Section D Working Capital Flashcards
What transaction will affect the overall amount of Working Capital?
Sale of a Non Current Asset on credit at its NBV
Re Working Capital:
- cash received from a customer
- payment of a trade payable
- purchase of inventory on credit
- increases cash , decreases trade receivables /
- decreases cash , decreases trade payables /
- increases inventory , increases trade payables /
What is least likely to arise from the introduction of a JIT system?
Less risk of stock shortages.
List 5 methods of Short Term Finance
Bank overdraft Short term loan Trade credit Debt Factoring Bank loans
List 4 methods of Short-term Investments
Bill of Exchange /
Stocks/Bonds /
Interest Accounts /
Money market deposits
An Agressive WC policy ….
ALL of the fluctuating Current assets
AND part of the permanent current assets
A Conservative WC policy ….
PART of the fluctuating current assets
but NONE of the permanent current assets.
After A Bill Of Exchange has been accepted …
You cannot ask the customer for immediate payment.
Working Capital cycle equation -
Inventory Days + Trade receivable days less
Trade payable days
What txn will most likely increase Working Capital?
Paying a supplier and taking early settlement discount
this increases WC
What 2 of the following arise from exceeding supplier payment terms?
- Difficulty in obtaining credit from new suppliers
2. Reduction in credit rating
X Plc is preparing its cash forecast for the next 3 months
What item should be left out of the calculation?
The expected gain on Disposal of Land.
( cash outflows would be tax payment and rental payment
Cash inflow would be receipt from a new bank loan )
State 4 advantages of exporting for an Exporter
- Cash is received immediately
- The risk of bad debts is eliminated
- As the cash is received now, fex risk is eliminated
- Organisation will have cash so less need for financing
Fact about an overdraft -
Compared with other types of loans, is quick and easy to set up.
A cash budget prepared on a monthly base is done to calculate ….
Whether there will be significant cash in the bank to meet requirements.
What is not a symptom of overtrading?
Increasing levels of long term borrowings
If the Current Ratio for a company is equal to the Acid Test ( the Quick ratio)
then -
The entity does not carry inventories /
NB - Current Ratio is all Curr Assets : Curr Liabs
Which is LEAST likely to characterise Overtrading?
An increase in cash balances.
NB - a company who over trades has a shortage of cash and liquidity
An Aged Creditors Analysis is …
A breakdown of trade payables, according to length of time elapsing since purchase made.
Under the Miller-Orr model …
The greater the variability in cash flows, the greater the spread between the upper and lower cash balance limits.
Return point is the lower point plus 1/3 of the spread.
State 3 main services provided by a Recourse Factor?
Sales Ledger administration /
Credit Insurance /
Factor Finance
Invoice Discounting involves…
Selling an individual invoice for cash to a Factor organisation for cash.
After a Bill Of Exchange has been accepted, what is NOT a course of action?
Ask the customer for immediate payment.
An Acceptance Credit -
Is a bill drawn on a bank under a short-term financing agreement
What is Forfaiting?
It is a method of providing medium-term EXPORT finance
What is LEAST likely to arise from intro of a JIT purchasing system?
Less risk of stock shortages.
What is LEAST relevant to the EOQ model for Inventory?
Safety Stock
List 3 items which are part of the cost of placing an order -
Admin Costs /
Postage Costs /
Quality Control Costs
Factors to consider for offering a cash discount
Borrowing an o/draft may be risky /
It’s cheaper to finance the receivables by borrowing than a discount /
Other customers might demand the discount /
May be difficult to withdraw at future date.
Q - Aged Analysis of Receivables ….
.. Allows an entity -
To focus its collection efforts to enforce credit terms /
Makes it easier for company to set credit limits /
And whether it needs to take any action in respect of cash balances.
The Coupon Rate is -
The interest payable on the face ( nominal ) value of the bond.
The Yield to Maturity -
The effective yield on a redeemable …….. /
Takes into account the interest yield and any gain or loss ,/
, due to the fact it was purchased at a price different to the redemption value.
Forms of short-term investments
Negotiable instruments /
Short term govt bonds /
Interest bearing bank accounts
Bank o/drafts advantages
- Flexible /
- generally cheaper
Bank o/drafts disadvantages
Repayable on demand /
Variable Finance cost
Bank loans
adv’s and dis adv’s
A's - fixed finance cost / Repay date known D's - generally more cheaper - less flexible
Indicators of Overtrading
Rapid increase in Turnover
/
Rapid increase in Current Assets
What does NOT influence the credit policy of an entity?
Profitability of products
Advantage of using a Factoring agency
There is savings on Admin costs.
Advantage of Invoice Discounting
The entity has control over debt collection.
Usefulness of Aged analysis of receivables
Can be used to set credit limits to customers / effective action can be taken to collect debt / can be used to estimate a provision for bad debts for yr end accounts
Sources of info used when setting credit limits to customers
Trade references / bank references / financial no’s and credit risk / credit report agencies
