Financial Management & Capital Budgeting

Question 1

Working Capital

Answer 1

Working Capital = current assets (CA) - much current liabilities (CL)

Question 2

Current Ratio

Answer 2

Current ratio = CA/CL

Question 3

Quick/Acid Test Ratio

Answer 3

Quick/Acid Test Ratio = (cash + marketable securities + net A/R)/CL

Question 4

Cash Conversion Cycle

Answer 4

Cash Conversion Cycle = Inventory Conversion Period (ICP) + Receivables Conversion Period (RCP) - Payable Deferral Period (PDP)

Question 5

Inventory Conversion Period

Answer 5

Inventory Conversion Period (ICP) – the average number of days required to convert inventory to sales (assumes 365 days in a year unless told otherwise)

– ICP = average inventory/COGS per day (sometimes uses sales per day)
– average inventory = (beginning inventory + ending inventory)/2

Question 6

Receivables Conversion Period (RCP)

Answer 6

Receivables Conversion Period (RCP) the average number of days required to collect accounts receivable.

– RCP = average receivables/credit sales per day

Question 7

Accounts Payables Deferral Period (PDP)

Answer 7

Accounts Payables Deferral Period (PDP)– the average number of days between the purchase of inventory (including materials and labor for a manufacturing entity) and payment for them.
– PDP = average payables/purchases per day (COGS /365)

Question 8

Account Receivables(A/R) Turnover

Answer 8

Account Receivables(A/R) Turnover = net credit sales/average A/R
– number of days of sales in average resealable = 360/A/R Turnover

Question 9

Number of Days of Sales in Average Resealable

Answer 9

Number of days of sales in average receivables = 360/A/R Turnover

Question 10

Reorder Point

Answer 10

Average daily demand x average lead-time = the order point without safety stock + safety stock = reorder point with a safety stock

Question 11

Economic Order Quantity

Answer 11

How Much Is Your Purchase? the quantity to order depends on the economic order quantity (EOQ), and there is a formula that takes into account the average usage of the inventory (A), cost involved in placing the orders (P), and storage costs for carrying inventory (S).

Square root times 2 AP/S
A = annual usage of inventory
P = costs to place an order
S = cost to store individual units of inventory for one period/obsolescence costs

Question 12

Inventory Turnover Ratio

Answer 12

Inventory Turnover Ratio COGS/average inventory

Question 13

Number of Days Supply In Average Inventory

Answer 13

Number of Days Supply In Average Inventory = 360/Inventory Turnover

Question 14

Payback Period

Answer 14

investment/annual cash flow = #years
disadvantages:
it ignores projects profitability and there is no time value of money, however the discounted payback method does P. V. the cash flows.