Chapter 26 notes

Chapter 26 notes - Short-term Financing, which is one of...

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Short-term Financing , which is one of the most important topics in corporate finance. Capital structure and capital budgeting decisions are made on less frequently compared to the working capital management, a.k.a. short-term financing. Net working capital + Fixed assets = Long-term debt + Equity Net working capital = Cash + Other current assets – Current liabilities Substituting NWC into the first equation and rearranging; Cash = Long-term debt + Equity + Current Liabilities – Other current assets – Fixed assets The Sources and Uses of Cash Sources of Cash (Activities that increase cash) Increase in long-term debt account (borrowed money) Increase in equity accounts (sold stock) Increase in current liability accounts (borrowed money) Decrease in current asset accounts, other than cash (sold current assets) Decrease in fixed assets (sold fixed assets) Uses of Cash (Activities that decrease cash) Decrease in long-term debt account (repaid loans) Decrease in equity accounts (repurchased stock or paid dividends) Decrease in current liability accounts (repaid suppliers or short-term creditors) Increase in current asset accounts, other than cash (purchased current assets) Increase in fixed assets (purchased fixed assets) The operating cycle is the average time required to acquire inventory, sell it, and collect for it. Operating cycle = inventory period + accounts receivable period The inventory period is the time to acquire and sell inventory. Inventory turnover = Cost of goods sold / average inventory Inventory period = 365 / inventory turnover The accounts receivable period (average collection period) is the time to collect on the sale. Receivables turnover = credit sales / average receivables Accounts receivable period = 365 / receivables turnover The cash cycle is the average time between cash disbursement for purchases and cash
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This note was uploaded on 02/14/2011 for the course FINANCE 610 taught by Professor Siad during the Spring '09 term at UMBC.

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Chapter 26 notes - Short-term Financing, which is one of...

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