Universal College of Parañaque: Working Capital Management

UCP :MAS 13_WORKING CAPITAL MANAGEMENT BATCH 2019
UNIVERSAL COLLEGE OF PARAÑAQUE

COLLEGE OF BUSINESS & ACCOUNTING
MS13 – WORKING CAPITAL MANAGEMENT

EXERCISES
STRAIGHT PROBLEMS:
Working Capital Investment and Financing Policy
EXERCISE 1:
Real Company has P8,000,000 in current assets, P3,500,000 of which are considered permanent current assets.
In addition, the firm has P6,000,000 invested in fixed assets. Real Company wishes to finance all fixed assets and
permanent current assets plus half of its temporary current assets with long-term financing costing 15 percent.
Short-term financing currently costs 10 percent. Real Company's earnings before interest and taxes are
P2,200,000. Income tax rate is 40 percent.
How much would Real Company's earnings after taxes under this financing plan?
EXERCISE 2:
A firm that is in the process of preparing its financial plan for the upcoming year has estimated the following
current assets (in P000,000) for the year.
Month CA Month CA Month CA
Jan 19.2 May 36.6 Sept 26.9
Feb 21.6 June 43.8 Oct 25.5
Mar 24.5 Jul 40.5 Nov 23.4
Apr 33.4 Aug 34.4 Dec 20.7
The firm’s fixed assets should remain constant at P40 million. Owner’s equity is forecast to be P25 million.
Working capital policy requires that 50% of maximum current assets be financed with permanent financing.
REQUIREMENT:
1. How much will the firm’s permanent level of assets be for the coming year?
2. Compute the permanent financing requirement of the firm.
3. Compute the maximum temporary financing requirement of the firm.
External Financing Needed / Additional Financing Needed

EXERCISE 3:
At year-end 2002, total assets for Amore Inc. were P1.2 million and accounts payable were P375,000. Sales, which
in 2002 were P2.5 million, are expected to increase by 25% in 2003. Total assets and accounts payable are
proportional to sales, and that relationship will be maintained. Amore typically uses no current liabilities other
than accounts payable. Common stock amounted to P425,000 in 2002, and retained earnings were P295,000.
Amore plans to sell new common stock in the amount of P75,000. The firm’s profit margin on sales is 6 percent,
60 percent of earnings will be retained.
REQUIREMENT:
A. What was Amore’s total debt in 2002?
B. How much new, long-term debt financing will be needed in 2003?
EXERCISE 4:
The KRAM Company had the following data for the current year, 2004:
Sales, 2004 P4,000,000
Sales, 2005 5,500,000
Items that vary directly with sales:
Assets 45%
Liabilities 15%
Net profit margin 15%
Payout ratio 45%
Required:
1. Compute the projected additional financing needed for 2005.
2. Compute the projected additional financing needed for 2005 under each assumption:
A. Payout ratio is 55%
B. Net profit margin is 10% and payout ratio is 30%
C. Sales next year is P5,000,000 and the payout ratio is 40%.
Cash Management
Management Advisory Services by Karim G. Abitago, CPA

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Aim…Believe..Claim
EXERCISE 5:
Samson Corporation, a leading producer of automobile batteries, turns out 1,500 batteries a day at a cost of P600
per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Samson
allows its customers 40 days in which to pay for the batteries, and the firm generally pays suppliers in 30 days.
A. What is the length of Samson's cash conversion cycle?

B. At a steady state in which Samson produces 1,500 batteries a day, what amount of working capital must it
finance?
C. By what amount could Samson reduce its working capital financing needs if it was able to stretch its
payables deferral period to 35 days?
D. Samson's management is trying to analyze the effect of a proposed new production process on the working
capital investment. The new production process would allow Samson to decrease it s inventory conversion
period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would
cause the cost of materials and labor to increase to P700. Assuming the change does not affect the
receivables collection period (40 days) or the payables deferral period (30 days), what will be the length of
the cash conversion cycle and the working capital financing requirement if the now production process is
implemented?
EXERCISE 6:
Abbey Products is concerned about managing cash efficiently. On the average, inventories turns over 5 times,
and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they
arise. The firms spends P30 million on operating cycle investments each year, at a constant rate. Assuming a
360-day year.
Required:
A. Calculate the firm’s operating cycle
B. Calculate the firm’s cash conversion cycle
C. Calculate the amount of negotiated financing required to support the firm’s cash conversion cycle.
D. How could management reduce the cash conversion cycle?
EXERCISE 7:
A firm that has an annual opportunity cost of 12% is contemplating installation of a lockbox system at an annual
cost of P90,000. The system is expected to reduce mailing time by 2 days, reduce processing time by 1.5 days,
and reduce check clearing time by 1 day. If the firm collects P300,000 per day, would you recommend the
system?
EXERCISE 8:
Calma Company uses a continuous billing system that results in average daily receipts of P750,000. The company
treasurer estimates that a proposed lock-box system could reduce its collection time by 2 days.
Required:
A. How much cash would the lock-box system free up for the company?
B. What is the maximum amount that Calma would be willing to pay for the lock-box system if it can earn 6
percent on available short-term funds?
C. If the lock-box system could be arranged at an annual cost of P45,000, what would be the net gain from
instituting the system?
EXERICSE 9:
Syl Company projects that cash outlays of P45 million will occur uniformly throughout the year. Syl plans to meet
its cash requirements by periodically selling marketable securities from its portfolio. The firm’s marketable
securities are invested to earn 12 percent, and the cost per transaction of converting securities to cash P30.
A. What is the optimal transaction size for transfer from marketable securities to cash?
B. What will be Syl’s average cash balance?
C. Compute the annual cost of cash based on optimal transaction size
Receivables Management
EXERCISE 10:
McPan Company sells on terms of 3/10, net 30. Total sales for the years are P900,000. Forty percent of the
customers pay on the 10th day and take discounts; the other 60 percent pay, on average, 40 days after their
purchases. Assume 360 days per year.
A. What is the days sales outstanding?
B. What is the average amount of receivables?
C. What would happen to average receivables if McPan toughened up on its collection policy with the result that
all no-discount customers paid on the 30th day?
EXERCISE 11:
S Mart has sales of P3 million. Its credit period and average collection periods are both 30 days, and 1.5% of its
sales end as bad debts. The manager intends to extend the credit term to 45 days which will increase sales to
P3.3 million. However, bad debt 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 debt expenses. Assuming
360 days a year, what incremental cost of investment is required to support the change in policy?
EXERCISE 12:
Dessa, Inc. currently has sales of P2.5 million. Its credit period and days sales outstanding (DSO) are both 30
days, and 1 percent of its sales end up as bad debts. The credit manager estimates that, if the firm extends its
credit period to 45 days so that its days sales outstanding increases to 45 days, sales will increase by P250,000,

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but its bad debt losses on the incremental sales would be 2.5 percent. Variable costs are 60 percent, and the cost
of carrying receivables, k, is 12.5 percent. Assume a tax rate of 40 percent and 360 days per year.
A. Compute the incremental investment required to finance the increase in receivables if the change is effected.
B. What would be the incremental cost of carrying receivables?
C. What would be the effect of those changes in net income?
Inventory Management
EXERCISE 13:
Wilbur Co. last year reported sales of P10,000,000 and an inventory turnover ratio of 2. The company is now
adopting a just-in-time inventory system. If the new system is able to reduce the firm's inventory level and
increase the firm's inventory turnover to 5, while maintaining the same level of sales, how much cash will be
freed up?
EXERCISE 14:
Ever Company is considering switching from level production to seasonal production in order to lower very high
inventory costs. Average inventory levels would decline by P300,000 but production costs would rise about
P40,000 because of additional startups and other inefficiencies. The firm's cost of financing inventory balances is
15%.
A. Should the firm switch to seasonal production?(ignore income taxes)
B. At what interest rate would the cost of financing additional inventory under level production be equal to the
added production costs of seasonal production?(ignore income taxes)
C. Answer (A) and (B) if the applicable income tax rate is 40 percent.
EXERCISE 15:
The Electra Car Company purchases 20,000 units of a major component part each year. The firm's order costs are
P200 per order and the carrying cost per unit is P2 per year.
A. Compute the total inventory costs associated with placing orders of 20,000, 10,000, 5,000, 1,000.
B. Determine the EOQ for the component parts.
EXERCISE 16:
The following information pertains to Emy Manufacturing Corporation’s Product X:
Annual demand 33,750 units
Annual cost to hold one unit of inventory ₱15
Setup cost (or the cost to initiate a production run) ₱500
Beginning inventory of product X 0
At present, the company produces 2,250 units of Product X per production run, for a total of 15 production runs
per year. The company is considering to use the EOQ model to determine the economic lot size and the number
of production runs that will minimize the total inventory carrying cost and setup cost for Product X.
A. If the EOQ model is used, the economic lot size is
B. If the EOQ model is used, the number of production runs should be
C. At present, the company’s total annual inventory costs is
D. If the EOQ model is used, the total annual inventory costs, compared with that under present system, will
increase (decrease) by
EXERCISE 17:
DF Tires unlimited is a business enterprise located in the City of Cagayan de Oro. The market price on a per unit
basis is P 3,000. Since Cagayan de Oro is a very progressive rural place, the business sells an average of 36,000
tires annually. Based on a company study covering the last five years of its operations, it was found out that
annual carrying cost per tire is P 5.00 and the ordering cost is P 100 on a per order basis. The store is open 7 days
a week ( which includes Sundays and holidays of obligation). The delivery time per order (tires are ordered from
Manila) is 5 days. Since it normally takes time before an order is placed, filled up and delivered, the manager has
decided to keep a safety stock of 3,000 tires which is equivalent to a month’s sales. The average inventory is
EXERCISE 18:
The following information is available for Edgar Corporation’s Material X.
Annual usage 12,600 units
Working days per year 360 days
Normal lead time 20 days
The units of Material X are required evenly throughout the year.
A. What is the reorder point?
B. Assuming that occasionally, the company experiences delay in the delivery of Material X, such that the lead
time reaches a maximum of 30 days, how many units of safety stock should the company maintain and what
is the reorder point?
EXERCISE 19:
Handy operated a chain of hardware stores across Laguna. The controller wants to determine the optimum safety
stock levels for an air purifier unit. The inventory manager compiled the following data.
• The annual carrying cost of inventory approximates 20% of the investment in inventory.
• The inventory investment per unit averages P50
• The stockout cost is estimated to be P5 per unit
• The company orders inventory on the average of 10 times per year

