Podcast
Questions and Answers
What is a common reason why a company may have a cash outflow despite showing a profit on the income statement?
What is a common reason why a company may have a cash outflow despite showing a profit on the income statement?
- Poor accounting staff management
- Increases in working capital requirements (correct)
- Large asset purchases without senior management approval
- Inefficient credit granting processes to existing customers
What is the primary role of a controller in evaluating working capital?
What is the primary role of a controller in evaluating working capital?
- To manage accounting staff
- To review and explain increases in working capital requirements (correct)
- To grant credit to new customers
- To approve large asset purchases
What is the result of a poor credit granting process to new customers?
What is the result of a poor credit granting process to new customers?
- A decrease in accounts receivable
- An increase in company investment in accounts receivable (correct)
- An increase in inventory
- An increase in accounts payable
Which component of working capital represents a source of cash?
Which component of working capital represents a source of cash?
What are the three components of working capital?
What are the three components of working capital?
Why may a company experience a cash outflow despite showing a profit on the income statement?
Why may a company experience a cash outflow despite showing a profit on the income statement?
What is the recommended frequency for reviewing a customer's ability to pay after being granted a credit limit?
What is the recommended frequency for reviewing a customer's ability to pay after being granted a credit limit?
What is the consequence of not informing the shipping department about customers on credit hold?
What is the consequence of not informing the shipping department about customers on credit hold?
What is the role of the collections staff in managing AR?
What is the role of the collections staff in managing AR?
What is the consequence of not having an effective return authorization program?
What is the consequence of not having an effective return authorization program?
What happens when a company's sales growth increases?
What happens when a company's sales growth increases?
What is the result of not being able to send error-free invoices to customers?
What is the result of not being able to send error-free invoices to customers?
Study Notes
Working Capital Evaluation
- A common issue for senior-level managers is to see a profit on the income statement but still face a cash shortage, often due to increased working capital requirements.
Components of Working Capital
- There are three components of working capital: accounts receivable, inventory, and accounts payable.
- Accounts receivable and inventory represent a net usage of cash, while accounts payable is a source of cash.
Accounts Receivable (AR) Issues
- Credit granting problems: poor credit evaluation can lead to customers taking advantage of the company, resulting in increased AR investment.
- Credit review problems: failure to regularly review customers' credit limits can lead to increased AR investment.
- Credit hold problems: shipping to customers with poor credit ratings can increase AR investment.
- Collection problems: ineffective collections can increase AR investment.
- Billing problems: sending error-filled invoices can lead to delayed payments and increased AR investment.
- Product return problems: inadequate return authorization programs can increase AR investment.
- Sales growth: increased sales can lead to increased AR investment.
Inventory Issues
- Production obsolescence problems: inventory that is no longer needed or used can increase working capital requirements.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Understand the reasons behind a cash outflow despite a profitable income statement. Learn how to identify and manage working capital effectively to ensure sufficient cash on hand to meet current requirements.
