Working Capital Management Pt. 1 Flashcards
T/F: inventory represents the most significant current noncash resource of an organization
True; it typically is most significant in businesses that involve the sale or manufacture of goods; inventory can be classified as either raw materials, work-in-process, or finished goods
T/F: inventory is generally accounted for at cost, which is the price paid to acquire an asset
True; when the value of the inventory falls below original cost, the inventory must be restated to the lower of market value or net realizable value; inventory costing using LIFO or the retail inventory method is measured at the lower of cost or market value; inventory costed using other methods is measured at the lower of cost or net realizable value
What is net realizable value (aka market ceiling)?
it’s equal to the net selling price less costs to complete and dispose
Market value represents the median value of the item’s replacement cost, the market ceiling, and the market floor
replacement cost - equal to the cost to purchase the inventory on the valuation date
market ceiling - the net selling price less the costs to complete and dispose of the inventory
market floor - equal to the market ceiling less a normal profit margin
What is a periodic inventory system?
inventory quantities are determined by physical counts performed at least annually; inventory units are valued at the end of the accounting period and actual COGS for the period is determined after each physically inventory by calculating the difference between beginning inventory plus purchases less ending inventory
What is a perpetual inventory system?
the inventory balance is updated for each purchase and each sale and is always current; COGS is determined and recorded with each sale
Inventory valuation depends on the inventory system employed and the cost flow assumption chosen by an entity
specific identification
FIFO
LIFO
weighted average method (periodic only)
moving average method (perpetual only)
T/F: inventory depends on the accuracy of sales forecasts
True; lack of inventory can result in lost sales, and excessive inventory can result in burdensome carrying costs including: storage costs, insurance costs, opportunity costs of inventory investment, and lost inventory due to obsolescence or spoilage
the lower the carrying costs of inventory, the more inventory companies are willing to carry
What is safety stock?
it ensures that manufacturing or customer supply requirements are met; the determination of safety stock depends on the following factors: reliability of sales forecasts, possibility of customer dissatisfaction resulting from back orders, stockout costs (the cost of running out of inventory), lead time (the time that elapses from the placement to the receipt of an order), and seasonal demands on inventory
What is reorder point?
the inventory level at which a company should order or manufacture additional inventory to meet demand and to avert incurring stockout costs
formula: reorder point = safety stock + (lead time * sales during lead time)
What is economic order quantity (EOQ)?
it assumes that demand is known and is constant throughout the year, so EOQ does not consider stockout costs, nor does it account for costs of safety stock; it also assumes that carrying costs per unit and ordering costs per unit are fixed
the EOQ inventory model attempts to minimize total ordering and carrying costs; the model can be applied to the management of any exchangeable good
formula: E = square root of [2 * (annual sales in units) * (cost per purchase order)] / annual carrying cost per unit
What is a just-in-time inventory model?
it reduces the lag time between inventory arrival and inventory use; it ties delivery of components to the speed of the assembly line; it reduces the need of manufacturers to carry large inventories, but requires a considerable degree of coordination between manufacturer and supplier
benefits = tying production scheduling with demand, more efficient flow of goods between warehouses and production, reduced setup time, and greater employee efficiencies
What is integrated supply chain management (ISCM)?
it 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; ISCM is a collaborative effort between buyers and sellers
the goal of ISCM is to better understand the needs and preferences of customers and cultivate the relationship with them; if the actual demand of the customer is met and excess supply does not exist in the market, the firm will be able to minimize costs all along the supply chain
What is the supply chain operations reference (SCOR) model?
it assists a firm in mapping out its true supply chain and then configuring it to best fit the needs of the firm; there are 4 key management processes/core activities pertaining to SCOR: plan, source, make, and deliver
SCOR: plan
developing a way to properly balance demand and supply within the goals and objectives of the firm and prepare for the necessary infrastructure