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• Total cost = carrying cost + expected stockout cost

The probabilities of a stockout per order cycle with varying levels of safety stock are as follows:
Safety stock Stockout (Units) Probability
200 0 0%
100 100 15%
0 200 12%
The total cost of safety stock on an annual basis with a safety stock level of 100 units is
EXERCISE 20:
Each stockout of a product sold by A.W. Inn Company costs P1,750 per occurrence. The carrying cost per unit of
inventory is P5 per year, and the company orders 1,500 units of product 24 times a year at a cost of P100 per
order. The probability of a stockout at various levels of safety stocks is.
Units of safety stock Probability of stockout
0 .50
100 .30
200 .14
300 .05
400 .01
The optimal safety level for the company is
Trade Credit
EXERCISE 21:
Cash discount Decisions. The credit terms for each of three suppliers are shown below:
Supplier A 2/10 net 55
Supplier B 3/10 net 55
Supplier C 2/15 net 45
Supplier D 2/10 net 30
A. Determine the annual approximate cost of giving up the cash discount from each supplier.
B. Assuming that the firm needs short-term financing, recommend whether it would be better to give up the
cash discount or take the discount and borrow from a bank at 20% annual interest. Evaluate each supplier
separately using your findings in Question A.
C. Assuming that the entity continuously foregoes the cash discount, compute the annual effective cost of
giving up the discount on each supplier.
Short-term Loan
EXERCISE 22:
Divina Mendez, owner of DM Company is negotiating with Island City Bank for a P1M, 1-year loan. Island City
Bank has offered DM Company the following alternatives. Calculate the effective annual interest rate for each
alternative. Which alternative has the lowest effective annual interest rate?
A. A 12.5 percent annual rate on a simple interest loan, with no compensating balance required and interest
due at the end of the year.
B. A 9.25 percent annual rate on a simple interest loan, with a 20 percent compensating balance required and
interest again due at the end of the year.
C. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance.
D. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance and an existing cash
balance of P150,000
E. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance which earns 5%
interest income.
F. A 8.75 percent annual rate on a discount loan, with a 20 percent compensating balance and an existing cash
balance of P150,000. The bank balance earns 5% interest income.
Redo requirement (A) to (F) assuming the loan is for four (4) months.
Factoring
EXERCISE 23:
Lei Company enters into an agreement with a firm that will buy Lei Company’s accounts receivable and assume
the risk of collection.
Details about the agreement are as follows.
Average amount of receivable to be factored each month: P500,000
Average collection period: 60 days
Amount to be advanced by the factor : 80% of the face amount of the receivables
Interest rate, deductible in advance: 10% p.a.
Factor’s fee, deductible in advance: 2%
Annual savings of Lei Company in collection expenses: P60,000
Requirement:
A. How much is the monthly net proceeds from factoring the receivables?
B. What is the annual net cost of factoring?
C. What is the effective annual cost rate of financing?
D. If the interest charge and factor’s fee is not deducted in advance, the effective annual cost rate is
Commercial Paper
EXERCISE 24:

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Nardo, Inc. can issue a three-month commercial paper with a face value of P1,000,000 fpr P980,000. Transaction
costs would be P1,200. The annualized percentage cost of the financing would be
Short-term Financing Alternatives

EXERCISE 25:
Lance Hardware can buy equivalent materials from two-distributors. Supplier A offers term 1/10, net 30 whereas
Supplier B provides terms of 2/15, net 60.
A. If Lance foregoes the discount, which of the two suppliers should it purchase from if supply prices are
comparable.
B. If Lance can borrow from Lending Bank at a 16%, should it forego the discount?
C. If in (B) above the bank requires a 20% compensating balance for the loan, should the firm forego the
discount?
EXERCISE 26:
Tyler Company needs P100,000 to take advantage of a discount based on terms of 3/10, net 60. Barangay Bank
has agreed to lend the money at a 12% rate with a 15% compensating balance requirement. Townbank will lend
at a 13% interest rate on a discounted loan from three months.
A. What is the effective rate of interest charged by each bank?
B. What is the cost of foregoing the discount?
C. How much would Tyler have to borrow from each bank in order to take the discount?
D. Suppose that Tyler normally banks with Barangay Bank and maintains deposit balance of P15,000, what
amount would have to be borrowed and what would the effective interest rate be?
EXERCISE 27:
Dela Merced, owner of DM Company is negotiating with Island City Bank for a P500,000, 1-year loan. Island City
Bank has offered DM Company the following alternatives. Calculate the effective annual interest rate for each
alternative. Which alternative has the lowest effective annual interest rate?
A. A 12 percent annual rate on a simple interest loan, with no compensating balance required and interest due
at the end of the year.
B. A 9 percent annual rate on a simple interest loan, with a 20 percent compensating balance required and
interest again due at the end of the year.
C. An 8.75 percent annual rate on a discount loan, with a 15 percent compensating balance.
D. Interest is figured as 8 percent of the P50,000 amount, payable at the end of the year, but the P50,000 is
repayable in monthly installments during the year.
MULTIPLE CHOICE:
THEORIES
1. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
a. Increase in the ratio of current liabilities to noncurrent liabilities.
b. Decrease in the operating cycle.
c. Decrease in the quick ratio.
d. Increase in the ratio of current assets to noncurrent assets.
2. A firm following an aggressive working capital strategy would (M)
a. Hold substantial amount of fixed assets.

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b. Minimize the amount of short-term borrowing.

c. Finance fluctuating assets with long-term financing.
d. Minimize the amount of funds held in very liquid assets.
3. Which of the following statement is false?
A. Net working capital equals working capital less current liabilities.
B. A firm with a current ratio greater than one has positive net working capital.
C. Working capital management concerns decisions about all of a firm’s assets.
D. Net working capital is that portion of a firm’s current assets financed with long-term funds.
4. An advantage of the use of long-term debt as opposed to short-term debt to finance current assets is
A. It is easy to repay C. It generally is less costly than short-term debt
B. It decreases the risk of the firm D. It generally places fewer restrictions on the firm
5. Which of the following statements is true?
A. Short-term debt is usually more expensive than long-term debt.
B. A conservative working capital policy is characterized by higher current ratio and acid-test ratio.
C. Determining the appropriate level of working capital for a firm requires changing the firm’s capital
structure and dividend policy.
D. Liquid assets do not ordinarily earn higher returns relative to long-term assets, so holding the former will
maximize the return on total assets.
6. The length of time it takes for the initial cash outflows for goods and services to be realized as cash inflows
from sales is called
A. Cash conversion cycle C. Product life cycle
B. Manufacturing cycle D. Vicious cycle
7. As a firm's cash conversion cycle increases, the firm:
A. becomes less profitable C. reduces its accounts payable period
B. incurs more shortage costs D. increases its investment in working capital
8. An objective of cash management is to
A. Maximize the cash balance to avoid the risk of illiquidity.
B. Minimize the cash balance to maximize the return from idle cash.
C. Reserve as much cash as possible for potential investment opportunities.
D. Invest cash for a return while retaining sufficient liquidity to satisfy future needs.
9. According to John Maynard Keynes, the three major motives for holding cash are for
A. Transactional, psychological, and social purposes.
B. Speculative, fiduciary, and transactional purposes.
C. Speculative, social, and precautionary purposes.
D. Transactional, precautionary, and speculative purposes.
10. Which of the following statements concerning zero balance accounts is not correct?
A. They are set up to handle disbursement activity
B. The account has a minimum amount at all times
C. Checks are automatically transferred into the account as checks presented for payment
D. The transfer is automatic and involves an accounting entry only
E. The master and the zero balance account locate at the same bank
11. Which of the following statements is most correct? (E)
a. A cash management system that minimizes collections float and maximizes disbursement float is better
than one with higher collections float and lower disbursement float.
b. A cash management system that maximizes collections float and minimizes disbursement float is better
than one with lower collections float and higher disbursement float.
c. The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than
theft losses saved, then the lockbox should be installed. Brigham
d. Other things held constant, a firm will need a smaller line of credit if it can arrange to pay its bills by the
5th of each month than if its bills come due uniformly during the month.
12. Which of the following actions would not be consistent with good management? (M)
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.
13. The Baumol model determines the optimal cash balance by:
A. Balancing total costs against opportunity costs
B. Minimizing total costs of holding cash against trading securities costs
C. Balancing trading securities costs against total costs
D. Minimizing total costs less trading costs
14. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
A. Liquidity & safety
B. Maximizing taxes.
C. Maximizing the rate of return.
D. Investing in Treasury bonds since they have no default mix.

