Podcast
Questions and Answers
What is the focus of working capital management?
What is the focus of working capital management?
- Annual revenues and profits
- Long-term assets and liabilities
- Investments in new projects
- Day-to-day bills and short-term assets (correct)
In working capital management, what does a negative working capital (Current Assets < Current Liabilities) indicate?
In working capital management, what does a negative working capital (Current Assets < Current Liabilities) indicate?
- High profitability levels
- Potential liquidity issues (correct)
- Effective management of long-term debt
- Healthy financial position
How is working capital calculated?
How is working capital calculated?
- $$\text{Total assets} - \text{Total liabilities}$$
- $$\text{Fixed assets} - \text{Current liabilities}$$
- $$\text{Current assets} - \text{Current liabilities}$$ (correct)
- $$\text{Inventory} - \text{Accounts payable}$$
What is the primary purpose of evaluating working capital?
What is the primary purpose of evaluating working capital?
Why should current assets exceed current liabilities in working capital management?
Why should current assets exceed current liabilities in working capital management?
Which financial aspect does working capital management primarily address?
Which financial aspect does working capital management primarily address?
What is the equation to calculate assets?
What is the equation to calculate assets?
How are all assets funded according to the text?
How are all assets funded according to the text?
What happens when an asset is bought and paid in cash according to the text?
What happens when an asset is bought and paid in cash according to the text?
What are fixed assets also known as?
What are fixed assets also known as?
What is the defining characteristic of current assets?
What is the defining characteristic of current assets?
Which type of asset usually has higher liquidity?
Which type of asset usually has higher liquidity?
What is the main consequence of having a low level of working capital according to the text?
What is the main consequence of having a low level of working capital according to the text?
Why are businesses that need a lot of inventory, like retailers, likely to have higher levels of working capital than businesses that provide services?
Why are businesses that need a lot of inventory, like retailers, likely to have higher levels of working capital than businesses that provide services?
What is one of the main downsides of keeping high levels of inventory?
What is one of the main downsides of keeping high levels of inventory?
Which of the following is identified in the text as the most effective way to improve both working capital and cash flow?
Which of the following is identified in the text as the most effective way to improve both working capital and cash flow?
Which of the following ratios does NOT consider inventories when evaluating a business's liquidity?
Which of the following ratios does NOT consider inventories when evaluating a business's liquidity?
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Study Notes
Financial Management
- Auditing is the process of checking a company's accounts for authenticity by an independent firm of accountants.
- The result of the auditing process is stated in the annual report.
Managerial Accounting
- Provides information for the management of the business.
- Helps managers make decisions like where to cut costs and how to calculate prices.
- Uses data from the balance sheet and income statement to calculate figures and ratios.
Balance Sheet and Ratios
- Assets = Liabilities + Owner's equity is a fundamental equation in accounting.
- Assets are funded either through equity or liabilities.
- Working capital or circulating capital indicates a business's ability to pay its day-to-day bills.
- Working capital = Current assets – Current liabilities.
- Current assets should be higher than current liabilities.
Assets
- Fixed or non-current or long-term assets have a lifespan of more than one year and are intended to be used in the company for a longer time period.
- Examples: property, plant, premises, buildings, machinery, and equipment.
- Current or short-term assets are used up, spent in production, or sold within a year.
- Examples: inventory, accounts receivables, and cash.
Liquidity
- Liquidity or solvency is the ability of a business to pay its bills and repay its debts on time.
- Working capital ratio or current ratio = Current assets / Current liabilities.
- Acid test ratio = (Current assets – Inventory) / Current liabilities.
- A low level of working capital might indicate a lack of cash or excessive borrowing.
Profitability
- Profitability is a business's profit in relation to an indicator of the size of the business (usually capital employed or turnover).
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