Working Capital and Inventory management

The working capital of a company is equal to:

• Total assets less current assets.

• Long-term assets less current assets.

• Current assets less current liabilities.

• Current assets less current liabilities.

Answer explanation

Explain :

A. total assets less current assets.

The difference equals fixed assets.

B. long-term assets less current assets.

The sum of long-term and current assets equals total assets.

C. current assets less current liabilities.

The difference between these two items reports working capital. Current assets become cash in a year and current liabilities are due in a year.

D. stockholders' equity.

Equity results from the difference between total assets and total liabilities, not just current assets and liabilities.

Which of the following accounts should be closed to the capital account at the end of the year?

• Equipment

• Prepaid Insurance

• Service revenue

•  Unearned rent

"Total paid-in capital" is the legal capital plus amounts paid in excess of par values.

• True

• False

The purchase price of an inventory item is $25 per unit. In each three month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The costs of placing an order for the item is $20. What is the Economic Order Quantity ( EOQ ) for the inventory item to the nearest whole unit ?

• 730

• 894

• 1,633

• 1,461

Answer explanation

D= 20,000 x 4 = 80,000 per year

S= 20

H= 6% x 25 = 1,5

Therefore the EOQ = square root (( 2 x 80,000 x 20 ) / 1,5 ) = 1, 461 units

A company always determines its order quantity for a raw material by using the Economic Order Quantity ( EOQ ) model. What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material ?

• 1. The EOQ and the total annual holding cost will both be higher 

• 1. The EOQ will be lower and the total annual holding cost will be higher 

• 1. The EOQ and the total annual holding cost will both be lower

• 1. The EOQ will be higher and the total annual holding cost will be lower

Answer explanation

If Co in the formula is lower, then the EOQ will be lower.

 

If the EOQ is lower, then the average inventory will be lower and hence the total annual holding cost will be lower.

The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of $15 and ordering costs are $20 per order placed. The annual holding cost of one unit of product is 10% of its purchase price. What is the Economic Order Quantity ( to the nearest unit ) 

• 1. 1,816

• 1. 577

• 1. 1,866

• 1. 1,155

Answer explanation

D = 12,500 x 4 = 50,000 per year 

S = 20

H = 10% x 15 = 1.5

EOQ = square root (( 2 x 50,000 x 20 ) / 1.5 ) = 1,155 units

Which of the following would be MOST likely to arise from the introduction of a just-in time inventory ordering system ?

• Less frequent deliveries 

• Higher inventory holding costs

• More risk of inventory shortages 

• Less dependence on supplies

Answer explanation

There will be more risk of inventory shortages because JIT involves keeping minium levels of inventory.

A balance sheet has total assets of $1,930, fixed assets of $1,331, long-term debt of $705, and short-term debt of $240. What is the net working capital?

• $465

• $386

• $599

• $359

• $1,225

 The tools of treasury management does not include :

• 2. Foreign exchange management

• 1. Cash management

• 1. Receivable management

• Risk management

 Inventory management helps businesses be successful…. It requires the understanding of

• 2. Inventory Levels

• 1. Inventory Value

• 1. Both