Exercises on Cash Mgt/AR Mgt/Inventory Mgt

Theory

1. Which of the following is not a function of cash management?

a. Cash flow control
b. Cash surplus investment
c. Maximizing sales
d. Obtaining financing services
2. Which of the following investments is not likely to be a proper investment for temporary idle
cash?
a. Initial public offering of an established profitable conglomerate
b. Commercial paper
c. Treasury bills
d. Treasury bonds due within one year
3. Which of the following actions would not be consistent with good management?
a. Increased synchronization of cash flows
b. Minimize the use of float
c. Maintaining an average cash balance equal to that required as a compensating balance or
that which minimizes total cost
d. Use of checks and drafts in disbursing funds
4. The goal of credit policy is to
a. Extend credit to the point where marginal profits equal marginal costs
b. Minimize bad debt losses
c. Minimize collection expenses
d. Maximize sales
5. An increase in sales resulting from an increased cash discount for prompt payment would be
expected to cause
a. An increase in the operating cycle
b. An increase in the average collection period
c. A decrease in the cash conversion cycle
d. A decrease in purchase discounts taken
6. A change in credit policy has caused an increase in sales, an increase in discounts taken, a
reduction of the investment in accounts receivable, and a reduction in the number of doubtful
accounts. Based on the information, we know that:
a. Net profit has increased
b. The average collection period has decreased
c. Gross profit has declined
d. The size of the discount offered has decreased
7. The goal of managing working capital, such as inventory, should be to minimize the
a. Costs of carrying inventory
b. Opportunity cost of capital
c. Aggregate of carrying and shortage costs
d. Amount of spoilage or pilferage
8. The use of safety stock by a firm will
a. Reduce inventory costs
b. Increase inventory costs
c. Have no effect on inventory costs
 d. None of the above
9. When a specified level of safety stock is carried for an item in inventory, the average inventory
level for that item
a. Decreases by the amount of safety stock
b. Is one-half of the level of the safety stock
c. Increases by one-half of the level of safety stock
d. Increases by the number of units of the safety stock

Problems

10. AA. Co. writes checks averaging P15,000 a day, and it takes 5 days for these checks to clear. The
firm also receives checks in the amount of P17,000 per day, but the firm loses 3 days while its
receipts are being deposited and cleared.
Determine the firm’s net float in pesos.
11. BB Co. estimates its total annual cash disbursements of P3,251,250 which are to be paid
uniformly. BB has the opportunity to invest the money at 9% per annum. The company spends,
on the average, P25 for every cash conversion to marketable securities and vice versa.
What is the opportunity cost (pesos) of keeping cash in the bank account?
12. CC Co. has daily check receipts of P20,000, which it processes and clears for about 6 days. The
manager has received 2 bank offers to reduce processing and clearing to 4 days, (1) for a
monthly fee of P3,000; (2) for a fee equal to one-half of 1% of total annual collection. Assuming
that the opportunity cost is 12% and 300 days a year, which offer should be accepted and why?
13. DD Co. believes that its collection costs could be reduced through modification of collection
procedures. This action is expected to result in a lengthening of the average collection period
from 30 to 35 days, however, there will be no change in uncollectible accounts, or in total credit
sales. Furthermore, the variable cost ratio is 60%, the opportunity cost of a longer collection
period is assumed to be negligible, the company’s budgeted credit sales for the coming year are
P45,000,000, and the required rate of return is 6%. Assuming 360 days in a year, what is the
minimum reduction in costs in order to justify the changes in collection procedures?
14. EE Co. has sales of P3 million. Its credit period and average collection period are both 30 days
and 1% of its sales end as bad debts. The manager intends to extend the credit period to 45
days which will increase sales by 10%. However, bad debts losses on the incremental sales
would be 3%. Costs of products and related expenses amount to 40% exclusive of the cost of
carrying receivables of 15% and bad debts expenses. Assuming 360 days a year, what is the net
advantage/(disadvantage) of the credit period extension?
15. FF Co. uses the EOQ model for inventory control. The company has an annual demand of 3
million units. Per unit carrying costs, ordering costs, and stock out cost are P12, P500, and P7,
respectively. The following data have been gathered in an attempt to determine the optimal
level of safety stock:
Units short because of excess demand Number of times short
During lead time period in the last 50 reorder cycles
500 5
600 10
700 15
800 5
900 15

Determine the optimal level of safety stock.