6-2. Working Capital Management Flashcards Preview

BEC III > 6-2. Working Capital Management > Flashcards

Flashcards in 6-2. Working Capital Management Deck (33)
Loading flashcards...
1
Q

A/R Management: What is it concerned with?

A
  • Conditions leading to the recognition of receivables

* Process that results in elimination (e.g. collection) of receivables

2
Q

A/R Management: What is involved in the process?

A
  • Establish general terms of credit
  • Determine customer creditworthiness and setting credit limits
  • Collecting A/R
3
Q

A/R Management: what must a firm selling on credit establish?

A

General terms under which credit will be granted - will be influenced by terms common in its industry.

4
Q

A/R Management: What are elements of general terms of credit decisions?

A
  • Total credit period - the maximum period for which credit may be extended
  • Discount to be offered for early pmt if any
  • Penalty for late pmt
  • Nature of credit sales documentation if any
5
Q

A/R Management: What is the objective when deciding whether or not to grant credit to each customer and how much?

A

Maximize profits, not minimize credit losses.

6
Q

A/R Management: What happens when the credit policy is too strict?

A

Strict: Reduces uncollectible accounts, but may result in not making credit sales that would be collected.

7
Q

What are 2 major approaches to determine whether or not to grant credit?

A
  • Use credit-rating service: obtain and use a rating report from a credit agency (Equifax, Experion, Transunion, Dun & Bradstreet)
  • Do financial analysis - usually done by large firms or in special circumstances
8
Q

A/R Management: What is the objective for collection?

A

To keep post-sales losses to a minimum.

9
Q

A/R Management: What are process?

A
  • Monitoring A/R continuously
  • Identify overdue accounts
  • Prompt collection action
10
Q

A/R Management: what can a firm use to monitor A/R at aggregate level?

A

Use averages and ratios;

  • Average collection period
  • Day’s sales in A/R
  • A/R turnover
  • A/R to current or total assets
  • Bad debt to sales
11
Q

A/R Management: what can a firm use to monitor A/R at the individual account level?

A

Use aging of A/R
*Shows the amount owed and how long it has been due for each customer
*amount would be grouped by;
not yet due, 1-30 days over due, 30-60 days, greater than 60 days etc.

12
Q

A/R Management: What costs may drastic collection actions have?

A

Financial and goodwill costs

13
Q

Inventory Management: What is a risk-reward tradeoff?

A

Under investing to save costs = risk of shortages

Over investing to provide cushion = risk of excessive costs

14
Q

Inventory Management: Objective?

A

To neither under invest nor over invest.

15
Q

Inventory Management: What are 2 general approaches (systems) in US?

A
  • Traditional Materials Requirement Planning (MRP) system

* Just-in-time (JIT) inventory system

16
Q

Inventory Management: What is Traditional Materials Requirement Planning (MRP) system?

A

Predominant in US from 1960s to advent of JIT.

  • Supply push = goods are produced in anticipation of their sale
  • The inventory buffers = inventory is maintained at every level as buffers against unexpected demand
  • Production based on long set-up time and long production runs - inflexible system
  • Impersonal relationships with suppliers - purchase based on lowest bid
  • Quality stds set at an “acceptable” level - allow for certain defects
  • Emphasis = job order and processing cost approaches
17
Q

Inventory Management: What is Just-in-Time inventory (JIT) system?

A

Originates with Toyota

  • Based on obtaining (on the supply side) and delivering (on the sell side) inventory just as and only when needed
  • Demand pull = goods are produced only when and as needed by the end user
  • Inventory reductions = production and purchasing occur only as needed - inventory reduced or eliminated
  • Production in work center (or cells) - workers operate multiple pieces of equipment or robotics are used
  • Close working relationships with a limited number of suppliers located physically close to production facilities
  • Quality is critical, including inputs to the production process
  • Simplified cost accounting with fewer accounts - more items considered direct cost and reducing allocations
18
Q

Inventory Management: Financial benefits of JIT and related production processes?

A
  • Reduced investment in inventory
  • Lower cost of inventory transportation, warehousing, insurance, property taxes and related costs
  • Reduced lead time in replenishing production inputs
  • Less complex and more relevant accounting and performance measures
19
Q

Inventory Management: Can JIT be used by every firm?

A

No

20
Q

Inventory Management: Regardless of methods, what are 2 elements a firm is concerned?

A
  • The economic order quantity

* The reporter point for its inventory

21
Q

Inventory Management: The economic order qty: what are the trade off of inventory ordering cost and carrying cost?

A

Larger the qty ordered, the lower per unit order cost

Larger the qty ordered, the higher the carrying cost

22
Q

Inventory Management: what is total inventory administrative cost?

A

Total order costs + Total carrying costs

23
Q

Inventory Management: what does the economic order qty (EOQ) model determines?

A

The order size that minimize total inventory administrative costs.

24
Q

Inventory Management: what is the formula for total order cost? no need to remember

A

= (Total units / Order size qtry) x Per order cost

= (T/Q) x O

25
Q

Inventory Management: what is the formula for total carrying cost? no

A

= (Order size qty / 2) x Per unit carrying cost

= (Q/2) x C

26
Q

Inventory Management: Formula for total cost? no

A
TC = [(T/Q) x O] + [(Q/2) x C] or
TC = (T x O) / Q + (Qx C) / 2
27
Q

Inventory Management: Formula for EOQ?

A

2 TO/C square root.
T = total demand
O = Per order cost
C = Per unit carrying cost

28
Q

Inventory Management: EOQ EX:

Total demand = 10,000 units, per order cost = $100, Per unit carrying cost = $2.00.

A

square root of 2 x 10,000 x 100 / 2 = 1,000 units = optimum order qty

29
Q

Inventory Management: what are assumptions for EOQ?

A
  • Demand is constant during period
  • Unit cost and carrying costs are constant during the period
  • Delivery is instantaneous
30
Q

Inventory Management: What is inventory reorder point? Formula?

A

Determine the inventory qty at which goods should be reordered.
Reorder point = Delivery time stock + Safety stock

31
Q

Inventory Management: Reorder point ex:

Annual use equally over 50 wks = 300,000 units, delivery time = 2 wks, safety stock = 1,000 units.

A

[(300,000 / 50) x 2 wks] + 1,000 = 13,000 units = reorder point

32
Q

Current Liabilities Management: What is the guideline?

A
  • Should be used to finance assets which generate cash in the short-term; the principle of self-liquidating debt.
  • Some amount provide a permanent amount of financing
  • Normally do not require collateral or impose restrictive covenants
  • If requires a compensating balance, the effective cost is greater than the stated cost
  • A line of credit, revolving credit and letter of credit provide “stand by” financing
33
Q

Current Liabilities Management: computing the value of discount ex:
A: 1.5/15, net 30
B: 1/10, net 30
C: 2/10, net 60
A firm must borrow from a bank to take the discount at annual rate of 10%.

A

Discount% / (100% - discount%) x 360 days / (Total pay period - Discount period).

A: 0.015 / (1 - 0.015) x 360 / (30-15) = 0.3648 - Annual cost of not taking discount. By borrowing from the bank at 10% and taking advantage of the discount, Ruby would benefit by .3653 annual rate saved less .10 annual cost of borrowing = .2653.