Chapter 5 Essentials Flashcards

1
Q

Chapter 5 focuses on

A

Day to day cash flow

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2
Q

Cash Flow Cycle

A

Indicates the length of time it takes for a firm to convert its inputs into cash accounting for both converting credits sales into cash and paying suppliers

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3
Q

Decrease in current assets
Increase in current liabilities
Decrease in fixed assets
Increase in long term debt
Increase in retained earnings
Increase in equity

A

Sources of cash

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4
Q

Uses of cash

A

Increase in current assets
Decrease in current liabilities
Increase in fixed assets
Decrease in long term debt
Decrease in repainted earning
Decrease in new equity

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5
Q

Cash flow related to operating activities primarily affects which two accounts?

A

Current Assets and Current Liabilities

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6
Q

The two key current asset items affected by cash flow are?

A

Inventory and AR

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7
Q

The key current liabilities item is

A

AP

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8
Q

Why is inventory management important?

A
  • Inventory affects sales and profits
  • Lack of inventory = opportunity cost
  • Profitability affects investors
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9
Q

Why accounts receivable management is important

A
  • Trade credit is a competitive advantage
  • The cost is delayed cash flow
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10
Q

Why accounts payable management is important

A
  • Using AP wisely is a short-term fund
  • it can be a cost to lose early discounts
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11
Q

3 ways to reduce or eliminate a working capital gap

A

1 decrease age of inventory
2 decrease age of AR
3 increase age of AP

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12
Q

The most common source of short-term financing, especially for small and medium sized firms

A

Banks Loans

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13
Q

Simple promises or IOUs to a firm to repay the bank a certain amount of money by a specified date a specified rate are

A

Promissory Notes

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14
Q

Rates may be fixed or variable which are often tied to a specific benchmark such as the

A

Prime Rate or LIBOR

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15
Q

An alternative bank funding vehicle which allows a borrower to tap into an agreed-on max loan amount on an as-needed basis

A

Line of Credit

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16
Q

Another option or an interim loan provided by a bank before long-term funding can be obtained

A

Bridge Loan

17
Q

These provide lenders with protection, as they are backed by assets of the firm as collateral

A

Secured Loan

18
Q

Another form of receivables secures financing whereby the firm sells receivables to a lender at a discount to the actual value of the receivables

A

Factoring

19
Q

If inventory is used to secure a loan, the claim that the lender has against the firm’s inventory is called a

A

Lien

20
Q

A short-term debt issued by a firm, usually with a repayment term of up to nine months

A

Commercial Paper

21
Q

A source of short-term financing most common in international trade, such as when a firm exports goods

The seller or exporting firm arranges a draft or an IOU and sends it to the buyer’s or importer’s bank indicating payment terms

The buyer then indicates to its bank that it has accepted that debt, turning the draft into a what?

If the buyer can’t pay, the bank will pay instead

A

Banker’s Acceptance

22
Q

BAs are bought and sold in the marketplace and are a common investment in

A

Money Market Funds

23
Q

Relevance for managers

A
  • Know how to use operating cash wisely