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

What are the stages in the performance budgeting, Stages in the performance...

Stages in the performance budgeting The stages in the performance budgeting is enumerated as follows: 1) Establishment of goals objectives and policies: data collection revi

Make or buy decisions under limiting factors, MAKE OR BUY DECISIONS UNDER L...

MAKE OR BUY DECISIONS UNDER LIMITING FACTORS One reason for buying products/services from another organisation is the scarcity of resources, so that the company may be unable t

What is the objective of performance budgeting, What is the objective of pe...

What is the objective of performance budgeting The objectives of performance budgets is to provide a closer linkage between planning and action and also to provide a common bas

Make and b, The Rohr Company’s old equipment for making subassemblies is wo...

The Rohr Company’s old equipment for making subassemblies is worn out. The company is considering two courses of action: (a) Completely replacing the old equipment with new equipme

Extensions to linear programming, Extensions to Linear Programming In man...

Extensions to Linear Programming In many real situations the solutions to linear programming models make sense only if they have integer values. Rounding off the linear programmi

Define activities based costing by horngren, Define Activities based costin...

Define Activities based costing by horngren According to horngren " ABC is a system that focuses on activities as fundamental cost object and utilizes cost of these activi

Determine the proprietary ratio and equity ratio, Proprietary ratio/ equit...

Proprietary ratio/ equity ratio  Meaning: the ratio measures a relationship among proprietor's funds and the total assets. Objective: the objective of computing this ra

Journal Entries and T-account, h. Production orders that had cost 450,000 t...

h. Production orders that had cost 450,000 to complete according to their job cost sheets were shipped to customers during the month. These goods were sold on account at 50% above

Innovations of management accounting and control, Implementing management a...

Implementing management accounting and control innovations are often problematic. Provide a brief commentary around the key factors necessary to give such innovations the best chan

Expected future warranty claims, 1. Paid $350,000 to purchase furniture and...

1. Paid $350,000 to purchase furniture and leased it to DEF Corp. for 5 years. DEF agreed to pay $89,955 on July 1 for each of the next 5 years.  At the end of the lease term we ex

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