Business, 10.12.2019 06:31 valeriegarcia12

Working capital management includes which one of the following? a. deciding which new projects to acceptb. deciding whether to purchase a new machine or fix a current machinec. determining which customers will be granted creditd. determining how many new shares of stock should be issuede. establishing the target debt-equity ratio

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Answer from: sacoyia27

c. Determining which customers will be granted credit.

Explanation:

Lets first understand what working capital is. Working capital is the available capital for running day-to-day operations an entity. We can numerically represent working capital as:

WC = Current assets minus Current liabilities. From the equation we can say that working capital is the excess of current assets over current liabilities. So working capital management means the management of both current assets and liabilities to minimize the risk of liquidity and maximize return on assets.

Working capital management has three fundamental components, namely;

- Receivable management

- Payable management

- Inventory management

Now in the given question,

- Option A is referring to investment appraisal, in which case, investments are appraised based on various models and techniques such as NPV, IRR etc.

- Option B, the decision whether to purchase a machine or fix has nothing to do with working capital management because the decision relates to NCA (non-current assets) which is dealt within IAS 16 and forms part of capital investment decisions.

- Option D, is a financing decision aimed at raising funds for facilitating investment decisions and/or growth.

- Option E, again establishing a target debt-equity ratio pretty much relates to the financing decision because when making financing decisions entities have to consider the consequences of raising debt or equity financing on ratios and financial statements.

Therefore, option C is the one dealt within working capital management. Because granting credit to customers with bad credit rating or poor payment history may increase the risk of default and recovery and hence, create unnecessary working capital problems. Similarly extending customer credit period may elongate the working capital cycle and therefore effect the liquidity position of the entity and vice versa.

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