Chapter 18
Cash Reserves
- the flexible financing policy implies surplus cash and little short term borrowing
Types of inventory loans
-Blanket inventory lien -Trust receipt -field warehouse financing
Activities that decrease cash
-Decreasing long-term debt -Decreasing equity (repurchasing some stock) -Decreasing current liabilities -Increasing current assets other than cash -Increasing fixed assets
Activities that Increase Cash
-Increasing long-term debt -Increasing equity (selling some stock) -Increasing current liabilities -Decreasing current assets other than cash -Decreasing fixed assets
Characteristics of non-SEC registered commercial paper
-Issues by large, highly rated firms -Issued directly by the firm -Interest often below prime rate
Short-term financial policies that are flexible with regard to current assets include such actions as:
-Keeping large balances of cash and marketable securities -Making large investments in inventory -Granting liberal credit terms, which results in a high level of accounts receivable
Restrictive short-term financial policies with regard to current assets include such actions as:
-Keeping low cash balances and making little investment in marketable securities -Making small investments in inventory -Allowing few or no credit sales, thereby minimizing accounts receivable
Cash Outflows
-Payments of AP -Wages, Taxes, and other expenses -Capital expenditures -Long-term financing expenses
The short-term financial policy that a firm adopts will be reflected in at least two ways:
-The size of the firm's investment in current assets -The financing of current assets
Two kinds of shortage costs
-Trading, or order, costs -Costs related to lack of safety reserves
Two types of short-term borrowing
-Unsecured borrowing -Secured Borrowing
short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with _____.
-capital budgeting -dividend policy -capital structure
Payables period
365 / payables turnover
Inventory period
365/inventory turnover
Receivables period (days' sales in receivables OR average collection period)
365/receivables turnover
Cash budget
A forecast of cash receipts and disbursements for the next planning period.
Line of credit
A formal (committed) or informal (noncommitted) prearranged, short-term bank loan.
Cash Flow Timeline
A graphical representation of the operating cycle and the cash cycle.
Letters of Credit
A letter issued by a bank allowing the bearer to withdraw a specific amount of money from the bank or its branches.
Accounts Receivable Financing
A secured short-term loan that involves either the assignment or the factoring of receivables.
Inventory loans
A secured short-term loan to purchase inventory.
Cash Collections
Beginning Accounts Receivable + 1/2 x sales
Net Working Capital = _____ + Other current assets - Current Liabilities
Cash
_______ = long-term debt + equity + Current liabilities - Current Assets (other than cash) - fixed assets
Cash
Effective interest rate
Interest paid/amount available
Compensating balance
Money kept by the firm with a bank in low-interest or non-interest-bearing accounts as part of a loan agreement.
Cash Cycle Formula
Operating Cycle - Accounts Payable Period
Relative interest rates
Short term interest rates are usually lower than long term rates. (On average, it is more costly to rely on long-term borrowing as compared to short-term borrowing)
What is the primary concern in short-term finance?
The firm's short-run operating and financing activities
The Operating Cycle
The period between the acquisition of inventory and the collection of cash from receivables.
Accounts payable period
The time between receipt of inventory and payment for it.
Accounts Receivable Period
The time between sale of inventory and collection of the receivable.
Inventory Period
The time it takes to acquire and sell inventory.
maturity hedging
a strategy where a firm tries to match the maturities of its assets and liabilities
The higher the ________ ratio is, the greater the firm's accounting return on assets (ROA), and return on equity (ROE)
asset turnover
The shorter the _______, the lower is the firm's investment in inventories and receivables. As a result, the firm's total assets are lower, and total asset turnover is higher
cash cycle
Inventory turnover
cost of goods sold/average inventory
shortage costs
costs that fall with increases in the level of investment in current assets
Carrying costs
costs that rise with increases in the level of investment in current assets
The two types of accounts receivable financing are ___ and ____.
factoring and assignment
Net working capital + _______ = Long-term debt + Equity
fixed assets
Operating cycle formula
inventory period + accounts receivable period
Asset turnover
net sales/ average total assets.
commercial paper
short-term unsecured debt issued by large corporations
Net Cash Inflow
the difference between cash collections and cash disbursements
trade credit
the practice of buying goods and services now and paying for them later
Cash Cycle
the time between cash disbursement and cash collection