Accounting 3
Classified in Mathematics
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1. TRACING CASH AND NET WORKING CAPITAL
Current assets are cash and other assets that are expected to convert to cash within a year. They are presented on the balance sheet in order of their accounting liquidity. Four of the most important items in this section of the balance sheet are cash and cash equivalents, marketable securities, accounts receivable and inventories.Firms use several kinds of short-term debt called current liabilities, which are obligations that are expected to require cash payment within one year or within the operating period if it is longer than one year. Three major items as current liabilities are accounts payable, accrued wages, taxes and notes payable.
2. DEFINING CASH IN TERMS OF OTHER ELEMENTS
NetWorkingCapital+Fixedassets=LT Debt+Equity
Activities that increase cash (sources of cash)
- Increasing long-term debt (borrowing over the long term)
- Increasing equity (selling some stock)
- Increasing current liabilities (getting a 90-day loan)
- Decreasing current assets other than cash (selling some inventory for cash)
- Decreasing fixed assets (selling some property)
Operating cycle is the time since we acquire some inventory to the time we collect the cash. This cycle has two distinct components: the first part is the time it takes to acquire and sell the inventory which is called the inventory period. The second part is the time it takes to collect on the sale, which is theaccounts receivable period.
What the operating cycle describes is how a product moves through the current asset accounts. The product begins life as inventory, it is converted to a receivable when it is sold and it is finally converted to cash when we collect from the sale. At each step, the asset is moving closer to cash.
The cash cycle is the number of days that pass before we collect the cash from a sale, measured from when we actually pay for the inventory. The cash cycle is the difference between the operating cycle and the accounts payable period: