Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CIMA F1 > Working Capital and Operating cycle > Flashcards

Working Capital and Operating cycle Flashcards

1
Q

Define Working capital

A

Short-term assets and liabilities
- capital available to fund the day-to-day operations of an entity
- excess of your current assets over current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What does working capital management involve

A

The balance between the requirement to minimise the risk of insolvency (due to insufficient cash)
and the requirement to maximise profits (through minimising costs and maximising returns)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the working capital cycle?

A

Period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a purchaser

also known as the cash cycle/ operating cycle

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How is the working capital cycle calculated?

A

Inventory days + Receivables days - Payable days

=Number of days of ‘cash’ we need

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does the inventory days ratio show

A

How long on average goods are held in inventory before they are sold

Generally the lower the better

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

When an entity is manufacturing business what elements are in the inventory days ratio

A

Raw material days, Work-in-progress days, Finished good days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Inventory Days Ratio Formula

A

(Average Inventory/ Cost of Sales) x 365 Days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How to work out average Inventory

A

Opening Balance - Closing balance / 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How to find inventory ratio in days

A

Average inventory/ cost of sales x 12

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does an increasing trend in inventory days show

A

Increasing ratio: slowdown in trading - business should take action

Or due to an active decision to build up inventory by management

Need to compare to an industry average to identify potential issue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define Receivable days

A

Shows how long on average customers take to pay for goods bought on credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Receivable days ratio formula

A

Average Receivables/ Credit sales x 365 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the risks of receivables

A

-Cash tied up in inventory
- Risk of Debt
- Slow Payment risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What considerations are there for the receivables ratio?

A

Receivables days raito should compared with an entity’s credit terms to determine effectiveness

An increasing ratio could indicate that customers are having financial difficulty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the payable day ratio formula?

A

Average Payable days/ Credit purchases x 365 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does the payables days ratio show

A

On average how long does the business take to pay for goods they have bought on credit

15
Q

How to work out Raw material days

A

Average raw materials/ Raw materials purchased or used x 365

15
Q

How to work out WIP days

A

Average WIP/ Cost of production (factory costs) x 365

16
Q

How to work out working capital

A

Raw materials period + WIP period + Finished good periods + Receivables period - Payables period = working capital

17
Q

How to work out Finished good days

A

Average finished goods/ cost of sales x 365

18
Q

What are actions that could be taken to decrease working capital?

A
  • Reduce Raw materials ordered or just in time order (risk of not having enough stock)
  • Reduce WIP days by speeding production (costs involved to speed up)
  • Reduce FG days- extra marketing, reduce prices (costs incurred decrease in profits)
  • Reduce receivable days - offer discounts and chase for payments (upsetting customers, costs incurred)
  • Increase time to pay suppliers to increase payables (discounts lost, risk of losing suppliers)
19
Q

What does liquidity measure

A

An entity’s ability to meet its debts as they fall due

20
Q

Current Ratio

A

How many times an entity’s current assets cover its current liabilities

Current Assets/ Current Liabilities

21
Q

What current ratio is ideal for most businesses

A

At least 1 and ideally 2

22
Q

Quick Ratio formula/Acid test ratio

A
  • more prudent than the current ratio

(Current Assets- not including Inventory )/ Current liabilities

23
Q

What is the ideal quick ratio for business

A

at least 1

24
Q

What is the point of calculating liquidity and working capital ratios

A

To compare them to prior periods to identify trends (3 lots of figures)
To set budgets and targets
To compare against competitors
To compare against industry averages

To decide if any action needs to be taken

25
Q

What is a markup price

A

Markup is the difference between the cost of goods and the price you are selling it for

26
Q

What are the risks of not monitoring working capital

A

Over capitalisation
Over trading

27
Q

What is meant by over-capitalisation

A

The entity has an excess of working capital - too much cash

Carry too much inventory, receivables and cash with few payables so have over-invested in current assets

28
Q

What is meant by overtrading

A

Condition of a business which enters into commitments in excess of its available short-term resources

  • even if trading profitability
  • Lack resources and cash to pay debts and can go into liquidation
29
Q

How are current assets split?

A

Permanent current assets - core levels of cash and inventory that will be maintained
Fluctuating current assets - these vary from period to period depending on level of activity

30
Q

What does financing working capital involve

A

A mixture of short term and long-term funding

  • Businesses with higher level of risk will hold fewer permanent current assets
31
Q

What possible policies exist to finance working capital

A
  1. Conservative policy
  2. Aggressive policy
  3. Moderate POlicy
32
Q

What is the conservative policy of financing working capital

A

All permanent assets (current and nca) and some fluctuating current assets are financed by long-term funding

33
Q

What is an aggressive policy of financing working capital

A

All of the fluctuating and part of the permanent current assets are financed by short-term funding

34
Q

What is the moderate policy of financing working capital?

A

Short-term funding is used to finance fluctuating current assets and permanent assets (current and nca) are financed by long-term funding

35
Q

What are the symptoms of an entity that is over trading

A
  • Increasing current liabilities
    -Increasing inventory, trade recievables and current liabilities

CIMA F1 (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions