Assets:
Inventory and
Operations
Management
Chapter 16
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document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objectives
LO1 Describe techniques to manage short-term assets.
LO2 Calculate the value of the assets in your business.
LO3 Describe techniques for managing fixed assets.
LO4 Calculate ratios used to analyze capital investment
decisions.
LO5 Describe the advantages of renting or leasing
capital equipment.
LO6 Describe techniques to manage and improve the
operations of your business.
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16-2
Accounts Receivable
Accounts receivable
 money that is owed to your business by your
customers
 Relatively few small businesses today provide
credit to customers
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16-3
The Pros and Cons of Offering
Credit to Customers
Providing credit usually results in higher sales
revenue because of increased repeat business
Reduces cost of selling
Credit delays receipt of cash
Must replace the “missing” cash
Sooner or later a customer will not pay
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16-4
Managing Accounts Receivable
Your goal is to:
1. Minimize the time that passes between
credit sale and when the cash is received
2. Keep number of bad accounts as low as
possible
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16-5
Policies for Managing
Accounts Receivable
Exhibit 16.1
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16-6
Managing Accounts Receivable
Lock box
 A locked receptacle for money, the keys to which
are not available to those who physically handle
the receptacle
 common example of a lock box is the coin
receptacle for parking meters which cannot be
opened by the workers who are responsible for
collecting the deposited coins.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-7
Using Your Accounts Receivable as a Source
of Financing
Use your receivables in two ways to quickly lay
your hands on cash:
 Customer payments on pledged receivables may be
collected either by you and forwarded to the lender,
or may be directly collected by the lender
 You can sell your receivables to a finance company in
a process called factoring
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16-8
Using Your Accounts Receivable as a Source
of Financing
Factoring
 Selling the rights to collect accounts receivable to
an entity outside your business.
Pledging receivables
 Giving a third party legal rights to debts owed
your business in order to provide assurance that
borrowed money will be repaid.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-9
Determine the Appropriate Level
of Inventory
Right amount of inventory is determined by:
1.
2.
3.
4.
Cost of processing an order
Cost of keeping merchandise in inventory
Cost of lost sales if you run out
Time it takes to receive inventory after it’s
ordered
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16-10
Determine the Appropriate
Level of Inventory
Economic order quantity (EOQ)
 A statistical technique that determines the
quantity of inventory that a business must hold
to minimize total inventory cost.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-11
Inventory Costs
Exhibit 16.2
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-13
Just-in-Time Inventory Systems
Just-in-time inventory
 The practice of purchasing and accepting delivery
of inventory only after it has been sold to the
final customer.
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16-16
Just-in-Time Inventory Systems
Pull-through system
 A term for just-in-time inventory systems in
which product is ordered and placed into
production only after a sale has been completed.
Microinventory
 The purchase of inventory only after a sale is
made; very typical with Internet firms.
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16-17
Other Approaches to Inventory Control
Periodic inventory
 process of
physically counting
business assets on a
set schedule
Perpetual inventory
 recording the
receipt and sale of
each item as it
occurs
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16-18
Other Approaches to Inventory Control
Bar coding
 Obtaining a Universal Product Code number and
scan-ready visual tag, and printing it on the
product or its packaging. Bar codes can then be
scanned and recognized by others.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-19
Other Approaches to Inventory Control
Point-of-sale system
 Hardware and software combinations that
integrate inventory management directly into
accounting software.
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16-20
Value of Assets in Your Business
Capital assets
 Assets that are
expected to provide
economic benefits
for periods of time
greater than one
year.
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16-21
Determining the Value of Your Operating
Assets
Book value
 The difference between the original cost of an
asset and the total amount of depreciation
expense that has been recognized to date.
Disposal value
 The net amount realized after subtracting the
costs of getting rid of an asset from its selling
price.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-22
Determining the Value of Your Operating
Assets
Arm’s length transaction
 A business deal where the parties have a prior
relation or affiliation, but where the business is
conducted as if they were unrelated.
 Approach is done to help guard against potential
conflicts of interest.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-23
Determining the Value of Your Operating
Assets
Replacement value
 The cost incurred to replace one asset with an
identical asset.
Fair market value
 The price at which goods and services are bought
and sold between willing sellers and buyers in an
arm’s-length transaction.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-24
Determining the Value of Inventory
Inventory valuation
 Determination of
the amount of
assets held by the
firm for sale or
production.
Physical inventory
 A count of all the
inventory being
held for sale at a
specific point in
time.
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16-25
Determining the Value of Inventory
Acquisition cost
 The total cost of acquiring an asset, including
such costs as purchase price, transportation,
installation, testing, and calibrating in order to
ready it for its first productive use.
Replacement cost
 The total cost of replacing an asset with an
essentially identical asset.
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16-26
Property, Plant, and Equipment
 Property
 A general term for real estate, but it can also be
applied as a legal term for anything owned or
possessed.
 Plant
 A general term for the facilities of a business.
 Equipment
 Machinery, tools, or materials used in the
performance of the work of the business.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-27
Property, Plant, and Equipment
Whole of life costs
 The sum of all costs of capital assets, including
acquisition, ownership, operation, and disposal.
Cost of owning
 Cost incurred in financing, insuring, taxing, or
tracking an asset.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-28
Property, Plant, and Equipment
Cost of operating
 The direct cost
incurred in using an
asset for the
purpose for which it
was intended.
Cost of disposition
 Cost incurred in the
activities necessary
to get rid of an
asset.
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16-29
The Capital Budgeting Decision
Capital budgeting
 The process of deciding among various
investment opportunities to create a specific
spending plan.
Payback period
 The amount of time it takes a business to earn
back the funds it paid out to obtain a capital
asset.
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16-30
The Capital Budgeting Decision
Return on investment (ROI)
 A capital budgeting equation used to measure
the relationship between initial investment and
the profits that are expected to be received from
making the investment.
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16-31
Financing with Leases
Operating lease
 A long-term rental in which ownership of the
asset never passes to the person paying for the
lease.
Capital lease
 A lease in which at the end of the lease period
the asset becomes the property of the lessee,
possibly with an additional payment.
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16-32
Managing Operations
Inputs
 The materials, labor,
and energy put into
the production of a
good or service.
Outputs
Operations
 The process of
transforming
materials, labor,
and energy into
goods or services.
 The service or
product that is
produced for sale.
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16-33
Managing Operations
Feedback
 The process of
communicating
within or to the
organization about
how the outputs
worked or were
received.
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16-34
The Operations Process
Figure 16.3
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16-35
Measuring and Improving Productivity
Productivity
 The ratio measure of how well a firm does in
using its inputs to create outputs, literally,
productivity is outputs divided by inputs.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16-36
Measuring and Improving Productivity
Efficiency
 The comparison of productivity ratios to see the
extent that an organization has generated more
outputs with fewer inputs.
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16-37
Measuring and Improving Productivity
Quality
 a product’s or service’s fitness for use, measured
as durability, reliability, serviceability, style, ease
of use, and dependability.
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16-38
Operations Management Challenges for
Product-Based Firms
Supply chain
 the line of distribution of a product from its start
as materials outside the target firm to its
handling in the target firm to its handling by
sellers into the hands of customers.
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16-39
Operations Management Challenges for
Product-Based Firms
Best practices
 Activities identified by authoritative bodies as
examples of optimal ways to get things done in a
particular industry, profession, or trade.
 Benchmarking
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16-40