Applied Managerial Finance
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Applied Managerial Finance
Working capital is an accounting measure used to find out the financial efficiency, liquidity and the overall operation of a given company or simply the measure of how efficient the company is in relation to its financial growth in a short term time-frame. The reason to why working capital is used in determining the operations of the company, it is because working capital includes accounts payables, accounts receivable, inventory, cash and salaries payable. Working capital is thus the difference between current assets and current liabilities (McLeary, 2000).
1. Explain what working capital is and provide an equation that can beused to compute it.
The working capital concept plays an important role in financial management for a company as it is a term required for the operation of the company. For example, a merchant has goods which yields her no profit unless she gives them out for cash, and the cash brings her some profit till the cash is given out in exchange for goods. The working capital in accounting is necessary as it is required regularly for business operations. Such business operations includes the buying of raw materials, production activities, stock and store investment, paying of both direct and indirect expenditures, and inventories or credit given to customers who keep balance (Shweta, 2013).
In financial management, a statement (working capital) showing the flow of funds is calculated. The purpose of preparing the working capital statement is to illustrate its net effect on the flow of all funds in and out of the company over a period of time. Thus, the accounting equation can best be used to show the effect of funds flow on working capital. The equation therefore is:
Liabilities + Capital = Assets or
Current Assets – Current Liabilities = Working Capital
That is, L + C= A
The equation can further be expounded to: Current Assets + Long Term Assets = Current Liabilities + Long Term Liabilities + Capital
That is, CA +LTA = CL + LTL + C
The same equation can be read as CA – CL = LTL+ C – LTA
In addition to the equation above, in case there is any change in the working capital, the result will then be equal to all the sum of the changes on either side of the equation used to compute it. That is, ∆WC (change in working capital) = ∆LTL (long term liabilities) + ∆C (change in capital) – ∆LTA (change in long term assets).
2. Compute the working capital for Apex
In computing the working capital of a given company, say Apex, one looks at the components on the balance sheet since all the components of the equation above appear on the balance sheet (Aswath, 2007).
3. Describe the trend and show whether the trend is improving, deteriorating, or moderating.
Form the balance sheet; it is evident to say that, among the current assets, the inventory takes the largest amount thus determines the gross working capital. In 2012 the inventory hiked from $6500 to $ 12100. This measures the average ability of Apex Company to manage its short-term obligations.
4. Demonstrate the need for external capital.
As a result therefore, it can be deduced from the balance sheet that, the trend of the working capital is moderating as the current assets and liabilities from either years averages to the same as the other.
References
Aswath, D. Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications. Stern School of Business Article, July 2007
McLeary, F. (2000). Accounting and its Business Environment. USA: Juta and Company Ltd.
http://books.google.co.ke/books?id=Xt2lLSi_qgIC&dq=explain+what+working+capital+is+and+provide+an+equation+that+can+be+used+to+compute+it.&source=gbs_navlinks_s
Shweta, M. Working Capital Trends and Liquidity Analysis of Fmcg Sector in India. IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 9, Issue 4 (Mar. -Apr. 2013), PP 45-52
HYPERLINK “http://www.iosrjournals.org/iosr-jbm/papers/Vol9-issue4/F0944552.pdf”http://www.iosrjournals.org/iosr-jbm/papers/Vol9-issue4/F0944552.pdf
Quanititive Analysis
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Hypothesis testing gives a basis for taking thoughts or theories that an individual initially build up about the economy or empowering or markets, as well as then making a decision whether these thoughts are true or sometimes when they are false. Quantitative analysis in simple terms is defined as a scientific advance to management decision building. Quantitative analysis comprises of five steps that are utilized in its advance. The step comprises of :
the null hypothesis as well as the alternate hypothesis.
the suitable test statistic as well as level of significance.
the decision rules and regulation.
Compute the suitable test statistic as well as making the decision.
Interpreting the decision selected.
When a distinction is statistically important, it means that the difference is maybe not due to likelihood. This does not tell effectively if the distinction is meaningful or minor! Effect sizes give one a quantitative way to charge to what a degree a significant distinction may also be substantively vital(Terrell, 2012).
Z-test as well as t-test are essentially the similar; they evaluate between two means to recommend whether all samples come from the similar population. There are conversely variations on the topic for the t-test. If one has a sample and wish to contrast it with a recognized mean (for example, national average) the sole or single sample t-test is accessible. If all of the samples are not independent of every other as well as have some issue in common, for instance geographical site or before/after management, the balancing sample t-test can be useful. There are as well two variation or distinctions on the two sample t-test, the first variation uses the samples which have no equal variances as well as the second employ samples whose variation or distinctions are equal(Gravetter, & Wallnau, 2000).
A statistical test on which the critical region happens to be of a sharing is one-sided so that it is either superior than or less than an assured value, however not both. If it samples that is being tested drop into the one-sided serious area, the alternative or substitute hypothesis will be established instead of using the null hypothesis. Therefore, the one-tailed test obtains its name from testing the region beneath one of the tails or sides of the normal sharing, even though the test can be employed in other non-normal sharing as well.
On the other hand, a statistical test on which the critical region of a sharing is two sided as well as tests whether a trial is either larger or superior than or less than a firmed range of standards. If the sample that is to be tested go down into either of the critical region, the alternative hypothesis will be established as a substitute of the null hypothesis.
In conclusion, the labels ” a left-tailed, ” as well as ” right-tailed test ” refer to the usual normal sharing (as well as all of the t-sharing). The key term for identifying a left-tailed test are “greater than and less than”(Terrell, 2012).
References
HYPERLINK “http://www.bibme.org/” o “Edit this item”Gravetter, F. J., & Wallnau, L. B. (2000). Statistics for the behavioral sciences (5th ed., Instructor’s ed.). Australia: Wadsworth/Thomson Learning.
Terrell, S. R. (2012). Statistics translated: a step-by-step guide to analyzing and interpreting data. New York: Guilford Press.
