Chapter 29: Working Capital and Liquidity Flashcards
Operating cycle
The length of time between a company’s acquisition of goods or raw materials and the collection of cash from sales to customers.
Days payable outstanding (DPO)
The average number of days it takes a company to pay its suppliers. It is calculated as either the ending or average balance of accounts payable divided by (cost of goods sold/days in the period).
Days of inventory on hand (DOH)
The average number of days it would take to sell the amount of inventory on hand. It is calculated as either the ending or average balance of inventories divided by (cost of goods sold/days in the period).
Days sales outstanding (DSO)
The average number of days it takes for a company to receive payment from customers who purchase goods or services on credit. It is calculated as either the ending or average balance of accounts receivable divided by (revenues/days in the period).
Cash conversion cycle
The amount of time between an issuer paying its suppliers in cash and receiving cash from its customers.
Total working capital
The difference between current assets and current liabilities.
Net working capital
Working capital excluding short-term items unrelated to business operations, such as cash, marketable securities, and short-term debt.
Statement of cash flows
A financial statement that details the movement of cash over a period. The statement is classified into operating, investing, and financing activities.
Cash flow from operations
A cash profit measure over a period for an issuer’s primary business activities. It includes cash from customers as well as interest and dividends received from financial investments, less cash paid to employees and suppliers as well as taxes paid to governments and interest paid to lenders.
Free cash flow
The actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as _____ to the firm); the internally generated funds that can be distributed to the company’s investors (e.g., shareholders and bondholders) without impairing the value of the company.
Drag on liquidity
An action or event that reduces available funds or delays cash inflows.
Pull on liquidity
An action or event that accelerates cash outflows.
Current ratio
A measure of liquidity that is the ratio of current assets to current liabilities.
Quick ratio
A measure of liquidity that is the ratio of cash, marketable securities, and receivables to current liabilities.
Cash ratio
A measure of liquidity that is the ratio of cash and marketable securities to current liabilities.
