Lecture 40 - Business Finance(ACC501 Lesson 40 Review of...

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209 Business Finance (ACC501) Lesson 40 Review of the Previous Lecture Bankruptcy Costs Static Theory of Capital Structure Some Managerial Recommendations Net Working Capital Topics under Discussion Operating Cycle and Cash Cycle Management Calculation Interpretation Short-term Financial Policy Operating Cycle and Cash Cycle For a typical manufacturing firm, short run activities might consist of the following sequence of events and decisions: Events Decisions 1. Buying raw materials 1. How much inventory to order? 2. Paying cash 2. Whether to borrow or draw down cash balances? 3. Manufacturing the product 3. What choice of production technology to use? For a typical manufacturing firm, short run activities might consist of the following sequence of events and decisions: Events Decisions 4. Selling the product 4. Whether credit should be extended to a particular customer? 5. Collecting cash 5. How to collect? These activities are Unsynchronized because payment for purchases may not happen at the same time as the receipts of sales Uncertain because future sales and costs cannot be precisely predicted
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210 Consider the following chronological events Day Activity Cash Effect 0 Acquire inventory on credit None 30 Pay for inventory -$1,000 60 Sell inventory on credit None 105 Collect on sale +$1,400 Operating cycle The time period between the acquisition of inventory and the collection of cash from receivables. (in our example, it is 105 days) Inventory period The time it takes to acquire and sell inventory. (in our example, it is 60 days) Accounts receivable period The time between sale of inventory and collection of receivable. (here, it is 45 days) So we can describe the operating cycle as: Operating cycle = Inventory period +
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This note was uploaded on 08/04/2011 for the course ACCT 501 taught by Professor Na during the Spring '11 term at Virtual University of Pakistan.

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Lecture 40 - Business Finance(ACC501 Lesson 40 Review of...

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