MORE Know Good Flashcards
HOW would an equal dollar reduction in both numerator and denominator affect a ratio less than 1.0?
THIS would Decrease the ratio
e.g. The Current or Quick ratio
WHAT is the purpose of a “Lockbox System?”
IT accelerates the inflow of funds to a company
How? - Customers submit their payments to a mailbox, Bank personnel remove the envelopes from the mailbox and deposit them to the firm’s account immediately
HOW does writing off obsolete inventory during the current year affect the current ratio?
This decreases the current ratio
HOW? - Because the loss of inventory which is included in the numerator of the current ratio will result in a reduction of the ratio
Journal Entry: Debit a loss and Credit inventory
HOW does a company become more conservative with respect to working capital financing policy?
By increasing their ratio of current assets to noncurrent assets
HOW? - Because a conservative working capital policy finances working capital mostly with long-term debt
Hence, this reduces current liabilities which ultimately increases the current ratio
WHAT is the purpose of a compensating balance?
IT Compensates a financial institution for services rendered, by providing it with deposits of funds
i.e. IT is a minimum amount that the bank requires the firm to keep in its demand account
NOTE: THIS is noninterest-bearing and meant to compensate the bank for various services rendered e.g. unlimited check writing
WHAT is Liquidity Risk?
THE risk or possibility that an asset cannot be sold on short notice for its market value
i.e. If an asset must be sold at a high discount, it is said to have a substantial amount of liquidity risk
HOW can firms best determine the required/ appropriate level of working capital?
BY offsetting the profitability of current assets and current liabilities against the probability of technical insolvency
WHY? - Because a company must maintain a level of working capital sufficient to pay bills as they come due
Failure to do so, is technical insolvency (i.e. can result in involuntary bankruptcy)
WHAT would be considered a spontaneous source of financing?
Trade Credit Financing
WHY? - Because it arises automatically as part of the purchase transaction
WHAT are the three major motives for holding cash, according to John Maynard Keynes?
Transactional, Precautionary, and Speculative purposes
WHAT is the likely affect a lockbox would provide receivables management?
THIS would minimize the collection float
HOW? - Because funds received are immediately deposited into the firm’s account, which hastens the availability of the funds by bypassing the firm’s accounting department
Thus, reducing the time in postal system and minimizing the collection float time
WHAT is a corporate CFO (aka the “Treasurer”) most concerned about when managing Cash and Short-Term Investments?
LIQUIDITY AND SAFETY
WHY? - Because Cash and short-term investments are crucial to a firm’s continuing success
i.e. Sufficient liquid assets must be available to meet obligations as they come due
WHAT affect will Recording the payment (as distinguished from the declaration) of a cash dividend have on the Current and Acid-Quick ratio?
Caveat - the declaration of which was already recorded
IT will increase (decrease) the current ratio with a ratio greater than (less than) 1.0 but will have no affect on Working Capital
NOTE: The increase (decrease) in the ratio occurs when the cash dividend is declared
WHAT happens to a company’s current assets to current liabilities ratio when they become more conservative in their Working Capital policies?
THIS increases their ratios
WHY? -Because firm will increase current assets or decrease current liabilities
Thus, a conservative policy finances assets using long-term or permanent funds rather than short-term sources
WHAT objective of enterprise risk management (ERM) addresses an entity’s high-level goals, aligned with supporting its mission?
Strategy
WHAT is the equation for the Accounts Payable (A/P) Turnover Ratio?
Total Purchases Divided by Average Accounts Payable
