Chapter 21 Flashcards

1
Q

What are the three current asset investment policies

A
  • relaxed policy
    -moderate policy
    -restricted policy
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1
Q

What are the two basic questions in working capital management?

A
  1. What is the appropriate amount of working capital?
  2. How should working capital be financed
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2
Q

What is the relaxed policy?

A

CA investment policy that means a company holds onto a lot of cash, receivables and inventory relative to it’s sales

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3
Q

What is a moderate policy

A

CA investment policy in between relaxed and restricted

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4
Q

What is a restricted policy

A

CA investment policy that holds current assets to a minimum… exposes firm to risks

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5
Q

What is the optimal CA investment policy?

A

one that will maximize the firms long-run free cash flow

-changing technologies can lead to optimal changes

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6
Q

What are the primary sources of funds for operating current assets?

A

-Bank loans
-credit from supplies
-accrued liabilities
-long term debt
-common equity

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7
Q

What are permanent operating CA

A

The operating assets needed at low point of the buisness cycle

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8
Q

What are temporary operating CA

A

the extra CA due to sales increase during a cyclical upswing

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9
Q

What is the definition of operating CA financing policy

A

The way permanent and temporary assets are financed

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10
Q

Maturity Matching or “Self-Liquidating “ Approach

A

moderate CA approach

matches assets and liabilities maturities

-temporary assets financed with short term debt

-long term assets financed with long-term capital

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11
Q

What are the two issues with the maturity matching approach?

A

-The lives of assets are uncertain (can’t always perfectly match up)

  • Some common equity must be used
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12
Q

Agressive Approach

A

-some of the permanent CA is financed with short-term debt b/c short term interest rates are lower

-keep getting new short-term loans

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13
Q

What are the risks of aggressive approach

A

dangers of loan renewals and rising interest rate problem

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14
Q

What is the conservative approach

A
  • long term capital is used to finance all permanent assets and also to meet some seasonal needs

“storing liquidity” in the form of marketable security

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15
Q

Is the cost of short term or long-term debt more expensive

A

long term

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16
Q

why is short term debt riskier

A
  • interest expense can fluctuate widely
    -temporary recession may adversely affect its financial ratios
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17
Q

What are the advantages of short term debt:

A
  • easy to arrange quickly
    -increased flexibility
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18
Q

What is the Cash Conversion Cycle (CCC)

A

The length of time between the firm’s actual cash expenditure and its cash receipt from the sale of the product

-how long it takes to collect the cash from a sale

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18
Q

What are spontaneous sources of funding

A

AP and Accrual

19
Q

What are the three parts of the CCC cycle

A

Inventory conversion period: how long it takes to sell something

Average Collection period: how long it takes to collect cash payment

Payable deferral period: the length of time supplier give to pay for purchase

20
Q

Is a short or long CCC good

A

short - collect cash quicker

21
Q

What are the benefits of reducing CCC

A

strong relationship between stock performance and low CCC

22
Q

What are the goals when it comes to inventory management

A

Ensure inventory needed to sustain operation is available but carry the lowest level of inventory possible

23
What is the Just in time inventory system
receive goods only as they are needed "remember from supply chain"
24
What is receivable management
when a firm sells good to a customer on credit
25
what does receivable management include:
-credit policy -monitoring system
26
what is a credit policy
2/10, net 30
27
what are credit standards
how much financial strength a customer must have to qualify for credit
28
What is the accumulation of receivables
the total amount of AR outstanding at any given time
29
What are the two was to monitor receivable position
-DSO -Aging Schedule
30
What is trade credit (AP)
when a firm makes a purchase on credit
31
what is the true price of trade credit
100% - the discount X the listed price... the price you'd actually pay
32
what is the finance charge of credit
the discount percentage X fixed price
33
What two can trade credit be broken down into
free trade credit and costly trade credit
34
what is free trade credit?
credit received during the discount period
35
what is costly trade credit
credit in excess of the free trade credit and whose cost is an implicit one based on the forgone discount
36
what is a transaction balance
balance that is used for routine payments topic: cash management and target cash balance
37
what is a precautionary balance
needed for unforeseen fluctuations topic: cash management and target cash balance
38
what is a compensating balance
amount needed to stay in bank... learned in acct.
39
What are the two cash management techniques
synchronizing cash flows and using float
40
What is synchromizing cash flows
A cash management technique that times cash receipts with cash outlays
41
What is using float
A cash management technique that is the difference between the balance shown in the firm checkbook and the balance on the bank record -
42
what is a collection float?
don't have revenue collection yet
43
what is disbursement float
dont have the money on the checkbook ... bank hasn't cleared the check yet so firm has less on books
44
which float do you not want
collection float - want to collect the money quickly
45
what are the techniques to speed up collections - Cash managment
lockbox system and electronic payments
46
Short term marketable securities are held for what three reasons
- liquidation just prior to scheduled transaction -unexpected opportunities -reduce company's risk