FIN%204260%20Chapter%201%20Problems_Solutions - Chapter 1...

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Chapter 1 The Role of Working Capital Contents Introducting the Cash Flow Timeline Relationship Between Profit and Cash Flow Managing the Cash Cycle How Much Working Capital is Enough? Page 1
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Chapter 1 - Page 2 Answers to Questions: 1. Inventory is purchased on credit creating an accounts payable. The inventory is sold for cash or on credit generating an accounts receivable. Receivables are collected for cash. Payables are paid out of cash from sales, by drawing down liquid reserves, or by borrowing. 2. Noncash charges such as depreciation and amortization and changes in working capital are the primary causes for cash flow to diverge from profit. They will be the same when depreciation is zero and/or when there are no changes in the working capital accounts. Note that changes in balance sheet accounts do not always directly reflect changes in cash flows. Consider, for instance an increase in receivables of $1,000 with a GPM of 45%. The cost of (cash flows associated with) adding $1,000 to receivables is effecivly the cost of replacing the items in inventory = (Inc. Inv) * COGS% = $1,000 * 0.65 = $650.00. 3. Managing the cost strucuture to ensure a profitable operation and management of working capital to obtain a proper level of liquidity. 4. The five C's of credit help the credit manager in determing who to give credit to and how much credit to give. 5. Collection float involves the time from when a payment is sent until the recipient of the payment medium finally receives cash. Collection float slows down the receipt of cash. For example, a check mailed from Seattle to Miami involves a long delay due to transit time and a delay in getting the check cleared, once deposited. 6. Take finished goods inventory as an example. These inventory items are ready for sale and a firm may have a policy for determing the amount of inventory based on forecasted sales. Having an extra stock of inventory can allow the firm
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This note was uploaded on 01/24/2012 for the course FIN 4260 taught by Professor Victorwakeling during the Spring '12 term at Kennesaw.

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FIN%204260%20Chapter%201%20Problems_Solutions - Chapter 1...

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