BEC Finance 3 Flashcards
What makes up working capital?
Current assets and current liabilities
Working capital=current assets-current liabilities
Objectives of managing working capital:
- Meet ongoing operating needs by keeping inventory and cash to meet current obligations
- Not overinvest by keeping excess idle cash, excess accounts receivable or excess inventory
Will efficient practices seek to increase or decrease receipt float and disbursement float?
Decrease receipt float and increase disbursement float
Accelerating and controlling cash INFLOWS:
- Lock-box system- firm’s bank collects payments from post office box and deposits them, reduces float from 7 days to 2-3 days
- Preauthorized checks and credit card charges- especially when customers pay fixed amount per prior for many periods (checks involve bank, credit card is only customer and firm)
- Remote deposit- allows digital checks to be used
- Concentration banking- funds from local banks for concentrated in principal bank of firm
- Depository transfer checks- can also be automated, efficient way to transfer funds between firm’s accounts at different banks
- Wire transfer- electronic means to transfer funds for a fee, since there is a fee, only good with large amounts
Deferring and controlling cash OUTFLOWS:
- Managing purchase/payment process- use charge accounts, don’t pay bills until due
- Remote disbursing- establish checking accounts in remote locations that take longer to clear payment, so float time is increased for payment
- Zero-balance accounts- agreement with bank that payment accounts have no real balance, overdrawn accounts are paid and other funds automatically transferred to cover exact amount
- Payment through draft- bank draft, cashier’s check, certified check, money order, provides assurance to payee but typically involves a fee
- Positive pay system- firm sends bank deposits and all checks are checked against this information for fraud detection
- Electronic funds transfers (EFTs)- similar to wire transfer but transfers using computer files, must lower cost
When making short-term investments, which one of the following is the risk associated with the ability to sell an investment in a short period of time without having to make significant price concessions?
Liquidity risk
All other things being equal, which one of the following types of investment securities would be expected to have the highest yield (return)?
Since corporate bonds are more risky than U.S. Treasury bills and Federal agency securities, and since the interest they pay is taxable, they would be expected to have the highest yield.
Concerns with temporary excess cash:
- Safety of principal
- Price stability
- Marketability/liquidity
Short-term cash investment opportunities:
- US Treasury bills- risk-free, maturities of 3 mo-1yr, excellent liquidity
- Federal agency securities- not backed by federal government so not as marketable as treasury obligations, have higher yields, wide range of maturities and good liquidity
- Negotiable CDs- can be bought and sold in secondary market, low risk, less marketable than 1 and 2
- Banker’s acceptances- primarily used in foreign transactions
- Commercial paper- short-term unsecured promissory notes issues by firms, maturities up to 270 days, secondary market limited, higher yield
- Repurchase agreements- firm makes loan that gets paid back with interest, yield lower than treasury bills but offers higher liquidity and very short maturity
The overall objective of accounts receivable management is to:
Maximize profits
Concerned with policies related to recognition of accounts receivable and collection of accounts receivable.
Focus of accounts receivable management:
- Establishing general terms of credit
- Determining customer creditworthiness
- Collecting accounts receivable (monitoring and collection action)
Which of the following inventory management approaches seeks to minimize total inventory costs by considering both the restocking (reordering) cost and the carrying costs?
Econonic order quantity= square root of (2x annual demand x cost per order)/carrying cost per unit
Reorder point=
delivery time stock + safety stock
delivery time stock- time it takes for order to arrive
safety stock-amount of safety stock to keep on hand
What is central issue in inventory management?
Determine and maintain and optimum investment in all inventories.
Two common inventory systems in US:
- Traditional material requirement planning (MRP)
2. Just-in-time
In managing its working capital, your firm tries to follow the hedging principle of finance. Which one of the following would be too aggressive to be consistent with that principle as applied to working capital?
Financing long-term needs with short-term funds.
