CHAPTER 10

Accounts Receivable and Inventory

Management
 Accounts
receivable

Amounts of money owed to a firm by customers
who have bought goods or services on credit.
A current asset, the accounts receivable account
is also called receivables.

Credit standard - The minimum quality of
creditworthiness of a credit applicant that is
acceptable to the firm.

Credit period - The total length of time over which

credit is extended to a customer to pay a bill.

Cash discount period - The period of time during

which a cash discount can be taken for early
payment.

Cash discount - A percent (%) reduction in sales
or purchase price allowed for early payment of
invoices. It is an incentive for credit customers to
pay invoices in a timely fashion.

Seasonal dating - Credit terms that encourage

the buyer of seasonal products to take delivery
before the peak sales period and to defer
payment until after the peak sales period.
 Credit and
Collection
Policies
The several decisions
the quality of the account accepted;
the length of the credit period;
the size of the cash discount given;
any special terms, such as seasonal datings;
and
the level of collection expenditures.
 Sources of
Information

Financial Statements
Credit Ratings and Reports
Bank Checking
Trade Checking
The Companys Own Experience

Credit-scoring system - A system used to
decide whether to grant credit by assigning
numerical scores to various characteristics
related to creditworthiness.
Line of credit - A limit to the amount of credit
extended to an account. Purchaser can buy on
credit up to that limit.
ABC method of inventory control - Method
that controls expensive inventory items more
closely than less expensive items.
 Economic Order
Quantity

Economic Order Quantity (EOQ)- The quantity
of an inventory item to order so that total
inventory costs are minimized over the firms
planning period.

Formula in getting the average quantity;

Average inventory = Q/2

Total inventory cost (T ) = C(Q/2) + O(S/Q)


where Q is the quantity ordered and is assumed
to be constant for the planning period.

NOTE; that the higher the order quantity, Q, the

higher the total carrying costs, but the lower the
total ordering costs. The lower the order quantity,
the lower the total carrying costs, but the higher
the total ordering costs.
 Order Point

Order point - The quantity to which inventory
must fall in order to signal that an order must
be placed to replenish an item.
Order point (OP) = Lead time Daily usage

Lead time - The length of time between the

placement of an order for an inventory item
and when the item is received in inventory.
 Safety Stock

Safety stock- Inventory stock held in reserve
as a cushion against uncertain demand (or
usage) and replenishment lead time.

Order point (OP) = (Average lead time

Average daily usage) + Safety stock
 Just-in-Time

Just-in-time (JIT) - An approach to inventory
management and control in which inventories
are acquired and inserted in production at the
exact times they are needed.

Supply chain management (SCM)- Managing the
process of moving goods, services, and
information from suppliers to end customers.
 Business-to-
business
(B2B)
Business-to-business (B2B) - Communications
and transactions conducted between businesses,
as opposed to between businesses and end
customers. Expressed in alphanumeric form (i.e.,
B2B), it refers to such transactions conducted
over the Internet.

B2B exchange Business-to-business Internet
marketplace that matches supply and demand by
real time auction bidding.
What is needed to make a
"Just-in-time" system work

Geographic concentration
Dependable quality
Manageable supplier network
Controlled transportation system
Manufacturing Flexibility
Small lot sizes
Efficient receiving and material handling
Strong management commitment