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15. Investment instruments used to invest temporarily idle cash balances should have the following
characteristics:
A. low default risk, low marketability, and a short term to maturity.
B. high expected return, readily marketable, and no maturity date.
C. low default risk, readily marketable, and a short term to maturity.
D. high expected return, low marketability, and a short term to maturity.
16. Which of the following investments generally pay the highest return?
A. Commercial paper C. Treasury bills
B. Money market accounts D. Treasury notes
17. All of the following are alternative marketable securities suitable for investment except
A. RP Treasury Bills C. Commercial paper
B. Eurodollars D. Convertible bonds
18. An enterprise's receivables collection period is equal to
A. The inventory conversion period. C. The day's sales outstanding.
B. The cash conversion cycle. D. The inventory divided by average daily sales.
19. Which of the following represents a firm’s average gross receivables balances?
I. Days’ sales in receivables x accounts receivable turnover.
II. Average daily sales x average collection period.
III. Net sales ÷average gross receivables. (E)
a. I only. c. II only.
b. I and II only. d. II and III only.
20. An increase in the firm’s collection period means
A. the firm’s current ratio is increasing.
B. the firm’s collection expenses have fallen.
C. the firm’s receivables turnover ratio is increasing.
D. the firm has become less efficient in the collection of its receivables.
21. Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in
sales or operating costs, then the company
A. might well end up with a lower debt ratio. C. would probably end up with a higher ROE.
B. might well end up with a higher debt ratio. D. total asset turnover ratio would probably decline.
22. A change in a seller’s credit policy has caused the following:
• Sales decreased • Investment in accounts receivable increased
• Discounts taken decreased • The number of doubtful accounts increased
Based on this information, we can say that
A. Net profit has decreased C. The average collection period has increased
B. Gross profit has increased D. The company increased the rate of discount offered
23. Following are ways of accelerating collection of accounts receivables, except
A. shorten credit terms. C. age accounts receivables.
B. minimize negative float. D. offer special discounts to those who pay promptly
24. The carrying cost associated with inventory management includes
A. Insurance cost, shipping costs, storage costs, and obsolescence
B. Purchasing cost, shipping costs, set up costs, and quantity discount lost
C. Storage costs, handling costs, interest on capital invested and obsolescence
D. Obsolescence, set up costs, interest on capital invested, and purchasing order costs
25. The purpose of the economic order quantity model is to
A. Minimize the safety stock.
B. Minimize the inventory quantities.
C. Minimize the sum of the order costs and the holding costs.
D. Minimize the sum of the demand costs and the backlog costs.
26. The Economic Order Quantity (EOQ) formula does not assume that
A. usage is uniform C. the cost of inventory itself is constant
B. demand is known D. the cost of placing an order is constant
27. Which of the following is not an element in the EOQ formula?

A. periodic carrying cost per unit C. variable cost per order
B. safety stock D. yearly demand
28. The use of safety stock by a firm will
A. have no effect on inventory costs C. reduce inventory costs
B. increase inventory costs D. none of the given choices
29. Pepper Company changed from a traditional manufacturing philosophy to a just-in-time technology. What
are the expected effects of this change on Pepper’s inventory turnover and inventory as a percentage of total
assets reported on Pepper’s balance sheet?
A. B. C. D.
Inventory turnover Increase Increase Decrease Decrease
Inventory percentage Increase Decrease Increase Decrease

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30. Which one of the following provides a spontaneous source of financing for a firm?
A. Accounts payable C. Debentures
B. Accounts receivable D. Mortgage bonds
31. The following forms of short-term borrowings are available to a firm:
• Floating lien • Bankers’ acceptances
• Factoring • Lines of credit
• Revolving credit • Commercial paper
• Chattel mortgages
The forms of short term borrowing that are unsecured credit are:
A. Factoring, chattel mortgage, bankers’ acceptances, and line of credit
B. Floating lien, chattel mortgage, bankers’ acceptances, and line of credit
C. Floating lien, revolving credit, chattel mortgages, and commercial paper
D. Revolving credit, bankers’ acceptances, line of credit, and commercial paper
32. Which of the following statements is most correct? (M)
a. Compensating balance requirements apply only to businesses, not to individuals.
b. Compensating balances are essentially costless to most firms, because those firms would normally have
such funds on hand to meet transactions needs anyway.
c. If the required compensating balance is larger than the transactions balance the firm would ordinarily
hold, then the effective cost of any loan requiring such a balance is increased.
d. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating
balances.
33. A manufacturing firm wants to obtain a short-term loan and has approached several lending institutions. All
of the potential lenders are offering the same nominal interest rate, but the terms of the loans vary. Which of
the following combinations of loan terms will be most attractive for the borrowing firm?
A. Simple interest, no compensating balance.
B. Discount interest, no compensating balance.
C. Simple interest, 20% compensating balance required.
D. Discount interest, 20% compensating balance required.
34. An example of secured short-term financing is:
A. A line of credit C. A warehouse receipt
B. A revolving credit line D. Commercial paper
35. A firm which finances through a factor
A. maintains a compensating balance. C. sells approved accounts receivable without recourse.
B. uses inventory as collateral for a loan. D. uses another company to guarantee a loan.
PROBLEMS
1. May Co. has total fixed assets of P100,000 and no current liabilities. The table below displays its wide
variation in current asset components.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Cash P 20,000 P 10,000 P 15,000 P 20,000
Accounts receivable 66,000 25,000 47,000 88,000
Inventory 20,000 65,000 59.000 10,000
Total P106,000 P100,000 P121,000 P118,000
If May's policy is to finance all fixed assets and half the permanent current assets with long-term financing
and rest with short time-financing, what is the level of long-term financing?
A. P68,000 C. P150,000
B. P100,000 D. P155,625
2. Silver Company has the following ratios: A*/S = 1.6; I*/S = 0.4: profit margin = 0.10; and dividend payout
ratio = 0.45, or 45 percent. Sales last year were P100 million. Assuming that these ratios will remain
constant and that ail liabilities increase spontaneously with increases in sales, what is the maximum growth
rate Silver Company can achieve without having to employ nonspontaneous external funds? *Spontaneous
assets and liabilities
A. 3.9 percent C. 7.8 percent
B. 4.8 percent D. 9.6 percent
3. Texas Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable
conversion cost. It takes the firm 18days to convert raw materials into calculator. Texas usual credit terms to
its customers is 30days, and the firm generally pays its suppliers in 20 days. If the foregoing cycles are
constant, what amount of working capital must Texas finance?
A. P1,400,000 C. P2,400,000
B. P900,000 D. P1,800,000
4. Hep Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Hep has the
opportunity to invest the money at 24% per annum. The company spends, on the average, P40 for every
cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000 C. P45,000
B. P55,000 D. P72,500

