Chapter 5 Essentials Flashcards
Chapter 5 focuses on
Day to day cash flow
Cash Flow Cycle
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
Decrease in current assets
Increase in current liabilities
Decrease in fixed assets
Increase in long term debt
Increase in retained earnings
Increase in equity
Sources of cash
Uses of cash
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
Cash flow related to operating activities primarily affects which two accounts?
Current Assets and Current Liabilities
The two key current asset items affected by cash flow are?
Inventory and AR
The key current liabilities item is
AP
Why is inventory management important?
- Inventory affects sales and profits
- Lack of inventory = opportunity cost
- Profitability affects investors
Why accounts receivable management is important
- Trade credit is a competitive advantage
- The cost is delayed cash flow
Why accounts payable management is important
- Using AP wisely is a short-term fund
- it can be a cost to lose early discounts
3 ways to reduce or eliminate a working capital gap
1 decrease age of inventory
2 decrease age of AR
3 increase age of AP
The most common source of short-term financing, especially for small and medium sized firms
Banks Loans
Simple promises or IOUs to a firm to repay the bank a certain amount of money by a specified date a specified rate are
Promissory Notes
Rates may be fixed or variable which are often tied to a specific benchmark such as the
Prime Rate or LIBOR
An alternative bank funding vehicle which allows a borrower to tap into an agreed-on max loan amount on an as-needed basis
Line of Credit
Another option or an interim loan provided by a bank before long-term funding can be obtained
Bridge Loan
These provide lenders with protection, as they are backed by assets of the firm as collateral
Secured Loan
Another form of receivables secures financing whereby the firm sells receivables to a lender at a discount to the actual value of the receivables
Factoring
If inventory is used to secure a loan, the claim that the lender has against the firm’s inventory is called a
Lien
A short-term debt issued by a firm, usually with a repayment term of up to nine months
Commercial Paper
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
Banker’s Acceptance
BAs are bought and sold in the marketplace and are a common investment in
Money Market Funds
Relevance for managers
- Know how to use operating cash wisely
