Chapter 9 Flashcards

Flashcards covering key terms and calculations from Chapter 9 - Working Capital Management, Inventory Management, Receivables Management, Credit Management and Cash Management.

EAR formula

EAR = (1 + periodic \ rate)^m - 1

Payables Turnover formula

\text{Payables Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Payables}}

Average Payment Period formula

\text{Average Payment Period} = \frac{365}{\text{Payables Turnover}}

What are the three types of inventory?

Raw materials, work in process, and finished goods.

What is 'work in process' inventory?

Products undergoing transformation in the production process but not yet complete.

What are the two main costs of holding inventory?

Carrying costs and order costs.

What are the components of 'carrying costs'?

Storage fees, insurance, obsolescence, and opportunity cost of capital tied up in inventory.

What is the optimal order size in the EOQ model?

The point where carrying costs equal order costs.

What assumptions does the EOQ model make?

Constant demand, constant lead time, constant costs, and no stockouts.

What is the primary risk associated with accounts receivable?

The possibility of default, where the customer fails to pay the amount owed.

What is the difference between trade credit and consumer credit?

Trade credit is for businesses; consumer credit is for individuals.

What does 'net 30' mean in credit terms of 3/10 net 30?

Full payment is due within 30 days from the invoice date if the discount is not taken.

What are common types of bank loans used for short-term financing?

Lines of credit, term loans, and commercial paper.

What are typical money market instruments?

Treasury bills, commercial paper, and certificates of deposit (CDs).

Define EOQ.

Economic Order Quantity: EOQ = \sqrt{\frac{2 * \text{annual sales in units} * \text{cost per order}}{\text{carrying cost per unit}}}

Describe how companies manage accounts receivable

Companies can manage accounts receivable through terms of sale and break-even analysis

Operating Cycle forumla

Operating Cycle = Number of days in inventory + Number of collection period

Cash Cycle = Operating cycle - Number of payment period