Capital investment decisions

Question 1

What is just-in-time procurement?

Answer 1

A policy of obtaining goods from suppliers at the latest possible time.

Question 2

Name a few carrying costs

Answer 2

Storage and tracking.
Insurance and taxes.
Losses due to obsolescence, deterioration. or theft.

Question 3

Advantages of just-in-time:

Answer 3

Less/no risk of obsolescence.
Lower inventory levels and associated costs.

Question 4

Disadvantages of just-in-time:

Answer 4

Risk of stock-outs.
Transport/order/admin costs.

Question 5

What are some reasons for holding cash?

Answer 5

Speculative motive:
take advantage of additional investment opportunities.
Precautionary motive:
safety margin to act as a financial reserve.
Transaction motive:
satisfy normal disbursement and collection activities associated with a firm’s ongoing activities.

Question 6

Define float

Answer 6

The difference between book cash and bank cash, representing the net effect of cheques in the process of clearing.

Question 7

What are terms of sale?

Answer 7

Conditions under which a firm sells its goods or services for cash or credit (e.g. credit period, cash discount, discount period, and type of credit instrument)

Question 8

What is credit policy?

Answer 8

Sets the credit terms. Involves credit analysis, the process of determining the probability customers will not pay.

Question 9

What is collection policy?

Answer 9

The procedures followed by a firm in collecting trade receivables.