Term: Inventory and Current Assets

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Chapter 13

1. Why is short-term financial management one of the most important and time-consuming activities of the financial managers? What is net working capital? Short term financial management deals with the managing of current assets and current liabilities. Short term financial management is time consuming and important because manages must achieve balance between the current assets and current liabilities in a manor that positively contributes to the firm’s value. Net working capital is the difference between the firm’s current assets and its current liabilities; can be positive or negative. 2. What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are the net working capital, liquidity, and risk of technical insolvency related? When an obligation is incurred, the firm generally knows when the corresponding payment will be due. Cash inflows are difficult the conversion of current assets to more liquid forms. The more predictable its cash flow, the less net working cash out flows for current liabilities. Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming...
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