M4 Working Capital Management: Part 1

Question 1

What Inventory Valuation method is used for LIFO?

Answer 1

Lower of Cost or Market

Question 2

What inventory valuation method is used for FIFO/WA

Answer 2

Lower of cost or NRV

Question 3

What is the market value and how to calculate it?

Answer 3

MEDIAN VALUE of replacement cost, market ceiling and market floor
Replacement cost = Cost to purchase inventory on the valuation date
Market Ceiling = net selling P LESS cost to complete and dispose of inventory
Market Floor = Mkt ceiling LESS normal profit margin
NRV - Profit

Question 4

How to calculate the net realizable value NRV

Answer 4

Net selling price LESS costs to complete and dispose (FIFO/WA)

Question 5

Type of inventory system where inventory quantities are determined by physical counts performed at least annually

Answer 5

Periodic inventory system

Question 6

Type of inventory system where the inventory balance is updated for each purchase and each sale

Answer 6

Perpetual inventory system

Question 7

5 Inventory Cost Flow Assumptions

Answer 7

Specific Identification Method
FIFO (lower of cost or NRV)
LIFO (lower of cost or market)
Weighted Average (lower of cost or NRV)
Moving Weighted Average

Question 8

inventory cost flow assumption in which the cost of each item in inventory is uniquely identified to that item

Answer 8

Specific Identification Method

Question 9

FIFO - in a rising price environment, COGS = ? and Ending Inventory = ?

Answer 9

COGS down - CHEAPEST being sold first
Ending Inventory - UP Expensive items staying in inventory

Question 10

LIFO - in a rising price environment, COGS = ? and Ending Inventory = ?

Answer 10

COGS UP - EXPENSIVE sold first
Ending Inventory - DOWN cheapest left in inventory

Question 11

Weighted Average method formula and what type of inventory system does it work with?

Answer 11

COGAFS / # units
Periodic

Question 12

Inventory cost flow assumption that computes the weighted average cost of the inventory after each purchase by dividing the total cost of inv avail after each purchase by total units aval after each purchase. What type of inventory system does it work with?

Answer 12

Moving Average Method
-Perpetual

Question 13

Inventory carrying costs

Answer 13

Storage
Insurance
Opportunity costs of inventory investment
Lost inventory due to obsolescence or spoilage
*the lower the carrying costs, the more inventory companies are willing to carry

Question 14

many companies maintain this to ensure that manufacturing or customer supply requirements are met

Answer 14

safety stock

Question 15

The inventory level at which a company should order of manufacture additional inventory to meet demand and to avert incurring stockout costs

Answer 15

Reorder Point

Question 16

Reorder Point formula

Answer 16

safety stock + (lead time * Sales during lead time)

Question 17

model that attempts to minimize total ordering and carrying costs

Answer 17

Economic Order Quantity (EOQ)

Question 18

Economic Order Quantity Formula (EOQ - 2SOC!)

Answer 18

E = square root of 2SO/C where,

E = order size
S = annual SALES (in units)
O = cost per purchase ORDER
C = annual CARRYING costs per unit

Question 19

inventory model developed to reduce the lag time between inventory arrival and inventory use

Answer 19

Just-in-time (JIT) model

Question 20

inventory control technique that gives visual signals that a component required in production must be replenished

Answer 20

Kanban Inventory Control

Question 21

Exists when a firm and the entire supply chain are able to reasonably predict the expected demand of consumers for a product and then plan accordingly to meet their demand

Answer 21

Integrated Supply Chain Management (ISCM)

Question 22

What is the goal of supply chain management?

Answer 22

Understand the needs and preferences of customers and to cultivate the relationship with them

Question 23

Developed to create a generic model for supply chain analysis; assists a firm in mapping out its true supply chain and then configuring it to best fit the needs of the firm

Answer 23

Supply Chain Operations Reference (SCOR) Model

Question 24

What are the 4 key management processes/core activities of the SCOR Model

Answer 24

Supply Chain Operations Reference SCOR
-Plan
-Source
-Make
-Deliver

Question 25

The effective annual interest cost can be extremely high if discounts are offered and foregone as part of this working capital management strategy. What is the formula to calculate the annual cost (APR) of a quick payment discount assuming a 360-day year

Answer 25

APR =
360/Pay period - discount period * Discount / 100-Discount%

Question 26

What financial instrument generally provides the largest source of short term credit for small firms?

Answer 26

Trade Credit

Question 27

inventory management technique that projects and plans inventory levels in order to control the usage of raw materials in the production process

Answer 27

Materials requirement planning

Question 28

inventory model that attempts to minimize both ordering and carrying costs

Answer 28

Economic order quantity (EOQ)

Question 29

what assumption is associated with the economic order quantity formula?

Answer 29

Periodic demand is known

Question 30

What type of working capital technique delays the outflow of cash?

Answer 30

DRAFT

Question 31

Formula for calculating cost of a credit policy

Answer 31

360 / (total pay period - discount period) * Discount% / (100% - Discount )

*terms 2/10, net 30, 360 day year :
[360 / (30-10)] * [2% / (100%-2%)]