38106833
Description
Flashcards by Emma Sexton, updated more than 1 year ago
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Created by Emma Sexton
over 1 year ago
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| Question | Answer |
| What are current assets? | Cash and other assets that will be converted to cash within 1 year |
| How are current assets on the balance sheet? | In order of liquidity |
| What is the most and least liquid assets? | Most liquid - cash Lease liquid - inventory |
| What are current liabilities? | Obligations that should be paid within 1 year |
| What are the 3 major current liability items? | 1. Accounts Payable 2. Notes Payable 3. Expenses Payable |
| What is working capital? | Current assets and current liabilities |
| What is net working capital? | Current assets – current liabilities |
| What is net working management? | The management of how we will short-term assets and liabilities |
| Working capital management is a process that involves day-to-day activities related to: | 1. Level of current assets 2. Proportion of short-term/long term debt 3. Level of investment in each current asset 4. Proportions of short-term credit |
| What is the operating cycle? | The length of time it takes to: 1. purchase inventory 2. distribute / sell inventory 3. collect payment |
| Formula for operating cycle | Inventory Conversion Period + Receivable Conversion Period The time it takes to produce and sell products + the time it takes to collect on receivables |
| How do you calculate the inventory conversion period? | Average inventory / (COGS/365) |
| How do you calculate the receivables conversion period? | Average accounts receivable / (annual credit sales / 365) |
| What is the cash conversion cycle? | The number of days that pass until cash is collected from a sale. Allows us to determine how long we have till we must pay. |
| What is the formula for the cash conversion cycle? | Operating cycle - payables deferral period |
| What is the definition of the payables deferral period? | The time from when we receive inventory to when we have to pay for it |
| How do you calculate the payable deferral period? | Average accounts payable / (COGS/365) |
| What should we consider to determine our level of working capital investment? (How much short term investment should we hold onto?) | 1. Profitability 2. Risk that they might not meet obligations |
| What are the three approaches to determining the level of working capital investment? | 1. Conservative approach 2. Aggressive approach 3. Moderate approach |
| The conservative approach has: ______ current assets, ______ profitability ______ risk | More ; less ; less |
| The aggressive approach has: ______ current assets, ______ profitability ______ risk | Less ; more ; more |
| How do you measure rate of return / profitability? | EBIT / Assets |
| What is the current ratio? | Current assets / current liabilities |
| What does the net working capital position measure? | Risk |
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