ty refers to the availability of company resources to
term cash requirement
anys short-term liquidity refers to its ability to meet
bligations.
f liquidity can implies that the company is unable to t
age of favorable discounts. implies limited opportunities and constraints on ements part.
xtreme liquidity problems can lead to forced sale of
ments and assets hen a companys owner possess unlimited liability lack of uidity endangers their personal assets.
a creditor a lack of liquidity can delay in collecting interest a
ncipal payments.
easure of liquidity: rrent Ratio levance of the current ratio
urrent liability coverage
uffer against losses
eserve of liquid funds.
tations of the current ratio
sure and predict the pattern of future cash inflows
outflows?
sure the adequacy of future cash inflows to outflows
a static measure of resources available at a point in
current reserve of cash does not have logical or cau
on to its future cash inflows rade cycle Analysis: mpanys working capital requirements are affected b sired inventory investment and the relation between t terms and from suppliers and those extended to mers. These consideration determine a companys n cycle. This is the working capital management effic Selected financial information from X company, for the end o Year 1
Sales for year 1 3,60,000
Receivables 40,000 Inventories* 50,000 A/P** 20,000 Cost of goods 3,20,000 sold(including depreciation of 30,000)
* Beginning inventory is 1,00,000
** we assume these relate to purchase included in costs of goods sol We estimate companys purchases per day as:
Ending Inventory 50,000
Cost of goods sold 3,20,000 Less: beginning 1,00,000 inventory Cost of goods 2,70,000 purchased and manufactured Less: depreciation in 30,000 cost of goods sold =Purchases 2,40,000 Purchases per day 2,40,000/360=666.67 he net trade cycle for X company (in days)
Accounts receivable = 40,000/(3,60,000/360) = 40 days
nventories =50,000/(3,20,000/360)=56.24 days
_________________________________________________ 96.24 days
ess: Accounts payable=20,000/666.67 = 30 days
Net trade cycle = 66.24 days
e daily sales is (3,60,000 /360)=1000 then required working