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Working Capital Management-
uses largest portion of financial managers time, Current
assets make more than half of Total assets, important for
small firms since a large investment in CA cannot be avoided
TERM 2
Current assets
DEFINITION 2
assets that are reasonably expected to be converted into
cahs and to be available for the operation of the business
within one year
TERM 3
Net working
capital
DEFINITION 3
current assets minus current liabilities, measures the firms
liquidity
TERM 4
Current Ratio
DEFINITION 4
the ratio of current assets to current liabilities
TERM 5
Matching
Principle
DEFINITION 5
the firm matches the maturity structure of its assets with the
maturity structure of liabilities and equity
Aggressive Strategy
Strategy were the risk is high, profit is high and high liability
TERM 7
Conservative Strategy
DEFINITION 7
Strategy were risk is low, profit is low and low liability
TERM 8
Operating cycle
DEFINITION 8
the length of time that elapses from the point when the firm
purchases raw materials and collects cash from the finished
product
TERM 9
Cash conversion cycle
DEFINITION 9
the Cash Conversion Cycle (CCC) measures how long a firm
will be deprived of cash if it increases its investment in
resources in order to expand customer sales.
TERM 10
Profitability
DEFINITION 10
measured by profits after taxes, while risk is measured by
the probability that a company will be unable to pay its
obligations as they come due
Methods of Acc Cash
Collection
Lockbox system, concentration banking and preauthorized
checks for speedy cash flow into the firm
TERM 17
Lock box system-
DEFINITION 17
customer puts payment in a lockbox at post office
TERM 18
Concentration banking
DEFINITION 18
company works with select banks to make payments
TERM 19
Marketable securities and characteristics
DEFINITION 19
Treasury securities, commercial paper, bankers acceptance,
repurchase agreement, Negotiable Certificates, Money
market funds
TERM 20
Credit policy factors
DEFINITION 20
Credit standards and credit terms that controllable and
uncontrollable
Credit standards
the minimum criteria that customers must meet to purchase
merchandise on credit
TERM 22
Credit terms
DEFINITION 22
involve length of the period for which the company will grant
credit and the amount of deposit
TERM 23
Credit discount
DEFINITION 23
2/10/ net 30 etc. to speed up the payment of AR
TERM 24
Tight Collection policy
DEFINITION 24
procedure a firm undertakes to collect its past-due accounts.
With additional collection expenditures.
TERM 25
Source of credit information
DEFINITION 25
determine the ability and willingness of these applicants to
repay their credit according to the terms
Sources of Short term credit
Lines of credit, revolving line of credit, commercial paper
TERM 32
Revolving line of credit
DEFINITION 32
Revolving credit is a type of credit that does not have a fixed
number of payments, in contrast to installment credit.
TERM 33
Line of credit
DEFINITION 33
A line of credit is any credit source extended to a business by
a bank or financial institution.
TERM 34
Commercial paper
DEFINITION 34
unsecured promissory note with a fixed maturity of 1 to 270
days.
TERM 35
Advantage of commercial paper
DEFINITION 35
less costly, avoids inconvenience and expense of bank
arrangements, is free of bank regulations
Pledging AR
creates short term secured loan. The lender trust the firm to
forward the customers payments
TERM 37
Risk of default
DEFINITION 37
possibility that interest and principal payments will not be
made on schedule
TERM 38
Factoring AR
DEFINITION 38
involves actual sale of AR to another party at a discount
TERM 39
Inventory as collateral
DEFINITION 39
using inventory as collateral on a loan
TERM 40
Warehouse financing
DEFINITION 40
warehouse receipts which specifies that inventory in a
warehouse is under public and field
Market segmentation theory
implies that there are separate markets for each maturity
