Chapter 15
the ______ disposition toward inventory levels is to keep them low, to ensure that the firm's money is not being unwisely invested in excess resources
financial manager's
the five key dimensions - used by credit analysts to provide a framework for in-depth credit analysis
five C's of credit
two popular credit selection techniques are the
five C's of credit and credit scoring
funds that have been sent by the payer but are not yet usable funds to the payee
float
given that total assets remain unchanged, increase in current liabilities will lead to
increase in profit: because it just means that there are more current l than long-term l(more expensive) increase in risk: because more current liabilities mean lesser current assets and vice versa
describes a firm that is unable to pay it's bills as they come due
insolvent
inventory management technique that minimizes inventory investment by having materials arrive at exactly the time they are needed for production
just-in-time (JIT) system
SHORT-TERM funds are typically ______ than long-term funds.
less expensive
the relationship between revenues and costs generated by using the firm's assets-- both current and fixed -- in productive activities
profitability
provided that total assets remain constant and current assets increase then
profitability decreases because more current assets mean less fixed assets and current assets earn lesser profit than fixed risk decreases because the more current assets more chances of converting to cash as quick as possible leading to lesser risk and vice-versa
concerned solely with the raw materials inventories, must have on hand in the correct quantities at the desired times and at a favorable price
purchasing manager
the point at which to reorder inventory, expressed as days of lead time x daily usage
reorder point
the probability that a firm will be unable to pay it's bills as they come due
risk(of insolvency)
The aggressive strategy's heavy reliance on short-term financing makes it _____ than the conservative strategy because of interest rate swings...
riskier
extra inventory that is held to prevent stockouts of important items
safety stock
an investment in operating assets that varies over time as a result of cyclic sales
seasonal funding requirement
inventory management technique that divides inventory into three groups- A, B, C
ABC inventory system
preauthorized electronic withdrawal from the payer's account and deposit into the payee's account via a settlement among banks by the automated clearinghouse, or ACH
ACH (Automated clearinghouse) transfer
determines what order size minimizes total inventory cost
EOQ model
Computerized Systems for Resource Control:
MRP system: used to determine what materials to order and when to order them; applied EOQ concepts to determine how much to order MRP II: integrates data from numerous areas using a sophisticated computer system ERP systems: expand the focus to the EXternal environment (unlike the two above which focus on internal operations)
Relaxation of Credit standards would mean:
Sales volume increase and positive effect on profit Investment in AR increase but negative effect on profit Bad-debt expenses increase but negative " " " and vice-versa
reorder point means that
as soon as the item's inventory level falls to the reorder point(ex 45 units na lng ang nabilin sa inventory, an order will be placed at the item's EOQ; however naay times na ang lead times and usage rates are not precise, that's why naay safety stock (extra inventory)
The conservative strategy ____ these risks through the locked-in interest rate and long-term financing.
avoids
If the additional profit contribution is GREATER than marginal costs, then credit standards should ____.
be relaxed
When the ratio increases under current liabilities/total assets, profitability _____. Why?
because the firm uses more of the less-expensive current liabilities financing and less long-term financing
In general, the GREATER the margin by which a firm's current assets cover its current liabilities, the
better able it will be to pay its bills as they come due.
The firm's investment in short-term assets often consists of
both permanent and seasonal funding requirements
which five C's of credit: the applicant's ability to repay the requested credit
capacity
which five C's of credit: the applicant's debt relative to equity
capital
the variable costs per unit of holding an item in inventory for a specific period of time
carrying costs
the process used by the firm to bring lockbox and other deposits together into one bank, often called the ___
cash concentration, concentration bank
the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations
cash conversion cycle (CCC)
which five C's of credit: the applicant's record of meeting past obligations
character
To transfer lock box receipts to their concentration banks quickly, firms commonly use these three
depository transfer checks, ACH transfers, and wire transfers
inventory management technique for determining an item's optimal order size , which is the size that minimizes the total of it's order costs and carrying costs
economic order quantity(EOQ) model
a computerized system that electronically integrates external information about the firm's suppliers and customers with the firm's departmental data so that information on all available resources - human and materials -- can be instantly obtained in a fashion that eliminates production delays and control costs
enterprise resource planning (ERP)
The more predictable its cash inflows, the ________ a firm needs.
less net working capital
the nearer an asset is to cash, the _____
less risky it is.
collection procedure in which customers mail payments to a post office box that is emptied regularly by the firm's bank...
lockbox system
That is, interest rates on short-term loans are typically _____ than rates on long-term loans because the yield curve is typically upward sloping.
lower
the time delay between when payment is placed in the mail and when it is received
mail float
his/her major responsibility is to implement the production plan so that it results in the desired amount of finished goods of acceptable quality; he/she would keep raw materials inventories high to avoid production delays
manufacturing manager
sophisticated computerized system that integrates data from numerous areas...
manufacturing resource planning II
short-term, interest earning, money market instruments used by the firm to earn a return on temporarily idle funds
marketable securities
he/she would like to have large inventories of the firm's finished products because this would ensure that all orders could be filled quickly, eliminating the need for back orders due to stockouts.
marketing manager
inventory management technique that applied EOQ concepts and a computer to compare production needs...
materials requirement planning (MRP) system
The goal is to _____ the length of the cash conversion cycle, which ____ negotiated liabilities.
