Financial Management: Working Capital
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Questions and Answers

What is the primary focus of working capital management?

  • Long-term investment strategies
  • Capital budgeting
  • Debt equity structuring
  • Day-to-day financial management (correct)

    • Working capital includes long-term assets such as property and equipment.

    False

    What are the components of working capital?

    Cash, receivables, inventory, marketable securities

    The ______ cycle is the time period from inventory purchase until the receipt of cash.

    <p>operating</p> Signup and view all the answers

    Which of the following is NOT a reason for the importance of working capital?

    <p>Provision for future investments</p> Signup and view all the answers

    Match the following components with their role in working capital management:

    <p>Cash = Immediate liquidity Accounts Receivable = Money owed by customers Inventory = Goods held for sale Accounts Payable = Money owed to suppliers</p> Signup and view all the answers

    Working capital is also referred to as circulating capital.

    <p>True</p> Signup and view all the answers

    What is the purpose of maintaining a safety margin in working capital?

    <p>To cover unexpected expenses</p> Signup and view all the answers

    What is the cash cycle formula derived from?

    <p>Operating Cycle - Payables Period</p> Signup and view all the answers

    The cash cycle includes the time from the placement of an order until the arrival of stock.

    <p>False</p> Signup and view all the answers

    If the average inventory is Php 10,800 and sales are Php 547,500 annually, what is the inventory period?

    <p>72 days</p> Signup and view all the answers

    The formula for calculating the receivables period is Average Receivables divided by ___ .

    <p>Sales/365</p> Signup and view all the answers

    Match the following terms with their formulas:

    <p>Inventory period = Average Inventory / (Sales/365) Receivables period = Average Receivables / (Sales/365) Payables period = Average Payables / (COGS/365) Cash cycle = Operating Cycle - Payables period</p> Signup and view all the answers

    Given the average payables of Php 9,000 and COGS of Php 547,500, what is the payables period?

    <p>30 days</p> Signup and view all the answers

    An operating cycle of 96 days means that the business takes 96 days to convert inventory into cash.

    <p>True</p> Signup and view all the answers

    What is the total operating cycle for Amazing Boutique?

    <p>96 days</p> Signup and view all the answers

    What is the cash conversion cycle (CCC) for Max’s Chocolate Factory?

    <p>55 days</p> Signup and view all the answers

    Cash management aims to maximize the amount of cash the firm must hold for conducting normal business.

    <p>False</p> Signup and view all the answers

    How much financing does Max’s Chocolate Factory need based on their cash conversion cycle?

    <p>Php 55,000</p> Signup and view all the answers

    The primary cash management tool is the __________.

    <p>cash budget</p> Signup and view all the answers

    Match the cash management concepts with their descriptions:

    <p>Cash Conversion Cycle = The time taken to convert investments in inventory and other resources into cash flow from sales Cash Budget = Foretells cash inflows and outflows Trade Discounts = Reductions in price offered to buyers Noncash Charge = An accounting expense that does not involve actual cash movement</p> Signup and view all the answers

    Which of the following should not be included in the cash budget?

    <p>Depreciation</p> Signup and view all the answers

    Proceeds from the sale of fixed assets can be considered as cash inflows.

    <p>True</p> Signup and view all the answers

    List two factors that affect the cash budget.

    <p>Sales forecast, forecast of purchases and payment terms</p> Signup and view all the answers

    What does a credit score primarily represent?

    <p>The creditworthiness of an individual</p> Signup and view all the answers

    Relaxing credit standards always leads to increased sales and profits.

    <p>False</p> Signup and view all the answers

    What does the credit term '2/10 net 30' signify?

    <p>2% discount if payment is made within 10 days; full payment due in 30 days.</p> Signup and view all the answers

    A credit score is based on a person's credit ____.

    <p>report</p> Signup and view all the answers

    Match the following credit terms with their definitions:

    <p>Net 30 = Payment in full due in 30 days 2/10 net 30 = 2% discount if payment is made within 10 days Cash Discounts = Incentives for early payment Creditworthiness = Ability to repay borrowed money</p> Signup and view all the answers

    Which of the following is NOT a common use of credit scoring?

    <p>Predicting investment returns</p> Signup and view all the answers

    Tightening credit standards generally leads to an increase in sales.

    <p>False</p> Signup and view all the answers

    What actions might a collection policy include to initiate customer payment?

