Problem 16-12 Working Capital Cash Flow Cycle Strickler Technology is considerin
ID: 2727632 • 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.
days
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
Inventory Turnover ratio = Cost of goods sold / Average Inventory (NOTE 1)
10 = 121896 / Average Inventory
Average Inventory = 121896 / 10 = $ 12189.60
Days inventory outstanding = 365 * Average inventory / Cost of goods sold
= 365 * 12189.60 / 121896
= 36.5 Days
1) Cash Conversion Cycle:- = Days inventory outstanding + Days Sales outstanding - Days Payable outstanding
= 36.5 + 37.5 - 44
= 30 Days
2) Total asset turnover ratio = Sales / Total assets = 160000 / 48189.60 = 3.32 Times (Assuming Strickler holds negligible amounts of cash and marketable securities)
Total assets = Fixed assets + Current assets (Inventory) = 36000 + 12189.60 = $ 48189.60
3) Return on assets (ROA) = Return / Capital employed * 100
Capital employed = Fixed assets + Current assets (Inventory) - Current liabilities (Payables)
Average payables = (Days payable outstanding * Cost of sales ) / 365
= 44 * 121896 / 365 = $ 14694.31
Capital employed = 36000 + 12189.60 - 14694.31 = $ 33495.29
Return = 7 % of sales = 7 % of 160000 = $ 11200
Return on assets = 11200 / 33495.29 * 100 = 33.44 % (approx)
Situation:- If inventory turnoner ratio is 9
Inventory Turnover ratio = Cost of goods sold / Average Inventory (NOTE 1)
9 = 121896 / Average Inventory
Average Inventory = 121896 / 9 = $ 13544
Days inventory outstanding = 365 * Average inventory / Cost of goods sold
= 365 * 13544 / 121896
= 40.5 Days (approx)
4) Cash Conversion Cycle:- = Days inventory outstanding + Days Sales outstanding - Days Payable outstanding
= 40.5 + 37.5 - 44
= 34 days
5) Total asset turnover ratio = Sales / Total assets = 160000 / 49544 = 3.23 Times (Assuming Strickler holds negligible amounts of cash and marketable securities)
Total assets = Fixed assets + Current assets (Inventory) = 36000 + 13544 = $ 49544
6) Return on assets (ROA) = Return / Capital employed * 100
Capital employed = Fixed assets + Current assets (Inventory) - Current liabilities (Payables)
Average payables = (Days payable outstanding * Cost of sales ) / 365
= 44 * 121896 / 365 = $ 14694.31
Capital employed = 36000 + 13544 - 14694.31 = $ 34847.69
Return = 7 % of sales = 7 % of 160000 = $ 11200
Return on assets = 11200 / 34847.69 * 100 = 32.14 % (approx)
(NOTE 1):- The alternatie formula of inventory ratio is Sales / Average inventory, but The formula which i have used i.e., Cost of sales / average inventory is more appropriate.