Exam 3 lecture 1&2 Flashcards Preview

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Flashcards in Exam 3 lecture 1&2 Deck (40)
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1
Q

Factor that complicate cash flow

A
  1. the business (pharmacy) usually buys inventory on credit
  2. pharmacies frequently sell on credit
  3. cash flows out of the business (pharmacy) to pay for expenses such as salaries, utilities & rent
    - making there no longer be a direct relationship between sales and cash
2
Q

purchasing inventory on credit

A

creates a time lag between the time inventory is received and the payment for it

3
Q

selling on credit

A

creates a time lag between the time merchandise is sold and payment is received

4
Q

cash used to cover salaries, utilities and rent

A

must come from the gross margin or the amount left over after the cost of inventory has been covered

5
Q

the basic means of improving cash flow include:

A
  1. decrease the amount of cash invested in the pharmacy
  2. slow the amount & rate of cash flowing out of the pharmacy
  3. increase the amount & rate of cash flowing in
6
Q

6 ways to accomplish improving cash flow

A
  • proper control of inventory
  • maintenance of GM
  • investment of idle cash
  • proper control of accounts receivable
  • delay of disbursements for accounts payable
  • minimization of operating expenses
7
Q

carrying the proper inventory

A
  1. has the effect of reducing the demand for cash
  2. un-saleable inventory requires the same cash investment as saleable inventory
  3. un-saleable inventory decreases inventory turn over & increases total inventory investment
8
Q

the 80/20 rule

A
  • “80% of your inventory problems come from 20% of your inventory”
  • “2-% of your inventory may account for 80% of sales”
9
Q

applying the 80/20 rule to inventory management

A
  1. determine overall sales dollars produced by each category of items
  2. start by breaking dollar sales into 3 categories: class A (80% dollars), class B (15% dollars), class C(5%)
10
Q

what becomes apparent after classification

A

a minority of the actual inventory creates the majority of the sales

11
Q

define shrinkage

A

merchandise lost through breakage or theft

12
Q

control shrinkage

A
  • lost, stolen or broken merchandise must be paid for but generates no cash income
  • shrinkage has a dramatic effect on cash flow
13
Q

maintain adequate GM

A
  • emphasize high-margin products

- selection of third party contracts

14
Q

pharmacies can decrease product costs by

A
  • taking cash discounts
  • utilizing the lowest cost sources
  • participating in buying groups
15
Q

what to do with idle cash?

A

invest it!

16
Q

liquidity

A

an investment that can be rapidly, readily and cheaply converted to cash

17
Q

negatives of accounts receivable (selling merchandise on credit)

A
  • represents a substantial investment of cash
  • amount of cash invested = amount of outstanding AR
  • slows the rate of cash flow into the pharmacy that may not be received for weeks or months
  • a % of outstanding debts may become uncollectible & be regarded as bad debt, permanently reducing payment for merchandise sold & reducing cash flow
18
Q

opportunity cost

A

the time that the pharmacy’s cash is tied up in AR or the time between when the sale is made and the customer pays the bill

19
Q

opportunity cost of the investment of cash in AR or credit program is =

A

the interest that could be earned in the next best investment

20
Q

minimizing AR

A
  • carefully screen credit applicants
  • send out bills promptly & regularly
  • add a finance charge to overdue accounts
  • follow up on overdue accounts
21
Q

managing accounts payable

A
  • slow down payments to supplies, but pay soon enough to receive cash discounts, but no sooner
  • purchases made after suppliers close the books, will extend payments the longest
22
Q

capital expenditures differ from ordinary expenditures in that they:

A
  • usually involve very large sums of money
  • are not as regularly recurring as are expenditures for payroll & inventory
  • commit a firm to a long-term course of action which cannot be easily reversed
  • involve large cash inflows * outflows over number of years
23
Q

factors affecting the decision to invest in non-current assets

A
  • external pressures: include effects of competition, demand and technology
  • internal pressures: a firms cost structure & management expectations
24
Q

types of investments

A

replacements
cost reduction
expansion
new products

25
Q

steps for capital budgeting decision process

A
  1. ideas for projects developed
  2. projects are classified by type of investment
  3. expected future cash flows from a project are estimated (estimate outflows & inflows)
  4. the riskiness inherent in the project appraised
  5. financial value of proposed project is analyzed. projects are accepted when NPV>0
  6. final step is a post-audit, which involves comparing actual results to predicted result
26
Q

borrowing is only worthwhile if

A

the return on the proposed project exceeds the cost of the borrowed funds

27
Q

lending is only worthwhile if

A

the return is at least EQUAL to that which can be obtained from alternative risk opportunities in the same risk class

28
Q

interest is determined by

A
  • the receipt of money is preferred sooner rather than later
  • the risk of the capital sum being repaid
  • inflation
29
Q

a dollar in hand today is worth

A

more than a dollar to be received in the future bc if you had it now you could invest it & earn interest
- “future value”

30
Q

future value

A
  • the amount to be received at the end of one period

- i.e. 2000+(1+0.12)=$2240

31
Q

present value

A

the current value of specified amount to be received at some future date
-i.e. 2240/(1+0.12)=$2000

32
Q

future value (FV) equation

A

FV=PV(1+i)^n

33
Q

present value (PV) equation

A

PV=FV/(1+i)^n

PV=FVn(PVIFi,n)

34
Q

PVIF

A

present value interest factor (found in the table)

35
Q

net present value

A

method of adjusting the cash inflows and outflows for the time value of money so that they are comparable

36
Q

to calculate the net present value,

A

the business must choose a required rate of return (RRR) in order to know how to discount the cash inflows & outflows

37
Q

RRR

A

rate of return that an investment must earn to be financially attractive
- as RRR increases, PV of cash flows in future years decreases

38
Q

RRR for a business should be

A

set equal to its cost of capital-debt & equity

39
Q

higher the risk of a project

A

the higher the required rate of return

40
Q

internal rate of return (IRR)

A

calculated by finding the interest rate at which the present value of the inflows from the investment is equal to the present value of the outflows