P3 Flashcards
PAS 2
Inventories
Assets which are held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services
Inventories
Classes of inventory
Raw materials inventory
Work in process “
Finished goods “
Supplies
Consist of basic materials purchase from other firms to be used in the production of goods or product
Raw materials inventory
Consist of basic materials purchase from other firms to be used in the production of goods or product
Raw materials inventory
Consist of partially finished goods requiring additional work before they become wholly completed
Work in process inventory
Consist if completely manufactured goods that are not yet sold
Finished good inventory
Materials that are regularly used by the company but do not form part of the finished goods sold
Supplies
Importance of inventory management
Decoupling function
Storing resources
Irregular supply and demand
Quantity discounts
Avoiding stock outs and shortage
If the firm does not store up for a good inventory, there can be many delays and inefficiencies
Decoupling function
In a manufacturing process, raw materials can be stored by themselves, or included in the work-in-process or the finished goods inventory
Storing resources
When the supply or demand for an inventory item is irregular, storing certain amounts in hand can be important
Irregular supply and demand
Purchasing in large quantities can substantially reduce the cost of products; however, this may result to higher cost due to spoilage, damage stock, theft, insurance, so on, and less availability of cash for other investments
Quantity discounts
If a company is repeatedly out-of-stock, customers will likely go elsewhere to satisfy their needs
Avoiding stock-outs and shortages
Ways in managing invetories
Monitor inventory ratios
Maintain inventory at its optimum level
Hedge
Examine the degree of spoilage
Examine the quantity of inventory with respect to sales
Eliminate slow moving inventories
Watch out for inventory risks
Forecast the price of materials needed
Types of inventory cost
Ordering cost
Carrying cost
Also known as purchase cost or set up cost, this is the sum of the fixed cost that are incurred each tine an ite is ordered.
Order cost
Formula of TOTAL ORDERING COST
number of orders× OC (ordering cost per order
Also called holding cost, associated with having the inventory on hand. It is primarily made up of cost related to the inventory investment and storage. For the purpose of the inventory in hand, it should not be included in the carrying cost
Carrying cost
EOQ (economic order quantity) formula
Carrying cost is the average number of units of inventory for the period×carrying cost per unit
Total Carrying Cost formula
(Q or Quantity or EOQ÷2)×CC or carrying cost per unit
Components of the carrying cost
Interest
Insurance
Taxes
Storage costs
An essential accounting formula that determines the point at which the combination of order costs and inventory carrying costs is the least
Economic order quantity
Results to the most cost-effective quantity to order
Economic order quantity
Required number of times a firm or company orders in a given period; on the assumption that the inventory will be used at the constant rate throughout the period
Optimum numbers of order
The inventory level at which an order should be places to replenish the inventory; computed by multiplying the lead time by the normal lead time usage
Reorder point
Used only under condition of certainty, meaning the lead time and lead time usage don’t fluctuate
Reorder point
The time it normally takes to receive the delivery of inventory after the order has been placed
Lead time
Refers to the number of units to be used during the lead time
Lead time usage
Formula of Reorder Point or ROP
Lead time × lead time usage
Additional inventory on hand used to cushion uncertainties during the lead time and lead time usage
Safety stock
Factors to be considered in maintaining safety stocks
Demand
Lead time
Cost of stock outs
Higher the risk associated with the perceived demand in the inventory, the higher the safety stock to be required by the company
Demand
The higher the risk of not receiving the goods needed, the higher the risk of stock out or out of stock
Lead time
Safety stock is maintained to avoid risk of losing sales
Cost of stock out
Formula to get Reorder point with safety stock
(lead time × usage per day) + safety stock
What basis the firm may use to determine the required safety stock
Maximum usage basis
Frequency distribution basis
Firms safety stock is determined by identifying the normal usage during lead time and deducting it from maximum usage during lead time
Maximum usage basis
Uses a series of historical data sorted into classes with their corresponding frequencies of occurence
Frequency distribution basis
Statistical tool applied to historical data is used to arrive at the desired level of safety stock
Frequency distribution basis
Part of the total production concept that often interfaces with a total quality control program
Just in time inventory
JIT or Just in time program’s 3 basic requirements
Quality production that continually satisfies customers requirement
Close ties between suppliers, manufacturers and customers
Minimization level of inventory
Requires close cooperation with the vendors regarding the quality of the output and design-for-manufacturing (DFM) issues to assure ease in manufacturing, quality, realibility, and ease of the service which are built into the product from the design stage
Lean production
As presented in the balance sheet, consist of all current liabilities
Short term financing
Criteria provided by the revised PAS no. 1 for a liability to be considered current
Expected to be settled in the entity’s normal operating cycle
Held primarily for the purpose of being traded
Due to be settled within 12 months after the balance sheet date
Entity does not have an unconditional right to defer the payments of the liability for at least 12 months after the balance sheet date.
Advantages of short term financing
Easier to arrange
Less expensive
Afford the borrower more flexiblity
Disadvantages of short term financing
Interest rate fluctuates more often
Refinancing is frequently needed
Delinquent payment may be detrimental to the credit rating to the credit rating of the borrower
Sources of the short term financing
Trade credit
Stretching payable
Accruals
Short term bank loan
Banker’s acceptance
Commercial finance company loans
Commercial paper
Receivable financing
Inventory financing
An agreement between the buyer and the seller
Trade credit
The buyer received the invoice sent by the seller specifying the goods purchased, the purchase price, the total amount to be paid, and the term of purchase
Trade credit
Term if purchase is the cheapest way of obtaining a short term loan and is considered to be the largest source if short term funds
Trade credit
advantages of trade credit
Immediately available from suppliers
Collateral is not needed
No interest is charged, although there is an implicit cost if the discount is forgone
Can be easily paid off
Easily to obtain
Trade creditors are usually generous or supportive in the event of financial difficulty
Disadvantages of trade credit
Possibility of not availing of the discount dus to financial problems
Buyer avails of the discount but at a disadvantage due to lower implicit cost as compared with a higher cost of the bank credit
Not paying within the discount period may lead the firm to a lower credit rating
Factors to be considered
Market conditions
Financial stability
Competitiveness
Nature of the product
Nature of the demand and supply
Formula of average account payable
(annual purchase ÷ 360) × credit period
Formula cost of discount forgone
(discount÷100%) - discount 100%] × (360/ final due date - discount period)
Mean paying the obligation later than expected; helps the company reduce the cost of discount
Stretching payable
Expenses already incurred but not yet paid off by the company; with the discrepancy, the company is able to benefit fron the short term financing
Accruals
The company has the power to use the funds for other operating activities until such time that it needs to release payment
Accruals
