BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
1 views

CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain’s 2016 sales (all on credit) were $121,000; its cost of goods sold is 80% of sales; and it earned a net profit of 2%, or $2,420. It turned over its inventory 7 times during the year, and its DSO was 37 days. The firm had fixed assets totaling $42,000. Chastain’s payables deferral period is 35 days.

  1. a. Calculate Chastain’s cash conversion cycle.
  2. b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.
  3. c. Suppose Chastain’s managers believe that the inventory turnover can be raised to 9.9 times. What would Chastain’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.9 for 2016?
  4. d.
  5. e.

a.

Summary Introduction

To determine: The cash conversion cycle.

Introduction:

Cash Conversion Cycle: It refers to the time period which starts from the production of the products to selling of the products and lasts until the time the customer receives the cash.

Explanation

Given information:

The credit sales were $121,000.

The cost of goods sold is 80% of sales.

The net profit is 2% or $2,420.

The inventory turnover ratio is 7 times.

The day's sales outstanding are 37 days.

The amount of total fixed assets is $42,000.

The payment deferral period is 35 days.

Calculation of the cash conversion cycle:

The formula to calculate the cash conversion cycle is,

CashConversionCycle=(Inventoryconversionperiod+AveragecollectionperiodPaymentdeferralperiod)

Substitute 52.14 days for inventory conversion period, 37 days for theaverage collection period and 35 days for the payables deferral period in the above formula.

CashConversionCycle=52.14+3735=54

b.

Summary Introduction

To determine: The total assets turnover and return on assets.

c.

Summary Introduction

To determine: The cash conversion cycle, total assets turnover and return on assets.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Distinguish between operating mergers and financial mergers.

Fundamentals of Financial Management (MindTap Course List)

Explain the separate entity concept.

College Accounting (Book Only): A Career Approach

Explain the factors in the future value of a single sum table.

Intermediate Accounting: Reporting And Analysis

Why do options typically sell at prices higher than their exercise values?

Fundamentals of Financial Management (MindTap Course List)

Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms....

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What is the purpose of interim quality standards?

Cornerstones of Cost Management (Cornerstones Series)