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