Concept explainers
Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler’s sales last year were $3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was $1,800,000. The firm had fixed assets totaling $535,000. Strickler’s payables deferral period is 45 days.
- a. Calculate Strickler’s cash conversion cycle.
- b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and
ROA . - c. Suppose Strickler’s managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Strickler’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?
a)
To determine: Cash conversion cycle of Company S.
Explanation of Solution
Calculation of inventory and inventory conversion period:
Therefore inventory is $300,000 and inventory conversion period is 60.8 days
Calculation of length of cash conversion cycle:
Hence, length of cash conversion cycle is 56.8 days.
b)
To determine: Total assets turnover ratio and ROA.
Explanation of Solution
Calculation of total assets:
Hence, total assets of company are $1,200,068.49
Calculation of assets turnover ratio:
Hence assets turnover is 2.7082 times
Calculation of ROA:
Therefore, return on assets is 18.96%
c)
To determine: Cash conversion cycle, total assets turnover and ROA if inventory turnover had been 9 for the current year.
Explanation of Solution
Calculation of inventory:
Therefore, inventory is $20,000
Calculation of inventory conversion period:
Therefore, the inventory conversion period is 40.6 days.
Cash conversion cycle is 36.6 days.
Hence, total assets of company are $1,100,068.49
Calculation of assets turnover ratio:
Hence assets turnover is 2.9544 times
Calculation of ROA:
Therefore, return on assets is 20.68%
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Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
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