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5. Collectrite Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty percent of the
customers pay on the tenth day and take discounts; the other 60 percent pay, on average, 45 days after
their purchases. What is the average amount of receivables?
A. P70,000 C. P77,200
B. P77,500 D. P67,500
6. Globe, Inc. is considering changing its credit terms from 2/15, net 30, to 3/10, net 30. In order to speed
collections. At present, 40 percent of Globe's customers take the 2 percent discount. Under the new term,
discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers
who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The
change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise
above their present 2 percent level. However, the more generous cash discount terms are expected to
increase sales from P2 million to P2.6 million per year.
Globe's variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9
percent, and the firm's income tax rate is 40 percent
What are the days sales outstanding (DSO) before- and after the- change of credit policy?
A. 27 days and 22.5 days, respectively C. 22.5 days and 27 days, respectively
B. 22.5 days and 21.5 days, respectively D. 21.5 days and 22.5 days respectively
7. The Tempo Company has an inventory conversion period of 60 days, a receivable conversion period of 30
days, and a payable payment period of 45 days. The Tempo's variable cost ratio is 60 percent and annual
fixed costs of P600,000. The current cost of capital for Tempo is 12%. If Tempo's annual sales are P3,375,000
and all sales are on credit, what is the firm's carrying cost on accounts receivable, using 360 days year?
A. P281,250 C. P20,250
B. P168,750 D. P56,250
Questions 8 and 9 are based on the following information:
Melsie Computer Furniture Inc, (MCF) manufactures a line of office computer chairs. The annual demand for
the chairs is estimated to be 5,000 units. The annual cost to hold one unit in inventory is P10 per year, and
the cost to initiate a production run is P1,000. There are no computer chairs on hand, and MCF has scheduled
four equal production runs of computer chairs for the coming year, the first of which is to be run immediately.
RCF has 250 business days per year, sales occurred uniformly throughout the year, and production start-up is
within one day.
8. The number of production runs per year of computer chairs that would minimize the sum of carrying and
setup costs for the coming year is
A. 1 C. 4
B. 2 D. 5
9. If RCF does not maintain a safety stock, the estimated total carrying costs for the computer chairs for the
coming year based on their current schedule is
A. P 4,000 C. P 6,250
B. P 5,000 D. P 12,500
10. Eklog Manufacturing Corporation uses the standard economic order quantity (EOQ) model. If the EOQ for
Product A is 200 units and Eklog maintains a 50-unit safety stock for the item, what is the average inventory
of Product A?
A. 100 units C. 150 units
B. 125 units D. 250 units
Questions 11 & 12 are based on the following information.
A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. Its
purchases total P1,080,000 per year.
11. How much "non-free" trade credit does the firm use on average each year?
A. P120,000 C. P60,000
B. P90,000 D. P30,000
12. What is approximate cost of the "non-free" trade credit?
A. 16 2% C. 21.9%
B. 19.4% D. 24.5%
13. A company obtained a short-term bank loan of P500,000 at an annual interest rate of 8%. As a condition of
the loan, the company is required to maintain a compensating balance of P100,000 in its checking account.
The checking account earns interest at an annual rate of 3%. Ordinarily, the company maintains a balance of
P50,000 in its account for transaction purposes. What is the effective interest rate of the loan?
A. 7.77% C. 9.44%
B. 8.50% D. 8.56%
14. Gees Pipeline, Inc., has developed plans for new pump that will allow more economical operation of the
company’s oil pipelines. Management estimates that P2,400,000 will be required to put this new pump into
operation. Funds can be obtained from a bank at 10 percent discount interest, or the company can finance
the expansion by delaying to payment to its suppliers. Presently, Gees purchases under terms of 2/10, net
40, but management believes payment could be delayed 30 additional days without penalty; that is,
payment could be made in 70 days. Which means of financing should Gees use? (Use the approximate cost
of trade credit.)
A. Trade credit, since the cost is about 12.24 percent.
B. Trade credit, since the cost is about 3.13 percentage points less than the bank loan

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C. Bank loan, since the cost is about 1.13 percent points less than trade credit
D. Bank loan, since the cost is about 3.13 percentage points less than trade credit
15. You plan to borrow P100,000 from your bank, which offers to lend you the money at a 15 percent nominal, or
stated, rate on a 1-year loan.
What is the effective interest rate if the loan is a discount loan with a 10 percent compensating balance?
A. 17.65% C. 17.50%
B. 20.00% D. 26.50%
End of Exercises
“I can't give you a sure-fire formula for success, but I can give you a formula for failure: try to please everybody
all the time.” ― Herbert Bayard Swope
QUIZZER (DO-IT-YOURSELF DRILL)

THEORIES
1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs could increase its
working capital by the
A. Prepayment of $50,000 of next year's rent.
B. Collection of $50,000 of accounts receivable.
C. Purchase of $50,000 of temporary investments for cash.
D. Refinancing of $50,000 of short-term debt with long-term debt.
2. Determining the appropriate level of working capital for a firm requires
A. Changing the capital structure and dividend policy for the firm.
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total
investments.
C. Offsetting the profitability of current assets and current liabilities against the probability of technical
insolvency.
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than
long term debt.
E. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance
these assets.
3. Compared to other firms in the industry, a company that maintains a conservative working capital policy will
tend to have a
A. Higher total asset turnover.
B. Greater percentage of short-term financing.
C. Higher ratio of current assets to fixed assets.
D. Greater risk of needing to sell current assets to repay debt.
4. A firm following an aggressive working capital strategy would
A. Hold substantial amount of fixed assets.
B. Minimize the amount of short-term borrowing.
C. Finance fluctuating assets with long-term financing.
D. Minimize the amount of funds held in very liquid assets.
5. The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the
firm’s maturing obligations is the policy that finances
A. Fluctuating current assets with long-term debt.
B. Fluctuating current assets with short-term debt.
C. Permanent current assets with long-term debt.
D. Permanent current assets with short-term debt.
6. Ignoring cost and other effects on the firm, which of the following measures would tend to reduce the cash
conversion cycle?
A. Take discounts when offered.
B. Forgo discounts that are currently being taken.
C. Maintain the level of receivables as sales decrease.
D. Buy more raw materials to take advantage of price breaks.
7. 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. A decrease in purchase discounts taken.
C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.
8. A precautionary motive for holding excess cash is
A. To enable a company to have cash to meet emergencies that may arise periodically.
B. To enable a company to meet the cash demands from the normal flow of business activity.
C. To enable a company to avail itself of a special inventory purchase before prices rise to higher levels.

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D. To avoid having to use the various types of lending arrangements available to cover projected cash
deficits.
9. The amount of cash that a firm keeps on hand in order to take advantage of any bargain purchases that may
arise is referred to as its
A. Compensating balance. C. Speculative balance.
B. Precautionary balance. D. Transactions balance.
10. Which of the following is not a major function in cash management?
A. Cash flow control C. Maximizing sales
B. Cash surplus investment D. Obtaining financing services
11. Which of the following actions would not be consistent with good management?
A. Minimize the use of float.
B. Increased synchronization of cash flows.
C. Use of checks and drafts in disbursing funds.
D. Maintaining an average cash balance equal to that required as a compensating balance or that which
minimizes total cost.
12. The following are desirable in cash management except:
A. Cash is collected at the earliest time possible.
B. Post-dated checks are not deposited on time upon maturity.
C. All sales are properly receipted and promptly deposited intact.
D. Most sales are on cash basis and receivables are aged “current”
13. A lock-box system
A. Accelerates the inflow of funds.
B. Provides security for late night deposits.
C. Reduces the need for compensating balances.
D. Reduces the risk of having checks lost in the mail.
14. All of the following are valid reasons for a business to hold cash and marketable securities except to
A. Meet future needs.
B. Satisfy compensating balance requirements.
C. Earn maximum returns on investment assets.
D. Maintain adequate cash needed for transactions.
15. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
A. Minimizing taxes.
B. Liquidity and safety.
C. Maximizing rate of return.
D. Investing in Treasury bonds since they have no default risk.
16. Which of the following investments is not likely to be a proper investment for temporary idle cash?
A. Treasury bills.
B. Commercial paper.
C. Treasury bonds due within one year.
D. Initial public offering of an established profitable conglomerate.
17. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal mix
between cash and marketable securities. The EOQ model assumes all of the following except
A. Cash flow requirements are random.
B. The total demand for cash is known with certainty.
C. An opportunity cost is associated with holding cash, beginning with the first dollar.
D. The cost of a transaction is independent of the dollar amount of the transaction and interest rates are
constant over the short run.
18. The one item listed below that would warrant the least amount of consideration in credit and collection policy
decisions is the
A. Cash discount given. C. Quality of accounts accepted.
B. Quantity discount given. D. Level of collection expenditures.
19. The goal of credit policy is to
A. Maximize sales.
B. Minimize bad debt losses.
C. Minimize collection expenses.
D. Extend credit to the point where marginal profits equal marginal costs.
20. When a company analyzes credit applicants and increases the quality of the accounts rejected, the company
is attempting to
A. Maximize sales.
B. Maximize profits.
C. Increase bad-debt losses.
D. Increase the average collection period.
21. A strict credit and collection policy is in place in Star Co. As Finance Director you are asked to advise on the
propriety of relaxing the credit standards in view of stiff competition in the market. Your advise will be
favorable if

Page 11 of 24
A. The competitor will do the same thing to prevent lost sales.

