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Financial Management ACCA > Chapter 13 - Working capital > Flashcards

Chapter 13 - Working capital Flashcards

1
Q

What is working capital defined as?

A

The excess of current assets over current liabilities

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2
Q

What are the two main objectives of Working Capital Management?

A
  • Liquidity

- Profitability

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3
Q

What is the conservative approach to Working Capital Management?

A

Maintaining high levels of working capital to avoid liquidity problems

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4
Q

What is the aggressive approach to Working Capital Management?

A

Keeping working capital to a minimum in order to improve profitability

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5
Q

What is the conservative approach to Working Capital Financing?

A

Finance all NCA, permanent CA and a proportion of fluctuating CA using long term financing methods. ie bank loan

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6
Q

What is the aggressive approach to Working Capital Financing?

A

Finance a proportion of permanent CA and fluctuating CA with short term financing methods ie bank overdraft.

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7
Q

What the advantage of the conservative approach to Working Capital Financing?

A

Good for liquidity.

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8
Q

What the advantage of the aggressive approach to Working Capital Financing?

A

Good for profitability

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9
Q

What the disadvantage of the conservative approach to Working Capital Financing?

A

Bad for profitability ie high bank loan interest

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10
Q

What the disadvantage of the aggressive approach to Working Capital Financing?

A

High risk of running out of cash

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11
Q

What are the two types of working capital ratios?

A

Liquidity

Efficiency

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12
Q

What is the current ratio?

A

(Current assets) ÷ (Current liabilities)

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13
Q

What is the quick ratio? (acid test)

A

(Current assets - inventory) ÷ (Current liabilities)

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14
Q

Inventory days?

A

(Inventory) ÷ (Cost of sales) x 365

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15
Q

What are the three elements that inventory days can be broken down to?

A

Raw materials days
WIP days
Finished goods days

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16
Q

Raw materials days?

A

(Raw materials) ÷ (Purchases) x 365

17
Q

WIP days? (Average production time)

A

(WIP) ÷ (Cost of sales) x 365

18
Q

Finished goods days?

A

(Finished goods) ÷ (Cost of sales) x 365

19
Q

Trade receivables days?

A

(Trade receivables) ÷ (Sales) x 365

20
Q

Trade payables days?

A

(Trade payables) ÷ (Purchases) x 365

21
Q

For payables and receivable days, what should ideally be used?

A

Credit sales/purchases over total sales/purchases.

22
Q

What is the cash operating cycles description?

A

The length of time from purchasing inventory to receiving cash from the sale of the related finished goods.

23
Q

What is the cash operating cycles formula?

A 
Trade receivables days        x
Raw materials days              x
WIP days                                x
Finished goods days            x
Less: Trade payables days   (x)

Cash operating cycle x

24
Q

If there is an over investment in current assets, what is this termed as?

A

Over-capitalization

25
Q

When a company grows too quickly and as a result runs out of finance and hence cash, what is this termed as?

A

Over trading

26
Q

What are four things to look for if asked if a company might be overtrading?

A
  • Rapid increase in revenue
  • Increase in working capital days (especially receivables and payables)
  • Most of the increase in assets financed by credit
  • A dramatic drop in liquidity ratios
27
Q

When calculating gearing, if you are told to use book value you include…

A

Retained earnings

28
Q

When calculating gearing, if you are told to use market value you do not include…

A

Retained earnings

29
Q

Why do you not include retained earnings in gearing when using market values?

A

Because its already included in the value of the shares.

30
Q

The faster a firm can ‘push’ items around the cycle the lower its investment in …

A

Working capital

31
Q

What are four factors that the length of the cash operating cycle depend on?

A
  • Liquidity verses profitability decisions
  • Terms of trade
  • Management efficiency
  • Industry norms ie construction
32
Q

Working capital turnover formula

A

Sales revenue / net working capital

Financial Management ACCA (26 decks)

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