Problem 16-12 Working Capital Cash Flow Cycle Strickler Technology is considerin
ID: 2727112 • 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 $160,000 (all on credit), and it earned a net profit of 7%. Its inventory turnover was 10 times during the year, and its DSO was 37.5 days. Its annual cost of goods sold was $121,896. The firm had fixed assets totaling $36,000. Strickler's payables deferral period is 44 days. Assume 365 days in year for your calculations. Do not round intermediate calculations.
Calculate Strickler's cash conversion cycle. Round your answer to two decimal places.
{} days
Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover. Round your answer to two decimal places.
}x
Calculate its ROA. Round your answer to two decimal places.
%
Suppose Strickler's managers believe that the inventory turnover can be raised to 9 times without affecting sales and cost of goods sold. What would Strickler's cash conversion cycle have been if the inventory turnover had been 9 for the year? Round your answer to two decimal places.
What would Strickler's total assets turnover have been if the inventory turnover had been 9 for the year? Round your answer to two decimal places.
x
What would Strickler's ROA have been if the inventory turnover had been 9 for the year? Round your answer to two decimal places.
%
Explanation / Answer
a. Days Inventory Outstanding (DIO)= 365/10 = 36.5 days
Days sales Outstanding (DSO) = 37.5 days
Days payable oustanding (DPO) = 44 days
The cash conversion cycle = DIO + DSO - DPO = 36.5 + 37.5 - 44 = 30 days
b. Inventory = COGS/ Inventory turover = 121896/10 =12,189.60
Debtors turnover = 365/ DSO = 365/ 37.5 = 9.733
Accounts recievable = Sales/Debtors turnover = 160,000/9.7333 = 16,438.36
Hence total assets = Inventory + accounts recivable + Fixed assets = 12,189.60+ 16,438.36 +36,000 = 64,627.96
Total asset turnover ratio = Net sales/ Avg. total assets = 160,000/64,627.96 = 2.4757 = 2.48
c. ROA = Net Profit/ total assets
Net profit = 0.07 * 160,000 = 11,200
Total assets = 64,627.96
ROA = 11,200/64,627.96 = 0.1733 = 17.33%
d. Days Inventory Outstanding (DIO)= 365/9 = 40.56 days
Days sales Outstanding (DSO) = 37.5 days
Days payable oustanding (DPO) = 44 days
The cash conversion cycle = DIO + DSO - DPO = 40.56 + 37.5 - 44 = 34.06 days
e.Inventory = COGS/ Inventory turover = 121896/9 =13,544
Debtors turnover = 365/ DSO = 365/ 37.5 = 9.733
Accounts recievable = Sales/Debtors turnover = 160,000/9.7333 = 16,438.36
Hence total assets = Inventory + accounts recivable + Fixed assets = 13,544+ 16,438.36 +36,000 = 65,982.36
Total asset turnover ratio = Net sales/ Avg. total assets = 160,000/65,982.36 = 2.4248 = 2.42
f. ROA = Net Profit/ total assets
Net profit = 0.07 * 160,000 = 11,200
Total assets = 65,982.36
ROA = 11,200/65,982.36 = 0.1697 = 16.97%