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39 terms

Chapter 18 Finance Quiz

Finance, Dr. Hubbard, Spring 2012, Trinity University
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accounts receivable management
refers to the decision a business makes regarding its overall credit and collection policies and the evaluation of individual credit applicants
optimal credit policy
in formulating this, a company's financial managers must analyze the marginal benefits and costs associated with changes in three variables (credit standards, credit terms, collection effort)
optimal credit policy
what are these three variables a part of?
--credit standards
--credit terms
--collection effort
individual credit applicants
the evaluation of these consists of the following three principal steps:
--gathering
--analyzing
--deciding
gathering
(step 1 of evaluating individual credit applicants); relevant information on the credit applicant
analyzing
(step 2 of evaluation individual credit applicants); the information obtained to determine the applicant's creditworthiness
deciding
(step 3 of evaluation of individual credit applicants); whether to extend credit to the applicant and, if so, determining the amount of the line of credit
optimal level of inventory investment
the determination of this requires that the benefits and costs associated with alternative levels be measured and compared
inventory related costs
these include:
--ordering costs
--carrying costs
--stockout costs
inventory control models
the use of these can aid in efficiently managing a company's level of inventory investment
economic order quantity model
this permits determination of the quantity of an inventory item that should be ordered to minimize total inventory costs
marginal benefits; marginal costs
a company should change its credit extension policy only if the expected what of the change will exceed the expected what.
liberal credit policy
this normally leads to increased sales and generates marginal benefits in the form of higher gross profits
marginal costs
the _________ of a liberal credit policy include the cost of the additional funds invested in accounts receivable and inventories, any additional credit checking and collection costs, and increased bad-debt expenses
total cost
= ((D/Q) x S) + ((Q/2) x C)
Q*
= square root of [(2xSxD)/C]
T*
= Q* / (D/365)
3 credit policy variables
what are these?
1). credit standards
2). credit terms
3). collection effort
3 credit policy variables
these can be used to control the average collection period and bad-debt loss ratio
credit standards
the criteria a business uses to screen its credit applicants
credit terms
the conditions under which customers are required to repay the credit extended to them; these specify the length of the credit period and the cash discount (if any) given for early payment
collection effort
represents the methods used in attempting to collect payment from past-due accounts
5 Cs of credit
what are these? character, capacity, capital, collateral, and conditions
5 Cs of credit
these can be used as credit-screening guidelines to help ensure that a company will consider most of the relevant factors in the analysis and decision-making process
buffer
inventories serve as what between the various stages of the manufacturing firm's procurement-production-sales cycle
flexibility
by uncoupling the various phases of the firm's operations, inventories provide the firm with this in timing purchases, scheduling production, and meeting fluctuating, uncertain demand for the finished product
inventory related costs
these include ordering costs, carrying costs, and stockout costs
ordering costs
include all the costs of placing and receiving an order
carrying costs
include the various costs of holding items in inventory, including the cost of funds invested in inventory
stockout costs
the costs incurred when demand exceeds available inventory, such as lost profits
inventory control models
usually classified into two types: deterministic and probabilistic
deterministic inventory control model
this is used if demand and lead time are known with certainty
probabilistic inventory control model
this is used if demand and/or lead time are random variables with known probability distributions
deterministric economic order quantity (EOQ)
the objective of this model is to find the order quantity tat minimizes total inventory costs
economic order quantity
this is equal to the square root of (2SD/C), where D is the annual demand; S is the fixed cost per order; and C, is the annual carrying cost per unit
probabilistic inventory control models
these require consideration of the possibility of stockouts
safety stock
one approach used to handle the problem of stockouts, is to add what to the inventory
just-in-time inventory models
these are based on the concept that required inventory items are supplied exactly as needed by production
inventory investment
successful implementation of just-in-time models can reduce inventory investment