P2 Flashcards
Working capital
Current asset
Comprises assets that are used in the company’s normal operations and replaced all during the year
Working capital
Comprises assets that are used in the company’s normal operations and replaced all during the year
Working capital
Deducted from working capital
Current assets that are not used in normal operations
Working capital includes?
Cash
Accounts receivable
Inventories
Formula to get NET WORKING CAPITAL
Current Assets-Current Liabilities
Working capital- interest free loans
Net Working Capital
Represent the amount of money the company obtain from non-free sources to carry its non-current asset.
Net Working Capital
Total amount of interest free loans and accruals are ______ to the net working capital
Deducted
When getting bank loan, they considering your?
Status of cash flow
Types of current asset investment policies
Relaxed
Restricted
Moderate
Illustration of the direct relationship of sales and current assets for every investment policy
Linear
Curvilinear
Type of relationship of sales and current asset for every investment policy
Direct
The company holds a great deal of cash, receivables, marketable securities and inventories relative to its sales
Relaxed current asset investment policy
Holdings of current assets are minimize
Restricted current asset investment policy
Between relaxed and restricted policies
Moderate current asset investment policy
Relatively large amounts of cash, marketable securities, and inventories are carried
Relaxed current asset investment policy
Liberal credit policy result in a high level of receivables
Relaxed
Holding current assets are constrained
Restricted
Current asset
Cash
Receivables
Marketable securities
Inventories
Low level of asset which results in a high ROE, other things held constant
Restricted
Formula of ROE
(Net Income÷sales)×(sales÷assets)×(assets÷equity)
Current assets can be?
Temporary
Permanent
Company maintains even at the low point of the business cycle
Permanent current asset
Fluctuate with seasonal or cyclical variations of sales
Temporary current assets
Types of current assets financing policies
Moderate approach or maturity matching or self-liquidating approach
Aggressive approach
Conservative approach
Calls for matching asset or liability maturities
Moderate approach
Maturity matching
Self-liquidating approach
Maturity matching
Moderate approach
Self-liquidating approach
Moderate approach
Finances some if its permanent assets with short-term debt.
Aggressive Approach
Mismatching of assets and liablities
Aggressive approach
Long-term capital is used to finance all the permanent assets and to meet some of the seasonal needs
Conservative approach
Process undertaken by the company to purchase or produced inventory, hold it for a time and then sell it and received cash
Cash conversion cycle or CCC
CCC
Cash Conversion Cycle
It is the length of time funds are tied up in working capital or the length of time between paying for working capital and collecting cash from the sale of the working capital
CCC
Formula to get CCC
CCC= ICP+ACP-PDP
Average time required to convert raw materials into finished goods and then to sell them
ICP or Inventory Conversion Period
Average length of time required to convert the firm’s receivables to cash, that is, to collect cash following a sale
Average Collection Period or ACP
Average length of time between the purchase of material and labor and the payment of cash for them
PDP or Payables Deferred Period
Formula to get ICP
Inventory ÷ Cost of good sold per day
Currency (bills or coins)
Cash
More important than currency for most businesses
Bank demand (or checking) deposits
Used to pay for labor and raw materials, purchasing fixed assets, paying taxes, servicing debt, paying dividends, and other business transaction
Bank demand (or checking) deposits
Do not earn any interest so companies try to minimize amount of deposits while maintaining enough balance to pay the obligations in a timely basis
Bank demand (or checking) deposits
Post office box operated by a bank to which payments are sent.
Lockbox
Used to speed up effective receipt of cash
Lockbox
Short term securities
Cash Equivalents
Companies also purchase marketable securities as cash builds up from operations and then sell those securities when they need cash
Cash Equivalents or short term securities
Primary forecasting tool used by companies to forecast their cash flows
Cash budget
A table shows cash receipts, disbursements and balances over some period
Cash budget
A table shows cash receipts, disbursements and balances over some period
Cash budget
