Lecture 41 - Business Finance (ACC501) Lesson 41 Review of...

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214 Business Finance (ACC501) Lesson 41 Review of the Previous Lecture Operating Cycle and Cash Cycle Management Calculation Interpretation Topics under Discussion Short-Term Financial Policy Flexible vs. Restrictive Policies Alternative Policies Choosing the Best Policy Cash Budget Short-Term Borrowing Short-Term Financial Policy Size of investments in current assets Flexible policy maintain a high ratio of current assets to sales Restrictive policy maintain a low ratio of current assets to sales Financing of current assets Flexible policy less short-term debt and more long-term debt Restrictive policy more short-term debt and less long-term debt If policies are flexible with regard to current assets Keep larger cash/marketable securities balances Larger investments in inventory More liberal credit terms, thus higher accounts receivable If policies are restrictive with regard to current assets Keep lower cash/marketable securities balances Make smaller investments in inventory Tight or no credit sales, minimal accts. receivable The optimum level of investment in short term assets depends on a trade off between the costs of a restrictive policy against the costs of a flexible one
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215 Current assets holdings are highest with a flexible short term financial policy and lowest with a restrictive one. So flexible policies are costly as they require greater investment in current assets. However expected future cash-flows are higher too. A restrictive short-term financial policy reduces future sales level than under flexible policy. Managing short-term assets involves a trade-off between carrying costs and shortage costs Carrying costs Increase with increased levels of current assets are the costs to store and finance the assets,
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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 41 - Business Finance (ACC501) Lesson 41 Review of...

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