Working Capital: Inventory and Short-Term Financing Flashcards
Purchase Costs
actual invoice amounts charged by suppliers
Carrying Costs
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
Ordering Costs
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
Stockout Costs
opportunity costs of not being able to fill customer orders
minimized by incurring higher carrying costs
Lead Time
time between placing an order and receipt of goods from the supplier
Reorder Point
(average daily demand * lead time in days) + safety stock
Economic Order Quantity Model
square root [(2 * ordering cost * demand in units)/carrying costs per unit]
Periodic Inventory Systems
inventory and cost of goods sold are updated only when physical inventory counts are made
Perpetual Inventory Systems
every item received is individually recorded in the tracking system; inventory and cost of goods sold are updated after every sale
Just-in-Time Inventory
inventories are reduced or eliminated entirely; agreements with suppliers ensure that materials arrive exactly when they are needed and not before (demand driven)
Kanban
tickets control the flow of production or parts so that they are produced or obtained in the needed amounts at the needed times
Materials Requirements Planning
computerized system for moving materials through a production process according to a predetermined schedule; driven by forecasted demand, derived demand
Inventory Turnover
cost of goods sold / average balance in inventory
Days Sales in Inventory
days in year / inventory turnover ratio
Operating Cycle
days sales in receivables + days sales in inventory
Cash Conversion Cycle
average collection period + days sales in inventory - average payables period
Accounts Payable Turnover
cost of goods sold / average balance in accounts payable
Average Payable Period
days in year / accounts payable turnover
Trade Credit
[discount % / (100% - discount %) ] * [days in year / (total payment period - discount period) ]
Term Loan
must be repaid by a definite time
Line of Credit
allows firm to reborrow amounts continuously up to a a maximum amount
Effective Interest Rate
interest expense (interest to be paid) / usable funds (net proceeds)
Total Borrowings for Discounted Loan
amount needed / (1 - stated rate)
Effective Rate for Discounted Loan
net interest expense / usable funds
