study guide
1. Management of Working Capital: Indicate whether each of the following statements is true or false. Explain your answer.
1. With a current ratio of "2.5:1", a company can already be certain of being able to pay its bills on time.
TRUE - Current ratio is the ratio of current assets of a business to its current liabilities.
Current ratio is calculated using the following formula: Current Ratio =Current Assets / Current Liabilities . To illustrate : CR = 2.5/1= 2.5
Current ratio matches current assets with current liabilities and tells us whether the current assets are enough to settle current liabilities. Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. General rule is that higher the current ratio better it is but there is a limit to this. Abnormally high value of current ratio may indicate existence of idle or underutilized resources in the company.
2. Terms of 2/10, n/30 means that the supplier will provide 10% of the order within 2 days and the balance of the order will be delivered in 30 days.
FALSE – The figures 2/10 means that the customer will obtain a 2% discount if payment will be made within 10 days (collection period), and will not obtain any percentage of discount if payments will be made within 30 days and beyond for n/30 figures.
3. The ‘float’ refers to funds in transit to the firm and is caused by the time required for a check to reach the payee plus the time required for the check to clear through the banking system.
FALSE – Time lapse between issuing a check and debiting of its account and crediting of its amount to the check of depositor’s account. The check issuer gains interest gains interestdue to the payment float, the check depositor loses interest due to the payment float.
4. The economic order quantity is the optimal order size of inventory in which carrying cost equals ordering cost.
FALSE - Economic order quantity is the order
1. With a current ratio of "2.5:1", a company can already be certain of being able to pay its bills on time.
TRUE - Current ratio is the ratio of current assets of a business to its current liabilities.
Current ratio is calculated using the following formula: Current Ratio =Current Assets / Current Liabilities . To illustrate : CR = 2.5/1= 2.5
Current ratio matches current assets with current liabilities and tells us whether the current assets are enough to settle current liabilities. Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. General rule is that higher the current ratio better it is but there is a limit to this. Abnormally high value of current ratio may indicate existence of idle or underutilized resources in the company.
2. Terms of 2/10, n/30 means that the supplier will provide 10% of the order within 2 days and the balance of the order will be delivered in 30 days.
FALSE – The figures 2/10 means that the customer will obtain a 2% discount if payment will be made within 10 days (collection period), and will not obtain any percentage of discount if payments will be made within 30 days and beyond for n/30 figures.
3. The ‘float’ refers to funds in transit to the firm and is caused by the time required for a check to reach the payee plus the time required for the check to clear through the banking system.
FALSE – Time lapse between issuing a check and debiting of its account and crediting of its amount to the check of depositor’s account. The check issuer gains interest gains interestdue to the payment float, the check depositor loses interest due to the payment float.
4. The economic order quantity is the optimal order size of inventory in which carrying cost equals ordering cost.
FALSE - Economic order quantity is the order
References: September 26, 2014 Deana Pauline M