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101BF > Lesson 4: Working Capital Management > Flashcards

Lesson 4: Working Capital Management Flashcards

1
Q

refers to the current assets used in the operations of the business. This includes cash, accounts receivable, inventories, and prepaid expenses.

A

working capital

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2
Q

working capital includes

A

cash, accounts receivable, inventories, prepaid expenses

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3
Q

The amount of resources that a company sets aside to these working capital accounts can be reduced by current liabilities such as trade accounts payable and accrued expenses payable.

A

working capital management

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4
Q

the difference between these current assets and current liabilities used in the operations of the business

A

net working capital

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5
Q

net working capital formula

A

net working capital = total current assets - total current liabilities

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6
Q

he management of these accounts, both the current assets and the current liabilities, is important because these accounts deal with

A

day-to-day operations of the business

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7
Q

importance of working capital management

A

good management allows the company to pay maturing obligations on time; relieves managers of unnecessary stress and gives them more time to improve the business operations; improve the earnings of the company

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8
Q

Good management of working capital accounts allows the company to

A

pay maturing obligations on time

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9
Q

Good management of working capital accounts also relieves

A

managers of unnecessary stress an gives them more time to improve the business operations

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10
Q

*Efficient management of working capital accounts can improve

A

the earnings of the company

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11
Q

Working capital requirements change with

A

the volume of the business operations

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12
Q

As the sales increase,

A

working capital requirements also increase

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13
Q

working capital financing policies

A

maturity-matching; aggressive; conservative WORKING CAPITAL FINANCING POLICY

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14
Q

During the year, sales are not the same every month. This is why companies have

A

slack season and peak season

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15
Q

the net working capital requirements during the slack season are

A

lower than those during peak season

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16
Q

permanent working capital requirements should be financed by long-term sources while temporary working capital requirements should be financed by short-term sources of financing.

A

maturity-matching working capital financing policy

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17
Q

according to the maturity-matching policy, permanent working capital requirements should be financed by

A

long-term sources

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18
Q

according to the maturity-matching policy, temporary working capital requirements should be financed by

A

short-term sources

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19
Q

Long-term sources of financing include

A

long-term debt and equity (common and preferred stocks)

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20
Q

short-term sources of financing includes

A

short-term loans from a bank

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21
Q

short-term loans from banks are called

A

working capital loans

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22
Q

Are strategies that businesses use to maximize their liquidity and financial flexibility, often by pushing the boundaries of traditional financing approaches.

A

aggressive working capital financing policy

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23
Q

in terms of short-term borrowing, the aggressive policy means

A

relying on short-term loans or lines of credit to cover immediate operational needs even if it involves higher interest rates

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23
Q

some of the permanent working capital requirements are financed by short-term sources of financing

A

aggressive working capital financing policy

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24
Q

in terms of inventory financing, the aggressive policy means

A

using inventory as collateral to secure loans, which allows the company to free up cash while still maintaining its stock levels

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25
Q

in terms of accounts receivable management, the aggressive policy means

A

implementing aggressive credit policies to accelerate receivables, such as shortening the credit terms offered or using factoring services to receive cash more quickly

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26
Q

some of the temporary working capital requirements are financed by long-term sources

A

conservative working capital policy

27
Q

the most liquid asset of a company

A

cash

28
Q

why is cash considered the most vulnerable

A

it is vulnerable to theft

29
Q

how to safeguard the cash asset

A

there must be proper internal controls

30
Q

what are some proper internal controls to manage cash

A

separating cashiering function from recording/accounting function; issuing O/R for collections and making a collection report; depositing collections to safeguard cash; adopting the check voucher system for payments

31
Q

a small amount of cash kept on hand to cover minor or incidental expenses, such as the small change and bills kept in the cash register or lockbox

A

petty cash fund

32
Q

how to cross-check a check

A

the payee draws two-lines on the check

33
Q

what are the working capital accounts

A

cash, accounts receivable, inventory

34
Q

the balance of money due to a firm for goods or services delivered or used but not yet paid for by the customer

A

accounts receivable

35
Q

proper internal control over accounts receivable

A

providing credit terms to customers; following the five C’s of credit

36
Q

how to manage accounts receivable

A

use the 5cs of credit

37
Q

what are the 5C’s of credit

A

character, capacity, capital, collateral, condition

38
Q

This refers to the integrity and reputation of the customer. The educational background and experience in the business are also considered.

A

character

39
Q

This refers to the capacity to pay. The operations of the business especially the operating cash flows are given emphasis in this criterion.

A

capacity

40
Q

what are looked into in terms of capacity since they affect the ability of the company to generate positive operating cash flows

A

liquidity ratios and efficiency of the management in handling A/R

41
Q

If your company cannot collect its accounts receivable

A

it will have to shut down

42
Q

This looks at the customer’s history and reputation for paying bills on time. If they’ve been reliable in the past, they’re likely to be reliable now

A

character

43
Q

This checks if the customer has the financial ability to pay back what they owe. It involves looking at their income, expenses, and overall financial health.

A

capacity

44
Q

This considers what assets the customer has that could be used to pay the debt if needed. It’s like having a backup plan—if they can’t pay with cash, they might have valuable things they could sell to pay off the debt.

A

capital

45
Q

This looks at the economic situation and how it might affect the customer’s ability to pay. For example, if the economy is bad, even a normally reliable customer might struggle to pay.

A

conditions

46
Q

This refers to something valuable the customer offers as security in case they can’t pay. If they don’t pay, the business can take the collateral as payment.

A

collateral

47
Q

description of maturity-matching

A

moderate

48
Q

liquidity of maturity-matching

A

balance

49
Q

profitability of maturity-matching

A

balanced

50
Q

default risk of maturity-matching

A

balanced

51
Q

investments of maturity-matching

A

balanced

52
Q

description of conservative

A

relaxed

53
Q

liquidity of conservative

A

high

54
Q

profitability of conservative

A

low

55
Q

default risk of conservative

A

low

56
Q

investments of conservative

A

current assets

57
Q

description of aggressive

A

restricted

58
Q

liquidity of aggressive

A

low

59
Q

profitability of aggressive

A

high

60
Q

default risk of aggressive

A

high

61
Q

investments of aggressive

A

non-current assets

62
Q

the company is increasing the probability that it will not be able to meet maturing obligations.

A

default risk

63
Q

internal controls for inventory

A

separating custodial functions from the recording functions; aging of inventories/ABC analysis

64
Q

24 hour companies have

A

two collection reports and deposits every day

65
Q

how is a check cross-checked

A

drawing two lines on the payee of the check

101BF (12 decks)

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