Question

As an intern at Crescent Corporation, you are asked to evaluate the company’s cash flow cycle. The company’s annual sales were $250,000 with a net profit margin of 8% and fixed asset turnover ratio of 4 times. The company’s inventory turnover ratio, based on sales figure, was 7. The company collected its receivables in 28 days on average while its payables deferral period extended 35 days. (Hint: Use Sales/Inventories as the Inventory Turnover measure whenever necessary in the following questions).

part b and c

Question b of problem:

1. You are then asked to compute Crescent’s total asset turnover and return on assets assuming that the company’s cash holding is negligible.

Question c of problem:

1. Finally, you are asked to analyze the impact of an increase on company’s inventory turnover ratio on its cash cycle. Specifically, what would happen to Crescent’s cash cycle, total asset turnover, and return on assets if the company can bring to its ITO to industry average of 9?

Answer 1

Total assets turnover ratio = Turnover 2.13 b) Total assets turnover ratio = Turnover 2.28 Increased Total assets Total assets Fixed assets 62500 35714.29 19178.08 Fixed assets 62500 27777.78 19178.08 Inventory Inventory 10 Receivables Receivables 12 13 15 16 17 18 Return on assets 17.04% Return on assets 18.27% Increases