Lesson 4: Working Capital Management

Question 1

refers to the current assets used in the operations of the business. This includes cash, accounts receivable, inventories, and prepaid expenses.

Answer 1

working capital

Question 2

working capital includes

Answer 2

cash, accounts receivable, inventories, prepaid expenses

Question 3

The amount of resources that a company sets aside to these working capital accounts can be reduced by current liabilities such as trade accounts payable and accrued expenses payable.

Answer 3

working capital management

Question 4

the difference between these current assets and current liabilities used in the operations of the business

Answer 4

net working capital

Question 5

net working capital formula

Answer 5

net working capital = total current assets - total current liabilities

Question 6

he management of these accounts, both the current assets and the current liabilities, is important because these accounts deal with

Answer 6

day-to-day operations of the business

Question 7

importance of working capital management

Answer 7

good management allows the company to pay maturing obligations on time; relieves managers of unnecessary stress and gives them more time to improve the business operations; improve the earnings of the company

Question 8

Good management of working capital accounts allows the company to

Answer 8

pay maturing obligations on time

Question 9

Good management of working capital accounts also relieves

Answer 9

managers of unnecessary stress an gives them more time to improve the business operations

Question 10

*Efficient management of working capital accounts can improve

Answer 10

the earnings of the company

Question 11

Working capital requirements change with

Answer 11

the volume of the business operations

Question 12

As the sales increase,

Answer 12

working capital requirements also increase

Question 13

working capital financing policies

Answer 13

maturity-matching; aggressive; conservative WORKING CAPITAL FINANCING POLICY

Question 14

During the year, sales are not the same every month. This is why companies have

Answer 14

slack season and peak season

Question 15

the net working capital requirements during the slack season are

Answer 15

lower than those during peak season

Question 16

permanent working capital requirements should be financed by long-term sources while temporary working capital requirements should be financed by short-term sources of financing.

Answer 16

maturity-matching working capital financing policy

Question 17

according to the maturity-matching policy, permanent working capital requirements should be financed by

Answer 17

long-term sources

Question 18

according to the maturity-matching policy, temporary working capital requirements should be financed by

Answer 18

short-term sources

Question 19

Long-term sources of financing include

Answer 19

long-term debt and equity (common and preferred stocks)

Question 20

short-term sources of financing includes

Answer 20

short-term loans from a bank

Question 21

short-term loans from banks are called

Answer 21

working capital loans

Question 22

Are strategies that businesses use to maximize their liquidity and financial flexibility, often by pushing the boundaries of traditional financing approaches.

Answer 22

aggressive working capital financing policy

Question 23

in terms of short-term borrowing, the aggressive policy means

Answer 23

relying on short-term loans or lines of credit to cover immediate operational needs even if it involves higher interest rates

Question 23

some of the permanent working capital requirements are financed by short-term sources of financing

Answer 23

aggressive working capital financing policy

Question 24

in terms of inventory financing, the aggressive policy means

Answer 24

using inventory as collateral to secure loans, which allows the company to free up cash while still maintaining its stock levels

Question 25

in terms of accounts receivable management, the aggressive policy means

Answer 25

implementing aggressive credit policies to accelerate receivables, such as shortening the credit terms offered or using factoring services to receive cash more quickly

Question 26

some of the temporary working capital requirements are financed by long-term sources

Answer 26

conservative working capital policy

Question 27

the most liquid asset of a company

Answer 27

cash

Question 28

why is cash considered the most vulnerable

Answer 28

it is vulnerable to theft

Question 29

how to safeguard the cash asset

Answer 29

there must be proper internal controls

Question 30

what are some proper internal controls to manage cash

Answer 30

separating cashiering function from recording/accounting function; issuing O/R for collections and making a collection report; depositing collections to safeguard cash; adopting the check voucher system for payments

Question 31

a small amount of cash kept on hand to cover minor or incidental expenses, such as the small change and bills kept in the cash register or lockbox

Answer 31

petty cash fund

Question 32

how to cross-check a check

Answer 32

the payee draws two-lines on the check

Question 33

what are the working capital accounts

Answer 33

cash, accounts receivable, inventory

Question 34

the balance of money due to a firm for goods or services delivered or used but not yet paid for by the customer

Answer 34

accounts receivable

Question 35

proper internal control over accounts receivable

Answer 35

providing credit terms to customers; following the five C's of credit

Question 36

how to manage accounts receivable

Answer 36

use the 5cs of credit

Question 37

what are the 5C's of credit

Answer 37

character, capacity, capital, collateral, condition

Question 38

This refers to the integrity and reputation of the customer. The educational background and experience in the business are also considered.

Answer 38

character

Question 39

This refers to the capacity to pay. The operations of the business especially the operating cash flows are given emphasis in this criterion.

Answer 39

capacity

Question 40

what are looked into in terms of capacity since they affect the ability of the company to generate positive operating cash flows

Answer 40

liquidity ratios and efficiency of the management in handling A/R

Question 41

If your company cannot collect its accounts receivable

Answer 41

it will have to shut down

Question 42

This looks at the customer's history and reputation for paying bills on time. If they've been reliable in the past, they’re likely to be reliable now

Answer 42

character

Question 43

This checks if the customer has the financial ability to pay back what they owe. It involves looking at their income, expenses, and overall financial health.

Answer 43

capacity

Question 44

This considers what assets the customer has that could be used to pay the debt if needed. It’s like having a backup plan—if they can’t pay with cash, they might have valuable things they could sell to pay off the debt.

Answer 44

capital

Question 45

This looks at the economic situation and how it might affect the customer's ability to pay. For example, if the economy is bad, even a normally reliable customer might struggle to pay.

Answer 45

conditions

Question 46

This refers to something valuable the customer offers as security in case they can't pay. If they don't pay, the business can take the collateral as payment.

Answer 46

collateral

Question 47

description of maturity-matching

Answer 47

moderate

Question 48

liquidity of maturity-matching

Answer 48

balance

Question 49

profitability of maturity-matching

Answer 49

balanced

Question 50

default risk of maturity-matching

Answer 50

balanced

Question 51

investments of maturity-matching

Answer 51

balanced

Question 52

description of conservative

Answer 52

relaxed

Question 53

liquidity of conservative

Answer 53

high

Question 54

profitability of conservative

Answer 54

low

Question 55

default risk of conservative

Answer 55

low

Question 56

investments of conservative

Answer 56

current assets

Question 57

description of aggressive

Answer 57

restricted

Question 58

liquidity of aggressive

Answer 58

low

Question 59

profitability of aggressive

Answer 59

high

Question 60

default risk of aggressive

Answer 60

high

Question 61

investments of aggressive

Answer 61

non-current assets

Question 62

the company is increasing the probability that it will not be able to meet maturing obligations.

Answer 62

default risk

Question 63

internal controls for inventory

Answer 63

separating custodial functions from the recording functions; aging of inventories/ABC analysis

Question 64

24 hour companies have

Answer 64

two collection reports and deposits every day

Question 65

how is a check cross-checked

Answer 65

drawing two lines on the payee of the check