Management of Working Capital

Question 1

What is the operating cycle?

Answer 1

The time taken for an organisation to convert its raw materials, purchased goods or service potential into cash is called the operating cycle.

Question 2

What is working capital?

Answer 2

Working capital is a firm’s investment in short term assets, including cash, short term securities, accounts receivabnle and inventories in excess of accounts payable and short term committments.

Question 3

What sort of inventories would a manufacturing firm hold?

Answer 3

1. Raw materials
2. Work in progress
3. Finished Goods

Question 4

What are the 3 motives for holding cash?

Answer 4

1. The transactional motive: A means os satisfying ordinary business transactions.
2. The precautionary motive: To keep money for contingencies.
3. The speculative motive: To take advantage of financial opportunities.

Question 5

What is accounts receivable?

Answer 5

The extension of credit to customers without specific charge.

Question 6

What is a credit policy?

Answer 6

A firm that offers trade credit will reate a credit policy with respect to:

1. Credit rating of new customers
2. Credit limits
3. Period of settlement and discount for early payment
4. Administration and enforcement of policy

Question 7

What is credit analysis?

Answer 7

This is the method of determining whether credit should be extended.