Working Capital

Cash conversion cycle =

avg collection period + days sales in inventory - avg payables period

Drafts drawn by a nonfinancial firm on deposits at a bank are called...

bankers' acceptances. Acceptance by the bank is a guarantee of pymt at maturity

Formula for working capital

current assets - current liabilities

Current ratio (working capital ratio) =

current assets/current liabilities

Days' sales in receivables (avg collection period) =

days in year / AR turnover ratio

Days' sales in inventory =

days in year / inventory turnover ratio

A 3-party instrument in which one person (drawer) orders a second person (drawee) to pay money to a third person (payee) is called a...

draft

quick ratio excludes...

inventories and ppd items

the time between placing an order and receipt of goods from the supplier is called

lead time

Is the interest rate on short term debt higher or lower than the interest on long term debt?

lower

What does a HIGH current ratio indicate?

management may not be investing idle assets productively

The goal of receivables management is to offer the terms of credit that ______________

maximize PROFIts, NOT sales

What does a LOW current ratio indicate?

possible lack of liquidity

List the 4 components of total inventory cost

purchase costs carrying costs ordering costs stockout costs

Which ratio is more conservative, the quick ratio or current ratio?

quick, bc It excludes inventories and ppd items

inventory held as a hedge against contingenciesis called

safety stock

Which is more risk, short term debt or long term debt?

short term, bc there is a greater chance that the firm will be unable to make principal and interest payments when due

permanent working capital is...

when liquid current assets must me maintained to meet a firm's LT minimum needs regardless of the firm's level of activity or profitability

Accounts Receivable Turnover Ratio =

Net Credit Sales/Avg Balance in AR

Reorder point =

(avg daily demand x lead time in days) + safety stock

Quick ratio (acid-test ratio) =

(cash and equiv + marketable sec + net receivables)/current liabilities

What are the 3 approaches in regards to risk and profitability in relation to Financing and working capital?

1. Maturity matching (rarely achievable bc of uncertainty) 2. Conservative policy - possibility of idle funds 3. Aggressive policy

3 motives for holding cash:

1. transactional 2. precautionary 3. speculative

Accounts payable turnover =

CGS / Avg balance in Accounts Payable

Inventory turnover ratio =

CGS / Avg balance in Inventory

Average payable period =

Days in year / Accounts Payable turnover

Operating cycle =

Days' sales in receivables + days sales in inventory

Using a conservative financing policy, a firm seeks to minimize liquidity risk by financing its temporary working capital mostly with...

LT debt

A firm's ability to pay its current obligations as they come due and remain in business in the short run.

Liquidity

Have maturities of 1 year or less

Treasury bills - do not pay interest but sold at a discount

As a firm grows, temporary and permanent working capital...

both grow with the firm

Order of liquidity in descending order of current assets

cash and equivalents marketable securities receivables inventories prepd items

The period of time from when a payor puts a check in the mail to the availability of the funds in the payee's bank is called...

float

Have maturities of 10 yrs or longer

treasury bonds - pay int every 6 mths

Have maturities of 1-10 years

treasury notes - int pd every 6 months