Chapter 6

Question 1

It focus on plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories

Answer 1

Inventory management

Question 2

The main objective is to get the right amount of inventory to best balance the estimate of actual savings, the cost of carrying additional inventory and the efficiency of inventory control

Answer 2

Inventory management

Question 3

How many units should be ordered

Answer 3

Units can be ordered using economic order quantity (EOQ)

Question 4

It is a function of demand carrying costs and ordering costs

Answer 4

Economic order quantity

Question 5

It is a deterministic model that calculates the ideal order quantity given specified demand ordering or setup cost and carrying cost

Answer 5

Economic order quantity model

Question 6

It is the quantity to be ordered which minimizes the sum of ordering cost and carrying cost

Answer 6

EOQ

Question 7

This will decrease together with the order size

Answer 7

Ordering costs

Question 8

This will increase together with order size

Answer 8

carrying costs

Question 9

The two parts of ordering cost

Answer 9

Transportation and administrative costs of purchasing and costs of receiving and inspecting goods

Question 10

Four parts of carrying cost

Answer 10

Storage cost
interest cost
spoilage
insurance

Question 11

Assumptions under the economic order quantity model

Answer 11

…..

Question 12

The formula of economic order quantity

Question 13

Formula of computing ordering cost

Question 14

Formula of computing carrying cost

Question 15

When should the units be ordered

Answer 15

It can be ordered using the reorder point

Question 16

The objective of knowing this is to prevent stockout problems

Answer 16

Reorder point

Question 17

The period between the time the order is placed and received

Answer 17

Lead time

Question 18

Normal lead time multiplied to the average usage

Answer 18

Normal lead time usage

Question 19

(maximum lead time - normal lead time) *average usage

Answer 19

Safety stock

Question 20

Reorder point who depend

Answer 20

If no safety stock
- Reorder point = normal lead time usage

If with safety stock
-safety stock + normal lead time usage

Question 21

The primary sources of funds

Answer 21

bank loans
credit from suppliers (accounts payable)
accrued liabilities
long-term debt
common equity

Question 22

As to cost this is generally lower

Answer 22

Short term financing

Question 23

As to cost this is generally higher

Answer 23

Long-term financing

Question 24

As to risk interest expense may fluctuate

Answer 24

Short term financing

Question 25

Ask to risk interest cost will be relatively stable over time

Answer 25

Long-term financing

Question 26

As to risk: bankruptcy a temporary recession may adversely affect its financial ratios and render it an able to repay this debt

Answer 26

Short term financing

Question 27

as to risk: bankruptcy temporary recessions will not adversely affect its financial ratios

Answer 27

Long-term financing

Question 28

Negotiation in this is faster

Answer 28

Short term financing

Question 29

Negotiation in this is slower

Answer 29

Long-term financing

Question 30

This has greater flexibility

Answer 30

Short term financing

Question 31

This has lesser flexibility

Answer 31

Long-term financing

Question 32

Short-term credit agreements generally have fewer restrictions

Answer 32

Short term financing

Question 33

Long term loan contracts may contain provisions that constrain the firm's future actions in order to protect the lender

Answer 33

Long-term financing

Question 34

Sources of credit

Answer 34

Trade credit (accounts payable) accruals (accrued expenses) deferred income commercial bank loans commercial paper

Question 35

This automatically obtained when a firm purchases goods or services on credit from a supplier

Answer 35

trade credit

Question 36

It arises spontaneously from ordinary business transactions

Answer 36

Trade credit

Question 37

It is the largest source of short term financing for many firms both large and small

Answer 37

Trade credit

Question 38

Two types of trade credit

Answer 38

Free trade credit costly trade credit

Question 39

It is the credit received during the discount .

Answer 39

Free trade credit

Question 40

Credit taken in excess of free trade credit whose cost is equal to the discount loss

Answer 40

Costly trade credit

Question 41

If a supplier allows a trade discount for prompt payment this is incurred if the discount is not avail the off

Answer 41

Implicit cost

Question 42

It represent liabilities for services that have been provided to the company but have not yet been paid for

Answer 42

accruals(accrued expenses)

Question 43

This is the customers advance payments or deposits for goods or services that will be delivered at some future date

Answer 43

Deferred income

Question 44

This results in a higher effective borrowing costs than simple interest because the bank deduct interest in advance so the borrower receives less than the face value of the loan

Answer 44

Discount interest

Question 45

This results in a higher effective borrowing cost

Answer 45

Compensating balance

Question 46

This is an amount of cash that the firm is unable to use

Answer 46

Compensating balance

Question 47

An agreement between a bank and a borrower indicating the maximum amount of credit the bank will extend to the borrower

Answer 47

Line of credit

Question 48

This is a formal line of credit and this makes the bank legally obligated to honor and it receives a commitment fee

Answer 48

Revolving credit agreement

Question 49

formula of regular interest rate

Answer 49

Interest / borrowed amount

Question 50

Formula of discounted interest rate

Answer 50

Interest / borrowed amount - interest

Question 51

Formula of effective interest rate

Answer 51

Interest / borrowed amount - interest - compensating balance

Question 52

This is a short term and secured note payable issued in large denominations by major companies with excellent credit ratings

Answer 52

Commercial paper

Question 53

Maturities of this usually do not exceed to 70 days

Answer 53

Commercial paper

Question 54

Formula of effective annual interest rate

Answer 54

Interest cost per period / usable loan amount