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35 Cards in this Set
- Front
- Back
Working Capital
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Current assets are often called working capital because these assets “turn over” (i.e are used and then replaced all during the year)
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Net working capital
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If we subtract the sum of payable plus accruals from current assets the difference is called Net Working Capital, which represent the amount of money that the firm must obtain from non-free sources to carry its current assets.
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Related current Asset Investment Policy
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relatively large amounts of cash, marketable securities and inventories are carried; and a liberal credit policy results in a high level of receivables.
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Restricted current asset Investment Policy
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Holdings of cash, marketable securities, inventories and receivables are constrained.
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Moderate Current Asset Investment Policy
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between the related and restricted policies.
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Permanent Current Assets
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current assets that a firm must carry even at the trough of its cycle.
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Temporary Current Asset
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Current assets that fluctuate with seasonal or cyclical variations on sales.
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Current Assets Financing Policy
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the way current assets are financed
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Maturity matching of “self-liquidating approach”
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a financing policy that matches asset and liability maturities. This is a moderate policy.
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Cash conversion cycle (ccc)
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the length of time funds are tied up in working capital or the length of time between paying for working capital and collecting cash from the sale of the working capital.
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Inventory Conversion Period
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The average time required to convert raw materials into finished goods and then to sell them.
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Average collection Period (ACP)
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the average length of time required to convert the firms receivables into cash, that is, to collect cash following a sale.
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Payable deferral period
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the average length of time between the purchase of materials and labor and the payment of cash of them.
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Target Cash balance
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the desired cash balance that a firm plans to maintain in order to conduct business.
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Lock box
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a post office box operated by a bank to which payments are sent. Used to speed up effective receipt of cash.
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Accounts receivable
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funds due from a customer.
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Credit Policy
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a set of rules that includes the firms credit period, discounts and collection procedures offered.
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Discount
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Price reduction given for early payment.
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Credit Standards
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the financial strength customers must exhibit to qualify for credit.
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Collection Policy
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the degree of toughness in enforcing the credit terms.
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Credit terms
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statement of the credit period and any discount offered.
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Credit score
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a numerical score from 0 to 10 that indicated the likelihood that a person or business will pay on time.
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Trade credit
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debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer.
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Free trade credit
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Credit received during the discount period.
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Costly trade credit
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credit taken in excess of free trade credit whose cost is equal to equal to the discount loss.
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Promissory note
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a document specifying the terms and conditions of a loan including the amount. Interest rate and repayment schedule
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Line of credit
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an arraignment in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
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Revolving Credit agreement
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a formal committed time of credit extended by a bank or another lending institution.
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Prime rate
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A published interest rate charged by a commercial banks to large, strong borrowers
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Regular or simple interest
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the situation when only interest is paid monthly.
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Add on interest
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Interest that is calculated and added to funds received to determine the face amount of an installment loan.
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Commercial paper
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unsecured, short term, promissory notes of large firms, usually issued in denominations of $100,000 or more with an interest rate somewhat below the prime rate.
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Accruals
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Continually recurring short-tem liabilities, especially accrued wages and accrued taxes.
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Spontaneous funds
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funds that are generated spontaneously as the firm expands.
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Secured loan
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a loan backed by collateral often inventories or accounts receivables.
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