ch 06 - accounts receivable & inventory

8/8/2019 CH 06 - Accounts Receivable & Inventory

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Foundat ions of Financ eFoundat ions of Financ e

Chapter 6

Accounts Receivable & Inventory


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Learn ing Objec t ivesLearn ing Objec t ives

Discuss t he det e rm inant s o f t heDiscuss t he de t e rminant s o f thef i rmf i rm s invest m ent i n acc oun tss invest m ent i n acc oun ts

rec e ivab le and learn how dec is ionsrec e ivab le and learn how dec is ionsregard ing c hanges in c red it po l ic yregard ing c hanges in c red it po l ic yare det erm ined.are det erm ined.

Disc uss t he reasons for c ar ry ingDisc uss t he reasons fo r c ar rying

inventory and how inventoryinventory and how inventorym anagement dec is ions a re m ade.m anagement dec is ions a re m ade.


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Ac c ount s Rec e ivableAc c ount s Rec e ivab leManagementManagement

Size o f inves t m ent in ac c ount sSize o f inves t m ent in ac c ounts

rec e ivab le is det erm ined by :rec e ivab le is det erm ined by :

The perc en tage o f c red i t sa les t oThe perc ent age o f c red i t sa les t ot o t a l sa lest o t a l sa les

The leve l o f sa lesThe leve l o f sa les

Cred it and c o l lec t ion po l ic iesCred it and c o l lec t ion po l ic ies


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Credi t and Col lec t ion Pol ic yCredi t and Col lec t ion Pol ic yDecis ionsDecis ions

Term s of Saleerm s of Sale Ident i fy t he possib le disc ount Ident i fy t he poss ib le disc ount

fo r ear ly paym ent , t he d iscount fo r ear ly paym ent , t he d iscount per iod, and the t o t a l c red it per iod, and t he t o t a l c red it

per iodper iod


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Credi t and Col lec t ion Pol ic yCredi t and Col lec t ion Pol ic yDecis ionsDecis ions

Col lec t ion Ef fo r t so l lec t ion Ef fo rt s Cont ro l and e l im inat ion of pastCont ro l and e l im inat ion of past --

due rec e ivab lesdue rec e ivab les


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Invent ory Managem entInvent ory Managem ent

Invo lves t he c on t ro l o f t he Invo lves t he c on t ro l o f t he asse t s t ha t a re produc ed t o be asse t s t ha t a re p roduc ed to be

so ld in t he norm al c ourse o f t he so ld in t he norm al c ourse o f t he f i rmf i rms operat ions s operat ions


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Invent ory Managem entInvent ory Managem ent

Genera l c at egor ies:Genera l c at egor ies: Raw m at e r ia lsaw m a te r i al s

Bas ic m at er ia ls purc hased t o be used in Bas ic m at er ia ls purc hased t o be used in

t he f i rmt he f i rm

s produc t ion operat ions s produc t ion operat ions Work in proc essork in p roc ess

Par t ia l ly f in ished goods requi r ingPar t ia l ly f in ished goods requi r ingaddi t iona l w ork be fore t hey becom eaddi t iona l w ork be fore t hey becom e

f in ished goodsf in ished goods

Fin ished goodsin ished goods Goods on w h ic h produc t ion has beenGoods on w h ic h produc t ion has been

c omple t ed bu t a re no t ye t so ld c omple t ed bu t a re no t ye t so ld


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Invent ory Managem entInvent ory Managem entTechniquesTechniques

Ef fec t ive invent ory m anagem entEf fec t ive invent ory managem ent

is d irec t ly re la t ed t o t he size o f i s di rec t ly rela t ed t o t he size o f

t he inves tm ent in invent oryt he inves tm ent in invent ory

Ef fec t i ve managem ent i sEf fec t i ve managem ent i s

essent ia l t o t he goa l o f essent ia l t o t he goa l of m ax im izat ion o f shareho lder m ax im izat ion o f shareho lder

w e a l t hw e a l t h


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Invent ory Managem entInvent ory Managem entTechniquesTechniques

To con t rol t he invest m ent inTo con t rol t he invest m ent in

invent ory , m anagem ent m ustinvent ory , m anagem ent m ust

solve t w o p roblem s:solve t w o prob lem s: Order quant i t y prob lemOrder quant i t y prob lem

Order point problemOrder point problem


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Order Quant i t y ProblemOrder Quant i t y Problem

InvolvesInvolves det e rm ining t he op t im a l det e rm ining t he op t im a l

order s ize for an invent ory i t emorder s ize for an invent ory i t em

g iven i t s ex pec t ed usage,g iven i t s ex pec t ed usage,c ar rying c os t s , and order ing c ar rying c os t s , and order ing

cos ts .cos ts .


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Order Quant i t y ProblemOrder Quant i t y Problem

Ec onom ic order quant i t y (EOQ)Ec onom ic order quant i t y (EOQ)

a t t empt s to det e rm ine the order a t t empt s to det e rm ine the order

s ize tha t w i l l m in im ize t o t a ls ize tha t w i l l m in im ize to t a linventory c os tsinvent ory c os ts

EOQ assum es:EOQ assum es :

Tota l invent o ry c os ts = t o t a lTo ta l invent o ry c os ts = t o t a l

c ar ry ing c os ts + t o t a l o rderingc ar ry ing c os ts + t o t a l o rdering

c o s t sc o s t s


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EOQ Assum pt ionsEOQ Assum pt ions

Const ant or uni fo rm dem andConst ant o r uni fo rm dem and

Const ant un it p r ic eConst an t un it p r ic e

Const ant c ar ry ing c os tsConst an t c ar ry ing c os ts

Const ant order ing c os t sConst ant o rder ing c os t s

Ins tant aneous de l iveryInst ant aneous de l ivery

Independent ordersIndependent orders


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Order Poin t Prob lemOrder Poin t Prob lem

Tw o of t he m ost l im i t i ngTw o of t he most l im i t i ng

assum pt ions in EOQassum pt ions in EOQ cons tan tcons tan t

dem and and ins t ant aneousdem and and ins t ant aneousdel iverydel ivery are deal t w i th t h roughare deal t w i t h t h rough

t he inc lusion o f sa fe t y st oc kt he inc lusion o f sa fe t y s toc k


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Order Poin t Prob lemOrder Poin t Prob lem

Safet y s t oc ka fe ty s toc k Inven to ry he ld t o ac c om m odat e any Inven to ry he ld t o ac c om m odat e any

unusua l ly la rge and unexpec t ed usageunusua l ly la rge and unexpec t ed usage

dur ing de l ivery t im edur ing de l ivery t im e

Order po in t prob lemrder po in t p rob lem The dec is ion on how m uc h sa fet y st oc k The dec ision on how m uch sa fet y s toc k

t o ho ld t o ho ld


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Det erm inat ion of Order PointDet erm inat ion of Order Point

Tw o key fac t o rs :w o key f ac t o rs : Del iveryel ivery -t ime s t oc kime st ock

Inventory needed be tw een the o rder dat e andInventory needed be tw een the o rder dat e and

t he rece ip t o f the inventory o rdered t he rece ip t o f the inventory o rdered

Safe ty s t oc ka fe ty s toc kThe order po int is reac hed w hen invent oryThe order po int is reac hed w hen invent ory

fa l ls t o a leve l equa l to t hefa l ls t o a leve l equa l to t he del iverydel ivery --t i m et i m es toc k p lus t he safe ty s toc ks toc k p lus t he safe ty s toc k

ch 06 - accounts receivable & inventory

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