CH 15- Assets: Inventory & Operations Management

Economic Order Quantity (EOQ)

- the quantity of inventory that a business must hold to minimize total inventory cost - tells us only how many units to order & how many orders to make

Just-in-time inventory

- The practice of purchasing and accepting delivery of inventory only after it has been sold to the final customer. - Fits perfectly with a contract

The four accounting methods to value capital assets:

- book value - disposal value - replacement value - fair market value

Inventory valuation

- determination of the amount of assets held by the firm for sale or production - knowing how much of what you are holding

Pledging receivables

- giving a third party legal rights to debts owed your business in order to provide assurance that borrowed money will be repaid - collateral of receivables

Inventory

- largest current asset that most manufacturing, wholesale, and retail firms have - not necessarily liquid

The two most commonly used financial ratios for comparing investment alternatives are:

- payback period - return on investment (ROI)

Optimum stocking level (reorder point)

- the amount of inventory that results in the minimum cost 1. the cost of lost sales resulting from running out of stock 2. the number of units sold per day 3. the number of days required to receive inventory

Productivity

- the ratio measure of how well a firm does in using its inputs to create outputs. - Outputs / Inputs

Four big reasons businesses provide credit to customers

1. Increases sales because people who buy on credit tend to buy more. 2. Increases repeat business 3. Reduces the costs of selling because it is much less expensive to obtain repeat business than it is to get new customers 4. It may raise some costs, but increased sales results in increased profits

To get the greatest benefit from outsourcing, you need to:

1. Know yourself: nobody is good at everything 2. Keep strategy decisions in-house: no one is likely to have the knowledge of your business & customers that you do. 3. Fully specify tasks that are to be outsourced: the single greatest cause of failure of outsourcing is lack of clear communications. 4. Know with whom you are contracting: you will be satisfied with the results of outsourcing if, and only if, you choose competent contractors.

Two types of leases

1. Operating Lease 2. Capital Lease

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.

Operating Lease

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

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.

Return on Investment Formula

Net Operating Income / Average Operating Assets

Replacement value

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

Disposal value

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

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.

Book Value

describes the difference between the original acquisition cost of capital assets and the amount of depreciation expense that has been recognized for them.

The most commonly outsourced functions of small businesses are:

legal & accounting

Periodic inventory

physically counting business assets on a set schedule

Perpetual inventory

recording the receipt and sale of each item as it occurs

Factoring receivables

selling receivables to a third party at a discount from their face value

Your goals when managing accounts receivable are:

1. minimize the time that passes between when a credit sale is made & when the cash is received 2. keep the number of bad accounts as low as possible

All capital assets cause you to incur four costs over time:

1. the cost of acquiring the asset 2. the cost of owning the asset 3. the cost of operating the asset 4. the cost of disposing of the asset