Working Capital Metrics Flashcards

1
Q

What involves managing cash so that a company an meet its short-term obligations and include all aspects of the administration of current assets and current liabilities?

A

Working Capital Management

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2
Q

What is the “goal” of working capital management?

A

Maximizing shareholder wealth

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3
Q

How to calculate the Net Working Capital:

A

Current assets - current liabilities

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4
Q

When Working Capital increases, what happens to risk, ROA and cash?

A

Risk decreases, ROA decreases and cash increases

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5
Q

When Working Capital decreases, what happens to risk, ROA, and cash?

A

Risk increases, ROA increases, and cash decreases

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6
Q

What does the Current Ratio show?

A

A firms ability to generate cash to meet its short-term obligations

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7
Q

What is the formula to calculate current ratio?

A

Current assets / Current liabilities

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8
Q

A decline in the current ratio means what?

A

Implies a reduced ability to generate cash and causes risk to increase

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9
Q

An increase in current ratio means what?

A

Implies and increased ability to payoff current liabilities and causes risk to go down

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10
Q

Do you want the current ratio to be higher or lower?

A

Higher

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11
Q

Do you want the quick ratio to be higher or lower?

A

Higher

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12
Q

Formula for calculating the quick ratio:

A

(Current assets - inventory - prepaid) / Current liabilities

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13
Q

The quick ratio is usually larger or smaller than the current ratio?

A

Smalled

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14
Q

The cash conversion cycle should be greater or lesser than the industry standard?

A

Less than

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15
Q

What is the cycle or the number of days it takes to generate cash from a core business?

A

The cash conversion cycle

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16
Q

What is the formula to calculate the cash conversion cycle?

A

days to sell + # days to collect - # days to pay

17
Q

Inventory turnover ratio measures what?

A

The effectiveness of an entity’s inventory management

18
Q

Formula for inventory turnover:

A

Cost of goods sold / average inventory

19
Q

Formula for days in inventory:

A

Ending inventory / (cost of goods sold / 365)

20
Q

Having a lax credit policy would cause what two things?

A

To sell fast

To collect slower

21
Q

Having a strict credit policy would cause what two things?

A

To sell slower

To collect faster

22
Q

If inventory turnover is too high, that could mean what?

A

That management has an issue of not stocking enough inventory to meet demand levels

23
Q

Accounts receivable turnover formula is:

A

Net sales / Net average accounts receivable

24
Q

Should the accounts receivable turnover ratio be greater than or less than the industry standard?

A

Greater than

25
Formula for days sales in accounts receivable:
Ending net accounts receivable / (net sales / 365)
26
Should days sales in accounts receivable be greater than or less than the industry standard?
Less than
27
Formula for accounts payable turnover:
Cost of goods sold / average accounts payable
28
Formula for days of payables outstanding:
Ending accounts payable / (cost of goods sold / 365)
29
Should the accounts payable turnover be greater than or less than the industry average?
Less than
30
Should the days of payables outstanding be greater than or less than the industry average?
Greater than
31
Working capital turnover should be greater than or less than the industry standard?
Greater than
32
Formula for calculating working capital turnover:
Sales / (((beginning period CA - CL) + (ending period CA - CL)) / 2)
33
Working capital turnover is the measure of:
How effective a company is at generating sales based on funds used in operations
34
A high working capital turnover means:
Company is doing well at conversions its working capital into sales