Short-term Exam 1 SG

Short-term Exam 1 SG - Short-Term Financial Management Fall...

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Short-Term Financial Management Fall 2011 1,2,3,4,7 Chapter 1 The Role of Working Capital Objectives o View Firm as a system of cash flows o How Working Capital and Depreciation create disparities between profits and cash flow. o Management of Working Capital Accounts Depreciation (Cash Shield) gets added back into the cash flow statement but is treated as an expense in the Net Income statement making the Net Income only $25 (less 100 dep. Expense) and Cash flows $125 (add back $100 depreciation) Why did the firm run out of cash during its operating cycle? o Timing differences between disbursements and payments. Question: How do you best manage Cash Flows to benefit shareholder? Collection Float: Time between when the check is sent and when the account is charged. Disbursement Float: Outflow of cash before Inflow of cash The firm must manage its cost structure to generate a profit . Working Capital accounts must be managed so that liquidity is maintained. Managing Inventory is a trade-off between: o Stock out costs o Cost of excess inventory o Ordering Costs Managing Receivables: o Who should receive credit and how much o Credit Terms o Monitoring the outstanding balance o Speeding up the receipt of payments Lockboxes for checks Electronic payments Managing Payables o Search for terms that match with cash receipts o Timing of payment o Controlled disbursement How much Working Capital is enough? o One View Optimal level is zero Working Capital is an idle resource Provides little value o How much in resource to commit? Why inventory? Why receivables and payables
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Why short-term investments Working Capital soaks up cash flow and may cause an otherwise profitable firm to fail. Successful firm’s operation is managed from: o A profit, and cash flow perspective Discretionary/Non-spontaneous o Financing decisions Cash flow is King Operating decisions are spontaneous. Chapter 2: Analysis of Solvency, Liquidity, and Financial Flexibility Differentiate between: o Solvency – When assets are greater than liabilities o Liquidity – The ability to pay its bills on time without undue cost Asses a firm’s financial flexibility position o Firms ability to cover unexpected costs or take advantage of unexpected opportunity Net Liquid Balance – Involves a flow o Positive numbers means assets are able to be liquidated to cover Current Ratio = CA/CL Quick Ratio = (CA-Inventories)/CL Net Working Capital = CA – CL Working Capital Req = (A/R+Inventory+Pre-pd)-(A/P+Accruals) o When comparing to other firms makes sure it is a percent of sales Net Liquid Balance= (Cash + Mkt Sec.) – (Notes Pay. + Current Mat. Long-Term Debt) What is Liquidity? o
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Short-term Exam 1 SG - Short-Term Financial Management Fall...

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