SUPPL

EMENT
ARY
LEARN
ING
MATER
IALS IN
BUSIN
ESS
FINAN
CE
UNIT 6
Prepared by:

VILMA E. LITAN, ED.D.

Subject Professor
BA 237 – BUSINESS FINANCE
Unit VI: WORKING CAPITAL
Lessons:
 Meaning and Composition of Working Capital
 The Need for Working Capital
 Management of Working Capital
 Liquidity Management
 Cash Management
 Accounts Receivable Management
 Inventory Management

Learning Outcomes
At the end of this Unit, the students must have:
1. Defined Working Capital
2. Discussed the needs for Working Capital
3. Evaluated the Management of Working Capital
4. Applied Liquidity, cash, accounts receivable and inventory management

Working Capital
What Is Working Capital?
Working capital, also known as net working capital (NWC), is the difference
between a company’s current assets, such as cash, accounts receivable
(customers’ unpaid bills) and inventories of raw materials and finished goods,
and its current liabilities, such as accounts payable. Net operating working capital
is a measure of a company's liquidity and refers to the difference between
operating current assets and operating current liabilities. In many cases these
calculations are the same and are derived from company cash plus accounts
receivable plus inventories, less accounts payable and less accrued expenses.

Working capital is a measure of a company's liquidity, operational efficiency and

its short-term financial health. If a company has substantial positive working
capital, then it should have the potential to invest and grow. If a company's
current assets do not exceed its current liabilities, then it may have trouble
growing or paying back creditors, or even go bankrupt.

The Formula for Working Capital

To calculate the working capital, compare a company's current assets to its
current liabilities. Current assets listed on a company's balance sheet include
cash, accounts receivable, inventory and other assets that are expected to be
liquidated or turned into cash in less than one year. Current liabilities include
accounts payable, wages, taxes payable, and the current portion of long-term
debt. Current assets are available within 12 months. Current liabilities are due
within 12 months.

The standard formula for working capital is current assets minus current
liabilities.

Working capital that is in line with or higher than the industry average for a
company of comparable size is generally considered acceptable. Low working
capital may indicate a risk of distress or default.

Changes in Working Capital Affect a Company's Cash Flow

Most major new projects, such as an expansion in production or into new
markets, require an investment in working capital. That reduces cash flow. But
cash will also fall if money is collected too slowly, or if sales volumes are
decreasing – which will lead to a fall in accounts receivable. Companies that are
using working capital inefficiently can boost cash flow by squeezing suppliers and
customers.

How do you calculate working capital?

Working capital is calculated by taking current assets and deducting current
liabilities. For instance, if a company has current assets of $100,000 and current
liabilities of $80,000, then their working capital would be $20,000. Common
examples of current assets include cash, accounts receivable, and inventory.
Examples of current liabilities include accounts payable, short-term debt
payments, or the current portion of deferred revenues.

What is an example of working capital?

To illustrate, consider the case of XYZ Corporation. When XYZ first started, it
had working capital of only $10,000, with current assets averaging $50,000 and
current liabilities averaging $40,000. In order to improve its working capital, XYZ
decided to keep more cash in reserve and deliberately delay its payments to
suppliers in order to reduce current liabilities. After making these changes, XYZ
has current assets averaging $70,000 and current liabilities averaging $30,000.
Its working capital is therefore $40,000.

Why is working capital important?

Working capital is important because it is necessary in order for businesses to
remain solvent. In theory, a business could become bankrupt even if it is
profitable. After all, a business cannot rely on accounting profits in order to pay
its bills—those bills need to be paid in cash readily in hand. To illustrate, consider
the case of a company that had accumulated $1 million in cash due to its
previous years’ retained earnings. If the company were to invest all $1 million at
once, they could find themselves with insufficient current assets to pay for their
current liabilities.
 https://www.g
oogle.com/search?q=working+capital
MULTIPLE CHOICE: On your answer sheet, write the correct letter of your choice.

