Chapter 16

Net working capital (formula)

(cash + other current assets) - current liabilities

inventory period

365/inventory turn over

payable period

365/payables turn over

receivables period (also called days' sales in receivables or the average collection period)

365/receivables turn over

if you substitute the formula for net working capital into the basic balance identity we can see that cash is what?

= long-term debt +equity + current liabilities - current assets other than cash - fixed assets

Here is a quick check of your understanding of sources and uses: If accounts payable go up by $100, is this a source or a use? If accounts receivable go up by $100, is this a source or a use?.

Accounts payable are what we owe our suppliers. This is a short-term debt. If it rises by $100, we have effectively borrowed the money, so this is a source of cash. Receivables are what our customers owe to us, so an increase of $100 in accounts receivable means that we have loaned the money; this is a use of cash.

what is the cash flow time line?

Graphical representation of the operating cycle and the cash cycle

What is the cash cycle?

The time between cash disbursement and cash collection. the number od days that pass until we collect the cash from a sale, measured from when we actually pay for the inventory. figuring out how to finance the money we spent on the inventory until we sell it and get the money we are owed for it. the example in the book is 105-30=75 days.

What is the accounts payable period?what is this an example of?

The time between receipt of inventory and payment for it. how it is not synchronized.

operating cycle

The time period between the acquisition of inventory and the collection of cash from receivables.

explain the connection between a firm's accounting-based profitability and it's cash cycle

You can see the connection with the total asset turnover. The higher the ratio the great their ROA and ROE. So the shorter the cash cycle the lower the firm's investment in inventories and recievables and as a result the firms total assets are lower, and total turn over is higher.

controller duties related to short term financial management

accounting information on cash flows; reconciliation of accounts payable; application of payments to accounts receivables

payables manager assets/ liabilities influenced

accounts payable

What are the three major items found as current liabilities?

accounts payable expenses payable (including accrued wages and taxes) and notes payable

credit manager assets/liabilities influenced

accounts receivable

controller assets/liabilities influenced

accounts receivable, accounts payable.

the lengthening cycle problem can be masked at least partically by?

an increased payables cycle, so both should be monitored.

Why are cash inflows and cash outflows unsyncronized?

because for example, the payment of cash for raw materials does not happen at the same time as the receipt of cash from selling the product.

why are cash inflows and outflows uncertain?

because future sales and costs cannot be precisely predicted.

Why does it makes sense that when you increase or decrease cash it involves increasing a liability (or equity account) or decreasing an asset account?

because increasing a liability means we have raised money by borrowing it or by selling an ownership interest in the firm. Where as a decrease in an assets means that we have sold or otherwise liquidates an asset. in either cash there is a cash inflow.

the gap between short term inflows and outflows can be filled by doing what?

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

short run activities create patterns of what?

cash inflows and cash outflows.

Net working capital is?

cash plus other current assets, less (minus) liabilities

cash manager assets/liabilities influenced

cash, marketable securities, short-term loans

The gap can be shortened by doing what?

changing the inventory, receivable, and payable periods.

cash manager duties related to short-term financial management

collection, concentration, disbursement; short-term investments; short-term borrowing; bank relations

inventory is other words is

cost of good sold

inventory turnover

cost of goods sold/ average inventory

payables turnover

cost of goods sold/ average payables

marketing manager duties related to short term financial managment

credit policy decisions

receivables turn over

credit sales/ average accounts receivable

payables manager duties related to short term financial management

decisions on payment policies and on whether to take discounts

purchasing manager duties related to short term financial management

decisions on purchases, suppliers; may negotiate payment terms

What are some activities that decrease 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 are some examples of short run activities?

events: buying raw materials paying cash manufacureing the product selling the product collecting cash decisions: how much inventory to order whether to borrow or draw down cash balances what choice of production technology to use whether credit should be extended to a particular customer and how to collect

the longer the cash cycle, the more?

financing is required.

the higher the total asset turnover ratio is the?

greater are the firm's accounting returns on assets, ROA, and return on equity ROE.