    <p>Reminders, form letters, telephone calls, or personal visits.</p> Signup and view all the answers

    What should a company generally do if a customer's account is delinquent?

    <p>Suspend further sales to the customer</p> Signup and view all the answers

    The average collection period is calculated using the total accounts receivable and total credit sales.

    <p>False</p> Signup and view all the answers

    What does aging of accounts receivable indicate?

    <p>It indicates the portions of the total accounts receivable balance that are outstanding.</p> Signup and view all the answers

    The _______ of accounts receivable provides a schedule that shows how much is owed over different time periods.

    <p>aging</p> Signup and view all the answers

    Match the credit monitoring techniques with their descriptions:

    <p>Average collection period = The average number of days credit sales are outstanding Aging of accounts receivable = Schedule indicating portions of A/R balance outstanding Payment pattern monitoring = Normal timing within which customers pay accounts</p> Signup and view all the answers

    What is a potential indicator that a firm should review its credit policies?

    <p>A change in the payment pattern of customers</p> Signup and view all the answers

    The payment pattern should remain constant over time.

    <p>True</p> Signup and view all the answers

    Define the term 'payment pattern' in the context of credit monitoring.

    <p>Payment pattern refers to the normal timing in which a firm's customers pay their accounts.</p> Signup and view all the answers

    Study Notes

    Financial Management Decisions

    • Capital budgeting determines which long-term investments or projects to undertake.
    • Capital structure focuses on financing methods for assets, including debt versus equity.
    • Working capital management involves daily financial operations of the firm.

    Working Capital

    • Represents liquid capital tied up in current assets such as cash, accounts receivable, inventory, and marketable securities.
    • Commonly referred to as circulating capital.

    Working Capital Management

    • Involves controlling cash, inventories, accounts receivable, and managing short-term liabilities.
    • Essential for inventory replenishment and daily operating expenses.
    • Acts as backup for credit sales and provides a safety margin for unexpected costs.

    Operating and Cash Cycles

    • Operating Cycle: Duration from inventory purchase to cash receipt.
    • Cash Cycle: Time between outflow of cash and cash inflow.
    • Relationship: Cash cycle = Operating cycle - Payables period.

    Calculating Periods

    • Inventory Period: Average Inventory / (Sales/365).
    • Receivables Period: Average Receivables / (Sales/365).
    • Payables Period: Average Payables / (COGS/365).

    Cash Conversion Cycle Example

    • Amazing Boutique example:
      • COGS per day: Php1,500, Inventory conversion period: 72 days, Receivables conversion period: 24 days, Payables deferral period: 30 days.
      • Operating cycle calculated as 96 days. Financing need = 55 days x Php1,500.

    Cash Management Goals

    • Minimize cash holdings while ensuring enough liquidity for:
      • Taking trade discounts.
      • Maintaining credit ratings.
      • Meeting unexpected cash needs.

    Cash Budget

    • Primary tool for cash management; forecasts cash inflows, outflows, and ending balances.
    • Informs about loans needed or funds available for investment.
    • Data required includes sales forecasts, collection delays, forecasted expenses, and initial cash balance.

    Credit Scoring

    • Numerical representation of creditworthiness based on credit files analysis.
    • Key for predicting timely payments in high volume, small credit requests.

    Credit Standards

    • Relaxed standards may boost sales but increase costs due to accounts receivable and potential bad debts.
    • Tightened standards reduce bad debts but may also decrease sales and profit.

    Credit Terms and Collection Policies

    • Common terms include Net 30; discounts incentivize early payments.
    • Collection efforts may involve reminders, phone calls, or suspension of future sales until delinquent accounts are settled.

    Credit Monitoring Techniques

    • Ongoing assessment of accounts receivable to ensure timely payments.
    • Techniques include average collection period, aging of accounts receivable, and monitoring payment patterns.

    Average Collection Period

    • Average days accounts receivable are outstanding, calculated as:
      • Average Accounts Receivable / Average Sales per Day.

    Aging and Payment Patterns

    • Aging schedules show portions of total accounts receivable outstanding.
    • Payment patterns indicate normal timing for customer payments; deviations warrant review of credit policies.

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    Related Documents

    Working Capital and Cash Flow Management PDF

    Description

    Explore key concepts in financial management, focusing on capital budgeting, capital structure, and working capital management. This quiz covers essential aspects of managing a firm's liquid assets and understanding operating and cash cycles. Test your knowledge on the critical functions of financial operations in a business.

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