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