Days sales outstanding * Net credit sales)/365 = (45 * 200000)/365 = 9000000/365 = 24658 Total assets Accounts receivable 24658 Fixed Assets 50000 74658 Asset turnover = Net sales / average assets (ROA = 200000 / 74658 = 2.68 c) Sales ( credit) 200000 Net profit 10% Inventory turnover 15 Days sales outstanding 45 Days payable outstanding 30 Cost of goods sold 120000 Fixed assets 50000 c) Cash conversion cycle = Days Inventory o/s + Days sales outstanding - days payable outstanding Days inventory outstanding = Inventory / cost of goods sold Inventory turnover = Cost of goods sold/ inventory Inventory = Cost of goods sold / Inventory turnover = 120000/ 15 = 8000 Days inventory outstanding = 8000 / 120000 * 365 = 24.33 Cash conversion cycle = 24.33 + 45 - 30 = 39.33 Days sales outstanding = Accounts receivable / Net credit sales*365 Accounts receivable = (Days sales outstanding * Net credit sales)/365 = (45 * 200000)/365 = 9000000/365 = 24658 Total assets Accounts receivable 24658 Fixed Assets 50000 74658 Asset turnover = Net sales / average assets (ROA) = 200000 / 74658 = 2.68