Working Capital metrics Flashcards
Working capital rule/policy
Is more conservative as an increasing portion of an organization’s long term assets, permanent current assets, and temporary current assets are funded by long term financing.
An increase in the ratio of current assets to noncurrent assets would indicate what?
An increase in conservative working capital. Indicates that current assets is financed by non current liabilities. Working capital and current ratio are improving.
When is a firm unable to meet its maturing debt obligations?
When they are financing permanent current assets with short term debt.
When is working capital increasing?
when current assets are increased or current liabilities decrease
Quick ( acid-test) ratio excludes what from current assets and what does it evaluate?
Inventory and prepaid.
Evaluates the firms short term liquidity.
What’s the affect of bad debt expense being recorded for the period?
Increase in contra-account Allowance for doubtful accounts.
Net realizable value on A/R declines, decreasing current assets.
Decreasing Working capital.
(Net W/C = current asset - current liability)
Selling at a loss does what to Net profit?
Decreases it
Cash Conversion cycle equation?
Inventory conversion period + R collection period - P deferral period
When is appropriate working capital management being used?
When the maturity life of an asset matches with the length of the financial instrument used to finance it.
Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency does what
Determines the appropriate level of working capital for the firm
Reducing the number of days sales are outstanding increases what?
Cash
