Working Capital Metrics

Question 1

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?

Answer 1

Working Capital Management

Question 2

What is the “goal” of working capital management?

Answer 2

Maximizing shareholder wealth

Question 3

How to calculate the Net Working Capital:

Answer 3

Current assets - current liabilities

Question 4

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

Answer 4

Risk decreases, ROA decreases and cash increases

Question 5

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

Answer 5

Risk increases, ROA increases, and cash decreases

Question 6

What does the Current Ratio show?

Answer 6

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

Question 7

What is the formula to calculate current ratio?

Answer 7

Current assets / Current liabilities

Question 8

A decline in the current ratio means what?

Answer 8

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

Question 9

An increase in current ratio means what?

Answer 9

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

Question 10

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

Answer 10

Higher

Question 11

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

Answer 11

Higher

Question 12

Formula for calculating the quick ratio:

Answer 12

(Current assets - inventory - prepaid) / Current liabilities

Question 13

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

Answer 13

Smalled

Question 14

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

Answer 14

Less than

Question 15

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

Answer 15

The cash conversion cycle

Question 16

What is the formula to calculate the cash conversion cycle?

Answer 16

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

Question 17

Inventory turnover ratio measures what?

Answer 17

The effectiveness of an entity’s inventory management

Question 18

Formula for inventory turnover:

Answer 18

Cost of goods sold / average inventory

Question 19

Formula for days in inventory:

Answer 19

Ending inventory / (cost of goods sold / 365)

Question 20

Having a lax credit policy would cause what two things?

Answer 20

To sell fast

To collect slower

Question 21

Having a strict credit policy would cause what two things?

Answer 21

To sell slower

To collect faster

Question 22

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

Answer 22

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

Question 23

Accounts receivable turnover formula is:

Answer 23

Net sales / Net average accounts receivable

Question 24

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

Answer 24

Greater than

Question 25

Formula for days sales in accounts receivable:

Answer 25

Ending net accounts receivable / (net sales / 365)

Question 26

Should days sales in accounts receivable be greater than or less than the industry standard?

Answer 26

Less than

Question 27

Formula for accounts payable turnover:

Answer 27

Cost of goods sold / average accounts payable

Question 28

Formula for days of payables outstanding:

Answer 28

Ending accounts payable / (cost of goods sold / 365)

Question 29

Should the accounts payable turnover be greater than or less than the industry average?

Answer 29

Less than

Question 30

Should the days of payables outstanding be greater than or less than the industry average?

Answer 30

Greater than

Question 31

Working capital turnover should be greater than or less than the industry standard?

Answer 31

Greater than

Question 32

Formula for calculating working capital turnover:

Answer 32

Sales / (((beginning period CA - CL) + (ending period CA - CL)) / 2)

Question 33

Working capital turnover is the measure of:

Answer 33

How effective a company is at generating sales based on funds used in operations

Question 34

A high working capital turnover means:

Answer 34

Company is doing well at conversions its working capital into sales