Chua, Kate Francine C.

BSA-2

1. What are the 5 Cs of credit? Explain why each is important?

i. Character

Character helps creditors in determining your capacity to repay a loan. It

gives information on the length and variety of your credit history, as well
as your capacity to make timely payments.

ii. Capacity

One of the most crucial of the five elements is capacity, which refers to
the borrower's ability to repay a loan. A person's capacity is determined
by their ability to meet their present financial obligations, pay off any new
debt, cover replacement allowances, make payments, and save reserves
for tough times.

iii. Capital

Lenders consider capital as a backup plan in case a borrower's income or

revenue is disrupted while the loan is still being repaid. Because a
borrower who has a lot of capital has some stake in the outcome, banks
favor them.

iv. Collateral

A borrower may use collateral to secure loans. It guarantees the lender

that, in the event of a borrower default, they will be able to recover some
of their investment by seizing the collateral.

v. Conditions

Credit criteria are the phrases that lenders, such banks, employ when
vetting prospective borrowers for capital loans. In other words, while
determining whether to grant loans to people or businesses, lenders
adhere to a set of criteria and a certain methodology.

2. What are the different inventory types? How do the types differ? Why are some
types said to have dependent demand whereas other types are said to have
independent demand?

Despite the fact that there are other sorts of inventory, the four primary
ones are raw materials and components, work in progress, finished goods and
maintenance, repair and operating supplies. The materials a business employs to
produce and finish goods are known as raw materials. The basic materials are
often indistinguishable from their original state when the product is finished.
Components are the materials that a corporation utilizes to make and finish
 things, similar to raw materials, but they are distinguishable once the product is
finished. WIP inventory stands for work in progress and comprises labor,
overhead, raw materials or componentry, and even packing supplies. Finished
goods are products that are offered for sale. MRO is inventory that supports the
production of a good or the upkeep of an enterprise, frequently in the form of
supplies.

When the demand for one item does not depend on the desire for another
item, that item is said to fall under the category of independent demand.
Independent demand items are finished goods that are produced for stock and
sale or ordered by external customers. On the other hand, dependent demands
are those for inventories of one item that depend on the availability of another
item. The demand for finished goods determines the need for raw materials and
component inventories, which is why they are referred to as dependent demand
inventories.

3. Davis Company sells on terms of net 45. Its annual credit sales are P912,500 and
its accounts receivable average 15 days overdue. Assume a 365-day a year. What
is Davis’ investment in receivables?

Average collection period = 45 + 15

= 60 days

Average sales = P912,500/365 days

= P2,500

Investment receivables = P2,500 x 60

= P150,000

Answer: P150,000

4. Fruitcake Specialists sells 36,000 fruit cakes annually. Annual carrying costs are
P5 per fruit cake and the ordering costs are P100 per order. The firm has decided
to maintain a safety stock of one month’s sales or 3,000 fruitcakes. The delivery
time per order is 5 days .. assume a 365-day year.

Required:

a. What is the economic order quantity (EOQ)?

√2 x annual demand in units x costs per order/carrying costs per unit

√2 x 36,000 x 100/5

√7,200,000/5
 √1,440,000

= 1,200 units

Answer: 1,200

b. What is the average inventory?

Average inventory= EOQ or order size/2

= 1,200/2

= 600

Answer: 600 units

c. How many orders should be placed each year?

Number of orders = 36,000/1,200

= 30

Answer: 30 orders per year

d. What is the total inventory cost?

Total inventory costs = total ordering costs + total carrying costs

= [(36,000/1,200)(100) + (1,200/2)(5)]

= 3,000 + 3,000

= 6,000

Answer: P6,000

e. What is the reorder point?

Reorder point = lead time usage + safety stock

= (36,000/100)(5) + 3,000

= 1,800 + 3,000

= 4,800

Answer: 4,800 units