B. The projected margin from increased sales will exceed the cost of carrying the incremental receivables.
C. The account receivable level is improving, so the company can afford the carrying cost of receivables.
D. there is a decrease in the distribution level of your product, and a more aggressive stance in necessary
to retain market share.
22. It is held that the level of accounts receivable that the firm has or holds reflects both the volume of a firm’s
sales on account and a firm’s credit policies. Which one of the following items is not considered as part of
the firm’s credit policies?
A. The size of the discount that will be offered.
B. The length of time for which credit is extended.
C. The minimum risk group to which credit should be extended.
D. The extent (in terms of money) to which a firm will go to collect an account.
23. The credit and collection policy of Amargo Co. provides for the imposition of credit block when the credit line
is exceeded and/or the account is past due. During the month, because of the campaign to achieve volume
targets, the general manager has waived the credit block policy in a number of instances involving big
volume accounts. The likely effect of this move is
A. Increase in the level of receivables only.
B. Deterioration of aging of receivables only.
C. Deterioration of aging and increase in the level of receivables.
D. Decrease in collections during the month the move was done.
24. A high turnover of accounts receivable, which implies a very short days-sales outstanding, could indicate that
the firm
A. Offers small discounts.
B. Has a relaxed (lenient) credit policy.
C. Has an inefficient credit and collection department.
D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
25. Accounts receivable turnover will normally decrease as a result of
A. An increase in cash sales in proportion to credit sales.
B. A change in credit policy to lengthen the period for cash discounts.
C. A significant sales volume decrease near the end of the accounting period.
D. The write-off of an uncollectible account (assume the use of the allowance for doubtful accounts
method).
26. The level of accounts receivable will most likely increase as
A. Cash sales increase and number of says sales.
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
C. Credit limits are expanded, cash sales increase, and aging of the receivables is improving.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain the same.
27. 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 this
information, we know that:
A. Net profit has increased.
B. Gross profit has declined.
C. The average collection period has decreased.
D. The size of the discount offered has decreased.
28. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be expected on the
balance sheet of its customer if the firm went to a net cash 30 policy?
A. Decrease in cash. C. Decreased receivables.
B. Increased receivables. D. Increased payables and increased bank loan.
29. Which condition justifies accepting a low inventory turnover ratio?
A. High carrying costs. C. Low inventory order costs.
B. High stock-out costs. D. Short inventory order lead times.
30. If one optimizes the inventory turnover ratio, which costs will not increase?
A. Carrying costs C. Total reorder costs
B. Stock-out cost D. Unit reorder costs
31. Order-filling costs, as opposed to order-getting costs, include all but which of the following items?
A. Credit check of new customers.
B. Packing ad shipping of sales orders.
C. Mailing catalogs to current customers.
D. Collection of payments for sales orders.
32. Which of the following inventory items would be the most frequently reviewed in an ABC inventory control
system?
A. Expensive, frequently used, high stock-out cost items with long lead time.
B. Expensive, frequently used, low stock-out cost items with long lead times.
C. Inexpensive, frequently used, high stock-out cost items with long lead time.
D. Expensive, frequently used, high stock-out cost items with short lead times.
33. In an ABC inventory analysis, the items that are most likely to be controlled with a red-line system are the
A. A items. C. C items.

Page 12 of 24
B. B items. D. items on a perpetual inventory.

34. The materials control method that is based on physical observation that an order point has been reached is
the:
A. ABC plan C. min-max method
B. cycle review method D. two-bin method
35. The underlying philosophy of “just-in-time” inventory system is that
A. The quantities of most stock items are subject to definable limits.
B. It is a quest toward continuous improvement in the environmental conditions that necessitates
inventories.
C. It is impractical to give equal attention to all stock items, hence the need to classify and rank them
according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or critical items
are examined more frequently than low-cost or non-critical items.
36. Companies that adopt just-in-time purchasing systems often experience
A. An increase in carrying costs.
B. Fewer deliveries from suppliers.
C. A reduction in the number of suppliers.
D. A greater need for inspection of goods as the goods arrive.
37. An inventory control system which employs mathematical models as an aid in making inventory decision is
known as
A. Mini-max system C. Statistical inventory control system.
B. Order cycling system D. Two-bin system
38. In inventory management, the problem of avoiding excessive investment in inventories and at the same time
avoiding inventory shortages can be solved by applying a quantitative technique known as
A. Payback analysis C. Probability analysis
B. Economic order quantity D. High-low point method
39. Which of the following is used in determining the economic order quantity (EOQ)?
A. Calculus. C. Queuing theory.
B. Markov process. D. Regression analysis.
40. A characteristic of the basic economic order quantity (EOQ) model is that it
A. Is relatively insensitive to error.
B. Is used when product demand, lead-time, and ordering costs are uncertain.
C. Should not be used in conjunction with computerized perpetual inventory systems.
D. Should not be used when carrying costs are large in relation to procurement costs.
41. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
A. Constant demand, constant ordering cost, constant carrying cost, unlimited production and inventory
capacity.
B. Limited production capacity, declining demand, constant ordering cost, constant carrying cost, and
unlimited inventory capacity.
C. Increasing demand, limited production capacity, increasing ordering cost, increasing carrying cost, and
limited inventory capacity.
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing carrying cost,
and unlimited inventory capacity.
42. The economic order quantity formula can be used to determine the optimum size of
A. B. C. D.
Production run Yes Yes No No
Purchase order Yes No Yes No
43. The simple economic production lot size model will only apply to situations in which the production
A. Rate equals the demand rate.
B. Rate is less than the demand rate.
C. Rate is greater than the demand rate.
D. For the period covered equals the projected sales for the period.
44. Which one of the following items is not directly reflected in the basic economic order quantity (EOQ) model?
A. Inventory obsolescence.
B. Interest on invested capital.
C. Public warehouse rental charges.
D. Quantity discounts lost on inventory purchases.
45. The ______________ would not affect the economic order quantity.
A. cost of a stockout
B. cost of insuring inventory
C. cost of purchase requisition forms
D. company's weighted average cost of capital
46. The economic order quantity is not affected by the
A. safety stock level
Page 13 of 24
B. cost of purchase-order forms.

C. cost of insuring a unit of inventory for a year.
D. estimate of the annual material consumption.
47. The ordering costs associated with inventory management include
A. Insurance costs, purchasing costs, shipping costs, and obsolescence.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs.
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost.
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested.
48. The carrying costs pertaining to inventory include
A. Insurance costs, incoming freight costs and setup costs.
B. Insurance costs, incoming freight costs and storage costs.
C. Setup costs and opportunity cost of capital invested in inventory.
D. Storage costs and opportunity cost of capital invested in inventory.
49. The optimal level of inventory is affected by all of the following except the
A. Cost per unit of inventory.
B. Current level of inventory.
C. Usage rate of inventory per time period.
D. Cost of placing an order for merchandise.
50. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, first-out) method
would
A. Not affect the EOQ.
B. Increase the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
D. Decrease the EOQ in times of rising prices.
51. The selling price of the product is relatively high and the purchase cost of the product is relatively low. In this
situation
A. The EOQ model will indicate frequent large orders.
B. The EOQ of the product is affected by the selling price.
C. The selling price has nothing to do with the EOQ of the product.
D. Management must increase the price to cover the cost of carrying higher inventory.
52. Clear View Co. manufactures various glass products including a car window. The setup cost to produce the
car window is $1,200. The cost to carry a window in inventory is $3 per year. Annual demand for the car
window is 12,000 units. If the annual demand for the car window was to increase to 15,000 units,
A. the number of setups would decrease.
B. the total carrying costs would increase.
C. the economic order quantity would decline.
D. all of the above would occur.
53. A decrease in inventory order costs will
A. Increase the reorder point.
B. Decrease the economic order quantity.
C. Decrease the holding cost percentage.
D. Have no effect on the economic order quantity.
54. An increase in inventory holding costs will

A. Increase the economic order quantity.
B. Decrease the economic order quantity.
C. Have no effect on the economic order quantity.
D. Decrease the number of orders issued per year.
55. The economic order quantity (EOQ) will rise following
A. An increase in carrying costs.
B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory.
D. An increase in the variable costs of placing and receiving an order.
56. For its economic order quantity model, a company has a $10 cost of placing an order and a $2 annual cost of
carrying one unit in stock. If the cost of placing an order increases by 20%, the annual cost of carrying one
unit in stock increases by 25%, and all other considerations remain constant, the economic order quantity
will:
A. decrease
B. increase
C. remain unchanged
D. either increase or decrease, depending on the reorder point
E. either increase or decrease, depending on the safety stock
57. Missile Company has correctly computed its economic order quantity as 500 units. However, management
feels it would rather order quantities of 600 units. How should Missile’s total annual purchase-order costs
and total annual carrying cost for an order quantity of 600 units compare to the respective amounts for an
order quantity of 500 units?

Page 14 of 24
A. Lower purchase-order cost and lower carrying cost.

