Question

In: Finance

Define these business finance terms in your own words and then give a real world example...

Define these business finance terms in your own words and then give a real world example of each: Liquidity, Matching Principle, Net Capital Spending, and Operating Cycle.

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Expert Solution

Liquidity - it is the concept of how a firm has adequate cash to address its short term obligations. A company has several short term onligations sich as accounts payable, taxes, etc. So a more liquied firm will find it easy to pay these. an accounts paybale balance must be paid with the current year as it is current liability and it expects its payment in the same year.

Matching principle - According to this concept, all expenses are matched against its revenue. For example, a January sales should be matched against all costs happend in the January to make this sales.

Net capital spending - It is the concept where a company spends in acquiring the fixed assets during a particular time period. Such as in expansion phase, a company incurs lots of expenses in capital assets to increase the current revenue capacity.

Operating cycle - Generally an operating cycle is the time taken from acquisition of raw materials, processing of goods and then actually converting the goods into cash. There may be several phases in this cycle but it starts from acquisition till the cash received from the selling of the goods. Such as a company purchases raw material converts into semi-finished and then finished goods. Then goods are sold in the market and finally cash is received.


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