Ch.

20: Accounts Receivable and

Inventory Management

 2002, Prentice Hall, Inc.

 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 360
x
1-a c - b
Accounts Receivable Management
Accounts Receivable Management

a 360
x
1-a c - b
 Accounts Receivable Management

a 360
x
1-a c - b

opportunity cost of foregoing 3/30 net 60:

 Accounts Receivable Management

a 360
x
1-a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360
1 - .03
x 60 - 30
 Accounts Receivable Management

a 360
x
1-a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360
1 - .03
x 60 - 30

= 37.11%
 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 firm’s 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:

2SO
Q* =
C
 Inventory Management

Q* = 2SO
C
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

Q* = 2SO
C
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

2SO
Q* =
C
Example: Inventory Management

2SO
Q* =
C

Q* = 2x250x10,000
1.25
Example: Inventory Management

2SO
Q* =
C

Q* = 2x250x10,000
1.25

= 2,000 units
 Order Point Problem

Average EOQ
= + safety stock
inventory 2