1. Which Asset liability combination would most likely result in the firm’s having the
greatest risk of technical insolvency?
a. Increasing current assets while lowering current liabilities
b. Reducing current assets, increasing current liabilities, and reducing long-term
debt.
c. Increasing current assets while incurring more current liabilities.
d. Replacing short-term debt with equity
2. In deciding the appropriate level of current assets for the firm, management is
confronted with
a. a trade-off between profitability and risk
b. a trade-off between liquidity and marketability
c. a trade-off between equity and debt
d. a trade-off between short-term versus long-term borrowing
3. In finance, “working capital” means the same thing as
a. Total assets
b. Fixed assets
c. Current assets
d. Current assets minus current liabilities
4. Which of the following would be consistent with a more aggressive approach to
financing working capital?
a. Financing short-term needs with short-term funds
b. Financing permanent inventory buildup w with long-term debt
c. Financing seasonal needs with short-term funds
d. Financing some long-term needs with short-term funds.
5. ________varies inversely with profitability
a. Liquidity
b. Risk
c. Blue
d. False
6. Spontaneous financing includes
a. Accounts receivable
b. Accounts payable
c. Short-term loans
d. A line of credit
7. Permanent working capital
a. Varies with seasonal needs
b. Includes fixed assets
c. Is the amount of current assets required to meet a firm’s long-term minimum
needs
d. Includes accounts payable
8. Net working capital refers to
 a. Total assets minus fixed assets
b. Current assets minus current liabilities
c. Current assets minus inventories
d. Current assets
9. A firm’s invesntory turnover (IT) is 5 times on a cost of goods sold (COGS) of
P800,000. If the IT is improved to 8 times while the COGS remains the same, a
substantial amount of funds is released from or additionally invested in inventory.
In fact,
a. P 160,000 is released
b. P 100,000 is additionally invested
c. P 60,000 is additionally invested
d. P 60,000 is released
10. Cost of not carrying enough inventory include:
a. Lost sales
b. Customer disappointment
c. Possible worker layoffs
d. All of these
11. Increasing the credit period from 30 to 60 days, in response to a similar action
taken by all of our competitors, would likely result in:
a. An increase in the average collection period
b. A decrease in bad debt losses
c. An increase in sales
d. Higher profits
12. An increase in the firm’s receivable turnover ratio means that:
a. It is collecting credit sales more quickly than before
b. Cash sales have decreased
c. It has initiated more liberal credit terms
d. Inventories have increased
13. A formal, legal commitment to extend credit up to some maximum amount over a
stated period of time.
a. Letter of credit
b. Revolving credit agreement
c. Line of credit
d. Trade credit
14. The accounts receivable that cannot be collected because of their bankruptcy or
another reason are termed as:
a. Collectible accounts
b. Doubtful accounts
c. Bad customers
d. Uncontrollable accounts
15. Allowance for doubtful accounts is an example of:
a. Asset account
b. Liability account
c. Expense account
d. Contra asset account
16. Inventory management is a key component of effective supply chain
performance.
a) True
b) False
17. Manufacturing’s cost efficiency is not affected by inventory decisions.
a) True
b) False
18. When a company’s product is nontangible (a service), inventory is no longer a
viable option.
a) True
b) False
19. MRP develops a time-phased schedule that shows future demand, supply and
inventories by time period.
a) True
b) False
20. Makespan has a link to customer due dates.
a) True
b) False
21. Precedence relationships structure the sequencing of activities.
a) True
b) False
22. Hand tools, lubricants, and cleaning supplies are usually examples of what?
a) WIP inventory
b) finished goods inventory
c) raw materials inventory
d) distribution inventory
e) MRO inventory
23. What costs are considered in the basic EOQ model?
a) annual ordering costs + annual holding costs
b) annual purchasing costs + annual holding costs
c) annual ordering costs + annual holding costs + annual shortage costs
d) annual purchasing costs + annual ordering costs + annual holding costs + annual
shortage costs
e) ordering costs per order + annual holding costs
24. What costs are considered in the quantity discount model?
a) annual ordering costs + annual holding costs
b) annual purchasing costs + annual holding costs + annual ordering costs
c) annual ordering costs + annual holding costs + annual shortage costs
d. annual purchasing costs + annual ordering costs + annual holding costs + annual
shortage costs
e. ordering costs per order + annual holding costs
25. Next level down in the planning process after development of the aggregate
plan is ___________.
a) materials requirements plan
b) engineering plan
c) rough-cut capacity plan
 d) master production schedule
e) purchasing plan
26. For the level aggregate plan, fluctuations in demand are absorbed by
________________.
a) inventory and subcontracting
b) back orders and price changes
c) inventory and back orders
d) price changes and subcontracting
e) subcontracting and back orders
27. What type of aggregate plan sets labor and equipment capacity to satisfy
demand each period?
a) uniform
b) level
c) chase
d) mixed
e) steady
28. Evaluating an aggregate plan in terms of number of back orders is using
what perspective?
a) cost
b) customer service
c) quality
d) operations
e) human resources
29. What is an information system designed to integrate internal and external
members of the supply chain?
a) material requirements planning
b) master production schedule
c) capacity requirements planning
d) aggregate planning
e) enterprise resource planning
30. Companies use to check that enough work is scheduled for
operations and that the amount of work scheduled is feasible.
a) capacity management
b) closed-loop requirements planning
c) cut requirements planning
d) capacity resources planning
e) capacity requirements planning
31. CRP systems are used to check that the amount of work:
a) meets the MRP directive.
b) meets the ERP directive.
c) will make a profit.
d) is feasible.
e) meets OSHA requirements.
32. In MRP, the starting points for each part and material needed to accomplish the
master production schedule are the ________________________.
a) net requirements
 b) gross requirements
c) planned releases
d) scheduled receipts
e) planned receipts
33. Which of the following techniques loads jobs without regard to the capacity
available to do the work?
a) finite loading
b) infinite loading
c) forward scheduling
d) backward scheduling
e) input/output control
34. Which of the following scheduling techniques determines the earliest possible
completion time for a job?
a) finite loading
b) infinite loading
c) forward scheduling
d) backward scheduling
e) input/output control
35. What does job flow time measure?
a) the time a job spends in the shop
b) due-date performance
c) the amount of time it takes to finish a batch of jobs
d) job tardiness
e) job lateness

TEST II. Explain the functions of the following:

a. Cash Management
b. Accounts Receivable Management
c. Inventory Management

Deadline for the submission of your output will be on December 10, 2021