The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and DSO on

Question:

The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and DSO on its cash flow cycle. Flamingo’s 2015 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. Flamingo’s payables deferral period is 30 days.

a. Calculate Flamingo’s cash conversion cycle.

b. Assuming Flamingo holds negligible amounts of cash and marketable securities, calculate its total assets turnover and return on assets (ROA).

c. Suppose Flamingo’s managers believe that the inventory turnover can be raised to 10 ×. What would Flamingo’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 10 × for 2015?

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