B. Lower purchase-order cost and higher carrying cost.
C. Higher purchase-order cost and lower carrying cost.
D. Higher purchase-order cost and higher carrying cost.
58. When a specific level of safety stock is carried for an item in inventory, the average inventory level for that
item
A. Is not affected by the safety stock.
B. Increases by the amount of the safety stock.
C. Decreases by the amount of the safety stock.
D. Increases by one-half the amount of the safety stock.
59. For inventory management, ignoring safety stocks, which of the following is a valid computation of the
reorder point?
A. The economic order quantity.
B. The square root of the anticipated demand during the lead time.
C. The anticipated demand per day during lead time times lead time in days.
D. The economic order quantity times the anticipated demand during the lead time.
60. The cost of stock-out do not include
A. Depreciation and obsolescence. C. Loss of customer goodwill.
B. Disruption of production schedules. D. Loss of sales.
61. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The usual lead-time for
the inventory item is six (6) days; however, at times, the lead-time has gone as high as eight (8) days.
Kulasa now desires to adjust its safety stock policy. The likely effect on stockout costs and carrying costs,
respectively, would be
A. Increase and increase. C. Decrease and increase.
B. Increase and decrease. D. Decrease and decrease.
62. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant
A. ordering costs and carrying costs. C. ordering costs and stockout costs.
B. ordering costs and purchasing costs. D. stockout costs and carrying costs.
63. A company obtaining short-term financing with trade credit will pay a higher percentage financing cost,
everything else being equal, when
A. The discount percentage is lower.
B. The items purchased have a lower price.
C. The items purchased have a higher price.
D. The supplier offers a longer discount period.
64. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not taking discounts
from one of their three biggest suppliers, or a 14.75% per annum renewable discount loan from its bank for 3
months. The suppliers' terms are as follows:
Fort Co. 1/10, net 30
Riley Manufacturing Co. 2/15, net 60
Shad, Inc. 3/15, net 90
Using a 360-day year, the cheapest source of short-term financing in this situation is
A. Fort Co. C. Shad, Inc.
B. Riley Manufacturing Co. D. The bank.
65. In assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory
that is work-in-process because
A. WIP generally has the lowest marketability of the various types of inventories.
B. WIP inventory usually has the highest loan value of the different inventory types.
C. WIP represents a lower investment by a corporation as opposed to other types of inventories.
D. WIP inventory is relatively easy to sell because it does not represent a raw material or a finished
product.
66. A company is arranging debt financing for the purchase of a new piece of equipment that has a 5-year
expected useful life. Which of the following alternative financing arrangements has the lowest effective
annual percentage rate if each has a quoted nominal rate of 9.5%?
A. A 5-year term loan with interest compounded annually.
B. A 10-year term loan with interest compounded semiannually.
C. A 5-year term loan with interest compounded quarterly.
D. A 10-year term loan with interest compounded monthly.
67. Commercial paper
A. Has a maturity date greater than 1 year.
B. Is usually sold only through investment banking dealers.
C. Ordinarily does not have an active secondary market.
D. Has an interest rate lower than Treasury bills.
68. Large companies often raise short-term debt by selling:
A. Bonds C. Medium term notes
B. Debentures D. Commercial paper
69. A one year, $20,000 loan with a 10% nominal interest rate provides the borrower with the use of <List A> if
interest is charged on a <List B> basis. (E)

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A. B. C. D.
List A $18,000 $20,000 $20,000 $22,000
List B Simple Simple Discount Discount
70. A small retail business would most likely finance its merchandise inventory with
A. Commercial paper. C. A line of credit.
B. A terminal warehouse receipt loan. D. A chattel mortgage.
PROBLEMS
1. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy.
The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of
total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40
percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current
assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and
relaxed policies?
A. 1.6% C. 5.4%
B. 3.8% D. 6.2%
2. Wildthing Amusement Company’s total assets fluctuate between $320,000 and $410,000, while its fixed
assets remain constant at $260,000. If the firm follows a maturity matching or moderate working capital
financing policy, what is the likely level of its long-term financing?
A. $ 90,000 C. $320,000
B. $260,000 D. $410,000
3. Bully Corporation purchases raw materials on July 1. It converts the raw materials into inventory by
September 30. However, Bully pays for the materials on July 20. On October 31, it sells the finished goods
inventory. Then, the firm collects cash from the sale 1 month later on November 30. If this sequence
accurately represents the average working capital cycle, what is the firm's cash conversion cycle in days?
A. 92 days. C. 133 days.
B. 123 days. D. 153 days.
4. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these checks to clear.
The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its
receipts are being deposited and cleared. What is the firm’s net float in dollars?
A. $ 24,000 C. $ 75,000
B. $ 32,000 D. $126,000
5. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is 0.02% and
the average transaction cost of investing money overnight is $50?
A. $50 C. $400
B. $350 D. $40,000
Questions 6 and 7 are based on the following information.
A company has a 10% cost of borrowing and incurs fixed costs of $500 for obtaining a loan. It has stable,
predictable cash flows, and the estimated total amount of net new cash needed for transactions for the year
is $175,000. The company does not hold safety stocks of cash.
6. When the average cash balance of the company is higher, the <List A> the cash balance is <List B>.
List A List B
A. Opportunity cost of holding Higher
B. Total transactions costs associated with obtaining Higher
C. Opportunity cost of holding Lower
D. Total costs of holding Lower
7. If the average cash balance for the company during the year is $20,916.50, the opportunity cost of holding
cash for the year will be
A. $2,091.65 C. $8,750.00
B. $4,183.30 D. $17,500.00
8. CMR is a retail mail order firm that currently uses a central collection system that requires all checks to be
sent to its Boston headquarters. An average of 5 days is required for mailed checks to be received, 4 days for
CMR to process them and 1½ days for the checks to clear through its bank. A proposed lockbox system
would reduce the mail and process time to 3 days and the check clearing time to 1 day. CMR has an average
daily collection of $100,000. If CMR should adopt the lockbox system, its average cash balance would
increase by
A. $250,000. C. $650,000.
B. $400,000. D. $800,000.
9. What are the expected annual savings from a lockbox system that collects 200 checks per day averaging
$500 each, and reduces mailing and processing times by 2.0 and 0.5 days, respectively, if the annual interest
rate is 6%?
A. $6,000 C. $15,000
B. $12,000 D. $250,000
10. A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lock box
service whereby the bank that offers this service will reduce the company’s collection time by four days at a

Page 16 of 24
monthly fee of $2,500. If money market rates average 4% during the year, the additional annual income
(loss) from using the lock box service would be
A. $(12,000). C. $6,000.
B. $(6,000). D. $12,000.
11. A banker has offered to set up and operate a lock box system for your company. Details are given below.
Average number of daily payments 325
Average size of payments $1,250
Daily interest rate 0.021%
Saving in mailing time 1.3 days
Saving in processing time 0.9 days
Bank charges $0.30
Estimate the annual savings. Assume 250 processing days per year.
A. $3,273 C. $23,500
B. $22,675 D. $47,000
12. QRS makes large cash payments averaging P17,000 daily. The company changed from using checks to sight
drafts which will permit it to hold unto its cash for one extra day. If QRS can use the extra cash to earn 14%
annually, what annual peso return will it earn?
A. P6.52 C. P2,380
B. P652.10 D. P6,521.00
Questions 13 and 14 are based on the following information.
Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment will satisfy the
firm's need for funds during the coming year.
13. If it costs $50 to sell these bills, regardless of the amount, how much should be withdrawn at a time?
A. $50,000 C. $250,000
B. $100,000 D. $500,000
14. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills?
A. About every 3 days. C. About every 15 days.
B. About every 9 days. D. About every 18 days.
15. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and the collections
department estimates that 30% of the customers pay on the 10th day and take discounts; 40% pay on the
30th day; and the remaining 30% pay, on the average, 40 days after the purchase. Assuming 360 days per
year, what is the average collection period.
A. 15 days. C. 27 days.
B. 20 days. D. 40 days.
16. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables turnover is 4.5, what
is the average collection period and the year-end receivables, respectively (assume a 365-day year)?
A. 73 days and $108,000. C. 81 days and $120,000.
B. 73 days and $120,000. D. 81 days and $200,000.
17. Best Computers 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 $45,000,000, and the required rate of return is 6%.
To justify changes in collection procedures, the minimum annual reduction of costs (using a 360-day year and
ignoring taxes) must be
A. $22,500 C. $125,000
B. $37,500 D. $375,000
18. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a
payment cycle of 26 days. If its sales for the period just ended amounted to P972,000, what is the
investment in accounts receivable? (Assume 360 days a year.)
A. P72,450 C. P85,200
B. P79,600 D. P94,500
19. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
Old New
Average number of days collection 75 50
Ratio of credit sales to total sales 70% 60%
Projected sales for the coming year is P100 million and it is estimated that the new policy will result in a 5%
loss if the new policy is implemented. Assuming a 360-day year, what is the effect of the new policy on
accounts receivable?
A. No change. C. Decrease of P 6.67 million.
B. Decrease of P5 million. D. Decrease of P13 million.
20. Simba Corp., whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The collections
manager estimated that 30% of the customers pay on the 10th day and take discounts; 40% on the 30th
day; and the remaining 30% pay, on the average, 40 days after the purchase. If management would
toughen on its collection policy and require that all non-discount customers pay on the 30th day, how much
would be the receivables balance?

