Fin test 2: Non Quan

Question 1

Working Capital Management

Answer 1

a business process that helps companies make effective use of their current assets and optimize cash flow

-ensuring short-term financial obligations and expenses

• contributing towards longer-term business objectives.

Question 2

Current Assets

Answer 2

a short-term asset that a company expects to use up, convert into cash, or sell within one fiscal year or operating cycle

Question 3

Net Working Capital

Answer 3

the difference between a company’s current assets and current liabilities on its balance sheet

Question 4

Current Ratio

Answer 4

a comparison of current assets to current liabilities, calculated by dividing your current assets by your current liabilities

Question 5

Matching Principle,Aggressive Strategy, and Conservative Strategy for Working Capital
Management

Answer 5

-Matching Principle: short-term financing is used for short-term assets while long-term financing is used for long-term assets.

-Agressive: involves spending more in order to make more

-Conservative: requires you to save working capital in order to lower your risk.

Question 6

Operating Cycle and Cash Conversion Cycle

Answer 6

-Operating: the amount of time it takes for a company to acquire inventory, sell that inventory and receive cash from customers in exchange for the inventory sold.

-Cash Con: represents the number of days it takes for a company to convert resources into cash.

The operating cycle measures the time it takes a business to convert inventory into cash, while the cash cycle takes into account that a business doesn’t have to pay its suppliers back right away.

Question 7

Profitability, liquidity, and risk relationships

Answer 7

-Proftiability: a measure of an organization’s profit relative to its expenses.

-Liquidity: the ease with which an asset, or security, can be converted into ready cash without affecting its market price

-Risk Relationship: the greater the risk, the higher the potential for profit or loss

Question 8

Motives for holding cash

Answer 8

1. transaction: the requirement of cash by the business for its day-to-day operations
2. Precautionary: to ensure that an individual has a certain reserve to cover any unforeseen transactions.
3. Tax
4. Agency: managers tend to hold excess cash, which will destroy shareholder value

Question 9

Float

Answer 9

difference between the cash balances reported in your business accounting and the amount of cash you actually hold in your bank accounts

Question 10

Types of float

Answer 10

1. Collection: created when a firm receives a check, causing an increase in the firm’s book balance but no change in its available balance
2. Disbursement :generated when a firm writes a check, causing a decrease in the firm’s book balance but to change in its available balance
3. Net: the difference between the disbursement and collection float

Question 11

Methods of Acceleration of cash collection

Answer 11

1. Prompt payment by customers
2. Quick conversion of payment into cash
3. Decentralized collections
4. Lock Box system

Question 12

Lock-box system

Answer 12

a service provided by banks to companies for the receipt of payment from customers

Question 13

Concentration banking

Answer 13

the practice of shifting the funds in a set of bank accounts into an investment account, from which the funds can be more efficiently invested

Question 14

Marketable securities and characteristics

Answer 14

-Marketable securities: financial products that can be converted into cash quickly and affordably

-Characteristics:
~A year or shorter for maturity

~The capability of being purchased or sold on a public stock or bond exchange

~Having a robust secondary market that facilitates liquid buy and sell transactions and provides investors with an accurate price valuation

~NOT cash or cash equivalents, which have reduced risk and more liquidity (money market securities due within 3 months)

Question 15

Credit policy factors

Answer 15

credit application process, types, limits and terms of credit, collection, monitoring and control, and risk management.

Question 16

Tight collection policy

Answer 16

less willingness to extend credit to support revenue growth

Question 17

Sources of credit information

Answer 17

mercantile agencies, reports from local correspondents, reports from traveling salesmen, and merchants’ associations or credit reporting agencies.

Question 18

Factors of credit analysis

Answer 18

financial efficiency ratios (returns on equity, sales, assets, etc.), capital utilization, cash flow, gross margin, cost, and revenues.

Question 19

Carrying costs of inventory

Answer 19

the amount that a business spends on holding inventory over a period of time

Question 20

Safety stock for inventory

Answer 20

an extra quantity of a product which is stored in the warehouse to prevent an out-of-stock situation

Question 21

Reorder point

Answer 21

the level of inventory at which a business should place a new order or run the risk that stock will drop below a comfortable level, or even down to zero

Question 22

Short term credit

Answer 22

a business line of credit with a loan term between six months and one year

Question 23

Sources of short term credit

Answer 23

(1) trade credit,
(2) commercial bank loans,
(3) commercial paper, a specific type of promissory note,
4) secured loans.

Question 24

Form of trade credit

Answer 24

-open account: an account which remains to be paid

-trade acceptance: f a bill of exchange is accepted by the buyer of the goods

-promissory note: a written agreement between a borrower and a lender saying that the borrower will pay back the amount borrowed plus interest.

Question 25

Short term bank loans

Answer 25

how quickly the loan needs to be paid off. In most cases, it must be paid off within six months to a year – at most, 18 months

Question 26

Line of credit

Answer 26

an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow.

Question 27

Revolving line of credit

Answer 27

a credit line that remains available even as you pay the balance.

Question 28

Commercial paper

Answer 28

a common form of unsecured, short-term debt issued by a corporation

Question 29

Advantage of commercial paper

Answer 29

lower interest rates

Question 30

Pledging accounts rec. and risk of default

Answer 30

-Pledging account: a financing arrangement in which a company uses its accounts receivable (outstanding invoices) as collateral to secure a loan or line of credit from a financial institution, such as a bank. -Risk of Default: the probability that a borrower fails to make full and timely payments of principal and interest

Question 31

Inventory as collateral

Answer 31

a short-term loan or a revolving line of credit that is acquired by a company so it can purchase products to sell at a later date.

Question 32

Warehousing and inventory financing

Answer 32

-Warehousing: a way for businesses to borrow money secured by their inventories. -Inventory: credit obtained by businesses to pay for products that aren't intended for immediate sale.

Question 33

Present value

Answer 33

the current value of a future sum of money or stream of cash flows given a specified rate of return

Question 34

Future value

Answer 34

the value of a current asset at a future date based on an assumed rate of growth

Question 35

Yield curves

Answer 35

depicts the interest rates of similar quality bonds at different maturities.

Question 36

Yield curve theories (Expectations, Liquidity Premium, and Market Segmentation)

Answer 36

Expectations: predict what short-term interest rates will be in the future based on current long-term interest rates. Liquidity: the yield curve will be sloping slightly upward even when short-term rates are expected to remain constant Market: the yield curve is determined by supply and demand for debt instruments of different maturities.