Working Capital Metrics

Question 1

Inventory Turnover

Answer 1

Cost of goods Sold / Average Inventory

Question 2

Inventory Conversion Period

Answer 2

365/ Inventory Turnover

Question 3

AR Turnover

Answer 3

Sales / Avg AR

Question 4

AR Collection Period

Answer 4

365/ AR Turnover

Question 5

AP Turnover

Answer 5

COGS/Avg AP

Question 6

AP Deferral Period

Answer 6

365/AP Turnover

Question 7

Cash conversion Cycle = Net Operating Cycle

Answer 7

number of days to collect + number of days to sell - number of days to Pay

Question 8

A high quick ration is most desirable to the stores creditors because it indicates

Answer 8

is most desirable to the stores creditors because it indicates the company has more ST assets on its balance sheet

Question 9

the relationship between allowance for doubtful accounts and working capital

Answer 9

when bad debt is recorded for the period, working capital decreases

Question 10

A higher Current ratio indicates

Answer 10

more liquidity

Question 11

The relationship b/t the AFDA and WC

Answer 11

when bad debt expense is recorded for the period, working capital decreases

Question 12

A higher current ratio indicates liquidity

Answer 12

more liquidity

Question 13

A company purchases inventory on terms net 30 days and resells it to its customers on terms net 15 days. The inventory conversion period averages 60 days.

Answer 13

Cash conversion Cycle is

60+15-30=45

Question 14

Cash Conversion Cycle is 
Receivables = 4,000,000
Inventory = 2,600,000
Payables = 3,700,00
Sales = 50,000,000
COGS = 45,000,000

Answer 14

Equal to the inventory conversion period plus the receivables collection period minus the AP deferral period
365/(45m/2.6m)+365/(50m/4m)-365(45m/3.7m)

Question 15

if a firm increases its cash balance by issuing additional shares of common stock

Answer 15

Working capital increases and the current ratio increases

Question 16

in determining the appropriate working capital of a firm requires

Answer 16

offsetting the benefit of current assets and current liabilities against the probability of technical insolvency

Question 17

As a company becomes more conservative in its working capital policy

Answer 17

it would tend to have an increase in the ratio of current assets to units of output