Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Finance > working capital management > Flashcards

working capital management Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 66 flashcards SIE Exam flashcards Series 63 flashcards Series 79 Top-Off Exam flashcards Series 7 Top-off Exam flashcards CFA flashcards Series 65 flashcards
1
Q

what is working capital

A

referring to current assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what is net working capital

A

difference between current assets and current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

why is net working capital important?

A

measure of the firms liquidity (ability to meet current obligations as when they fall due, using current assets)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what does a positive and negative NWC mean

A

high liquidity and low liquidity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

reasons that wcm is important

A
  • lack thereoff affects a firm’s profits and cash flows
  • assesses a firm’s liquidity or short term solvency (ability yo pay current liabilities as when they fall due - done with the current and quick ratios)
  • helps us assess how efficient the firm is in managing its current assets and current liabilities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what is the days inventory on hand ratio

A

how long inventory stays on the shelf - measuring efficient management of inventory

inventory (end of year)*365/cost of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what does an increase in the day inventory on hand ratio mean?

A

less efficient management of inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is the accounts receivable collection period

A

how long it takes debtors to pay

trade receivables(end of year)*365/turnover or sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what does a decrease in debtors collection period mean

A

debtors paying back sooner

better management of trade receivables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what are possible risks of improving debtor’s collection period

A

loss of customers

reduction of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is account payables days

A

the amount of days that it takes us to pay creditors

trade payables*365/cost of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

when is a reduction in creditors collection period good and when is it bad

A

good - exceeded creditors agreed period or taken advantage of early settlement discounts or cash discounts

bad - when the firm isnt taking advantage of discounts or hasnt exceeded credit terms yet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is the operating cycle

A

the time between purchasing inventory and the collection of cash from debtors (internet definition: An operating cycle is the amount of time a company spends between spending money operating activities and collecting money from the same operating activity. Operating cycle often focus on the purchase and sale of assets)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

formula for op cycle

A

days inventory on hand + accounts receivable period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what is the cash conversion cycle?

A

time period between the receipt of cash from the debtors and paying the creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

formula for ccc

A

operating cycle - creditors collection period

17
Q

what does a zero CC mean?

A

creditors are paid as soon as we receive cash from debtors - creditors are fully financing inventory and debotrs

18
Q

what does a positive ccc mean

A

creditors are paid before debtors pay us - the company needs funds to finance inventory and debtors - creditors and company are both financing inventory and debtors

19
Q

what is does a negative ccc means

A

detbors pay pay us before payment to creditors is due - creditors are fully financing debtors and inventory. Since cash is received before creditors is due - we invest it to earn interest

20
Q

what is the conservative wcm strategy?

A
  • high current assets to sales ratio
  • less short term debt
  • lots of long term debt
  • net working capital is positive
  • less financial distress
  • high carrying costs - storage, security, bad debts
  • low shortage costs
21
Q

what is the aggressive wcm strategy

A
  • lowcurrent assets to sales ratio
  • more short term debt
  • less long term debt
  • net working capital is negative
  • low liquidity
  • more financial distress
  • low carrying costs - storage, security, bad debts
  • high shortage costs
22
Q

what are the costs of carrying too much or too little inventory

A

little - shortage costs

much - carrying costs

23
Q

what happens when inventory increases and decreases

A

increase: shortage cost increase and storage costs decrease
decrease: shortage cost decrease and storage costs increase

24
Q

what are the inventory management techniques

A

abc
twin bin
economic order
just-in-time

25
Q

what is the abc technique

A

three groups of classified inventory:
- A - high values, low quant, close monitoring
- B - moderate value moderate quantity
C - low value high quantity

26
Q

what is the twin bin technique

A

two bins for each type of inventory

  • large bin for bulk stock and a smaller bin with enough stock to last the restocking period
  • as soon as the stock in the large bin is sold out order is placed and goods are sold from the smaller bin
  • new stock enough for both bins - new cycle begins
27
Q

what is the economic order quantity technique

A

mathematical model that determines the appropriate amount of inventory needed so as to minimize shortage and carrying costs

28
Q

what is the just in time technique

A
  • suppliers deliver raw material just in time for it to be used on the production line - ensures that no inventory of raw materials is kept
29
Q

what are the advantages and disadvantages of granting credit

A

+: increases sales

- : increased exposure to bad debts

30
Q

components of a credit policy

A 
terms of credit sales
- credit period
- cash settlement discount 
credit analysis
collection policy
31
Q

what are the costs of granting credit

A
  • carrying costs
  • shortage costs
  • if liberal credit policy - increase is carrying costs
  • if restrictive credit policy - increase in shortage cost
32
Q

what is credit analysis

A

done before granting credit to a customer - cathering relevant info, determining credit worthiness

33
Q

how is credit worthiness determined

A

5 C’s of credit evaluation

credit scoring system

34
Q

what are the 5 C’s of credit eval

A

character - willingness to meet financial obligatons
capacity - ability to meet financial positions
capital - financial worth or reserves
collateral - assets pledged as security
conditions - general economic conditions

35
Q

what is credit scoring

A

deciding to grant credit based on customer’s rating

36
Q

what does the collection policy entail

A

continuously monitoring accounts receivables
- keep an eye on average collection period relative to credit terms
- use an aging schedule to determine percentage of receivables that are late in payment
having a collection procedure

37
Q

what are the reasons for holding cash?

A

speculative motive - hold cash to take advantage of unexpected opportunities
precautionary motive
transaction motive - to pay day to day things

38
Q

what cost is incurred by a firm when it holds excess or substantial amounts of cash

A 
opportunity cost
(interest income foregone)

Finance (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions