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MB0045 : Explain the following concepts a) Operating cycle b) Total inventory cost c) Price earnings ratio d) Financial risk

Posted on: September 22, 2011

MB0045  : Explain the following concepts
a) Operating cycle

b) Total inventory cost

c) Price earnings ratio

d) Financial risk


Operating Cycle

The time gap between acquisition of resources and collection of cash from customers is known as the operating cycle

Operating cycle of a firm involves the following elements.

  • Acquisition of resources from suppliers
  • Making payments to suppliers
  • Conversion of raw materials into finished products
  • Sale of finished products to customers
  • Collection of cash from customers for the goods sold

The five phases of the operating cycle occur on a continuous basis. There is no synchronisation between the activities in the operating cycle. Cash outflows occur before the occurrences of cash inflows in operating cycle.

Cash outflows are certain. However, cash inflows are uncertain because of uncertainties associated with effecting sales as per the sales forecast and ultimate timely collection of amount due from the customers to whom the firm has sold its goods.

Since cash inflows do not match with cash out flows, firm has to invest in various current assets to ensure smooth conduct of day to day business operations. Therefore, the firm has to assess the operating cycle time of its operation for providing adequately for its working capital requirements.

Total Inventory Cost

Total Inventory cost is the total cost associated with ordering and carrying inventory, not including the actual cost of the inventory itself. It is important for companies to understand what factors influence the total cost they pay, so as to be able to minimize it. Use the total inventory cost calculator below to solve the formula.

Total Inventory Cost Definition

Total Inventory Cost is the sum of the carrying cost and the ordering cost of inventory.


C=Carrying cost per unit per year
Q=Quantity of each order
F=Fixed cost per order
D=Demand in units per year

Total Inventory Cost Formula :


Price Earnings Ratio

The price earnings ratio reflects the amount investors are willing to pay for each rupee of earnings.

Expected earnings per share = (Expected PAT) – (Preference dividend) / Number of outstanding shares.

Expected PAT is dependent on a number of factors like sales, gross profit margin, depreciation and interest and tax rate. The price earnings ratio has to consider factors like growth rate, stability of earnings, company size, company management team and dividend pay-out ratio.

Where, 1-b is dividend pay-out ratio

r is required rate of return

ROE*b is expected growth rate


Financial Risk

The risk that a company will not have adequate cash flow to meet financial obligations. Financial risk is the additional risk a shareholder bears when a company uses debt in addition to equity financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity.
Financial risk is an umbrella term for any risk associated with any form of financing. Risk may be taken as downside risk, the difference between the actual return and the expected return (when the actual return is less), or the uncertainty of that return.

Risk related to an investment is often called investment risk. Risk related to a company’s cash flow is called business risk.


7 Responses to "MB0045 : Explain the following concepts a) Operating cycle b) Total inventory cost c) Price earnings ratio d) Financial risk"

plz send me assinment 48 nd 47 if it is possible 4 u

Hi Tanvi ,

m going to upload assignment 47 and 48 in next 3-4 days in this blog .Stay Connected.


Hi Nikahat

plz send me the all 2 sets of
assignment 44,45,46,47,48 and 49
m very oblige u

great work and a gud job dear…….:)
and also thnx for that

Hey Nikhatshahin,

Fantastic work man….
Awaiting the remaining papers…..I would also like to add you my frnd on FB you can reach me on cool_055@yahoo.co.in.

Thanks Dude….you have been a great help!


Please help me with MB0045 financial management november 2011/ winter drive. plz forward to raviraaj9988@gmail.com

I wish I could help you , but dont hv winter drive’s answers.

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