CH 15 Key Terms

return on investment (ROI)

A capital budgeting equation used to measure the relationship between initial investment and the profits that are expected to be received from making the investment.

cost of owning

Cost incurred in financing, insuring, taxing, or tracking an asset.

Outflow

Fund being paid to others by the firm.

point-of-sale (POS) system

Hardware and software combinations that integrate inventory management directly into accounting software.

equipment

Machinery, tools, or materials used in the performance of the work of the business.

accounts receivable

Money owed to your business by customers who purchased your product on credit.

bar coding

Obtaining a universal product code number and scan-ready visual tag, and printing it on the product or its packaging. Bar codes can then be scanned and recognized by others.

inventory

Products that are held for sale to customers.

factoring

Selling the rights to collect accounts receivable to an entity outside your business.

process

The business activities necessary to convert inputs into desired outputs.

operations

The process of transforming materials, labor, and energy into goods or services.

microinventory

The purchase of inventory only after a sale is made; very typical with Internet firms.

arm's-length transaction

A business deal where the parties have a prior relation or affiliation, but where the business is conducted as if they were unrelated. This approach is done to help guard against potential conflicts of interest.

physical inventory

A count of all the inventory being held for sale at a specific point in time.

leasing

A formal agreement, reduced to writing, that specifies the term and conditions that must be met to allow one entity to use a specified asset (or assets) of the other.

property

A general term for real estate, but it can also be applied as a legal term for anything owned or possessed.

plant

A general term for the facilities of a business.

capital lease

A lease in which at the end of the lease period the asset becomes the property of the lessee, possibly with an additional payment.

lock box

A locked receptacle for money, the keys to which are not available to those who physically handle the receptacle; a common example of a lock box is the coin receptacle for parking meters which cannot be opened by the workers who are responsible for collecting the deposited coins.

operating lease

A long-term rental in which ownership of the asset never passes to the person paying for the lease.

quality

A product's or service's fitness for use, measured as durability, reliability, serviceability, style, ease of use, and dependability.

pull-through system

A term for just-in-time inventory systems in which product is ordered and placed into production only after a sale has been completed.

supply chain

A way to think about the line of distribution of a product from its start as materials outside the target firm, to its handling in the target firm, to its handling by sellers, with placement into the hands of customers.

pledging receivables

Giving a third party legal rights to debts owed your business in order to provide assurance that borrowed money will be repaid.

work instructions

Specific guidance for completing steps in a process.

Optimum stocking level

The amount of inventory that results in the minimum cost, when considering the cost of lost sales resulting from running out of stock, the number of units sold per day, and the number of days required to receive inventory. Also called reorder point.

payback period

The amount of time it takes a business to earn back the funds it paid out to obtain a capital asset.

feedback

The process of communicating within or to the organization about how the outputs worked or were received.

capital budgeting

The process of deciding among various investment opportunities to create a specific spending plan.

procedure

The series of steps and activities required to complete a process.

economic order quantity (EOQ)

A statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost.

perpetual inventory

A system of recording the receipt and sale of each item as it occurs.

straight line for a useful life of 10 years

Depreciation is computed using a straight line method over 10 years, so an asset would lose 10 percent of its value each year.

efficiency

The comparison of productivity ratios to see the extent that an organization has generated more outputs with fewer inputs.

replacement value

The cost incurred to replace one asset with an identical asset.

book value

The difference between the original cost of an asset and the total amount of depreciation expense that has been recognized to date.

cost of operating

The direct cost incurred in using an asset for the purpose for which it was intended.

replacement cost

The total cost of replacing an asset with an essentially identical asset.

outsourcing

Contracting with people or companies outside your business to do work for your business.

periodic inventory

The process of physically counting business assets on a set schedule.

productivity

The ratio measure of how well a firm does in using its inputs to create outputs. Literally, productivity is outputs divided by inputs.

outputs

The services or products that are produced for sale.

best practices

Activities identified by authoritative bodies as examples of optimal ways to get things done in a particular industry, profession, or trade.

renting

An agreement between two entities that allows one to use assets of the other in return for a specified payment or series of payments.

safety stock

An amount of inventory carried to ensure that you will not run out of inventory because of fluctuating levels of sales.

capital assets

Assets that are expected to provide economic benefits for periods of time greater than one year.

just-in-time (JIT) inventory

The practice of purchasing and accepting delivery of inventory only after it has been sold to the final customer.

fair market value

The price at which goods and services are bought and sold between willing sellers and buyers in an arm's-length transaction.

whole of life costs

The sum of all costs of capital assets, including acquisition, ownership, operation, and disposal.

cost of disposition

Cost incurred in the activities necessary to get rid of an asset.

inventory valuation

Determination of the amount of assets held by the firm for sale or production.

inputs

The materials, labor, and energy put into the production of a good or service.

disposal value

The net amount realized after subtracting the costs of getting rid of an asset from its selling price.

acquisition cost

The total cost of acquiring an asset, including such costs as purchase price, transportation, installation, testing, and calibrating in order to ready it for its first productive use.