Combining Liability Structure and

Current Asset Decision.

 The level of current assets and the method
of financing those assets are
interdependent.
 A conservative policy of “high” levels of
current assets allows a more aggressive
method of financing current assets.
 A conservative method of financing
(all-equity) allows an aggressive policy of
“low” levels of current assets.
Short-Term Liquidity Risks
Working capital: The excess (deficit) of
current assets minus current liabilities.

WC = CA - CL
 Working capital deficiency
 In working capital management if current assets are less
than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.
 Current assets

 An entity shall classify an asset as current when:

 
 It expects to realise the asset, or intends to sell or consume it, in its
normal operating cycle;
 
 It holds the asset primarily for the purpose of trading;
 
 It expects to realise the asset within twelve months after the
reporting period; or
 
 The asset is cash or a cash equivalent (as defined in FRS 7) unless the
asset is restricted from being exchanged or used to settle a liability
for at least twelve months after the reporting period.
 Current liabilities

 An entity shall classify a liability as current when:

 
 It expects to settle the liability in its normal operating cycle;
 
 It holds the liability primarily for the purpose of trading;
 
 The liability is due to be settled within twelve months after the
reporting period; or
 
 The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.
 The Working Capital Decision
 With the working capital decision, current assets and current liabilities become
the focus of the financial manager.

 Such items as cash balances, accounts receivable, inventory levels and short-
term accruals (such as prepaid rent or utilities) are included among the short-
term assets that comprise one component of working capital.

 Also with the working capital decision, we concern ourselves with short-term
obligations such as accounts payable to vendors, and other debt that is expected
to be paid off within one year.

 Net working capital is a meaningful outcome of the working capital decision-

making matrix. Net working capital is merely the difference between current
assets and current liabilities.
Business risks can be minimized with prudent working capital
management. Organizations are usually focused on cash. By combining
the accounts payable, as well as supply chain issues, such organizational
focus can also manage external issues like the legal and business
environments.
 ASSETS DECISIONS

•Working capital management involves financing and controlling the

current assets of the firm.
•Management must distinguish between those current assets that are easily
converted to cash and those that are more permanent.
•The financing of an asset should be tied to how long the asset is likely to
be on the balance sheet.
•Long-term financing is usually more expensive than short-term financing
based on the theory of the term structure of interest rates.
•Risk, as well as profitability, determines the financing plan for current
assets.
 Operating current assets cycle

RAW MATERIALS WORK IN PROGRESS

CASH FINISHED GOODS

ACCOUNTS RECEIVABLE
 MAJOR ASSET DECISIONS

1. Investment decision
2. Financial decision
3. Assets management decision
 Investment decision:
•it determines the total amount of asset needed by a firm
hence closely tied to the allocation  of funds, we have two
types of  investment decision which is capital investment
and working capital investment.
 Financial decision:
 Financial manager needs to decide on how to
finance the assets the source of funds examples
whether to borrow debts or share capital or
retained earnings, whether to borrow short,
medium or long term, the needs to determine  how
much dividend to pay to pay out as this will directly
affect the financial decision.