Key Terms

accounts receivable aging schedule

a report that shows amounts owed by customers by the age of the account, as measured by the number of days since the sale

allowance for doubtful accounts

an account that contains the estimated amount of accounts receivable that will not be collected

bad debt expense

an expense that a business incurs as a result of uncollectible accounts receivables

bankruptcies

federal court procedures that protect distressed businesses from creditor collection efforts while allowing the debtor firm to liquidate its assets or devise a reorganization plan

benchmarking

the process of performance analysis that involves comparing financial condition and operating results against a standard, called a benchmark

bill of lading

a document that is a detailed list of a goods that have been shipped; a receipt given by the carrier (shipping company) to the seller as evidence that the goods have been shipped to the buyer

carrying costs

all costs associated with having inventory in stock including storage costs, insurance, inventory obsolescence, and spoilage

cash budget

a report that shows an estimation of cash inflows, outflows, and cash balances over a specific period of time, such as monthly, quarterly, or annually

cash cycle or cash conversion cycle

the time period (measured in days) between when a business begins production and acquires resources from its suppliers (for example, acquisition of materials and other forms of inventory) and when it receives cash from its customers; offset by the time it takes to pay suppliers (called the payables deferral period)

cash discount

discount granted to a customer who has purchased goods or services on account (credit) and pays the invoice within a certain number of days as specified by credit terms

compensating balance

minimum balance of cash that a business must deposit and maintain in a bank account to obtain a loan

contra-asset

an account with a balance that is used to offset (reduce) its related asset on the balance sheet (for example, allowance for doubtful accounts reduces the value of accounts receivable reported on the balance sheet)

credit period

the number of days that a business purchaser has before they must pay their invoice

credit rating

a type of score that indicates a business’s creditworthiness

credit terms

the terms that are part of a sales credit agreement that indicate when payment is due, possible discounts, and any fees that will be charged for a late payment

current assets

assets that are cash or cash equivalents or are expected to be converted to cash in a short period of time and will be consumed, used, or expire through business operations within one year or the business’s operating cycle, whichever is shorter

discount period

the number of days the buyer has to take advantage of the cash discount for an early payment

factoring

the process of selling accounts receivables to a financial institution or, in some cases, using the accounts receivables as security for a loan from a financial institution

floor planning

a type of inventory financing whereby a financial institution provides a loan so that the company can acquire inventory with proceeds from the sale of inventory used to pay down the loan; a common method of financing inventory for automobile dealers and sellers of other big-ticket (high-priced) items

gross working capital

synonymous with the current assets of a company, those assets that include cash and other assets that can be converted into cash within a period of 12 months

just-in-time inventory

inventory management method in which a company maintains as little inventory on hand as possible while still being able to satisfy the demands of its customers

letter of credit

a letter issued by a bank that is evidence of a guarantee for payments made to a specified entity (such as a supplier) under specified conditions; common in international trade transactions

liquidity

ability to convert assets into cash in order to meet primarily short-term cash needs or emergencies

marketable securities

investments that can be converted to cash quickly; short-term liquid securities that can be bought or sold on a public exchange (market) and tend to mature in a year or less

net terms

also referred to as the full credit period; the number of days that a business purchaser has before they must pay their invoice

net working capital

the difference between current assets and current liabilities (Current Assets – Current Liabilities = Net Working Capital)

operating cycle

the time it takes a company to acquire inventory, sell inventory, and collect the cash from the sale of said goods; synonymous with cash cycle

opportunity cost

the cost of a forgone opportunity

ordering costs

costs associated with placing an order with a vendor or supplier

precautionary motive

a reason to hold cash balances for unexpected expenditures such as repairs, costs associated with unexpected breakdown of equipment, and hiring temporary workers to meet unexpected production demands

quick payment

a payment made on an account payable during a period of time that falls within the discount period

ratios

numerical values taken from financial statements that are used in formulas to examine financial relationships and create metrics of performance, strengths, weaknesses; help analysts gain insight and meaning

speculative motive

a reason for holding an amount of cash—to be able to take advantage of investment opportunities

stockout costs

an opportunity cost (lost revenue) incurred when a customer order cannot be filled because the item is out of stock and the customer goes elsewhere for the product

supply chain

the network of participants and activities between a company and its suppliers and the company and its customers; exists to distribute a product or to provide a service to the final buyer

trade credit

credit granted to a business, also called accounts payable; allows a business to buy goods and services on account and pay the cash at some point in the future

transactional motive

holding an amount of cash to meet operational expenditures such as payroll, payments to vendors, and loan payments

working capital

the resources that are needed to meet the daily, weekly, and monthly operating cash flow needs