Working Capital
current assets - current liabilities
Lock-box system
- firm leases post office boxes in areas where it has high volume of cash inflow by mail
- customer remits payment to the local post office box
- payments are collected and processed by the firm’s bank
- bank notifies the firm of sources and amounts received
Pre-Authorized Checks
Customers authorize checks in advance for payment of their obligation
Concentration Banking
Accelerates the flow of funds from multiple local banks to a firm’s primary bank by regular, usually automatic, transfer of funds
Bank Draft
An order to pay drawn by a bank on itself or on a correspondent bank with which the issuing bank has an account
Cashier’s Check
One-time order to pay drawn on the issuing bank
Certified Check
Order to pay drawn on a depositor’s account that is certified to be paid by the bank
Money Order
Like a certified check, but usually limited in amount for each order
Traditional Materials Requirement Planning (MRP) system
- supply push - goods are produced in anticipation of their sale
- inventory is maintained at every level as buffers against unexpected demand
- production based on long set-up time and long production runs; an inflexible system
- impersonal relationships with suppliers
- use of traditional cost accounting
Just-in-time inventory (JIT) system
- system is based on on obtaining (on the supply side) and delivering (on the sell side) inventory just as and only when it is needed
- demand pull - goods are produced only when and as needed by the end user
- inventory reductions - production and purchasing occur only as needed, therefore inventories are reduced or eliminated
- production in work centers (or cells) where workers operate multiple pieces of equipment or robotics are used
- close working relationship with limited number of suppliers
- quality is critical throughout the system
- uses simplified cost accounting
Economic Order Quantity Formula
square root of 2 TO/C
T = total demand O = per order cost C = per unit carrying cost
Inventory Reorder Point
Reorder point objective is to determine the inventory quantity at which goods should be reordered
Inventory Reorder Point Formula
delivery time stock + safety stock
What do the terms “to” and “on” indicate in ratio analysis?
To divide the first item described by the second item described
Return on assets
net income / assets
When using balance sheet value(s) with income statement value(s), what do you have to do?
Get average beginning and ending values for the balance sheet value(s)
Accounts receivable turnover
(net) credit sales / average accounts receivable
Liquidity Measures
assess the ability of a firm to pay its obligations as they become due
Working Capital Ratio
current assets/current liabilities
Acid test ratio (quick ratio)
cash + receivables + marketable securities / current liabilities
Defensive Interval Ratio
cash + receivables + marketable securities / average daily cash payments
Times interest earned (TIE)
net income + interest expense + income tax expense / interest expense
Times preferred dividends earned
net income / annual preferred dividend obligation
Accounts receivable turnover
- measures the number of times that accounts receivable are incurred and collected during a period
- net credit sales / average accounts receivable
