Management of Receivables and Inventory Discussion

Management of Receivables and Inventory Discussion1. The majority of a firm’s investment is in ______________
assets, however, it is tied up in accounts ______________
and ______________ which represent investments that are
necessary for day-to-day ______________ of the business.
A firm needs ______________ so that it will have
______________ to sell and the ______________ of inventory differs among firms largely because of the
______________ of the products they sell.
2. Firms extend ______________ to customers to help stimulate ______________. Extending ______________ is both
a(n) ______________ and a(n) ______________ decision.
When a firm extends credit to its customers, it does so to
encourage ______________ of its goods and ______________.
Ch20 Page 193 Tuesday, December 16, 2003 9:14 AM
194 QUESTIONS AND PROBLEMS
The most direct ______________ is the ______________ on
the increased sales.
3. The ______________ cost is similar to the ______________
cost that we looked at for cash balances: the product of
the ______________ cost of investing in accounts receivable and the ______________ in the accounts. The
______________ cost is the ______________ the firm could
have earned on its next best ______________. The investment is the amount the firm has ______________ to generate ______________.
4. The effective cost of trade ______________ for a customer
is calculated by determining the effective ______________
cost for the length of time the credit is extended.
______________ this cost makes it ______________ with
the cost of other forms of credit.
5. ______________ terms consist of the ______________
amount of credit, the length of period allowed for
______________, and the ______________ rate and
______________ period, if any. The purpose of
______________ is to attract ______________, thereby
increasing ______________, and to encourage the early
______________ of accounts, thereby reducing the amount
tied up in accounts ______________.
6. ______________ policies specify the procedures for collecting ______________ accounts. Collection could start with
Ch20 Page 194 Tuesday, December 16, 2003 9:14 AM
Management of Receivables and Inventory 195
polite ______________, continuing in progressively
______________ steps, and ending by placing the account
in the hands of a(n) ______________ agency. In designing
the collection procedures, you must keep in mind that
______________ efforts to collect may result in
______________ future sales.
7. ______________ how well accounts ______________ are
managed can be done using financial ______________ and
______________ schedules. Financial ______________ can
be used to get an overall picture of how fast collection is
going on accounts ______________. ______________
schedules, which are breakdowns of accounts receivable
by how ______________ they have been around, help give
a more detailed picture of the ______________ efforts.
8. Ideally, a firm wants to design its ______________ policy
so that the marginal ______________ from extending
______________ equals its marginal ______________ of
extending credit. At this point, the firm ______________ owners’ wealth. But the benefits and costs are ______________.
The best the firm can do in ______________ the benefits and
costs from its credit and collection policies is to learn from
its own ______________ or from the experience of others.
9. Some firms choose to form a wholly-owned ______________,
that is, a corporation ______________ by the parent firm
in order to provide the ______________ granting and
______________ function of the parent firm. The sole
Ch20 Page 195 Tuesday, December 16, 2003 9:14 AM
196 QUESTIONS AND PROBLEMS
purpose of ______________ finance subsidiaries is to
______________ the customers’ purchase of the parent
firm’s ______________. These subsidiaries can stimulate
______________ by providing easy access to ______________.
10.______________ is the stock of physical goods for eventual
sale. ______________ consists of raw material, work-inprocess, and finished goods available for ______________.
There are many ______________ in a decision of how much
inventory to have on hand. As with accounts receivable,
there is a trade-off between the costs of ______________ in
inventory and the costs of ______________ inventory.
There’s a cost to too much ______________ and there’s a
cost of too ______________ inventory.
11.______________ inventory can be done by looking at financial ______________ in much the same way we can monitor
receivables. The number of days of ______________ is the
ratio of the dollar value of ______________ at a point in
time to the cost of goods sold per day. This ratio is an estimate of the number of ______________ worth of
______________ you have on hand. Combined with an estimate of the ______________ for your goods, this ratio helps
you in planning your ______________ and ______________
of goods. The inventory turnover ratio tells, on average,
how many times ______________ flows through the firm—
from raw materials to goods sold—during the period.
Ch20 Page 196 Tuesday, December 16, 2003 9:14 AM
Management of Receivables and Inventory 197
SHORT ANSWER QUESTIONS
Refer to Chapter 20, pages 651–673 in Financial Management and Analysis.
1. What is the relationship between a firm extending credit
and accounts receivable?
2. What are the implicit costs with granting discounts? What
are the costs of credit?
Ch20 Page 197 Tuesday, December 16, 2003 9:14 AM
198 QUESTIONS AND PROBLEMS
3. What factors should be considered when extending credit?
4. What factors influence the assessment of credit?
Ch20 Page 198 Tuesday, December 16, 2003 9:14 AM
Management of Receivables and Inventory 199
5. What are the reasons for holding inventory?
6. Explain the two models of inventory management.