What the operating cycle describes is?

how a produce moves from the current assets account. It begins life as inventory, it is converted to a receivable when it is sold, and it is finally converted to cash when we collect from the sale. Notice that, at each step, the asset is moving closer to cash.

looking back at the list of things that increase or decrease cash you can see that sources of cash always involve what?

increasing a liability (or equity) account or decreasing an asset account.

What are some activities that increase 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)

inventory period + accounts receivable period

production manager assets/liabilities influenced

inventory, accounts payable

purchasing manager assets/liabilities

inventory, accounts payable

What three things does the cash cycle depend on?

inventory, receivables, and payables period.

what does it mean to say that a firm has an inventory turnover ratio of 4?

it means that they bought and sold off their inventory 4 times through out the past year.

We can easily see the link between the firm's cash cycle and its profitability by recalling that one of the basic determinants of profitability and growth for a firm is

it's total asset turnover

Th shorter a cash cycle is the

lower the firm's investment in inventories and receivables. as a result the firms total assets are lower and total turnover is higher.

changes in the firm's cash cycle are often

monitored as and early-warning measure.

credit manager duties related to short-term financial management

monitoring and control of accounts receivable; credit policy decisions

what is the basic balance sheet identity?

net working capital + fixed assets = long-term debt + equity

What is the difference between net working capital and cash?

net working capital is the difference between cash and other current assets - current liabilities. Where as cash is the long term debt + equity and current liabilites - current assets other than cash - fixes assets.

Will networking capital always increase when cash is increases?

no it also depends on if the current liabilties increased or decrease that could off set it.

what is the cash cycle formula?

operating cycle - accounts payable period

list 5 potential uses of cash

paying off a loan buying back some stock paying off a longer loan buying a new inventory for cash buying a new fixed asset like a property

most firms have a ______ cash flow, and they thus require financing for inventories and receivables

positive

total asset turnover

sales/ total assets

production managers duties related to short term financial management

setting of production schedules and materials requirements

activities that increase cash are called

sources of cash

T or F some actives naturally increase cash and some activities decrease it.

t

List five potential sources of cash?

taking out a new long term loan taking out a new short term loan selling some stock selling some inventory for cash or selling a property for cash

a lengthening cycle can indicate

that the firm is having trouble moving inventory or collection on it's receviables.

What can you notice about the list of stuff that increases and decreases cash?

that they are opposites for example floating a long-term bond issue increases cash (at least until the money is spent). Paying off a long-term bond issue decreases cash.

Who are some of the people involved with selling on credit

the credit manager, the marketing manager, and the controller.

The primary concerns in short term finances are what?

the firms short-run operating and financing activities.

The need for short term financial managment is suggested by what?

the gap between the cash inflows and cash outflows.

the cash cycle increase as?

the inventory and receivables period gets longer.

What are the two distinct components of the operating cycle?

the inventory period and the accounts receivable period.

describe the operating cycle and cash cycle. What are the differences?

the operating cycle is the time it takes from when we aquire inventory to when we collect cash on that inventory after it has been sold. The cash cycle is the number of days that pass until we collect the cash from a sale, measured form when we actually pay for the inventory. the difference is that the operation cycle starts as soon as we collect the inventory where as the cash cycle starts as soon as we have paid for that inventory.

What is the inventory period?

the time it takes to aquire and sell the inventory.

What is the accounts receivable period?

the time it takes to collect on the sale.

the cash cycle decrease if the company is able?

to defer payment of payables and thereby lengthen the payables period.

cash inflows and cash outflows are both what?

unsynchronized and uncertain.

activites that decrease cash are called

use of cash

Are uses of cash just the inverse of sources of cash?

yep! a use of cash involves decreasing a liability by paying it off, perhaps, or increasing assets by purchasing something. both of these activities require that the firm spend some cash.