Financial Management 1

Question 1

What is the primary focus of working capital management?

Answer 1

Managing inventory & receivables (current assets & liabilities)

Question 2

How is Net Working Capital calculated?

Answer 2

NWC : Current Assets - Current Liabilities

Question 3

What are the characteristics of effective Working Capital Management?

Answer 3

Shorten the cash conversion cycle

Don’t negatively impact operations

Question 4

What is the Inventory Conversion Period?

Answer 4

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

Question 5

What is the Receivables Collection Period?

Answer 5

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

Question 6

What is the Payables Deferral Period?

Answer 6

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

Question 7

What is the Cash Conversion Cycle?

Answer 7

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

Question 8

What traits should Cash and Short-Term Investments have?

Answer 8

Liquid

Safe

Question 9

For what are Letters of Credit used?

Answer 9

Used for importing goods.

Issued by importer’s bank.

Question 10

What is the advantage of using Trade Credit?

Answer 10

No interest cost if paid timely.

Question 11

What is a Lockbox System? What are the advantages?

Answer 11

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

Question 12

What is float?

Answer 12

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

Question 13

What are Zero Balance Accounts?

Answer 13

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

Question 14

What is the difference between Treasury Bills- Notes and Bonds?

Answer 14

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

Question 15

What is commercial paper?

Answer 15

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

Question 16

What are the advantages and disadvantages of Commercial Paper?

Answer 16

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.