New Horizon Flashcards
WHAT is the Operating Cycle?
THE length of time it takes a company to complete normal operating activities
Hence, the operating cycle is equivalent to the average time that inventory is held plus the average time that receivables are held
Days Held Inventory + Days Held Receivables
WHAT is an assumption associated with the Economic Order Quantity Formula?
Periodic Demand is Known; other assumptions included are:
(1) Demand is uniform
(2) order (setup) costs and carrying costs are constant, and
(3) no quantity discounts are allowed
WHAT is the economic order quantity (EOQ) model?
A mathematical tool for determining the order quantity that minimizes the sum of ordering costs and carrying costs
WHAT is the Cash Conversion Cycle?
THE amount of time that passes between the actual outlay of cash for inventory purchases and the collection of cash from the sale of that inventory
EQUATION: inventory conversion period, plus the average collection period, minus the payables deferral period
WHAT are examples of Value Chain Business Functions?
Research and Development
Marketing
Customer Service
WHAT effect does Safety Stock have on Economic Order Quantity?
NO Effect
WHY? - EOQ formula are periodic demand, cost per order, and the unit carrying cost for the period
NO mention of Safety Stock
WHAT does the Economic Order Quantity Formula indicate?
THE Quantity of each individual order during the year
NOTE: This model minimizes the sum of inventory carrying costs and either ordering or production setup costs
WHAT is the equation for the Conversion Cash Cycle?
Days Sales in Receivables + Days Sales in Inventory - Average Payable Period
WHAT type of system is Materials requirements planning?
Materials requirements planning (MRP) is a push system;
i.e., the demand for raw materials is driven by the forecasted demand for the final product as programmed into the system
WHAT is Derived Demand?
Demand driven by the demand for the final good
WHAT Calculation would assist in determining the inventory reorder point?
THE Average Daily Usage
i.e. The reorder point is the amount of inventory on hand indicating that a new order should be placed
This is calculated as: (Average daily demand × Lead time in days) + Safety stock
WHAT is the EQUATION for the Reorder Point?
This is calculated as: (Average daily demand × Lead time in days) + Safety stock
WHAT is one likely result of using a lockbox?
THE increase in the Cash Conversion Cycle
WHY? - Because the lockbox will accelerate cash collections and decrease the average collection period
Hence - cash conversion cycle (average collection period + days’ sales in inventory – average payables period) will increase
WHAT do the results of the Economic Order Quantity (EOQ) indicate?
THE quantity of each individual order during the year
i.e. the model minimizes the sum of inventory carrying costs and either ordering or production setup costs
WHAT is the difference between Monopolistic Competition and Perfect Competition?
Monopolistic Competition produces a greater variety of products at a higher cost per unit
i.e. Firms in Monopolistic Competition sell differentiating products
WHAT would cause inventory turnover to increase if sales and inventory were essentially unchanged?
THE Gross Profit Percentage Decreased
WHY? - Because a increase in Cost of Goods Sold increases the inventory turnover ratio
Thus, a decrease in the Gross Profit Percentage [(sales – cost of goods sold) ÷ sales] signifies a increase in Cost of Goods Sold
WHAT ratio will increase if a wholesale creditor changed their terms from 1/15, n/45 to 2/15, n/45?
The Accounts Receivable Turnover Ratio
WHY? - Because the discount has been increase - customers will be more willing to take advantage of the discount which will increase cash barely but decrease A/R
Thus A/R (Denominator) will decrease and Net Credit Sales (Numerator) remain relatively unchanged the ratio will go up
According to COSO, which enterprise risk management addresses entity’s high-level goals aligned with support of the mission?
Strategy
i.e. refers to a company’s high-level goals while supporting its mission
WHAT is an example of a “Pull-System?”
JIT is a pull system that is demand-driven
WHAT is an example of a “Push-System?”
Materials requirements planning (MRP) and Manufacturing Resource Planning (MRP II)
The demand for materials is driven by the forecasted demand for the final product as programmed into the system
