Management Accaunting

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CHAPTER 4: MANAGEMENT OF CURRENT ASSETS
MANAGING
MANAGING INVENTORY

EOQ MODEL

Reorder Point

ABC System

Just-in-Time System

EOQ = √2 X S X O / H
S = no of usage per period
Ordering Cost Admin cost to place
O = cost per order
and receive order
H = cost of holding the
Holding Cost Variable cost/unit to
stocks per period
hold the stocks
EOQ =number of unit to order per
THC = O X (S/EOQ) + H X
period.
(EOQ/2)
ROP = level of stock (in unit) to
reach before reorder the stocks.
ROP = Lead time (in days) X
Lead time = no of days it takes from
Usage per day
the day we place the order to the
day the stocks arrive
Classifying the inventory into 3
categories:
A: Highest value, verified daily
and closely monitored
B:
Second
highest
value,
monitored weekly.
C: Large no. of stocks but requires
low investment; 2-bin technique is
adopted.
The objective is to minimize the
inventory – order the inventory
when they are needed.
Need to have good suppliercustomer relationship for this to
work.

Material
Requirement
Determine what type to order and
Planning
(MRP) when to order them.
System

Who does something, then he or she must do it precisely!
S.A.W~
~Nabi Muhammad S.A.W~

MANAGING
MANAGING ACCOUNT RECEIVABLE

Character:
Reliability
in payment
Capital:

Condition:

High debts or low
debts?

Process
Process of
Credit
Selection

Can they survive if
economic changes?

Capacity:
Capacity:

Collateral:

Do they have cash
to pay?

Do they have
assets for security?

Credit Standards

• Relaxation of credit selection standards may lead
Relaxation
to higher sales, higher debtors and higher
debtors. [Vice-versa]

Credit Terms

• Term of sales: for credit to be extended to buyers.
Term
• Stated as a/n, net c
• Annualized Opp. Cost = [a/(1-a)] x [360/(c-b)]

Cash Discounts

• An incentive for customer to pay earlier.
• Help to reduce bad debts and may increase sales.
• Do CBA to know if cash discount is profitable.

Credit Monitoring and
Collection
Factor Determining
Size of Debtors

• Send letter to remind, then call if no response
• Personal visit by salesperson --> attorney if fails
• Legal action if all else fails.
• Nature of business: Sell on cash basis or credit?
• Level of Sales: Higher of sales, higher the debtors.
• Credit and Collection Policies

MANAGING
MANAGING CASH

Motives for
holding cash

Transaction Motive

Precautionary Motive

To
pay
ordinary
transaction of business

To
act
as
buffer
(emergency cash) is the
needs arise.

Eg: Salary, utilities & etc.

Speculative Motive
Speculative

For profit-making purpose
making
Eg: To buy in bulk when
Eg:
the price reduces.

Cash Planning:




We need to plan our cash
prepare cash budget (the forecast of cash inflows and cash
outflows).
Cash budget usually covers the forecast of cash for period of one year breaks down to
monthly budget in the event the cash flow is uncertain or seasonal. Cash budget enables the company whether to expect cash surplus or cash deficit.

Management of Cash Receipts and Cash Payments.


We need to manage cash float

Mail float
The period between
The
we mail the payment
and its receipt



it refers to the money that we have paid but cannot be used.

Processing
float
The period between
receipt of payment to
the deposit of the
money

Clearing
Clearing
float
The time taken for the
deposited cheque to
be cleared by bank.

So, how to manage these floats?
floats?
o Manage our debtors’ collections time using lockbox system. A system where we rent a post office box where customers can mail their payments
our bank will regularly empty the box and make immediate
deposits.

o
o

o

We can increase out PDP (payment deferral period) by increasing the floats when we make payments.
We need to concentrate our cash into one bank to create large pool of funds for...
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