Working Capital: Inventory and Short-Term Financing

Question 1

Purchase Costs

Answer 1

actual invoice amounts charged by suppliers

Question 2

Carrying Costs

Answer 2

consists of all costs associated with holding inventory: storage, insurance, security, depreciation/rent of facilities. interest, obsolescence, spoilage, opportunity cost

minimized by incurring high fixed costs of placing many small orders

Question 3

Ordering Costs

Answer 3

fixed costs of placing an order with a vendor; not affected by number of units ordered

minimized by incurring high carrying costs of larger inventories

Question 4

Stockout Costs

Answer 4

opportunity costs of not being able to fill customer orders

minimized by incurring higher carrying costs

Question 5

Lead Time

Answer 5

time between placing an order and receipt of goods from the supplier

Question 6

Reorder Point

Answer 6

(average daily demand * lead time in days) + safety stock

Question 7

Economic Order Quantity Model

Answer 7

square root [(2 * ordering cost * demand in units)/carrying costs per unit]

Question 8

Periodic Inventory Systems

Answer 8

inventory and cost of goods sold are updated only when physical inventory counts are made

Question 9

Perpetual Inventory Systems

Answer 9

every item received is individually recorded in the tracking system; inventory and cost of goods sold are updated after every sale

Question 10

Just-in-Time Inventory

Answer 10

inventories are reduced or eliminated entirely; agreements with suppliers ensure that materials arrive exactly when they are needed and not before (demand driven)

Question 11

Kanban

Answer 11

tickets control the flow of production or parts so that they are produced or obtained in the needed amounts at the needed times

Question 12

Materials Requirements Planning

Answer 12

computerized system for moving materials through a production process according to a predetermined schedule; driven by forecasted demand, derived demand

Question 13

Inventory Turnover

Answer 13

cost of goods sold / average balance in inventory

Question 14

Days Sales in Inventory

Answer 14

days in year / inventory turnover ratio

Question 15

Operating Cycle

Answer 15

days sales in receivables + days sales in inventory

Question 16

Cash Conversion Cycle

Answer 16

average collection period + days sales in inventory - average payables period

Question 17

Accounts Payable Turnover

Answer 17

cost of goods sold / average balance in accounts payable

Question 18

Average Payable Period

Answer 18

days in year / accounts payable turnover

Question 19

Trade Credit

Answer 19

[discount % / (100% - discount %) ] * [days in year / (total payment period - discount period) ]

Question 20

Term Loan

Answer 20

must be repaid by a definite time

Question 21

Line of Credit

Answer 21

allows firm to reborrow amounts continuously up to a a maximum amount

Question 22

Effective Interest Rate

Answer 22

interest expense (interest to be paid) / usable funds (net proceeds)

Question 23

Total Borrowings for Discounted Loan

Answer 23

amount needed / (1 - stated rate)

Question 24

Effective Rate for Discounted Loan

Answer 24

net interest expense / usable funds

Question 25

Effective Interest Rate on Discounted Loan

Answer 25

stated rate / (1 - stated rate)

Question 26

Total Borrowings for Compensating Balances

Answer 26

amount needed / (1 - compensating balance %)

Question 27

Effective Rate with Compensatory Balance

Answer 27

net interest expense / usable funds

Question 28

Effective Interest Rate with Compensatory Balance

Answer 28

stated rate / (1 - compensating balance %)