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Finance 300 Chapter 14 Ball State Torabi
Terms in this set (34)
Working Capital Management
The management of short-term assets (investments) and short-term liabilities (financing sources).
A firm's investment in short-term assets—cash, marketable securities, inventory, and accounts receivable.
Net Working Capital
Current assets minus current liabilities—the amount of current assets financed by long-term liabilities.
Working Capital Policy
Decisions regarding (1) the target levels for each current asset account and (2) how current assets will be financed.
Inventory Conversion Period (ICP)
The amount of time a product remains in inventory in various stages of completion.
Receivables Collection Period (DSO)
The time it takes to collect cash following a credit sale; also known as days sales outstanding (DSO).
Payables Deferral Period (DPO)
The average length of time between the purchase of raw materials and labor and the payment of cash for them; also known as days payables outstanding (DPO).
Cash Conversion Cycle
The length of time from the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of the product.
Permanent Current Assets
Current assets' balances that remain stable no matter the seasonal or economic conditions.
Temporary Current Assets
Current assets that fluctuate with seasonal or cyclical variations in a firm's business.
Maturity Matching ("Self-Liquidating") Approach
A financing policy that matches asset and liability maturities; considered a moderate current asset financing policy.
A policy under which all of the fixed assets, all of the permanent current assets, and some of the temporary current assets of a firm are financed with long-term capital.
A policy under which all of the fixed assets of a firm are financed with long-term capital, but some of the firm's permanent current assets are financed with short-term non-spontaneous sources of funds.
Any liability originally scheduled for repayment within one year.
Recurring short-term liabilities; liabilities such as wages and taxes that change spontaneously with operations.
The credit created when one firm buys on credit from another firm.
A document specifying the terms and conditions of a loan, including the amount, interest rate, and repayment schedule.
Compensating Balance (CB)
A minimum checking account balance that a firm must maintain with a bank to borrow funds—generally 10 to 20 percent of the amount of loans outstanding.
Line of Credit
An arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
Revolving (Guaranteed) Credit Agreement
A formal, committed line of credit extended by a bank or other lending institution.
A fee charged on the unused balance of a revolving credit agreement to compensate the bank for guaranteeing that the funds will be available when needed by the borrower; the fee normally is about 0.25 percent of the unused balance.
Unsecured, short-term promissory notes issued by large, financially sound firms to raise funds.
Loans backed by collateral; for short-term loans, the collateral often is inventory, receivables, or both.
Uniform Commercial Code
A system of standards that simplifies procedures for establishing loan security.
Using accounts receivable as collateral for a loan.
The lender can seek payment from the borrowing firm when receivables' accounts used to secure a loan are uncollectible.
The outright sale of receivables.
"Free" Trade Credit
Credit received during the discount period.
Costly Trade Credit
Credit taken in excess of "free" trade credit, whose cost is equal to the discount lost.
Simple Interest Loan
Both the amount borrowed and the interest charged on that amount are paid at the maturity of the loan.
The amount of the loan, or the amount borrowed; also called the principal amount of the loan.
Quoted (simple) Interest Rate
The annual percentage rate (APR) that is used to compute the interest rate per period, which is used to determine dollar amount of interest that is paid on the loan.
Discount Interest Loan
A loan in which the interest, which is calculated on the amount borrowed (principal), is paid at the beginning of the loan period; interest is paid in advance.
Interest that is calculated and then added to the amount borrowed to obtain the total dollar amount to be paid back in equal installments.
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