İŞLETME FİNANSI I

The gross working capital refers to the total current asset holdings of a company which can be converted into cash in less than a year time. The current assets include but are not limited to cash, cash in banks, marketable securities, receivables with a term less than 1 year which are mainly from clients, but also from others, inventory of raw materials, work-in-progress, finished goods, and prepayments received.

Volume of business: Generally, there exists a strong positive relationship between the size of the company and the working capital needs. The size of a company is defined in terms of sales volume and/or asset size. Whatever the terms of reference of size, increase in size generates higher activity level, larger amount of production, inventory, sales, ending up with higher amounts of raw materials and suppliers credits.

Turnover of working capital: Turnover of the working capital is realized by the sale of goods. In certain businesses, sales are made quickly and in order to materialize the final product the inventories of raw materials are used quickly so new purchases have to be made. In this manner, a small amount of money invested in stocks will result in sales of much larger amount.

• Time: As a means of survival in the market place, timing and availability of the required funds is critical.
• Investment: Although working capital management focuses on short-term asset and
liabilities, the relevant decisions indirectly determines the available funding for  investments.
• Credibility: Working capital management has great significance for all companies, but it is more critical for smaller companies which have more restricted funding capabilities. .
• Growth: The availability of funds contributes to the activity level in the short- run and potential growth by realizing investments in the long-run.

Accruals: The main source of financing secured internally has been by means of Accruals. The major accrual items are wages and taxes which in turn create obligations to payments to the employees and to the government.

The primary objective of management of receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be the only focus on the collection within the shortest possible period but also other possible related benefit and costs should be considered. Companies should establish clear principles with regards to trade credits which includes the following aspects (Mishra, 1973):
1. Allocation of Authority: The efficiency of a credit management in formulation and execution of sound and effective credit and collection policies largely depends on the location of credit department in the organizational structure. As credit and collection policies directly influence the solvency of the firm, they are considered to be under the responsibility of the chief finance officer. The other approach, referring to the receivables as a representation of sales and the value is not created until the collection is realized, proposes placing the authority of allocation under the direct charge of the marketing executive or the sales department. The choice of allocation of authority to administer credit and collection policies depends on either to a financial executive or the marketing executive or both of them jointly depending upon the organizational structure and the objectives of the company.

Delinquency Cost: This type of cost arises on account in relation with the delay in payment of receivables by the customer when they fall due and become doubtful debts. Some sanctions can be applied such as blocking of company’s funds for a period of time until the payment is realized, costs associated with the collection of overheads and legal expenses.

Inventory budget is used to determined the required inventory level for each item or a product during a particular period. By the virtue of production process, three main costs of production exist to form the unit cost per product as to determine the monetary amount of the finished products under both generally accepted accounting
principles and international financial reporting standards.

ABC analysis is a system of inventory control which is also named as Selective Inventory Control, or SIC. ABC analysis is a system of categorization by using three classes: s or categories used in the system. The first class of A, is the category for items that are considered to be important or critical. The second category of B, is the classification for items of average importance. Finally, category C is the designation for relatively unimportant items.

Unlike Baumol, Miller and Orr model (1966) assumes that the cashflow of a company has a stochastic structure, as different amounts of cash payments are made on different points of time. It is assumed that the movements in cash balance occur randomly. Miller and Orr also suggest that there exist control limits, which sets control points for time and size of transfers between Investment Account and Cash Accounts.

Since tax payments is a liabily item, an increase in tax payments causes to a decrease in net working capital since it is the difference between assets and liabilities.

In industries producing capital or semicapital goods the ratio of working capital o fixed capial is relatively low. However, in industries producing consumption goods such as biscuits, the ratio of working capital to fixed capital would be relatively high.

The relationship between the size of the company and the working capital needs is strongly positive, not negative. Thus only IV is false, all other statemens are true.

Transparency is not a dimension of working capital management.

Hedging, conservative and aggressive policies are among working capital management policies but there is no depressive policy.

Companies do not hold cash for manipulation. All others are motives for holding cash.

According to Baumol's model transaction cost is known and is constant. So C is the answer.

Given sentence is definition of Cash/Bank Reconciliation.

There is not a cost called promotion cost among the inventory costs.

Economic order quantity is calculated by the formula

where D=usage inventories in units 

H=buying cost per order

S=carrying cost per unit.

Thus EOQ=sqroot(2*9*4/2)=sqroot(36)=6