The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and days sales
Question:
The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Flamingos sales (all on credit) were $180,000, and it earned a net profit of 5 percent, or $9,000. The cost of goods sold equals 85 percent of sales. Inventory was turned over eight times during the year, and the DSO, or average collection period, was 36 days. The firm had fixed assets totaling $40,000. Flamingos payables deferral period is 30 days.
1Calculate Flamingos cash conversion cycle.
2Assuming Flamingo holds negligible amounts of cash and marketable securities, calculate its total assets turnover and return on assets (ROA).
3Suppose Flamingos managers believe that the inventory turnover can be raised to 10x. What would Flamingos cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 10x?