net working capital is defined as

net working capital is defined as

Question: 1. Net working capital is defined as: the depreciated book value of a firm's fixed assets. the va.

1. Net working capital is defined as:

the depreciated book value of a firm's fixed assets.

the value of a firm's current assets.

available cash minus current liabilities.

total assets minus total liabilities.

current assets minus current liabilities.

2. The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

statement of cash flows.

net working capital schedule.

3. The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement.

cash flow statement.

periodic operating statement.

4. Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

5. Which one of the following terms is defined as the total tax paid divided by the total taxable income? A. Average tax rate B. Variable tax rate

Marginal tax rate

Absolute tax rate

Contingent tax rate

6. Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns? A. Average tax rate B. Variable tax rate

Marginal tax rate

Absolute tax rate

Contingent tax rate

7. Cash flow from assets is defined as:

the cash flow to shareholders minus the cash flow to creditors.

operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.

operating cash flow minus the change in net working capital minus net capital spending.

operating cash flow plus net capital spending plus the change in net working capital.

cash flow to shareholders minus net capital spending plus the change in net working capital.

8. Operating cash flow is defined as:

a firm's net profit over a specified period of time.

the cash that a firm generates from its normal business activities.

a firm's operating margin.

the change in the net working capital over a stated period of time.

the cash that is generated and added to retained earnings.

9. Cash flow to creditors is defined as:

interest paid minus net new borrowing.

interest paid plus net new borrowing.

the operating cash flow minus net capital spending minus change in net working capital.

dividends paid plus net new borrowing.

cash flow from assets plus net new equity.

10. Cash flow to stockholders is defined as:

cash flow from assets plus cash flow to creditors.

operating cash flow minus cash flow to creditors.

dividends paid plus the change in retained earnings.

dividends paid minus net new equity raised.

net income minus the addition to retained earnings.

B. the value of a firm's current assets

C. available cash minus current liabilities

D. total assets minus total liabilities

E. current assets minus current liabilities

B. income statement

C. GAAP statement

D. balance sheet

E. net working capital schedule

B. cash flow statement

C. liquidity position

D. balance sheet

E. periodic operating statement

B. variable tax rate

C. marginal tax rate

D. absolute tax rate

E. contingent tax rate

B. variable tax rate

C. marginal tax rate

D. absolute tax rate

E. contingent tax rate

B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders

C. operating cash flow minus the change in net working capital minus net capital spending

D. operating cash flow plus net capital spending plus the change in net working capital

E. cash flow to shareholders minus net capital spending plus the change in net working capital

B. the cash that a firm generates from its normal business activities

C. a firm's operating margin

D. the change in the net working capital over a state period of time

E. the cash that is generated and added to retained earnings

B. cash flow from assets

C. operating cash flow

D. cash flow to shareholders

E. addition to retained earnings

B. interest paid plus net new borrowing

C. the operating cash flow minus net capital spending minus change in net working capital

D. dividends paid plus net new borrowing

E. cash flow from assets plus net new equity

B. operating cash flow minus cash flow to creditors

C. dividends paid plus the change in retained earnings

D. dividends paid minus net new equity raised

E. net income minus the addition to retained earnings

Working capital may be defined as a financial metric which relates to business oriented operating liquidity. It can be available for organizations, individuals and government entities. The calculation of the net working capital is expressed in the following formula:

Current assets – Current liabilities = Net working capital

Current assets is defined as assets that are available to a firm within the next 12 months.

Current liabilities are those that are due within the next 12 months.

Net working capital shows the liquidity of the company, which means that it indicates the financing needs of a company, both through long-term and short-term financing sources. In general, it indicates the short-term financial condition of a company.

There are two types of net working capital – positive and negative.

  1. Positive net working capital is defined when current assets exceed current liabilities.
  2. Negative net working capital takes place when current liabilities are higher current assets.

When the formula Current Assets – Current Liabilities = Working Capital is applied, the result can be both: positive or negative. If the result of the equation is vastly positive, it means that the short-term funds available from current assets will be enough to cover the current liabilities as they come for the payment. On the other hand, if the result of the equation is vastly negative, the business may not be have enough funds to cover its payments for the current liabilities, so there is a possibility of bankruptcy.

Using net working capital in determining the company’s growth

Net working capital may be useful when trying to assess the ability of a firm to grow fast. If the company has substantial cash reserves, the chances for it to rapidly grow are better since there is more cash which can be used to expand the business. Tight working capital means that the company is not in the situation to spend money on its growth. The ability of a firm to grow can be indicated if the terms for accounts receivables are shorter then for accounts payable. It is a lot better if a firm is able to gather cash from its customers before the suppliers and other work related expenses need to be paid.

Ways to alter net working capital

  1. Giving customers shorter time period in which they need to pay for the company’s products/services.
  2. Collecting more actively outstanding accounts receivable.
  3. Reducing inventory investment.
  4. Bringing back to suppliers unused assets and getting a restocking fee.
  5. Prolonging the time period for accounts payable to be covered.

Working capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:

Working Capital = Current Assets - Current Liabilities

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

  • If the ratio is less than one then they have negative working capital.
  • A high working capital ratio isn't always a good thing, it could indicate that they have too much inventory or they are not investing their excess cash

Accounting CPE Courses & Books

Net working capital is the aggregate amount of all current assets and current liabilities. It is used to measure the short-term liquidity of a business, and can also be used to obtain a general impression of the ability of company management to utilize assets in an efficient manner. To calculate net working capital, use the following formula:

+ Cash and cash equivalents

+ Trade accounts receivable

- Trade accounts payable

= Net working capital

If the net working capital figure is substantially positive, it indicates that the short-term funds available from current assets are more than adequate to pay for current liabilities as they come due for payment. If the figure is substantially negative, then the business may not have sufficient funds available to pay for its current liabilities, and may be in danger of bankruptcy. The net working capital figure is more informative when tracked on a trend line, since this may show a gradual improvement or decline in the net amount of working capital over time.

Net working capital can also be used to estimate the ability of a company to grow quickly. If it has substantial cash reserves, it may have enough cash to rapidly scale up the business. Conversely, a tight working capital situation makes it quite unlikely that a business has the financial means to accelerate its rate of growth. A more specific indicator of the ability to grow is when accounts receivable payment terms are shorter than the accounts payable terms, which means that a company can collect cash from its customers before it needs to pay its suppliers.

The net working capital figure can be extremely misleading for the following reasons:

  • Line of credit. A business may have a large line of credit available that can easily pay for any short-term funding shortfalls indicated by the net working capital measurement, so there is no real risk of bankruptcy. Instead, the line of credit is used whenever an obligation must be paid. A more nuanced view is to plot net working capital against the remaining available balance on the line of credit. if the line has been nearly consumed, then there is a greater potential for a liquidity problem.
  • Anomalies. If only measured as of one date, the measurement may include an anomaly that does not indicate the general trend of net working capital. For example, a large one-time account payable may not yet be paid, and so appears to create a smaller net working capital figure.
  • Liquidity. Current assets are not necessarily very liquid, and so may not be available for use in paying down short-term liabilities. In particular, inventory may only be convertible to cash at a steep discount, if at all. Further, accounts receivable may not be collectible in the short term, especially if credit terms are excessively long. This is a particular problem when large customers have considerable negotiating power over the business, and so can deliberately delay their payments.

The amount of net working capital can be altered favorably by engaging in any of the following activities:

  • Requiring customers to pay within a shorter period of time. This can be difficult when customers are large and powerful.
  • Being more active in collecting outstanding accounts receivable, though there is a risk of annoying customers.
  • Engaging in just-in-time inventory purchases to reduce the inventory investment, though this can increase delivery costs.
  • Returning unused inventory to suppliers in exchange for a restocking fee.
  • Extending the number of days before accounts payable are paid, though this will likely annoy suppliers.

Tracking the level of net working capital is a central concern of the treasury staff, which is responsible for predicting cash levels and any debt requirements needed to offset projected cash shortfalls.

Net working capital is also known as working capital.

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