Working capital decisions, Managerial Accounting

Assignment Help:

The decisions about long-term investment are depends on judgments on future cash flows, the improbability of such cash flows and the opportunity cost also of the funds to be invested. In so far as working capital management decisions are related the underlying criteria are similar but, there is a raised focus on liquidity and management of operating cycle. Operating cycle terms to the time this takes to exchange current assets as excluding cash in cash. The operating cycle in part finds out how long it gets for a firm to produce cash from current assets and thus the risk and cost of its investment in working capital or current assets. Working capital is the capital which can be instantly put to work to make the benefits of capital investment. Working capital is also termed as circulating or current capital.

The main difference among long and short-term financial management i.e. also considered as working capital management is about quantum and frequency of cash flows. The amount of funds dedicated are generally large and one off decision in case of long-term financial management whereas, in case of short term financing the amount of funds offer are relatively tiny and frequently repetitive in nature. The impact of long term financing ranges over an extended period of time generally 15 to 20 years or more, while, the impact of short term financing is inside the operating cycle generally ranging from three months to a year.

Two concepts of working capital are as:

(i) Gross working capital

(ii) Net working capital

The gross working capital is the sum of all current assets. Net working capital is the diversity between current liabilities and assets. The constituents of working capital are demonstrated in Table no.1. Part A of this table demonstrates current assets and part B of this table demonstrates current liabilities.

                  Table no.: Constituents of current assets and current liabilities

Part A

Part B

Current Assets

Cash and Bank Balances

Inventories

Raw material and components, work in progress/process (WIP) finished goods, trade debtors, loans and advances, investments, pre-paid expenses

Current Liabilities Sundry Creditors Trade Advances

Borrowings (short term) Outstanding expenses

Taxes and dividends payable,

Other liabilities maturing within a year

This section deals along with specific aspects and considerations concerned to overall working capital management and is separated in the subsequent sections:

  • Factors influencing working capital needs
  • Characteristics of current assets
  • Levels of current assets
  • Profit criterion for current assets
  • Current assets financing policy
  • Resource of working capital finance
  • Approaches to bank financing
  • Impact of inflation on working capital
  • Operating cycle analysis
  • Processes for estimating working capital needs

Related Discussions:- Working capital decisions

Marketing decisions, Marketing refers to the promotion of products, ...

Marketing refers to the promotion of products, especially advertising and branding. But marketing includes product management, pricing, prom

Status resources, Status Resources We had classified constraints as sca...

Status Resources We had classified constraints as scarce and abundant, depending respectively on whether or not the optimum solution "consumes" the entire available amount of t

7. Alma and Associates, Alma and Associates, a new consulting service, rece...

Alma and Associates, a new consulting service, recently received a bill for repairs on its computers totaling $2,350. Alma thinks it may have been overcharged and is trying to recr

Analysis of each decision package , Analysis of Each Decision Package ...

Analysis of Each Decision Package This analytic procedure permits the manager of the decision package and its alternatives to assess and validate its operation. Numerous quest

What rights do the stockholders have, When forming a company, the options a...

When forming a company, the options are sole proprietor, partnership, and corporation. Most choose corporation. Why is the corporate form seen to be best? What rights do the stockh

Asset securitisation, The emerging financial scenario has made a fierce com...

The emerging financial scenario has made a fierce competition among the companies to raise funds by innovative financial products by the capital and or money markets. Moreover sour

Illustration of graphic analysis , Illustration of Graphic Analysis Th...

Illustration of Graphic Analysis The four steps of cost-volume-profit analysis can be employed to graph and study any cost-volume relationship. Suppose that you have been aske

Determine the absolute liquid ratio - liquidity ratios, Absolute liquid rat...

Absolute liquid ratio - Liquidity ratios Although receivables debtors and bills receivable are usually more liquid than inventories yet there may be doubts regarding their rea

Accounting rate of return - arr, ARR gives a fast estimate of a project's v...

ARR gives a fast estimate of a project's value over its useful life. ARR is derived by determining profits before taxes and interest.   ARR is an accounting technique used fo

Costing and Budgetory Control, Given budgeted figures and actual, then anal...

Given budgeted figures and actual, then analyses each fixed cost into its components

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd