COMMERCE 3FA3 Study Guide - Final Guide: Coleco, Profit Margin, Mutual Fund
5 Jun 2018
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Tracing Cash and Net Working Capital
Statement of Financial Position
Current assets include cash, AR, and inventory, while current liabilities include AP
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Activity increasing cash
Activity decreasing cash
Increasing (borrowing) LT debt
Decreasing (paying off) LT debt
Increasing (selling) equity
Decreasing (repurchasing) equity
Increasing (borrowing) current liabilities
Decreasing (paying off) liabilities
Decreasing (selling) non-cash current assets
Increasing (buying) non-cash current assets
Decreasing (selling) fixed assets
Increasing (buying) fixed assets
The Operating and Cash Cycles
Inventory period is time taken to acquire and sell inventory
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Accounts receivable period is time between sale of inventory and collection of receivable - goal to collect receivables
quicker, improve cash flows
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Cash cycle is the time taken between cash disbursement and cash collection
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Accounts payable period is the time between receipt of inventory and payment for it - goal is to lengthen cash
payments
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Short-term activities create patterns of cash inflows and outflows that are unsynchronized and uncertain. The operating
cycle is the time period between acquisition of inventory and when cash is collected from receivables.
Cash cycle increases when inventory, receivables increase or payables decrease
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Lengthy cycle indicates more financing is needed - inventory may be obsolete or there are issues collecting
receivables, and there is lower profitability and sustainable growth
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Gap between ST inflows and outflows decreased by borrowing/holding liquidity reserve in form of cash/marketable
security, or changing inventory, receivable, payable periods
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= operating cycle
= inventory period
= accounts receivable period/average collection period/days sales in receivables
= cash cycle
= account payable period
Leads to high level of net working capital and overall liquidity
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Policies include keeping large balance of cash, marketable securities, making large investments in inventory,
granting liberal credit terms resulting in high AR
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Investments in cash and marketable securities have lower returns than in real assets
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These are flexible/accommodative if high current asset to sale ratio, and more LT debt compared to ST debt
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Leads to lower level of net working capital and lower liquidity
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Policies include keeping low cash balances, little investment in marketable securities and inventory, allowing
little/no credit sales leading to low AR
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Maturity mismatching creates risk when cost of financing in ST is volatile
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ST interest rates lower than LT rates, implying that yield curve is upward sloping
Restrictive if low current asset to sale ratio, and more ST debt compared to LT debt
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Aspects of Short-Term Financial Policy
Cash Management
March 30, 2018
3:26 PM
Managerial Finance Page 1
Document Summary
Current assets include cash, ar, and inventory, while current liabilities include ap. Decreasing (selling) non-cash current assets increasing (buying) non-cash current assets. Short-term activities create patterns of cash inflows and outflows that are unsynchronized and uncertain. The operating cycle is the time period between acquisition of inventory and when cash is collected from receivables. Inventory period is time taken to acquire and sell inventory. Accounts receivable period is time between sale of inventory and collection of receivable - goal to collect receivables quicker, improve cash flows. Cash cycle is the time taken between cash disbursement and cash collection. Accounts payable period is the time between receipt of inventory and payment for it - goal is to lengthen cash payments. = accounts receivable period/average collection period/days sales in receivables. Gap between st inflows and outflows decreased by borrowing/holding liquidity reserve in form of cash/marketable security, or changing inventory, receivable, payable periods. Cash cycle increases when inventory, receivables increase or payables decrease.
