Cash Conversion Cycle Assets Turnover and Return on Assets Questions
I’m working on a management question and need support to help me understand better.
1. Adams Stores, Inc. is trying to determine the effect of its inventory turnover ratio and days
sales outstanding (DSO) on its cash flow cycle. Adams’ sales last year (all on credit) were
$150,000, and it earned a net profit of 6%. It turned over inventory 7.5 times, during the year
and its DSO was 36.5 days. Its annual cost of goods sold was $121,667. The company had
fixed assets totally $35,000. Adams’ payable deferral period is 40 days.
A. Calculate Adams’ cash conversion cycle
B. Calculate assets turnover and return on assets (ROA)
C. As one of the managers at Adams Stores, Inc, you believe the annual inventory turnover
can be raised to 9 times without affecting sales. What would Adams’ cash conversion
cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for
the year?
2. Assume the company work for reported sales of $10 million and an inventory turnover of 2.
The company is now adopting a new inventory system as part of its working capital
management. If the new system is able to reduce the company’s inventory level and increase
inventory turnover ratio to 5 while maintaining the same level sales, how much cash will be
freed up as a result of the new inventory system.
