Chapter 6 Flashcards
It focus on plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories
Inventory management
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
Inventory management
How many units should be ordered
Units can be ordered using economic order quantity (EOQ)
It is a function of demand carrying costs and ordering costs
Economic order quantity
It is a deterministic model that calculates the ideal order quantity given specified demand ordering or setup cost and carrying cost
Economic order quantity model
It is the quantity to be ordered which minimizes the sum of ordering cost and carrying cost
EOQ
This will decrease together with the order size
Ordering costs
This will increase together with order size
carrying costs
The two parts of ordering cost
Transportation and administrative costs of purchasing and costs of receiving and inspecting goods
Four parts of carrying cost
Storage cost
interest cost
spoilage
insurance
Assumptions under the economic order quantity model
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The formula of economic order quantity
Formula of computing ordering cost
Formula of computing carrying cost
When should the units be ordered
It can be ordered using the reorder point
The objective of knowing this is to prevent stockout problems
Reorder point
The period between the time the order is placed and received
Lead time
Normal lead time multiplied to the average usage
Normal lead time usage
(maximum lead time - normal lead time) *average usage
Safety stock
Reorder point who depend
If no safety stock
- Reorder point = normal lead time usage
If with safety stock
-safety stock + normal lead time usage
The primary sources of funds
bank loans
credit from suppliers (accounts payable)
accrued liabilities
long-term debt
common equity
As to cost this is generally lower
Short term financing
As to cost this is generally higher
Long-term financing
As to risk interest expense may fluctuate
Short term financing
Ask to risk interest cost will be relatively stable over time
Long-term financing
As to risk: bankruptcy a temporary recession may adversely affect its financial ratios and render it an able to repay this debt
Short term financing
as to risk: bankruptcy temporary recessions will not adversely affect its financial ratios
Long-term financing
Negotiation in this is faster
Short term financing
Negotiation in this is slower
Long-term financing
This has greater flexibility
Short term financing
This has lesser flexibility
Long-term financing
Short-term credit agreements generally have fewer restrictions
Short term financing
Long term loan contracts may contain provisions that constrain the firm’s future actions in order to protect the lender
Long-term financing
Sources of credit
Trade credit (accounts payable)
accruals (accrued expenses)
deferred income
commercial bank loans
commercial paper
This automatically obtained when a firm purchases goods or services on credit from a supplier
trade credit
It arises spontaneously from ordinary business transactions
Trade credit
It is the largest source of short term financing for many firms both large and small
Trade credit
Two types of trade credit
Free trade credit
costly trade credit
It is the credit received during the discount .
Free trade credit
Credit taken in excess of free trade credit whose cost is equal to the discount loss
Costly trade credit
If a supplier allows a trade discount for prompt payment this is incurred if the discount is not avail the off
Implicit cost
It represent liabilities for services that have been provided to the company but have not yet been paid for
accruals(accrued expenses)
This is the customers advance payments or deposits for goods or services that will be delivered at some future date
Deferred income
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
Discount interest
This results in a higher effective borrowing cost
Compensating balance
This is an amount of cash that the firm is unable to use
Compensating balance
An agreement between a bank and a borrower indicating the maximum amount of credit the bank will extend to the borrower
Line of credit
This is a formal line of credit and this makes the bank legally obligated to honor and it receives a commitment fee
Revolving credit agreement
formula of regular interest rate
Interest / borrowed amount
Formula of discounted interest rate
Interest / borrowed amount - interest
Formula of effective interest rate
Interest / borrowed amount - interest - compensating balance
This is a short term and secured note payable issued in large denominations by major companies with excellent credit ratings
Commercial paper
Maturities of this usually do not exceed to 70 days
Commercial paper
Formula of effective annual interest rate
Interest cost per period / usable loan amount