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A. Zero C. P70,000
B. P60,000 D. P80,000
21. Numero 1 Co.’s budgeted sales for the coming year are P96 million, of which 80% are expected to be credit
sales at terms of n/30. The company estimates that a proposed relaxation of credit standards would increase
credit sales by 30% and increase the average collection period form 30 days to 45 days. Based on a 360-day
year, the proposed relaxation of credit standards would result to an increase in accounts receivable balance
of
A. P1,920,000 C. P6,080,000
B. P2,880,000 D. P6,880,000
22. Phillips Glass Company buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 30
days after the invoice date. Net purchases amount to $720,000 per year. On average, how much “free” trade
credit does Phillips receive during the year? (Assume a 360-day year.)
A. $30,000 C. $50,000
B. $40,000 D. $60,000
23. Slippers Mart 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 general manager intends to extend the credit period to 45 days which will
increase sales by P300,000. 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, the change in policy would result to incremental investment in
receivables of
A. P9,750. C. P65,000.
B. P24,704. D. P701,573
24. The Liberal Sales Co. budgeted sales for the coming year are P30 million of which 80% are expected to be on
credit. The company wants to change its credit terms from n/30 to 2/10, n/30. If the new credit terms are
adopted, the company estimates that cash discounts would be taken on 40% of the credit sales and the new
uncollectible amount would be unchanged. The adoption of the new credit terms would result in expected
discount availed of in the coming year of
A. P192,000 C. P480,000
B. P288,000 D. P600,000
25. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with respect to credit
policy, below is a summary of relevant information:
Old Credit Policy New Credit Policy
Sales P1,800,000 P1,980,000
Average collection period 30 days 36 days
The company requires a rate of return of 10% and a variable cost ratio of 60%.
Using a 360-day year, the pre-tax cost of carrying the additional investment in receivables under the new
policy would be
A. P2,880 C. P4,080
B. P3,000 D. P4,800
26. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He estimates the following
effects:
 Sales will increase by at least 20%.
 Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times.
 Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed changes is at
P900,000. Variable cost ratio is 55% and desired rate of return is 20%. Fixed expenses amount to
P150,000.
Should the company allow the revision of its credit terms?
A. No, because losses will increase by P28,000.
B. Yes, because income will increase by P68,850.
C. No, because income will be reduced by P13,000.
D. Yes, because losses will be reduced by P78,800.
27. Wasting Resource Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad
debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy,
whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30
days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and
the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental
change in the profitability of the company if stricter policy would be implemented would be
A. A reduction in net income by P35,400.
B. A reduction in net income by P38,350.
C. A reduction in net income by P70,000.
D. Zero as the positive and negative effects offset each other.
28. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier customers. It
has been estimated that uncollectible expenses would be 15% and collection costs 5%. The manufacturing
and selling costs are 70% of sales and corporate tax is 35%. If it pursues this opportunity, the after tax profit
will
A. Remain the same. C. Increase by P65,000.
B. Increase by P35,000. D. Increase by P97,500.
29. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are available.
Policy A would increase sales by $500,000, but bad debt losses on additional sales would be 8%. Policy B

Page 18 of 24
would increase sales by an additional $120,000 over Policy A and bad debt losses on the additional $120,000
of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the
decision made. The profit margin will be 20% of sales and no other expenses will increase. Assume an
opportunity cost of 20%. What should the firm do?
A. Make no policy change.
B. Change to only Policy A.
C. Change to Policy B (means also taking Policy A first).
D. All policies lead to the same total firm profit, thus all policies are equal.
30. A firm that often factors its accounts receivable has an agreement with its finance company that requires the
firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds
would be further reduced by an annual interest charge of 10% on the monies advanced. Assuming a 360-day
year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at
the time a $100,000 account that is due in 90 days is turned over to the finance company?
A. $83,700 C. $90,675
B. $90,000 D. $93,000
Questions 31 through 33 are based on the following information.
Flesher, Inc.'s credit manager studied the bill-paying habits of its customers and found that 90% of them
were prompt. She also discovered that 22% of the slow payers and 5% of the prompt ones subsequently
defaulted. The company has 3,000 accounts on its books, none of which has yet defaulted.
31. Calculate the total number of expected defaults, assuming no repeat business is on the horizon.
A. 66 C. 201
B. 135 D. 795
32. Given average revenues from sales of $1,200 and the cost of sales of $1,100, what is the average expected
profit or loss from extending credit to slow payers?
A. $100 profit. C. $220 loss.
B. $164 loss. D. $264 loss.
33. Given revenues from sales of $1,200 and the cost of sales of $1,100, what would the average level of
revenues that makes it worthwhile to extend credit to slow payers?
A. $1,364.00 C. $1,410.26
B. $1,389.74 D. $1,510.26
34. The following data refer to various annual costs relating to the inventory of a single-product company:
Unit transportation-in on purchases $0.20
Storage per unit 0.12
Insurance per unit 0.10
Annual interest foregone from alternate investment of funds $800
Annual number of units required 10,000
What is the annual carrying cost per unit?
A. $0.30 C. $0.42
B. $0.32 D. $0.50
35. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells blank and
recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per tape; tapes are shipped in
packages of 20. Phonic Goods pays all incoming freight, and Tape-Disk Mart does not inspect the tapes due
to Phonic Goods' reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per
week. Tape-Disk Mart earns 20% on its cash investments. The purchase-order lead time is two weeks. The
following cost data are available:
Relevant ordering costs per purchase order $90.50
Carrying costs per package per year:
Relevant insurance, materials handling, breakage, etc., per year $ 4.50
What is the required annual return on investment per package?
A. $0.60 C. $12.00
B. $2.50 D. $60.00
36. Penguin Company manufactures winter jackets. Setup costs are $2.00. Penguin manufactures 4,000 jackets
evenly throughout the year. Using the economic order quantity approach, the optimal production run would
be 200 when the cost of carrying one jacket in inventory for one year is:
A. $0.05 C. $0.20
B. $0.10 D. $0.40
37. A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If
ordering costs are $200 and carrying costs are $0.50 per unit per year, what is the estimated total annual
usage?
A. 2,400 units C. 7,200 units
B. 6,000 units D. 28,800 units
38. The following information are given:
Optimal production run in units 2,000
Average inventory in units 1,000
Number of production runs 5
Cost per unit produced P75
Desired annual return on inventory investment 18%
Set-up costs per production run P5,000

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If the units will be required evenly throughout the year, the total annual relevant costs using the economic-
order-quantity approach is
A. P5,000 C. P75,000
B. P38,500 D. P150,000
39. One of the products that Nature Way Health Products sells is a magnetic back support. The ordering cost
related to this product is P12.50 per order. The cost of carrying one item of inventory for one year is P16.00.
The business sells 40,000 of this type of product evenly throughout the year. How much is the total ordering
costs per year and the total carrying costs per year at the economic order quantity?
A. B. C. D.
Ordering costs P1,562.50 P1,562.50 P2,000.00 P4,000.00
Carrying costs P1,562.50 P2,560.00 P2,000.00 P4,000.00
40. The economic order quantity is the size of the order that minimizes total inventory costs, including ordering
and carrying costs. If the annual demand decreases by 36%, the optimal order size will
A. Decrease by 6%. C. Increase by 6%.
B. Decrease by 20%. D. Increase by 20%.
41. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of raw materials
by 80%. What is the effect of this safety stock reduction on Dee’s economic order quantity.
A. No effect. C. 64% decrease.
B. 20% increase. D. 80% decrease.
42. A&B Co.’s financial plan for next year shows sales of P72 million and cost of sales of P45 million. It expects
short term interest rates to average 10% for the coming year. It aims to increase inventory turnover from
the present level of 9 times to 12 times next year. If its plans and objectives would be carried out, how much
is the cost savings for the coming year?
A. P125,000 C. P375,000
B. P300,000 D. P500,000
43. Marita works for a local ceramics company. She just completed her accountancy degree and learned the
EOQ model in one of her subjects. She suggested to her employer to adopt it. The company sells 20,000
pieces of specialty ceramic items each year. Traditionally, they have produced these items four times a year,
making 5,000 pieces at a time. They carry no safety stock as customers do not mind waiting for orders. The
average piece of ceramic items costs P400 to make and costs the company P20 to carry in inventory for a
year. The set up costs for each production run total P80. The company should
A. Adopt EOQ due to savings of P35,675.
B. Adopt EOQ due to savings of P42,320.
C. Continue the existing system due to P38,950 advantage.
D. Continue the existing system due to P41,820 advantage.
44. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals. Information
concerning this item is as follows:
Cost of placing an order P10
Annual demand 20,000 units
Purchasing price per unit P0.50
The cost of holding the stock items amounts to 20% of the stock value per annum.
What annual cost saving would result if RODENSTOCK used the economic order quantity for order sizes
instead of their current policy?
A. P 80 C. P150
B. P 90 D. P240
45. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per year and the
ordering costs are $100. The company uses an order quantity of 500 units. By how much could the company
reduce its total costs if it purchased the economic order quantity instead of 500 units?
A. $0 C. $2,000
B. $500 D. $2,500
46. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average inventory (taking into
account the safety stock) is 8,000 pounds. What is the apparent order quantity?
A. 6,000 lbs. C. 16,000 lbs.
B. 10,000 lbs. D. 21,000 lbs.
47. D&R Corp. consumes 300,000 units of spare part V per year. The average purchase lead time is 20 working
days while the maximum is 27 working days. The company’s annual operations cover 240 days allowing for
shutdowns for plant maintenance, holidays and Sundays. The company would like to keep safety stock or
extra stock to guard against stock-outs. How much is the safety stock?
A. 1,250 units. C. 25,000 units.
B. 8,750 units. D. 33,750 units.
48. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work year. The
usual lead time for the part is six days. However, at times, the lead time has gone as high as eight days.
Scholas now desires to adjust its safety stock policy. The increase in safety stock size is
A. 2,800 units. C. 7,200 units.
B. 5,600 units. D. 16,800 units.

