Question

1. Is it better to have a longer or shorter cash conversion cycle? Explain.

2. What is the goal of inventory management?

3. List one advantage and one disadvantage of using short-term debt to finance permanent current assets.

4. True or False. The effective rate on a discount loan is always higher than the rate on an otherwise similar simple interest loan.

5. Explain what the Economic Ordering Quantity (EOQ) model does.

Answer 1

1.)    The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.the cash conversion cycle can be especially useful for comparing close competitors because the company with the lowest CCC is often the one with better management.

2.)Goal of inventory management

Ensuring Safety of Inventory:One of the goals of inventory management is to keep products safe. Inventory should be kept in a safe area, where it is protected against theft. Depending on the size of your company, this could mean using surveillance equipment, guards or alarm systems. The inventory should be handled carefully, as well, to avoid breakage. Broken or lost inventory means a financial loss for your company.

Tracking Sales: Track and review company sales on a regular basis as part of your inventory management plan. Note the items that don’t sell and have a tendency to sit for prolonged periods of time. Also, track the best sellers and seasonal items that experience increased sales at different times of the year. Use this data to manage the quantity of items and when to order them. Although you want to avoid excess stock, don’t be too safe with ordering inventory. You don’t want to be out of stock when new orders are requested.

Eliminating Excess Products: Inventory control also will keep dead stock off of the shelves. Stock that does not sell drains company’s resources because it takes up space in your store or warehouse. Sales events can be used to push stock that has not been performing well. Another strategy would be to return stock that is not selling or offer the products at a discounted rate to another company

3.)

Advantage

1. Convertible easily into cash

Disadvantage

1.High cost of loan

4.)True

5.)The economic order quantity is the optimum quantity of an item to be purchased at one time in order to minimize the combined annual costs of ordering and carrying the item in inventory.