Chapter 20 - Accounts Receivable and Inventory Management

2005, Pearson Prentice Hall

Accounts Receivable Management

Size of Investment in Accounts Receivable Percent of Credit Sales to Total Sales Level of Sales Terms of Sale Quality of Customer Collection Efforts

Accounts Receivable Management

Terms of Sale Quoted as a/b net c , which means deduct a% if paid within b days, otherwise pay within c days.

Example: 3/30 net 60 means

deduct 3% if paid within 30 days, otherwise pay the entire amount within 60 days.

Accounts Receivable Management

Terms of Sale Annualized opportunity cost of foregoing a discount:

Accounts Receivable Management

Terms of Sale Annualized opportunity cost of foregoing a discount:

a 1-a

360 c - b

Accounts Receivable Management

Accounts Receivable Management

a 1-a

360 c - b

Accounts Receivable Management

a 1-a

360 c - b

Opportunity cost of foregoing 3/30 net 60:

Accounts Receivable Management

a 1-a

360 c - b

opportunity cost of foregoing 3/30 net 60:

.03

1 - .03

360

60 - 30

Accounts Receivable Management

a 1-a

360 c - b

opportunity cost of foregoing 3/30 net 60:

.03

1 - .03

x
= 37.11%

360

60 - 30

Inventory Management

Too much inventory is expensive

and wasteful. Not enough inventory can result in lost sales.

Inventory Management
Raw materials inventory - basic materials
to be used in the firms production operations. Work-in-process inventory - partially finished goods requiring additional work before becoming finished goods. Finished-goods inventory - completed products that are not yet sold. Stock of cash - inventory of cash to allow payment of bills.

Inventory Management

Optimal inventory order size: the

Economic Order Quantity (EOQ) model:

Inventory Management

Optimal inventory order size: the

Economic Order Quantity (EOQ) model:

Q* =

2SO C

Inventory Management
2SO C

Q* =

Q = inventory order size in units C = cost of carrying 1 unit in inventory S = total demand in units over planning period O = ordering cost per order

Example: Inventory Management

2SO C

Q* =

Q = inventory order size in units C = cost of carrying 1 unit in inventory = 1.25 S = total demand in units over planning period = 10,000 units O = ordering cost per order = $250

Example: Inventory Management

Example: Inventory Management

Q* =

2SO C

Example: Inventory Management

Q* =

2SO C
2x250x10,000

Q* =

1.25

Example: Inventory Management

Q* =

2SO C
2x250x10,000

Q* =

1.25

= 2,000 units

Order Point Problem

Average = inventory

EOQ 2

+ safety stock