1. Accounts Receivable and
Inventory Management
 2005, Pearson Prentice Hall

2. 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.”

3. Accounts Receivable
Management
Terms of Sale
 Annualized opportunity cost of
foregoing a discount:

4. Accounts Receivable
Management
Terms of Sale
 Annualized opportunity cost of
foregoing a discount:
a 360
x
1-a c - b

5. 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%

6. Inventory Management
 Too much inventory is expensive
and wasteful.
 Not enough inventory can result
in lost sales.

7. 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.

8. Inventory Management
 Optimal inventory order size: the
Economic Order Quantity (EOQ)
model:
2SO
Q* =
C

9. 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

10. 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

11. Example: Inventory Management
2SO
Q* =
C
Q* = 2x250x10,000
1.25
= 2,000 units

12. Order Point Problem
Average EOQ
= + safety stock
inventory 2

13. Credit Policy Change
 Refer to pages 309 – 310 (Chapter 10)