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BethG
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What is the working capital formula and what do the results indicate?
 Current assets  current liabilities
 A smaller number indicates higher risk of not having enough cash to pay the bills; the entity may not be liquid enough.
 If you don't have enough cash, obtaining a loan is also more difficult and it would raise interest rate of loans, especially if you need a loan to pay short term obligations due to a cash shortage.

What is the formula for the working capital ratio? Which is comparatively better [higher/lower]? What does a deteriorating vs improving ratio indicate?
 current assets / current liabilities
 The higher ratio is better
 A deteriorating ratio indicates increased risk b/c either assets are decreasing or liabilities are increasing.
 For improving it's opposite.

What is the formula for the Quick ratio? Which is comparatively better [higher/lower]? What is another name for this test?
 aka Acid Test
 (Cash & Cash Equivalents + Marketable Securities + A/R) / Current liabilities
 Higher or improving is better

What is the formula for the Cash ratio? Which is comparatively better [higher/lower]?
Cash & Cash Equivalents / Current Liabilities

What is the formula for the Operating Cycle? Which is comparatively better [higher/lower]?
 Inventory Conversion Period + Receivables Collection Period
 Lower is better (fewer days to sell or collect funds)

As a company becomes more conservative with respect to working capital policy, it would tend to have which of the following: (1) an increase in the ratio of current assets to noncurrent assets, or (2) an increase in the ratio of current liabilities to noncurrent liabilities.
 Since working capital = current assets  current liabilities we would want current assets to increase.
 (1) Current assets should increase compared to noncurrent assets. Current assets should be financed by noncurrent liabilites.

When a firm finances each asst with a financial instrument of the same approximate maturity as the life of the asset, it is applying ...
working capital management

What is the difference between an aggressive vs conservative working capital policy?
 Aggressive: High default risk. Put as much money to work as possible  minimal investment in current assets + extensive use of shortterm credit.
 Conservative: Buffers against risk, increasing current assets, severely limiting ST debt (or eliminating), current ratio above 2.0

What is the formula for the Cash Conversion Cycle? What else is this known as? Which is comparatively better [higher/lower]?
 Net Operating Cycle (the operating cycle is a subset of the Net)
 Lower is better
 Inventory Conversion Period + Receivables Collection Period  Payables Deferral Period

What are the formulas for the Inventory Turnover Ratio and the Inventory Conversion Period? Which is comparatively better [higher/lower]?
 Inventory Turnover Ratio: COGS / Avg Inventory
 Higher is better
 Inventory Conversion Period: 365 days / Inventory Turnover Ratio

What are the formulas for the A/R Turnover and the Receivables Collection Period? Which is comparatively better [higher/lower]?
 A/R Turnover: Credit Sales / Avg A/R
 Higher is better
 Receivables Collection Period = Days sales outstanding = 365 / AR Turnover

What are the formulas for the A/P Turnover and A/P Deferral Period? Which is comparatively better [higher/lower]?
 A/P Turnover: COGS / Avg A/P
 Lower is better
 A/P Deferral Period: 365 / AP Turnover

What is the formula for the Working Capital Turnover? Which is comparatively better [higher/lower]?
 Sales / Avg Working Capital
 Higher is better

When the balance of A/R is decreasing, and sales are increasing, what is the effect on the collection period for A/R
It decreases

What are the 3 types of assets?
 Fixed assets (PP&E)
 Permanent current assets (the typical amount in cash, inventory, A/R needed to sustain the company)
 Fluctuating current assets (a sudden temporary increase in inventory, A/R)

What is the percentageofsales method? How is it used?
The premise that for an established company, account balances on the balance sheet are typically a percentage of sales for the year. This can then be used as a forecasting tool for future years using the same percentages, but adjusting for amount of sales.

