BEC B3B Working Capital

  1. Becker CPA Exam Final Review
    B-3  B Working Capital
  2. What is Solvency?
    a measure of security for long-term creditors/investors
  3. Debt-to-Equity Ratio
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  4. Debt to total assets Ratio
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  5. What is Liquidity?
    measures a firm's short-term ability to meet its current obligations
  6. Current Ratio

    Current Assets are Cash+ Marketable securities+ Receivables+ Inventory+ Prepaid expenses
  7. Quick (acid-test) Ratio
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  8. 3 Cash Management Strategies are?
    • Fee reduction
    • Expediting deposits
    • Fraud protection
  9. 3 Fee Reduction Strategies are?
    • Compensating Balances
    • Trade Credit
    • Commercial Paper
  10. How are Compensating Balances a Fee Reduction Strategy?
    Bank fees are waived when the customer maintains minimum account balances.
  11. How is Trade Credit a Fee Reduction Strategy?
    It maximizes the availability of funding with no (or reduced) charges.
  12. How is Commercial Paper a Fee Reduction Strategy?
    It is a source of short-term financing by the issuer and an investment of idle cash by the buyer.
  13. 3 Expediting Deposits Strategies are?
    • Zero-Balance Account
    • Electronic Funds Transfers (EFTs)
    • Lockbox System
  14. How is a Zero-Balance Account a Expediting Deposits Strategy?
    The zero-balance account maintains a zero balance at all times. Its use reduces the elapsed time for transfers between accounts and maximizes availability of idle cash.
  15. How is a Lockbox System a Expediting Deposits Strategy?
    Customers send payments to a PO box or a location accessible by the bank.
  16. What is a Fraud Protection Strategy in Cash Management?
    Official bank checks (aka depository transfer checks) are designed to insulate the company from fraud and simplify bookkeeping.
  17. Working Capital Formula
    Current Assets  -  Current Liabilities
  18. Discount Forgone Period per Year Formula

    Days Per year  ÷  Days Outstanding After Discount

    = 365  ÷  (30 -10)

    = 365  ÷  20

    = 18
  19. Effective Interest Rate of Discounts Forgone Formula

    Discount Percentage Offered  ÷  (100% - discount % offered)

    = 2%  ÷  (100% - 2%)

    = 2%  ÷  98%

    =  .02  ÷  .98

    = .020408
  20. Cost of discounts not taken formula

    Effective Interest Rate  ×  Discounts Forgone Periods

    = .020408  ×  18

    =  .367344

    =  36.7%
  21. What is an Operating Cycle?
    The length of time from the initial expenditure until the time the cash is collected from customers.
  22. Operating Cycle Formula
    Inventory Conversion Period aka Number of Days Sales in Inventory  +  Receivables Collection Period
  23. What does the Inventory Turnover Ratio measure?
    the number of times over an accounting period the inventory is sold
  24. Inventory Turnover Ratio Formula
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  25. What is Number of Days Sales in Inventory?
    The average number of days inventory is held before it is sold.
  26. Number of Days Sales in Inventory Formula
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  27. What does Receivables turnover measure?
    the number of times receivables are collected over an accounting period (typically one year)
  28. Receivables Turnover Formula
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  29. What is the Receivables Collection Period?
    The average number of days after a typical credit sale is made until the firm receives payment.
  30. Receivables Turnover Days Formula
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  31. Cash Conversion Cycle is also known as?
    Net Operating Cycle
  32. What does the Cash Conversion Cycle do?
    adjusts the operating cycle for the time in which vendors are paid by the firm for the initial expenditures
  33. How is the Cash Conversion Cycle calculated?
    Operating Cycle  -  Payables Deferral Period
  34. What does Accounts Payable Turnover measure?
    the number of times payables are paid by the firm over an accounting period
  35. Accounts Payable Turnover Formula
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  36. Accounts Payable Deferral Period is the ?
    average number of days a firm takes to pay its vendors for purchases made on credit
  37. Accounts Payable Deferral Period Formula
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  38. Why would a company sell their Accounts Receivables?
    to expedite cash collections
  39. Another name for selling accounts receivable is?
  40. What are the costs associated with selling receivables?
    Factors typically charge a fee plus interest on cash given in advance to the seller prior to the factor collecting from the seller's customers.
  41. Inventory management techniques focus on ?
    maintaining the minimum quantities on hand necessary to meet current needs
  42. What does a Just-In-Time Inventory System do?
    JIT reduces lag time between inventory arrival and inventory use. It assumes zero defects.
  43. Economic order quantity formulates?
    the order size that will minimize both ordering costs and carrying costs
  44. Economic Order Quantity (EOQ) Formula
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    Square root of [2(annual sales in units)(Cost per PO) ÷ Carry cost per unit]
  45. Inventory Turnover Ratio
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Card Set
BEC B3B Working Capital
CPA Becker Final Review BEC B3B Working Capital