Financial Mgmt - Working Capital Mgmt

Question 1

Economic Order Quantity Model

Answer 1

• There is a trade‐off between inventory ordering cost and inventory carrying cost.
• Specifically, the larger the quantity ordered, the lower the per unit cost of ordering (clerical, transportation, handling, etc.), but the higher the carrying cost (warehousing, insurance, property taxes, financing costs, etc.).
• Determining the order size that will minimize total inventory cost is solved using the economic order quantity model.

Total inventory cost = Total order cost +Total carrying cost

Question 2

Operating Income

Answer 2

Operating income is computed before interest expense.

Question 3

Net Working Capital

Answer 3

Net working capital is equal to current assets minus current liabilities.

Question 4

Geometric Average

Answer 4

The geometric average depicts the compound annual return earned by the investor. This method is preferred for evaluating long-term investments.

Question 5

Cash Conversion Cycle

Answer 5

Inventory conversion period + Receivables conversion period− Payables deferral period

The cash conversion cycle measures the time period from the time the firm pays for its materials and labor to the time it collects its cash from sales.

Question 6

Short Term Investments

Answer 6

Short-term investments must be liquid and safe to provide funds when needed.

Question 7

Coefficient of Variance

Answer 7

The coefficient of variation provides a measure of the relative variability of investments.

It is calculated by dividing the standard deviation of the investment by its expected return.

Question 8

Days Sales Oustanding

Answer 8

Days’ sales outstanding provides a measure of the average age of accounts receivable.

Question 9

Bankers Acceptance

Answer 9

A banker’s acceptance is a time draft, payable on a specified future date, with the bank guaranteeing the payment.^​