FIN 323 - Chapter 18

What is the formula for Total Asset Turnover?

Sales/Total Assets Higher the ratio the greater the firm's accounting ROA and ROE

How can the gap between short-term inflows and outlows be filled?

borrowing or by holding a liquidity reserve in the form of cash or marketable securities

What effect does an accounts receivable payment have on cash?

increase

The cash cycle _________ as the inventory and receivables periods get longer.

increases

The size of the firm's investment in current assets is usually measured by what?

level of total operating revenues

What do sources of cash always involve increasing?

liability or equity account or decreasing an asset account

A _________ short-term financial policy means a ________ proportion of short-term debt relative to long-term financing.

restrictive, high

What are the steps to calculate the operating cycle?

1. Inventory turnover 2. Inventory period 3. Receivables turnover 4. Receivables period 5. Inventory period + accounts receivable period

Flexible policy for the short-term

1. Keeping large balances of cash and marketable securities. 2. Making large investments in inventory. 3. Granting liberal credit terms. which results in a high level of accounts receivable.

Restrictive short-term policies

1. Keeping low cash balances and making little investment in marketable securities. 2. Making small investments in inventory 3. Allowing few or no credit sales, thereby minimizing accounts receivable.

What are the steps to calculate the cash cycle?

1. Operating cycle steps 2. Payables turnover 3. Payables period 4. Operating cycle - accounts payable period

What is payables period?

365 days/Payables turnover

What is the receivables period formula?

365 days/Receivables turnover

What is the inventory period formula?

365/Inventory turnover

Basic balance sheet identity

Net working capital + Fixed assets = Long-term debt + Equity

What is the Net working capital formula?

Net working capital = (Cash + Other current assets) - Current liabilities

Short-term policy factors

The size of the firm's investment in current assets The financing of current assets

What is the cash cycle?

The time between cash disbursement and cash collection.

What is one of the basic determinants of profitability and growth for a firms

Total Asset Turnover

Is an increase in accounts receivable a source or use of cash?

Use

What does the cash cycle depend on?

inventory periods receivables periods payables periods

Flexible policy has ______ current assets and ______ short-term debt.

large amount, less

Working capital management means the same as what?

net working capital

What effect does a purchase of inventory on credit have on cash?

none

Why are cash inflows and outflows unsynchronized?

spending cash and receiving cash do not always happen at the same time

What is receivables period?

the average amount of days it takes customers to pay

What is the payable period?

the average amount of days to pay accounts payable

What is a negative cash cycle?

when every sale generates a cash inflow short receivables period long payables period

What is short-term financial management called?

working capital management

What is the operating cycle?

the length of time it takes to acquire inventory, sell it, and collect for it

What are the major items found as current liabilities ?

Accounts Payable Expenses Payable Notes Payable

What are managerial options to shorten the gap between short-term inflows and outflows?

changing inventory, receivable, and payable periods

What is net working capital?

difference between current assets and current liabilities

A ________ policy means less short-term debt and more long-term debt

flexible

Name some expenses payable.

Accrued Wages Taxes

What are the most important items in the current asset section of a balance sheet?

Cash Cash Equivalents Marketable Securities Accounts Receivable Inventories

What is the formula for cash?

Cash = Long-term debt + Equity + Current liabilities - Current assets other than cash - Fixed assets

What is the formula for the cash cycle?

Cash cycle = operating cycle - accounts payable period

What is the inventory turnover formula?

Cost of goods sold/Average inventory

What is the payables turnover formula?

Cost of goods sold/Average payables

What is the receivables turnover formula?

Credit sales/Average accounts receivable

Name some activities that decrease cash. Uses of cash.

Decreasing long-term debt (paying off a long-term debt) Decreasing equity (repurchasing some stock) Decreasing current liabilities (paying off a 90-day loan) Increasing current assets other than cash (buying some inventory for cash) Increasing fixed assets (buying some property)

What is receivables turnover?

How many times accounts receivable is used and paid for during the year

Name some activities that increase cash. Sources of cash.

Increasing long-term debt (borrowing over the long term) Increasing equity (selling some stock) Increasing current liabilities (getting a 90-day loan) Decreasing current assets other than cash (selling some inventory for cash) Decreasing fixed assets (selling some property)

What is the Operating cycle formula?

Operating cycle = Inventory period + Accounts receivable period

Is an increase in accounts payable a source or use of cash?

Source

What is the accounts payable period?

The time between receipt of inventory and payment for it.

What is the receivables period also called?

days' sales in receivables or the average collection period

What effect does a payment to accounts payable have on cash?

decrease

The cash cycle ________ if the company can defer payment of payables and thereby lengthen the payables period.

decreases

A ________ or accommodative, short-term financial policy would maintain a relatively ______ ratio of current assets to sales.

flexible; high

Why are cash inflows and outflows uncertain?

future sales and costs cannot be precisely predicted

What is inventory period?

how many days before inventory is sold

What is inventory turnover?

how many times inventory has been bought and sold off during the year

What effect does selling inventory on credit have on cash?

none

Companies with a _______ cash cycle, require ________ for inventories and receivables.

positive; financing

How is the financing of current assets usually measured?

proportion of short-term debt (current liabilities) and long-term debt used to finance current assets

The net effect of a flexible policy is

relatively high level of net working capital higher level of liquidity

A _________ short-term financial policy would entail a ______ ratio of current assets to sales.

restrictive; low

What is the primary concern in short-term finance?

short-run operating and financing activities

What is the inventory period?

the time to acquire and sell inventory

What is the accounts receivable period?

time it takes to collect on the sale

What are the distinct components of the operating cycle?

time to acquire and sell inventory time it takes to collect on the sale

What is the most important difference between short-term and long-term finance?

timing of cash flows