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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

CASH CONVERSION CYCLE Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie’s 2015 sales (all on credit) were $150,000; its cost of goods sold is 80% of sales; and it earned a net profit of 6%, or $9,000. It turned over its inventory 6 times during the year, and its DSO was 36 5 days. The firm had fixed assets totaling $35,000. Christie’s payables deferral period is 40 days.

a. Calculate Christie’s cash conversion cycle.

b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.

c. Suppose Christie’smanagers believe that the inventory turnover can be raised to 9 0 times. What would Christie’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 0 for 2015?

a.

Summary Introduction

To determine: The amount cash conversion cycle.

Working capital:

Working capital speculation is the measure of cash, require to extend business, meet here and now business obligations and cover costs of doing business.

Cash budget:

A money spending plan is an estimation of the money inflows and outpourings for a business over a particular timeframe. This financial plan is utilized to evaluate whether the substance has adequate money to work.

Explanation

Given,

Sale is $150,000.

Cost of goods sold is 80% of sales.

Net profit is $9,000.

Inventory is 6 times of the year.

Days outstanding sale is 36.5.

Fixed assets is $35,000.

Payable deferral period is 40 days.

Formula to calculate the length of the cash conversion cycle:

Cashconversioncycle=(Inventoryconversionperiod+ReceivableconversionperiodPayabledeferralperiod)

Substitute 60.83 for the inventory conversion period, 36.5 for the receivable conversion period and 40 for the payable deferral period

b.

Summary Introduction

To determine: The amount of the fixed asset and return on assets.

c.

Summary Introduction

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

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