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Chapter 27 - Chapter 27 Short Term Finance and Planning...

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Chapter 27 – Short Term Finance and Planning Short-term finance is an analysis of decisions that affect current assets and liabilities and will frequently impact on the firm value 27.1 Tracing Cash and Net Working Capital Current assets = assets convertible into cash in less than one year. Current liabilities = obligations requiring cash payments within one year / within the operating cycle 27.2 Defining Cash in Terms of Other Elements Net working capital + Fixed assets = Long-term debt + Equity Net working capital = Cash + Other current assets – Current Liabilities Cash + Other current assets – Current Liabilities = Long-term debt + Equity - Fixed assets Cash = Long-term debt + Equity - Net working Capital - Fixed assets 27.3 The Operating Cycle and the Cash Cycle Short-run operating activities create patterns of cash inflows and cash outflows that are both unsystematic and uncertain o Unsynchronised because the payments of cash for raw materials does not happen at the same time as the receipt of cash from selling the product operating cycle = time period from the arrival of stock (or order) until the receipt of cash cash cycle = cash payment for materials until cash collection from receivables Short term financing is needed to fill the gap between cash inflow and cash outflow → related to the lengths of the operating cycle and the accounts payable period
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