İŞLETME FİNANSI I - Deneme Sınavı - 5

Financial controls are the means by which an organization’s resources are directed, monitored, and measured. It is fact that budgets and proforma financial statements are the major tools of financial control.

The components given in B, C, D and E are current liabilities. However, option A is one of the current assets. The correct answer is A.

The component given in the option A,B,C and D are current assets. Bank payments are one of the current liabilities. The correct answer is E.

Volume of business: Generally, there exists a strong positive relationship between the size of the company and the working capital needs. The size of a company is defined in terms of sales volume and/or asset size. Whatever the terms of reference of size, increase in size generates higher activity level, larger amount of production, inventory, sales, ending up with higher amounts of raw materials and suppliers credits. The correct answer is B.

Terms of credit: On the worst case, a company may purchase all types of raw-materials for cash and sell all of its products on credit, the required amount of working capital will be very high. On the best case, the company may have the capability to buy on credit and sell it for cash and it will need less amount of working capital. It is a fact that the companies stand at a situation in between these cases and the length of the period ofcredit has a direct bearing on working capital.The correct answer is C.

Figure 8.1 Components of Working Capital

A,B,D,E are amongst of factors

working capital management has the following four dimensions: • Time: As a means of survival in the market place, timing and availability of the required funds is critical. • Investment: Although working capital management focuses on short-term asset and liabilities, the relevant decisions indirectly determines the available funding for investments. • Credibility: Working capital management has great significance for all companies, but it is more critical for smaller companies which have more restricted funding capabilities. . • Growth: The availability of funds contributes to the activity level in the short- run and potential growth by realizing investments in the long-run.

As the name implies, conservative policy aims to minimize the risks associated with the financing of the current assets.

The companies hold cash by different types of motivations: - Transaction Motive explains holding cash or near cash to meet routine cash requirements of a company to finance transactions in the normal course of business such as purchasing raw materials, paying expenses, taxes, dividends etc. - Precautionary Motive explains holding cash or near cash as a cushion to meet unexpected contingencies such as flood, strikes etc. - Speculative motive explains the situations in which there occurs extra ordinary opportunities for the companies to quickly take advantage. For example, in order to be able to utilize the cash discount provided by a supplier, certain amount of cash can be made available as a strategy

The Baumol model is based on the following assumptions: - The cash is used evenly over a period of time. - The cash requirements of the firm are known with certainty in advance. - The transaction cost is known and is constant. - By holding the cash balances, the firm would incur the opportunity cost of interest forgone by not investing in marketable securities. The rate of carrying cost is known and is assumed to be constant. - The short term marketable securities can be freely bought and sold.

Inventory management aims to keep the inventories on optimal level, without stockouts and excesses, by organizing, holding and replenishments for each item.

Inventories can be classified into five major categories:

- Raw Material: It is the basic and the most important part of inventories. These are goods directly or used in the production process, and the expenses incurred for the procurement of raw materials are reflected to the cost per unit of product. - Work in Progress: These include those materials which have been committed to production process but have not yet been completed. - Consumables: These are the materials which are needed for smooth running of the manufacturing process. - Finished Goods: These are the final output of the production process. - Spares: It is also a part of inventories, which includes small spares and parts. - Transaction costs

1. Holding (or Carrying) Costs: This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, companies prefer to keep low inventory level for the items requiring high holding costs and frequent replenishment. Inventory management aims to keep the inventories on optimal level, without stockouts and excesses, by organizing, holding and replenishments for each item.

2. Setup (or production change) costs: Production of different types of products, especially the new product types, requires the arrangements for required amount and type of materials, specific equipment setups and filling out the required documents, all of which requires additional costs which are named as set up costs. While the set up costs may change according to the product type and production process, generally small lots are produced. This would reduce inventory levels, with a resulting savings in cost.

3. Ordering costs: These costs involve the transactional, managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs.

4. Shortage costs: When the stock of an item is run out, an order for that item must wait till the stock is replenished, and whenever no replenishment occurs, the order is cancelled. This is called stock out. A stock out may cause production process to fail. On the other hand, a backorder occurs when the order is held and filled at a later date when the inventory for the item is replenished. Both stock outs and backorders create implicit and explicit costs, some of which are hard to measure such as estimate of lost profits, the effects of lost customers, or lateness penalties.

Delinquency Cost: This type of cost arises on account in relation with the delay in payment of receivables by the customer when they fall due and become doubtful debts. Some sanctions can be applied such as blocking of company’s funds for a period of time until the payment is realized, costs associated with the collection of overheads and legal expenses.

As the name implies, conservative policy aims to minimize the risks associated with the financing of the current assets.Hedging policy, which is also named as matching policy, proposes a strategy by which the fluctuating part of the current assets are financed by the current liabilities. Consequently, the fixed and permanent current assets are financed through long-term sources.The correct answer is D.

Inventory management aims to keep the inventories on optimal level, without stockouts and excesses, by organizing, holding and replenishments for each item.

Inventories can be classified into five major categories:

Raw Material: It is the basic and the most important part of inventories. These are goods directly or used in the production process, and the expenses incurred for the procurement of raw materials are reflected to the cost per unit of product. - Work in Progress: These include those materials which have been committed to production process but have not yet been completed. - Consumables: These are the materials which are needed for smooth running of the manufacturing process. - Finished Goods: These are the final output of the production process. - Spares: It is also a part of inventories which includes small spares and parts.

The correct answer is C.

Order quantity of inventories can be determined with reference to the determinations of inventory peculiarly calculated for each company.Minimum Level: The minimum allowable level of inventory that should be hold at all times. If the stock level on a point of time is less than the minimum level, then the work will stop due to shortage of material.Re-order Level: Re-ordering level is fixed amount between the minimum and maximum level. Maximum Level: It is the maximum limit of the quantity of inventories to be maintained. Danger Level: It is the level below the minimum level. Average Stock Level: It represents the average holding of inventories. The correct answer is B.

Letter of Credit: A letter of credit is an arrangement whereby a bank helps its customer to obtain credit from its (customer’s) suppliers. When a bank opens a letter of credit in favor of its customer for some specific purchases, the bank undertakes the responsibility to honor the obligation of its customer, should the customer fail to do so.The correct answer is E.