This document provides an overview of techniques for managing short-term assets like inventory and accounts receivable, as well as long-term fixed assets. It discusses determining optimal inventory levels, scheduling orders, and using just-in-time systems. Accounts receivable management includes minimizing time to payment collection and managing bad debts. Fixed asset valuation methods and capital budgeting decisions like net present value are also covered. The document concludes with operations management challenges and measuring productivity.

1. Chapter 16
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Assets
Inventory and Operations
Management

2. Learning Objectives
LO1 Describe techniques to manage short-term assets
LO2 Calculate the value of assets in your business
LO3 Describe techniques for managing fixed assets
LO4 Calculate ratios used to analyze capital
investment decisions.
16-2

3. Learning Objectives
LO5 Describe the advantages of renting or leasing
capital equipment
LO6 Describe techniques to manage and improve
the operations of your business
16-3

4. Question
Money that is owed to your business by your
customers is called ________.
A. Accounts payable
B. Accounts receivable
C. Credit extension
D. Lender equity
16-4

5. Accounts Receivable
Accounts receivable
– money that is owed to your business by your
customers
Relatively few small businesses today
provide credit to customers
16-5

6. 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
16-6

7. 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
16-7

8. Using Your Accounts Receivable as
a Source of Financing
Use your receivables in two ways to quickly
lay your hands on cash:
 Pledge receivables as collateral for a
commercial loan
 You can sell your receivables to a finance
company in a process called factoring
16-8

9. 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.
16-9

10. Determine the Appropriate Level of
Inventory
Right amount of inventory is determined
by:
1. Cost of processing an order
2. Cost of keeping merchandise in inventory
3. Cost of lost sales if you run out
4. Time it takes to receive inventory after it’s
ordered
16-10

11. 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.
16-11

12. Economic Order Quantity
16-12
Figure 16.1

13. Inventory Costs
16-13

14. Scheduling Ordering and
Receipt of Inventory
Optimum stocking level
– The amount of inventory that results in the
minimum cost, when considering the cost of
lost sales resulting from running out of stock,
the number of units sold per day, and the
number of days required to receive inventory
– Also known as the reorder point
16-14

15. Scheduling Ordering and
Receipt of Inventory
Safety stock
– An amount of inventory carried to ensure that
you will not run out of inventory because of
fluctuating levels of sales.
16-15

16. 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.
16-16

17. 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.
16-17

18. 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
16-18

19. 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.
16-19

20. Other Approaches to Inventory
Control
Point-of-sale system
– Hardware and software combinations that
integrate inventory management directly into
accounting software.
16-20

21. Value of Assets in Your Business
Capital assets
– Assets that are expected to provide economic
benefits for periods of time greater than one
year.
16-21

22. 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.
16-22

23. 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.
16-23

24. 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.
16-24

25. 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.
16-25

26. 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.
16-26

27. 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.
16-27

28. 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.
16-28

29. 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.
16-29

30. 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.
16-30

31. 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.
16-31

32. 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.
16-32

33. Managing Operations
 Inputs
– The materials, labor,
and energy put into
the production of a
good or service.
 Outputs
– The service or product
that is produced for
sale.
Operations
– The process of
transforming
materials, labor, and
energy into goods or
services.
16-33

34. Managing Operations
Feedback
– The process of communicating within or to the
organization about how the outputs worked or
were received.
16-34

35. The Operations Process
16-35
Figure 16.3

36. 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.
16-36

37. Measuring and Improving
Productivity
Efficiency
– The comparison of productivity ratios to see
the extent that an organization has generated
more outputs with fewer inputs.
16-37

38. 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.
16-38

39. 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.
16-39

40. 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.
16-40