Business Finance Analysis

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Questions and Answers

After inventory reduction, what is the total costs calculation?

$15.8 million (correct)

$16 million

$15 million

$14 million

What is the holding cost before inventory reduction?

$0.8 million a year

$1 million a year (correct)

$1.5 million a year

$2 million a year

What is the profit after inventory reduction?

$3.8 million a year

$4.5 million a year

$4.2 million a year (correct)

$4.0 million a year

What formula is used to calculate the return on assets?

Profit / Total Assets Signup and view all the answers

What is the return on assets after inventory reduction?

12.35% Signup and view all the answers

Which method can be used to find stock value that considers changes over time?

Weighted average Signup and view all the answers

What happens to total assets after inventory reduction?

They decrease to $34 million Signup and view all the answers

If each unit is sold for $35, what affects the profit margin?

All of the above Signup and view all the answers

What is the annual wage cost for the inspector based on the average time needed for each purchasing order?

$58,240 Signup and view all the answers

How much does the company incur per pallet for carrying costs including financing and rental?

$25.50 Signup and view all the answers

What is the total inventory cost for item A stored in the warehouse?

$550,000 Signup and view all the answers

If the ordering frequency for item A is increased, how will this affect the ordering and carrying costs?

Ordering costs will increase, carrying costs will decrease Signup and view all the answers

What is the estimated annual ordering cost for item A?

$140,000 Signup and view all the answers

What is the primary cause of stockouts according to the information provided?

Insufficient demand forecasting Signup and view all the answers

Which of the following is NOT a component of capacity-related costs?

Transportation Signup and view all the answers

In financial accounting, what equation represents the relationship between assets, liabilities, and owners' equity?

Assets = Liabilities + Owners’ Equity Signup and view all the answers

What is safety stock primarily used for?

To protect against uncertainties in supply and demand Signup and view all the answers

Which inventory type is characterized by being unrelated to other items' demand?

Independent Demand Signup and view all the answers

What are carrying costs NOT typically associated with?

Purchase costs of items Signup and view all the answers

Which of the following is considered a stockout cost?

Lost sales due to lack of inventory Signup and view all the answers

What is the primary purpose of ordering and setup costs?

To facilitate the purchase and production of items Signup and view all the answers

If a company reduces its lot size from 200 to 100, how is the average inventory affected?

Average inventory decreases Signup and view all the answers

Which of the following costs is typically associated with capacity-related costs?

Deterioration costs Signup and view all the answers

What is NOT a component of inventory-related costs?

Marketing costs Signup and view all the answers

What is a consequence of having more inventory on a company's balance sheet?

It increases inventory carrying costs. Signup and view all the answers

In cash flow analysis, what happens when accounts receivable is paid?

It generates a cash inflow. Signup and view all the answers

If a company has $20 million in stock level, which of the following impacts its cash flow?

Cash outflow due to inventory carrying costs. Signup and view all the answers

What is the annual holding cost if stock level is maintained at 25% of $20 million?

$2 million. Signup and view all the answers

How do reduced stock levels to 20% of sales affect a company's overall inventory status?

It reduces cash outflow due to lower holding costs. Signup and view all the answers

What is the total number of units purchased?

410 units Signup and view all the answers

How many units make up the closing stock?

56 units Signup and view all the answers

Using FIFO, how is the profit calculated?

Income - (Total cost of purchases - Cost of units sold) Signup and view all the answers

What is the profit using the LIFO method?

$2,942 Signup and view all the answers

Which month had the highest cost per item in the purchases?

April Signup and view all the answers

What method assumes that the oldest items are sold first?

FIFO Signup and view all the answers

What is the total purchasing cost calculated?

$10,680 Signup and view all the answers

What would be the value of stock calculated using Weighted Average Cost?

$3,169 Signup and view all the answers

Study Notes

Profit and Costs Analysis: Current vs After Inventory Reduction

Holding cost calculated as stock amount multiplied by holding percentage, showing significant reduction from 1 million to 0.8 million after inventory decrease.
Total costs for the current situation sum up to 16 million, while post-reduction costs decrease to 15.8 million.
Profit before inventory reduction stands at 4 million; after reduction, it increases slightly to 4.2 million.
Total assets including stock change from 35 million to 34 million due to the decrease in stock value.
Return on assets (ROA) declines from 11.4% to 12.35% reflecting improved profitability despite reduced asset use.

Inventory Valuation Methods

Stocks are classified as current assets; accurate valuation requires multiplying item units by their unit costs.
Common inventory valuation methods include:
- FIFO (First-In-First-Out): Older inventory items are sold first, aligning with actual flow in most businesses.
- LIFO (Last-In-First-Out): Newest items are sold preferentially, used in specific businesses.
- Weighted Average Cost: Cost of all items averaged to determine value.

Example: Stock Valuation Scenario

Total purchases amount to 410 units with sales of 354 units, leaving a closing stock of 56 units.
Total purchasing cost calculated as 10,680 with profits derived from the difference between income and costs.
FIFO valuation for remaining stock results in a profit of 3,374; LIFO valuation leads to a lower profit of 2,942.
Weighted average method yields a profit of 3,169, indicating variations in valuation based on the methodology used.

Inventory Management Concepts

Safety stock: Maintained as a buffer against uncertainties, ensuring minimum inventory levels for continuity.
Independent demand refers to customer-driven need for items, while dependent demand connects with related items in production.

Costs associated with inventory include carrying, ordering, stockout, and capacity-related costs:
- Carrying Costs encompass storage, risk of obsolescence, and opportunity costs.
- Ordering Costs cover expenses related to sourcing and processing orders.
- Stockout Costs arise when demand exceeds available inventory, leading to lost sales and customers.

Financial Impact of Inventory on Business

Inventory represents an asset on the balance sheet, impacting cash flow and profitability.
Excess inventory can lead to reduced liquidity, increased liabilities, and owner investment requirements.
Cash flow analysis highlights inflow versus outflow related to various inventory stages:
- Raw material, WIP, and finished goods represent cash outflows.
- Accounts receivable represent cash inflows.

Exercise and Practical Application

Inventory cost scenarios demonstrate the complexity of calculating annual ordering and carrying costs.
Changes in inventory ordering frequency significantly affect ordering and carrying costs.
Example calculations outline the financial implications of inventory management decisions, affecting overall profitability and financial health.

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Description

Explore the financial metrics involved in calculating costs, profits, and returns on assets in a business scenario. This quiz covers important elements such as holding costs, total costs, and return on assets, providing insights for effective financial decision-making.