minimize, minimizes
the more net working capital, the
more liquid the firm and therefore the lower its risk of becoming insolvent
It is generally assumed that the GREATER the firm's net working capital, the ____ and therefore the ____
more liquid the firm, the lower its risk of becoming insolvent
the difference between the firm's current assets and its current liabilities
net working capital
the time from the beginning of the production process to collection of cash from the sale of the finished product
operating cycle (OC)
the fixed clerical costs of placing and receiving an inventory order
order costs
as the size of the order increases,
order costs decrease while carrying costs increase
changing credit standards table study*
page 670
constant investment in operating assets resulting from constant sales over time
permanent funding requirement
When current assets exceed current liabilities, the firm has _____. When current assets are less than current liabilities, the firm has _____.
positive net working capital, negative net working capital
the time between receipt of a payment and its deposit into the firm's account
processing float
aggressive vs conservative seasonal funding strategies
since ang aggressive strategy nag rely more on short-term financing na mas grabeg risk kaysa sa long-term , it becomes riskier than conservative conservative strategy however avoids the risk but more costly in terms of computations: aggressive - no surplus balances exist(meaning "earnings on surplus balances" = $0 conservative - "cost of short-term financing" = $0
International inventory managers place greater emphasis on making sure that
sufficient quantities of inventory are delivered where and when needed kaysa magpundo daan og inventory
four commonly used techniques for effectively managing inventory to keep its level low are
the ABC system, economic order quantity model, the just-in-time system, computerized systems for resource control: MRP, MRP II, and ERP
the more predictable its cash inflows,
the LESS net working capital a firm needs
in general, the GREATER the margin by which a firm's current assets cover its current liabilities,
the better able it will be to pay its bills as they come due
ST 15-1: Reduction/Addition in resource investment is computed from ____. Because AP has increased, the amount represents a _____ in net working capital.
the changes in inventories, accounts payable, or accounts receivable decrease
-7.6 days of cash conversion cycle means
the firm does NOT have to pay its suppliers until nearly 8 days after it has collected its receivables
Assuming a CONSTANT level of total assets, the HIGHER a firm's ratio of current assets to total assets,
the less profitable the firm and the less risky it is
the nearer an asset is to cash,
the less risky it is
With CONSTANT total assets, the higher a firm's ratio of current liabilities to total assets,
the more profitable and the more risky the firm is
The JIT system is used
to minimize inventory investment; the philosophy is that material should arrive at exactly the time they are needed for production ; it uses no(or very little) safety stock; it also requires high-quality parts from suppliers meaning when quality problems arise, production must be stopped until the problems are resolved
the sum of order costs and carrying costs of inventory
total cost of inventory
reduce length of cash conversion cycle by (4):
turn over inventory as quickly as possible(ibaligya dayun) without stockouts that result in lost sales collect AR as quickly as possible without losing sales from high-pressure collection techniques (panukot of utang asap) manage mail, processing, and clearing time to REDUCE them when collecting from customers and to INCREASE them when paying suppliers pay accounts payable as slowly as possible without damaging the firm's credit rating
unsophisticated inventory -monitoring technique that is typically applied to C group items and involves reordering inventory when one of two bins is empty
two-bin method
an electronic communication that via, bookkeeping entries, removes funds from the payer's bank and deposits them in the payee's bank
wire transfer
current assets, which represent the portion of investment that circulates from one form to another in the ordinary conduct of business
working capital
management of current assets and current liabilities
working capital(or short-term financial) management
a disbursement account that always has an end-of-day balance of zero because the firm deposits money to cover checks drawn on the account only as they are presented for payment each day
zero-balance account (ZBA)
an unsigned check drawn on one of a firm's bank accounts and deposited in another
depository transfer check (DTC)
Order costs _____ as the size of the order increases. While carrying costs ____ with increases in the order size.
decrease natural kay fc mangd ni. increase
When current assets increase- profitability ____. Why?
decreases; because current assets are less profitable than fixed assets, fixed assets are more profitable because they add more value to the product
a funding strategy under which the firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt
aggressive funding strategy
a credits monitoring technique that breaks down accounts receivable into groups on the basis of their time of origin; it indicates the percentages of the total accounts receivable balance that have been outstanding for specified periods of time
aging schedule
the seasonal requirements can be financed through using
an aggressive(low cost, high risk) or conservative(high cost, low risk) financing strategy
How should the firm manage its cash conversion cycle?
by turning inventory quickly, collecting accounts receivable quickly; managing mail, processing, and clearing time; and paying accounts payable slowly
a percentage deduction from the purchase price; available to the credit customer who pays it's account within a specified time
cash discount
the number of days after the beginning of the credit period during which the cash discount is available
cash discount period
the time between deposit of a payment and when spendable funds become available to the firm
clearing float
the amount of assets the applicant has available for use in securing the credit
collateral
which five C's of credit: current general and industry-specific economic conditions, and any unique conditions surrounding a specific transsction
conditions
funding strategy under which the firm funds both its seasonal and its permanent requirements with long-term debt
conservative funding strategy
the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively
controlled disbursing
the ongoing review of a firm's accounts receivable to determine whether customers are paying according to the stated credit terms
credit monitoring
the number of days after the beginning of the credit period until full payment of the account is due
credit period
credit selection method commonly used with high-volume/small -dollar credit requests; relies on a credit score determined by applying statically derived weights to a credit applicant's scores on key financial and credit characteristics
credit scoring
the firm's minimum requirements for extending credit to a customer
credit standards
the terms of sale for customers who have been extended credit by the firm
credit terms
this can be used to eliminate nonearning cash balances in corporate checking accounts
zero-balance accounts