Unit 10: Working Capital II: Inventory and ST Financing

Question 1

What is a push inventory system?

What are examples of them?

Answer 1

A push inventory system is a system that controls inventory based on forecasted demand.

Materials requirement planning (MRP) - The demand for materials is driven by the forecasted demand for the final product as programmed into the system. MRP creates schedules of when inventory is running low thereby reducing inventory costs.

Manufacturing resource planning (MRP II) - is an advanced MRP system that extends the scope of an MRP system

Question 2

What is a pull inventory system?
What are examples of them?

Answer 2

A pull inventory system is one that is demand driven.

Just-in-time (JIT) system - production of goods does not begin until an order has been received. In this way, finished goods inventories also are eliminated.

Kanban method - It uses tickets to control the flow of production or parts so that they are produced or obtained in the needed amounts at the needed times.

Question 3

Economic order quantity model (EOQ)

Answer 3

The model minimizes the total of ordering and carrying costs.

EOQ is calculated as follows:

2 X Periodic demand X Ordering costs per order DIVIDED BY

Carrying costs per unit

Increases in the numerator (demand or ordering costs) increase the EOQ, but decreases in the numerator decrease the EOQ.

Similarly, a decrease in the denominator (carrying costs) increases the EOQ.

Question 4

Formula for Reorder point is

Answer 4

Reorder point = (Avg weekly demand X lead time) + Safety Stock

Question 5

Inventory turnover formula is

Answer 5

COGS DIVIDED / Avg. balance in inventory

Question 6

Current - year operating cycle formula is

Answer 6

of days’ sales in inventory + # of days’ sales in receivables

Sum of :

of days’ sales in inventory (avg. #of days to sell inventory)

PLUS

of days’ sales in receivables (avg. collection period)

Question 7

Formula for a company’s cash conversion cycle

Answer 7

Average collection period

PLUS

Days’ sales in Inventory

MINUS

Avg. payables period

Question 8

Current Ratio - what is it and what is the formula for it?

Answer 8

Liquidity is a firm’s ability to pay its current obligations as they come due. Liquidity ratios relate a firm’s liquid assets to its current liabilities. The current ratio is the most common measure of short-term liquidity.

Current assets DIVIDED / Current Liabilities

and Acid-test ratio is same as above except it EXCLUDES Inventory & Prepaids

Question 9

Receivable turnover ratio formula

Answer 9

Net credit sales DIVIDED / Avg. AR