Working Capital Metrics_M3

Question 1

What is Cash Conversion Cycle?

CCC

Answer 1

(Days Sales in A/R + Days in Inventory) - Days Payables Outstanding

(OPERATING CYCLE 1ST PART OF FORMULA)

Question 2

What is the Operating Cycle?

1st half of the CCC

Answer 2

Days Sales in A/R + Days in Inventory

Question 3

What is the APR of Quick Payment?

Discount % if pay early taking Net discount

Answer 3

365 / Pay Period - Discount Period x Discount% /100% - Discount%

Question 4

What is agressive working capital management?

Answer 4

• Aggressive working capital management is when current assets are financed with current liabilities (as opposed to long-term liabilities). EX. Purchasing inventory (a current asset) with accounts payable (a current liability).

Question 5

What is the average collection period in days?

Answer 5

The average collection period represents the weighted average of the periods that accounts receivable are outstanding and is computed as follows EX.:
Customers paying on day 10 x 70% = 7
Customers paying on day 30 x 30% = 9
Average collection period in days 16

Question 6

What does the Current Ratio measure?

Answer 6

• The liquidity position of a company.
• Reflects the firm’s ability to generate cash to meet its short-term obligations.
• The current ratio divides current assets by current liabilities.
• A higher ratio represents a stronger liquidity position.

Question 7

What is the Quick Ratio and how is it analyzed?

Answer 7

Is calculated as the sum of cash, marketable securities, and accounts receivable divided by current liabilities.

NOTE all assets that convert to cash quickly also known as the acid-test