B2 - M4: Working Capital Management I

Question 1

3 inventory valuation methods

Answer 1

1) lower of cost, market, or net realizable value (GAAP)
2) market value
3) net realizable value

Question 2

If using LIFO method or retail inventory method, which inventory valuation method may be used?

Answer 2

lower of cost or market value

Question 3

If using any inventory valuation method besides LIFO (FIFO, Weighted Average, etc) which inventory valuation method may be used?

Answer 3

lower of cost or net realizable value

Question 4

How do you calculate the market value of inventory?

Answer 4

• median value of an item’s replacement cost, market and ceiling, and market floor
• market ceiling = Net selling price - cost to complete and dispose of inventory
• market floor = market ceiling - profit margin

Question 5

How do you calculate NRV

Answer 5

= market ceiling = net selling price - cost to dispose and complete inventory

• cost inventory could sell to market participants - shipping costs

Question 6

Steps to value inventory if the company uses LIFO

Answer 6

1) is the cost to acquire the inventory or the market value lower?
2) if market is lower - take the middle value of the replacement cost, ceiling, and floor
3) lowest value between cost and computed market value is reported on the B/S

Question 7

Steps to value inventory if the company uses FIFO or any other inventory valuation method besides LIFO

Answer 7

1) Is the cost or NRV lower?

2) report the lowest amount on the B/S

Question 8

Types of inventory systems

Answer 8

1) Periodic
- inventory quantities determined by physical count at the end of the period
- COGS is plugged as the difference between Beg Inv + Purchases - End. Inv

2) Perpetual
- inventory balance is updated for each purchase and sale
- COGS is determined and recorded with each sale

Question 9

What are the 5 Inventory Cash Flow methods

Answer 9

1) Specific Identification
- inventory is uniquely identifiable and is known specifically which unit was sold

2) FIFO
- Sell oldest first: if price goes UP - COGS (down) Ending Inv (up)
- use w/ periodic or perpetual system

3) LIFO
- Sell newest first: if price goes UP - COGS (up) Ending Inv (down)
- use w/ periodic or perpetual system

4) Weighted Average
- = COGS / # Units
- use ONLY with periodic

5) Moving Average
- computes weighted average after each purchase
- = Current Inv + Purchase / # units available after purchase
- use ONLY with perpetual

Question 10

Affect of increased or decreased cost of carrying inventory

Answer 10

Increased cost of carrying = company willing to carry LESS inventory

Decrease cost of carrying = company willing to carry MORE inventory

Question 11

Optimal Inventory Level depends on:

Answer 11

• Safety Stock
• Reorder Point
• Economic order quantity
• Materials requirements planning

Question 12

Safety Stock

Answer 12

• Amount of inventory kept on hand to ensure customer demands are met
  = expected stockout cost + carrying cost
• depends on:
  • reliability of forecasts
  • possibility of customer dissatisfaction
  • cost of running out of inventory (stockout costs)
  • lead time
  • seasonal demand

Question 13

Reorder Point

Answer 13

• inventory level when company needs to purchase or manufacture additional inventory

= safety stock + (lead time x Sales during lead time)

Question 14

Economic Order Quantity

Answer 14

• minimize the frequency of ordering inventory and carrying costs
• order quantity (down) carrying costs (down) but order frequency (up)

“ESOC”

= sq. root [(2 x annual sales x Cost per PO) / Annual carrying cost per unit]

Question 15

Materials Requirements Planning

Answer 15

• projects and plans inventory levels to control use of raw materials
• primarily applies to WIP and RM

Question 16

What is Just in Time inventory management method

Answer 16

• reduces lag time between inventory arrival and use in order to reduce the need to carry a large inventory
• requires lots of coordination
• “pull” approach

Question 17

Kanban Inventory Control

Answer 17

• visual signals to indicate when inventory needs to be replenished
• prevents oversupply and in turn reduces carrying costs

Question 18

What is integrated Supply Chain Management and how is it used?

Answer 18

• Method to better project customer supply and demand accordingly
• Understand customer needs and preferences
• Better demand projection will improve the forecasting of inventory/production levels and will reduce costs

Question 18

What is integrated Supply Chain Management and how is it used?

Answer 18

-

- Understand customer needs and preferences to better project demand. This will

Question 19

Trade Credit

Answer 19

• essentially AP

- largest source of ST credit for small firms

Question 20

AP Quick Payment Discount

Answer 20

= (360 / pay period - discount period) x (discount / 100 - discount %)

• this is the cost to a company for not taking advantage of the discount
• the discount should NOT be taken if ST borrowing rate is < computed rate
• the discount SHOULD be taken if ST borrowing rate is > computed rate

Question 21

Working Capital - Draft

Answer 21

• Payments made are guaranteed by the entity on which the draft is drawn
• Like a check but takes more time for money to be withdrawn from payers account
• A working capital technique that increases the payable float and therefore delays the outflow of cash

Question 22

Concentration Banking

Answer 22

• every source of cash receipts and disbursements located in one account

Question 23

Inventory Carrying Costs

Answer 23

• Storage
• Insurance
• Opportunity cost of inventory investment
• Obsolescence or spoilage

= inventory investment per unit x carrying cost % x Safety stock units

Question 24

Expected Stockout Cost

Answer 24

• cost of running out of inventory

= Stockout units x Stockout cost per unit x Probability x Orders per period