Long Inventory Periods

Long Inventory Periods

  • Submitted By: hessam
  • Date Submitted: 06/28/2009 4:00 AM
  • Category: Science
  • Words: 733
  • Page: 3
  • Views: 335

Chapter 26

1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus, such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a relatively long time to pay.

2. These are firms that have a relatively long time between the time that purchased inventory is paid for and the time that inventory is sold and payment received. Thus, these are firms that have relatively short payables periods and/or relatively long receivable cycles.

6. Shortage costs are those costs incurred by a firm when its investment in current assets is low. There are two basic types of shortage costs. 1) Trading or order costs. Order costs are the costs of placing an order for more cash or more inventory. 2) Costs related to safety reserves. These costs include lost sales, lost customer goodwill, and disruption of production schedules.

7. A long-term growth trend in sales will require some permanent investment in current assets. Thus, in the real world, net working capital is not zero. Also, the variation across time for assets means that net working capital is unlikely to be zero at any point in time. This is a liquidity reason.

8. It lengthened its payables period, thereby shortening its cash cycle.

9. Their receivables period increased, thereby increasing their operating and cash cycles.


2. The total liabilities and equity of the company are the net book worth, or market value of equity, plus the long-term debt, so:

Total liabilities and equity = £9,300 + 1,900
Total liabilities and equity = £11,200

This is also equal to the total assets of the company. Since total assets are the sum of all assets, and cash is an asset, the cash account must be equal to total assets minus all other assets, so:

Cash = £11,200 – 2,300 – 2,450
Cash = £6,450

We have NWC other than cash, so the total NWC is:

NWC = £2,450 + 6,450
NWC = £8,900...

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