Chapter 15 - Working Capital Management

Question 1

What is working capital?

Answer 1

Capital available for conducting day to day operations of an organisation.
The excess of current assets over current liabilities

Question 2

What are current assets?

Answer 2

Inventory
Receivables
Cash
Bank

Require funding consider reducing levels

Question 3

What is current liabilities?

Answer 3

Payables
Bank Overdraft

Provides funding consider increasing levels

Question 4

What are the consequences of poor working capital management?

Answer 4

Inability to meet bills as they fall due
Demands on cash during periods of growth being too great (Overtrading)
Overstocking

Question 5

What is the working capital cycle?

Answer 5

Length of time between the entities outlay on raw materials, wages and other expenditure and the inflow of cash from the sale of goods

Question 6

What is the order of the working capital cycle?

Answer 6

Cash
Raw materials
Work in progress
Finished goods
Receivables

Question 7

What are the factors affecting the length of the cycle depend on?

Answer 7

Liquidity versus profitability decisions
Management efficiency
Industry norms

Question 8

What is the equation for raw material inventory holding period?

Answer 8

(average raw material inventory held/material usage) x 365

Question 9

What is the equation for WIP holding period?

Answer 9

(average WIP/production cost) x 365

Question 10

What is the equation for finished goods inventory holding period?

Answer 10

(average finished goods inventory held/costs of goods sold) x 365

Question 11

What is the equation for trade payables days?

Answer 11

(average payables/credit purchases) x 365

Question 12

What is the equation for trade receivables days?

Answer 12

(average receivables days/credit sales) x 365

Question 13

What is the equation for current ratio?

Answer 13

Current assets/Current liabilites

Question 14

What is the equation for quick (acid test) ratio?

Answer 14

(current assets-Inventory)/current liabilities

Question 15

What are the three working capital policies?

Answer 15

Aggressive policy
Conservative policy
Moderate policy

Question 16

What is the aggressive working capital policy?

Answer 16

Reduces costs by holding lowest levels of current assets possible.
High risk!

Question 17

What is the conservative working capital policy?

Answer 17

Reduces risks by holding high levels of current assets.
High costs!

Question 18

What is the moderate working capital policy?

Answer 18

Middle ground balance between costs and risk

Question 19

What is overtrading?

Answer 19

When the business does not have access to sufficient capital to duns the increase