Chap10_2009 - Chapter 10 Accounts Receivable and Inventory...

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Unformatted text preview: Chapter 10 Accounts Receivable and Inventory Management Learning Objectives After studying Chapter 10, you should be able to: • List the key factors that can be varied in a firm's credit policy and understand the trade-off between profitability and costs involved. • Understand how the level of investment in accounts receivable is affected by the firm's credit policies. • Critically evaluate proposed changes in credit policy, including changes in credit standards, credit period, and cash discount. • Describe possible sources of information on credit applicants and how you might use the information to analyze a credit applicant. • Identify the various types of inventories and discuss the advantages and disadvantages of increasing/decreasing inventories. • Describe, explain, and illustrate the key concepts and calculations necessary for effective inventory management and control, including classification, economic order quantity (EOQ), order point, safety stock, and just-in-time (JIT). • Credit and Collection Policies • Analyzing the Credit Applicant • Inventory Management and Control Topics Credit and Collection Policies of the Firm (1) Average Collection Period (2) Bad-debt Losses Quality of Trade Account Length of Credit Period Possible Cash Discount Firm Collection Program Credit Standards Why lower the firm’s credit standards ? The financial manager should continually lower the firm’s credit standards as long as profitability from the change exceeds the extra costs generated by the additional receivables. Credit Standards-- The minimum quality of credit worthiness of a credit applicant that is acceptable to the firm. Credit Standards Costs arising from relaxing credit standards: • A larger credit department • Additional clerical work • Servicing additional accounts • Bad-debt losses • Opportunity costs Example of Relaxing Credit Standards Basket Wonders is not operating at full capacity and wants to determine if a relaxation of their credit standards will enhance profitability. • The firm is currently producing a single product with variable costs of $20 and selling price of $25. • Relaxing credit standards is not expected to affect current customer payment habits. Example of Relaxing Credit Standards • Additional annual credit sales of $120,000 and an average collection period for new accounts of 3 months is expected. • The before-tax opportunity cost for each dollar of funds “tied-up” in additional receivables is 20%. Ignoring any additional bad-debt losses that may arise, should Basket Wonders relax their credit standards? Example of Relaxing Credit Standards Profitability of ($5 contribution) x (4,800 units) = $24,000 additional sales Additional ($120,000 sales) / (4 Turns) = $30,000 receivables Investment in ($20/$25) x ($30,000) = $24,000 add. receivables Req. pre-tax return (20% opp. cost) x $24,000 = $4,800 on add. investment Yes! Profits > Required pre-tax return Credit and Collection Policies...
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This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

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Chap10_2009 - Chapter 10 Accounts Receivable and Inventory...

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