Working Capital Management Flashcards
LIFO uses lower of cost or _______
FIFO & Weighted Average use lower of cost or _______
LIFO - Lower of cost or Market
FIFO & WA - Lower of cost of NRV
What represents the median value of the item’s replacement cost, market ceiling and market floor?
Market value
What is the market ceiling and what is the market floor?
Ceiling - NRV
Floor - NRV - Profit
What is the net selling price minus the cost to complete and dispose?
Net Realizable Value
What type of system has inventory quantities determined by physical counts performed at least annually?
Periodic inventory systems
What type of system has inventory balances updated for each purchases and each sales and is always current?
Perpetual inventory system
What type of system has the cost of each item in inventory uniquely identified?
Specific identification
If using the FIFO method and prices are rising, what happens to COGS and Ending Inventory?
COGS goes down and Ending Inventory goes up
If using the LIFO method and prices are rising, what happens to COGS and Ending Inventory?
COGS goes up and Ending Inventory goes down
Formula to calculate the Average Cost Per Unit that is used in the weighted average method:
COGAFS / # of Units
The weighted average method only works with what type of inventory system?
Periodic
The moving average method only works with what type of inventory system?
Perpetual
If COGS increases, what happens to Net Income?
Net Income decreases
What is the most important factor to influencing inventory levels?
Accuracy of sales forecasts
Too much inventory results in______
Too little inventory results in ______
Too much = increase in carrying costs
Too little = loss of sales
To ensure that manufacturing or customer supply requirements are met, companies maintain what?
A safety stock
Formula for calculating the reorder point:
Safety stock + (lead time X sales during lead time)
Formula for calculating the Economic Order Quantity (EOC):
Order Size = square root of (2 X Sales in units X Cost per Purchase Order) / Carrying Cost per unit
The Economic Order Quantity (EOC) attempts to do what?
Minimize total ordering and carrying costs
Just in time inventory model was developed to:
Reduce the lag time between inventory arrival and use. It resulted the need of manufacturers to carry large inventory’s and requires a considerable degree of coordination between manufacturer and supplier.
Kansan inventory control techniques give:
Visual signals that it is time to reorder
Integrated supply chain management (ISCM) exists when:
A firm and the entire supply chain are able to reasonably predict the expected demand of consumers for a product and then plan accordingly to meet that demand
What are the four key core activities pertaining to SCOR (Supply Chain Operations Reference Model):
Plan
Source
Make
Deliver
What generally provide the largest source of short-term credit for small firms?
Trade Credits (or accounts payable)
Wha represent routine transactions that remain unpaid at the end of an accounting period purely asa result of timing?
Accruals
How to calculate the APR of quick payment discounts:
(360 / (Pay Period - Discount Period)) X (Discount % / (100% - Discount %))
What are some motives for holding cash?
Transaction motive: meet payments arising from ordinary course of business
Speculative motive: take advantage of temporary opportunities
Precautionary motive: maintain a safety cushion to meet unexpected needs
A disadvantage for holding on to cash could be:
Negative arbitrage: interest obligations exceed interest income
What’s the primary method for increase cash levels:
Reducing the operating cycle (selling and collecting quickly) by either speeding up cash inflows or slowing down cash outflows
One of the major determinants of demand fora firm’s products or services along with price, product quality, and advertising is:
Credit Policy
Credit policy variables include:
Credit period: length of time buyers are given to pay for their purchases
Credit standards: financial strength of credit customers
Collection policy: stringency or laxity in collecting delinquent accounts
Discounts: percentage and period
Method to speed up cash collections include:
Customer screening ad credit policy
Prompt billing
Payment discounts
2 ways to expedited credit sales in a timely manner are through the use of:
Electronic funds transfers
Lockbox systems
Turning over the collection of accounts receivable to a third-party facto in exchange for a discounted short-term loan is called:
Factoring
Cash is then collected immediately from the factor rather than from the customer
An external credit enhancement used by a company issuing otherwise unsecured debt to enhance its credit or can be required by a creditor to ensure payment is a:
Letter of credit
A revolving loan with a bank that is up to a specific dollar maximum amount for a defined term and is renewable upon the maturity date is a:
Line of credit
A company’s borrowing capacity goes up when
Debt goes down an equity goes up
What protects borrower’s credit rating and reduce the cost of borrowing?
Debt covenants
Advantages to Short-Term financing are:
Increased profitability
Decreased financing costs: interest rates are lower
Disadvantages to Short-Term financing:
Increased interest rate risk: interest rates may abruptly change
Decreased capital availability: lender evaluation of credit worthiness may change and make financing impossible or less favorable.
Advantages to Long-Term financing:
Decreased interest rate risk
Increased capital availability
Disadvantages to Long-Term financing:
Decreased profitability: higher financing costs
Increased financing costs: LT debt generally carries higher interest rates
