## Related questions with answers

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. a. Calculate Chastain’s cash conversion cycle. b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. 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?

Solution

VerifiedThe equation used to find the cash conversion cycle is posted below, this will be used multiple times in this problem. Below this equation there will be several other equations posted which will help us find what we are looking for in this problem-

$\textbf{CCC}$= Inventory conversion period$+$Average collection period$-$Payable deferral period

$\textbf{Cost of goods sold}$= Sales$\times$Cost of goods sold percentage

$\textbf{Total inventory}$= $\dfrac{\text{Sales}}{\text{Inventory turnover ratio}}$

$\textbf{Inventory conversion period}$= $\dfrac{\text{Inventory}}{\text{Cost of goods sold per day}}$

$\textbf{Accounts receivable}$=Payment period $\times\dfrac{\text{Sales}}{365}$

$\textbf{Total assets}$=Fixed assets$+$Accounts receivable$+$Inventory

$\textbf{Total asset turnover}$= $\dfrac{\text{Sales}}{\text{Total assets}}$

$\textbf{ROA}$=$\dfrac{\text{Net Income}}{\text{Total assets}}$

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