Ch16 Recap - CHAPTER RECAP INTRODUCTION Without effective...

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CHAPTER RECAP INTRODUCTION Without effective management of assets, liabilities, and owners' equity, all businesses are doomed to fail. Financial management addresses issues pertaining to obtaining and managing funds and resources necessary to run a business successfully. All organizations must manage their resources effectively and efficiently if they are to achieve their objectives. MANAGING CURRENT ASSETS AND LIABILITIES Managing short-term assets and liabilities involves managing the current assets and liabilities on the balance sheet. Current assets are short-term resources such as cash, investments, accounts receivable, and inventory. Current liabilities are short-term debts such as accounts payable, accrued salaries, accrued taxes, and short-term bank loans. The terms current and short-term are used interchangeably because short-term assets and liabilities are usually replaced by new ones within three or four months and always within a year. Managing current assets and liabilities is sometimes called working capital management because short-term assets and liabilities continually flow through an organization and are thus said to be "working." The chief goal of financial managers who focus on current assets and liabilities is to maximize the return to the business on cash, temporary investments of idle cash, accounts receivable, and inventory. A crucial element in financial management is effectively managing the firm's cash flow, the movement of money through the organization on a daily, weekly, monthly, or yearly basis. Astute money managers try to keep just enough cash on hand, called transaction balances, to pay bills, such as employee wages, supplies, and utilities as they fall due. To ensure that enough cash flows through the organization quickly, companies try to speed up cash collections from customers. One way to do this is to have customers send their payments to a lockbox , an address for receiving payments, instead of directly to the company's main address. Large firms with many stores or offices around the country can also use electronic funds transfer to speed up collections. If cash comes in faster than it is needed to pay bills, businesses can invest the cash surplus for periods as short as one day or for as long as one year, until it is needed. Such temporary investments of cash are known as marketable securities. Many large companies invest idle cash in U.S. Treasury bills (T-bills) , which are shortterm debt obligations the U.S. government sells to raise money. Commercial certificates of deposit (CDs) are issued by commercial banks and brokerage companies. Unlike consumer CDs, which must be held until maturity, commercial CDs may be traded prior to maturity. A popular short-term investment for larger organizations is commercial paper --a written promise from one company to another to pay a specific amount of money. Some companies invest idle cash in international markets such as the Eurodollar market, a market for trading U.S. dollars in foreign countries.
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This note was uploaded on 03/12/2011 for the course BUSINESS 300 taught by Professor Reynolds during the Fall '10 term at Los Rios Colleges.

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Ch16 Recap - CHAPTER RECAP INTRODUCTION Without effective...

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