M4 Working Capital Management: Part 1 Flashcards
What Inventory Valuation method is used for LIFO?
Lower of Cost or Market
What inventory valuation method is used for FIFO/WA
Lower of cost or NRV
What is the market value and how to calculate it?
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
How to calculate the net realizable value NRV
Net selling price LESS costs to complete and dispose (FIFO/WA)
Type of inventory system where inventory quantities are determined by physical counts performed at least annually
Periodic inventory system
Type of inventory system where the inventory balance is updated for each purchase and each sale
Perpetual inventory system
5 Inventory Cost Flow Assumptions
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
inventory cost flow assumption in which the cost of each item in inventory is uniquely identified to that item
Specific Identification Method
FIFO - in a rising price environment, COGS = ? and Ending Inventory = ?
COGS down - CHEAPEST being sold first
Ending Inventory - UP Expensive items staying in inventory
LIFO - in a rising price environment, COGS = ? and Ending Inventory = ?
COGS UP - EXPENSIVE sold first
Ending Inventory - DOWN cheapest left in inventory
Weighted Average method formula and what type of inventory system does it work with?
COGAFS / # units
Periodic
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?
Moving Average Method
-Perpetual
Inventory carrying costs
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
many companies maintain this to ensure that manufacturing or customer supply requirements are met
safety stock
The inventory level at which a company should order of manufacture additional inventory to meet demand and to avert incurring stockout costs
Reorder Point
Reorder Point formula
safety stock + (lead time * Sales during lead time)
model that attempts to minimize total ordering and carrying costs
Economic Order Quantity (EOQ)
Economic Order Quantity Formula (EOQ - 2SOC!)
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
inventory model developed to reduce the lag time between inventory arrival and inventory use
Just-in-time (JIT) model
inventory control technique that gives visual signals that a component required in production must be replenished
Kanban Inventory Control
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
Integrated Supply Chain Management (ISCM)
What is the goal of supply chain management?
Understand the needs and preferences of customers and to cultivate the relationship with them
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
Supply Chain Operations Reference (SCOR) Model
What are the 4 key management processes/core activities of the SCOR Model
Supply Chain Operations Reference SCOR
-Plan
-Source
-Make
-Deliver
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
APR =
360/Pay period - discount period * Discount / 100-Discount%
What financial instrument generally provides the largest source of short term credit for small firms?
Trade Credit
inventory management technique that projects and plans inventory levels in order to control the usage of raw materials in the production process
Materials requirement planning
inventory model that attempts to minimize both ordering and carrying costs
Economic order quantity (EOQ)
what assumption is associated with the economic order quantity formula?
Periodic demand is known
What type of working capital technique delays the outflow of cash?
DRAFT
Formula for calculating cost of a credit policy
360 / (total pay period - discount period) * Discount% / (100% - Discount )
*terms 2/10, net 30, 360 day year :
[360 / (30-10)] * [2% / (100%-2%)]
