ACCTG235

• What does working capital management refer to?

  It refers to decisions relating to current assets and current liabilities.
• What are current assets and current liabilities in the context of working capital management?

  Current assets are short-term assets, while current liabilities are short-term obligations.
• What does an increase in working capital indicate?

  It indicates an increase in current assets or a decrease in current liabilities.
• What are the fundamental principles of working capital management?

  They are reducing the capital employed and improving efficiency in receivables, inventories, and payables.
• How is net working capital calculated?

  Net Working Capital = Current Assets - Current Liabilities
• What does gross working capital represent?

  It represents the firm’s investment in current assets.
• What is the objective of working capital management?

  To run the firm efficiently with minimal money tied up in working capital.
• What are the benefits of low working capital?

  It allows money to be invested in higher payoff activities and reduces the need for costly financing.
• What are the costs associated with low working capital?

  The costs include the risk of shortages in cash and inventory.
• What are the trade-offs associated with high and low levels of inventory?

  High Levels:

  • Benefit: Happy customers, few production delays
  • Cost: Expensive, high storage costs, risk of obsolescence

  
  

  Low Levels:

  • Cost: Shortages, dissatisfied customers
  • Benefit: Low storage costs, less risk of obsolescence
• What are the trade-offs associated with high and low levels of cash?

  High Levels:

  • Benefit: Reduces risk
  • Cost: Increases financing costs

  
  

  Low Levels:

  • Benefit: Reduces financing costs
  • Cost: Increases risk
• What are the trade-offs associated with high and low levels of accounts receivable?

  High Levels:

  • Benefit: Happy customers, high sales
  • Cost: Expensive, high collection costs, increases financing costs

  
  

  Low Levels:

  • Cost: Dissatisfied customers, lower sales
  • Benefit: Less expensive
• What are the trade-offs associated with high and low levels of accounts payable and accruals?

  High Levels:

  • Benefit: Reduces need for external finance
  • Cost: Unhappy suppliers

  
  

  Low Levels:

  • Benefit: Happy suppliers/employees
  • Cost: Not using a spontaneous financing source
• What is the significance of working capital management in a typical manufacturing firm?

  Current assets exceed one-half of total assets and require continuous managerial supervision.
• What is the relationship between current liabilities and small firms?

  Current liabilities are the principal source of external financing for small firms.
• How does working capital management affect a company's risk, return, and share price?

  It directly affects the company's risk, return, and share price.
• What are the assumptions made regarding production in the study material?

  • Maximum of 50,000 units of production
  • Continuous production
  • Three different policies for current asset levels
• What is the liquidity analysis policy A characterized by?

  Policy A is characterized by high liquidity.
• What is the return on investment formula?


  Return on Investment = Net Profit / Total Assets
• How does profitability relate to liquidity according to the study material?

  Profitability varies inversely with liquidity.
• What is the impact of decreasing cash on a firm's financial obligations?

  • Reduces the firm's ability to meet financial obligations
  • Increases risk
• What is the impact of stricter credit policies on receivables?

  • Reduces receivables
  • Possibly loses sales and customers
  • Increases risk
• What is the impact of lower inventory levels on sales?

  • Increases stockouts
  • Leads to lost sales
  • Increases risk
• What is the summary of optimal current asset analysis?

  • Policy A: High liquidity, low profitability, low risk
  • Policy B: Average liquidity, average profitability, average risk
  • Policy C: Low liquidity, high profitability, high risk
• What is the definition of permanent working capital?

  • Supports constant or minimum level of sales
  • Minimum level of current assets required for business operations
• What is the definition of temporary working capital?


  • Additional working capital needed for seasonal or fluctuating sales
• What are the three policies regarding current assets mentioned in the study material?

  Policy A, Policy B, and Policy C
• How does Policy A affect liquidity, profitability, and risk?

  Policy A has high liquidity, low profitability, and low risk.
• What is the relationship between profitability and liquidity?

  Profitability varies inversely with liquidity.
• How does profitability relate to risk?

  Profitability moves together with risk.
• What is the distinction between permanent and temporary working capital?

  • Permanent working capital supports constant or minimum sales levels.
  • Temporary working capital supports seasonal peaks in business.
• What is the minimum level of current assets required to continue business operations called?

  Permanent working capital
• What does temporary working capital account for?

  Temporary working capital accounts for fluctuations in business activity due to seasonal changes.
• How does permanent working capital differ from temporary working capital in terms of predictability?

  Investment in permanent working capital can be predicted with some profitability, while investment in temporary working capital cannot be easily predicted.
• What sources should be used to finance permanent capital requirements?

  Permanent capital requirements should be financed from long-term sources.
• What components are included in working capital?

  Working capital includes cash, marketable securities, receivables, and inventory.
• What is spontaneous financing?

  Spontaneous financing includes trade credit and other payables and accruals that arise in day-to-day operations.
• What is the hedging (or maturity matching) approach in financing current assets?

  The hedging approach involves offsetting each asset with a financing instrument of the same approximate maturity.
• How are fixed assets and non-seasonal current assets financed?

  They are financed with long-term debt and equity.
• What is the self-liquidating nature of short-term loans?

  Short-term loans are self-liquidating as cash from receivables can be used to pay off the loans.