What would Adams’ cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?

Managerial finance- group problem set-2 | BA62070H519 Managerial Finance | Campbellsville University

Adams’ cash conversion cycle is calculated as the average collection period, plus the inventory turnover, minus the payment period. Since we are calculating with a theoretical inventory turnover of 9 instead of 8, this ratio would increase by 1: ((30+9)-20) = 19 days.

Total assets turnover measures the efficiency with which Adams uses its total assets to generate sales revenue. If inventory turnover increased from 8 to 9, total assets turnover will also increase because it takes fewer investments in inventories to generate revenue. The total asset turnover would become: (300/6000) = 0.05 or 5%.

Return on Assets (ROA) is measured by dividing net income by average total assets and reflects how much profit is earned for each dollar invested in assets. An increased inventory turnover from 8 to 9 means that Adams has more efficiently used their resources and reduced their investment in inventories relative to previous years; therefore ROA would likely increase from 6% to 7%.