U2, AOS 2 - Lesson 13 - Managing Accounts Payable/Receivable

Question 1

Formula for inventory turnover

Answer 1

COGS/Average Inventory

Question 2

Inventory turnover measures…

Answer 2

Inventory turnover is the rate that inventory stock is sold, or used, and replaced. The inventory turnover ratio is calculated by dividing the cost of goods by average inventory for the same period. A higher ratio tends to point to strong sales and a lower one to weak sales.

Question 3

ITO should be = faster or slower

Answer 3

Faster

Question 4

APTO stands for…

Answer 4

Accounts Payable Turnover

Question 5

ARTO stands for…

Answer 5

Accounts Receivable Turnover

Question 6

Why is it important to ensure that Accounts Payable are paid on time?

Answer 6

As your suppliers / Accounts Payable can withdraw your credit facilities preventing you from being able to buy on credit, meaning you have to have cash in order to purchase the inventory – leading to liquidity issues (i.e. impacting negatively on the ability of the businesses ability to meet it’s short term debts as they fall due), with cash tied up in inventory the business doesn’t have as much cash to use in making repayments on loans etc.

Question 7

APTO formula =

Answer 7

Question 8

When describing a trend in APTO, the terminology we must use is…

Answer 8

Faster or slower (not better or worse, higher or lower)

Question 9

What could a business do to ensure it manages its Accounts Payables effectively?

Answer 9

1. Develop a strong relationship with each supplier to access good prices, better credit terms and good quality of inventory.
2. Pay within, but as close as possible to the credit terms.
3. Pay early to earn a discount (i.e. discount revenue).
4. Appoint an Accounts Payable Officer / Clerk
5. Communicate in a timely fashion

Question 10

Strategies for managing Accounts Receivable

Answer 10

Offer a discount for quick settlement
Send invoices promptly
Conduct extensive credit checks
Send reminder notices
Threaten legal action
Employ a debt collection agency
Deny access to credit facilities
Appoint an Accounts Receivable Officer/Clerk (only suitable for medium to large sized businesses)

Question 11

ARTO formula =

Answer 11

Question 12

ARTO getting slower is = good/bad

Answer 12

Bad = this means it is taking customers longer to pay you for their credit purchases.

Question 13

APTO getting faster is = bad/good

Answer 13

Bad = this means you could be paying too quickly, meaning your cash flow could be negatively impacted and could affect your ability to meet other current liabilities.

Question 14

Why would a business want to maintain a quick APTO?

Answer 14

To take advantage of discounts offered by its suppliers.

Question 15

What is a downside of offering discounts for early settlement?

Answer 15

The business will collect less cash from its Accounts Receivable. (due to Discount Revenue increasing) this will have a negative impact on Net Profit.