{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

FIN%204260%20Chap%207%20SLIDES

FIN%204260%20Chap%207%20SLIDES - Chapter4 Chapter5...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Part II  – Mgmt of Working Capital Chapter 4 Inventory Management Chapter 5 Accounts Receivable Management Chapter 6 Credit Policy & Collections Chapter 7 Managing Payables &  Accruals 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
C a s h   F l o w   T i m e l i n e The cash conver sion period is the time betwee n when cash is receive d versus paid. The The firm is a system of cash flows. These cash flows are unsynchronized and uncertain. 2
Image of page 2
A/P Timing In Chapter 4, we studied optimal  inventory levels and considered the impact  on NPV from quantity and cash discounts.   In this chapter, we take it a step further  and decide  when to pay  A/P . 3
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Managing A/P and Accruals Most firms buy inventory on credit, creating an  Accounts Payable. The inventory is subsequently sold to customers on  credit, creating an  Accounts Receivable . In the meantime, the firm incurs expenses (e.g.:  salaries, wages, taxes) for which payment has not yet  been made, creating an  Accrual . A/P and Accruals are generally due before A/R  are received. 4
Image of page 4
Managing A/P and Accruals A/P (also called Trade Credit) and Accruals  represent spontaneous sources of financing for  a firm,  allowing the working capital cycle to continue  without making initial cash disbursements. Trade credit is effectively a free source of financing. Firms establish policies on how to manage these  accounts. 5
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Accounts Payable There are several types of  purchase terms : Open Credit Once credit is approved, the firm may repeatedly submit orders  without reapplying for credit. Cash Discounts Seasonal Dating Used in seasonal businesses (e.g.: toys). “2/10, net 30, dating 90”  allows customers to take the 2%  discount within 10 days or pay the invoice in full within 30  days after the 90 day period ends (120 days from purchase  date). Consignment 6
Image of page 6
Accounts Payable The concept of A/P is the same as A/R, but from the  opposite perspective. Say, a firm receives an invoice from a supplier  with the terms 2/10, net 30. Taking the discount requires the firm to part with  cash 20 days sooner, but it may deduct 2% from the  amount owed. Should the firm take the discount? 7
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
A/P Payment Timing Options Firm’s establish an A/P policy based on the number of  days payment is delayed from the purchase date ( DD ),  choosing from: 1. Date of purchase. DD  = 0 2. On or before end of cash discount period ( DP ).
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern