SBM Chapter 16
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
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
perpetual inventory
A system of recording the receipt and sale of each item as it occurs.
pull-through system
A term for just-in-time inventory in which product is ordered and placed into production only after a sale has been completed.
best practices
Activities identified by authoritative bodies as examples of optimal ways to get things done in a particular industry, profession, or trade
capital assets
Assets that are expected to provide economic benefits for periods of time greater than one year
cost of owning asset
Cost incurred in financing, insuring, taxing, or tracking an asset
cost of disposition
Cost incurred in the activities necessary to get rid of an asset
Scheduling Ordering and Receipt of Inventory
Deciding when to place an order is determined by 1) the rate of sales 2) the time required to receive new stock
inventory valuation
Determination of the amount of assets held by the firm for sale or production
Factoring issues
Factoring company will usually pay you about 75% to 80% of total amount that can be collected. The factor collects the receivables.
supply chain
Like the value chain, 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 into the hand of customers
Accounts receivable
Money owed to your business by customers who purchased your product on credit
Two ways to use receivables to get cash.
Pledge receivables as collateral for a commercial loan. Factoring, sell your receivables to a finance company.
inventory
Products that are held for sale to customers
quality
Quality is a product's or service's fitness for use, measured as durability, reliability, serviceability, style, ease of use, and dependability.
factoring
Selling the rights to collect accounts receivable to an entity outside your business
payback period
The amount of time it takes a business to earn back the funds it paid out to obtain a capital asset
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. More accurate
Total cost of keeping inventory is the sum of
The cost to buy the inventory The cost to store, protect, maintain the inventory, the cost of making an order to purchase inventory
book value
The difference between the original cost of an asset and the total amount of depreciation expense that has been recognized to date - useful mainly for accounting and income taxes
cost of operating asset
The direct cost incurred in using an asset for the purpose for which it was intended
inputs
The materials, labor, and energy put into the production of good or service
disposal value
The net amount realized after subtracting the costs of getting rid of an asset from its selling price
just-in-time 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
feedback
The process of communicating within or to the organization about how the outputs worked or were received
periodic inventory
The process of physically counting business assets on a set schedule
operations
The process of transforming materials, labor, and energy into goods or services
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 service or product that is produced for sale
whole of life costs
The sum of all costs of capital assets, including acquisition, ownership, operation, and disposal
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.
replacement cost
The total cost of replacing an asset with an essentially identical asset
Cons of Offering credit to customers
Three cons 1) delays receipt of cash 2) Need to replace missing cash 3) sooner or later one of the customers will not pay
pledging receivables issues
Usually less expensive than factoring. Your business is liable only for the borrowed amount and accrued interest on the loan. However, lender will loan you only 1/2 of amount that can be collected
Pros of Offering Credit to Customers
Usually results in higher sales revenue - increased repeat business 2) reduces cost of selling, less expensive to obtain repeat business
Managing accounts receivable to receive greatest benefit for business
You must establish and enforce efficient and effective policies and procedures for extending credit. Your goals are 1) minimize time that passes between when a credit sale is made and when cash is received. 2) Keep the number of bad accounts as low as possible.
physical inventory
a count of all the inventory being held for sale at a specific point in time.
just-in-time inventory
attempts to reduce inventory to absolute minimum by 1) accepting inventory only as it is sold 2) assembling product in the absolute minimum time possible 3) shipping product to the customer immediately upon completion.
capital budgeting
the process of deciding among various investment opportunities to create a specific spending plan
microinventory
the purchase of inventory only after a sale is made; very typical with internet firms
Determining appropriate level of inventory
1) cost of processing an order 2) cost of keeping merchandise in inventory 3) cost of lost sales if you run out 4) time it takes to receive inventory after ordered
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.
operating lease
A long-term rental in which ownership of the asset never passes to the person paying for the lease. End of lease period you either return asset or purchase asset at then current fair market value
optimum stocking level
AKA reorder point) 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 or units sold per day, and the number of days required to receive inventory
safety stock
An amount of inventory carried to ensure that you will not run out of inventory because of fluctuating levels of sales
pledging receivables
giving a third party legal rights to debts owed to your business in order to provide assurance that borrowed money will be repaid
inventory facts
1) supply of inventory and demand of customers cannot be matched precisely at all times. 2) holding inventory requires a nonproductive cash investment, while it sits on shelf, money required to buy it is tied up and not producing a return
cost incurred from capital assets
Four cost 1) the cost of acquiring the asset, 2) cost of owning asset 3) cost of operating asset 4) cost of disposing of asset
outflow
Funds being paid to others by the firm
point-of-sale (POS) system
Hardware and software combinations that integrate inventory management directly into accounting software
Economic Order Quantity (EOQ)
A statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost.
To use bar codes effectively in your business
you need 1) a method to create bar codes 2) a means to print the codes on items you track 3) a scanner that can read the codes 4) a computer software program that can interpret the codes and update a database of info associated with each code