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49. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000 units. The cost
per unit of inventory is $5, and the carrying cost is 10% of the average value of inventory. The annual
inventory carrying cost for the organization is
A. $3,000 C. $5,000
B. $3,500 D. $6,000
50. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs.,
and its order point is 1,500 lbs., what would be the total annual carrying costs assuming the carrying cost per
unit is $0.20?
A. $100 C. $1,000
B. $600 D. $1,100
51. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The market price per unit
is P3,000. Since Cagayan de Oro is a very progressive rural place, the business sells an average of 36,000
tires annually. Based on a company study covering the last five years of its operation, it was found out that
annual carrying cost per tire is P5.00 and the ordering cost is P100 per order. The store is open 7 days a
week (which includes Sundays and holidays). The delivery time per order (tires are ordered from Manila) is 5
days. Since it normally takes time before an order is placed, filled up and delivered, the manager has
decided to keep a safety stock of 3,000 tires which is equivalent to a month’s sales. The average inventory
is
A. 1,200 tires C. 3,493 tires
B. 3,000 tires D. 3,600 tires
52. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs.,
and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50 lbs.?
A. 10 days C. 30 days
B. 20 days D. 100 days
53. Information regarding the usage of material Y which shall be required evenly throughout the year by GAC
Company
Annual usage in units 30,000
Working days per year 250
Safety stock in units 1,200
Normal lead time in working days 25
The re-order point is
A. 3,000 C. 5,700
B. 4,200 D. 6,250
54. M&L Co. has the following information on inventory:

Sales 20,000 units per year
Order quantity 4,000 units
Safety stock 2,600 units
Lead time 4 weeks
What is the re-order point? (For calculation purposes, use 50-week year)
A. 1,600 units. C. 4,200 units.
B. 2,600 units. D. 5,600 units.
55. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
Selling price per bag P2.50
Purchase cost per bag P1.50
Ordering cost per order P5.40
Carrying cost 20% of unit cost
Number of days the company operates in a year 250
Average lead time on purchases 6 days
What is the reorder point if the company will keep a 10-day safety stock of inventory?
A. 2,400 bags C. 6,400 bags
B. 5,400 bags D. 8,800 bags
56. JASMIN Products, Inc. gathered the following information related to one of its materials:
Order quantity 1,500 units
Normal use per day 500 units
Maximum use per day 600 units
Minimum use per day 100 units
If the lead time is five days, the order point is
A. 500 units C. 2,500 units
B. 1,500 units D. 3,000 units
57. Inventory data for a certain raw material is as follows:
Annual usage in units 25,000
Working days per year 250
Normal lead time in working days 30
Maximum lead time in working days 50
Assuming that this raw material will be required evenly throughout the year, the order point will be

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A. 3,000 C. 5,000
B. 4,000 D. 8,000
58. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen on the proper
cases to be ordered and the frequency of call. From the route book and other records, the following are
available: prior year’s purchases, 50,000 cases; carrying cost per case of inventory, P1.20; distributor’s
discount, 1 case for every 10 cases bought; cost of placing an order, P3.00; weekly demand is approximately
962 cases. Safety stock required is 140 cases. No change in demand is expected this year. (Use a 365-day,
52-week year).
Determine the economic order quantity (EOQ), and the reorder point assuming a two-day lead-time.
A. B. C. D.
EOQ 250 cases 481 cases 500 cases 962 cases
Reorder point 280 cases 500 cases 414 cases 275 cases
59. If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units, how many days
can be covered if the shipment from the supplier is delayed by 12 days?
A. 6.7 days C. 10.0 days
B. 8.0 days D. 12.0 days
60. Each stockout of Product AX sold by Axiom Inc. costs P87,500 per occurrence. The carrying cost per unit of
inventory is P250 per year, and the company orders 1,500 units of product 24 times a year at a cost of
P5,000 per order. The probability of stockout at various levels of safety stock is
Units of Safety Stock Probability of a stockout
0 0.50
100 0.30
200 0.14
300 0.05
400 0.01
The optimal safety stock level for the company is
A. 0 units. C. 300 units.
B. 100 units. D. 400 units.
61. Vera Cruz Corporation seeks to determine the quantity of safety stock for product ST that they should
maintain that will result in the lowest cost to the company. Each stockout will cost P600 and the carrying
cost of each unit of safety stock will be P8. Product ST will be ordered five times a year. Which of the
following will produce the lowest cost?
A. A safety stock of 15 units which is associated with a 35% probability of running out of stock during an
order period.
B. A safety stock of 25 units which is associated with a 25% probability of running out of stock during an
order period.
C. A safety stock of 35 units which is associated with a 10% probability of running out of stock during an
order period.
D. A safety stock of 75 units associated with a 5% probability of running out of stock during an order period.
62. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual demand of 50,000
units for part number 101 and has computed an optimal lot size of 6,250 units. Per-unit carrying costs and
stockout costs are $13 and $3, respectively. The following data have been gathered in an attempt to
determine an appropriate safety stock level:
Number of Times Short
Units Short Because of Excess in the last 40 Reorder Cycles
Demand during the Lead Time Period
200 6
300 12
400 6
The annual cost of establishing a 200-unit safety stock is expected to be
A. $2,600 C. $4,040
B. $4,260 D. $5,200
63. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40.
Phranklin Pharms has gross purchases of $800,000 per year. What is the maximum amount of costly trade
credit Phranklin could get, assuming they abide by the suppliers credit terms? (Assume a 360-day year.)
A. $32,666.70 C. $54,444.50
B. $52,266.67 D. $87,111.20
64. On cash discounts, all of the following statements do not apply except
A. The cost of not taking a cash discount is always higher than the cost of a bank loan.
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
C. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of credit.
D. If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount period, the
amount paid would be P9,000.
65. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience,
your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out
that the nominal cost of not taking the discount and paying on Day 30 is around 37 percent. But since your
firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm’s current
practice, using a 360-day year?
A. 36.7% C. 106.9%

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B. 73.4% D. 43.6%
66. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate that this policy
effectively costs your firm $157,500 each year, what is the firm’s average accounts payable balance?
A. $157,500 C. $750,000
B. $625,000 D. $1,234,000
67. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that has monthly
payments?
A. 9% C. 9.81%
B. 9.38% D. 10.94%
68. Corbin, Inc. can issue 3-month commercial paper with a face value of $1,000,000 for $980,000. Transaction
costs will be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, will
be
A. 2.00%. C. 8.48%.
B. 8.00%. D. 8.66%.
69. ABC Company finances all of its seasonal inventory needs from the local bank at an effective interest cost of
9%. The firm’s supplier promises to extend trade credit on terms that will match the 9% bank credit rate.
What terms would the supplier have to offer (approximately)?
A. 2/10, n/60. C. 2/10, n/100.
B. 2/10, n/90. D. 3/10, n/60.
70. A company has accounts payable of $5 million with terms of 2% discount within 15 days, net 30 days (2/15
net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it
will receive revenues to cover the payment. If it borrows funds on the last day of the discount period in order
to obtain the discount, its total cost will be
A. $24,500 more. C. $75,500 less.
B. $51,000 less. D. $100,000 less.
71. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The credit terms for
these purchases are 2/10, net 30, and payment is made on the 30th day after each delivery. Thus, the
company is considering a 1-year bank loan for $9,800 (98% of the invoice amount). If the effective annual
interest rate on this loan is 12%, what will be the net dollar savings over the year by borrowing and then
taking the discount on the materials?
A. $1,176 C. $3,624
B. $1,224 D. $4,800
72. Three suppliers of Mama Corporation offer different credit term. Core Co. offers term of 1 1/2/15, net 30.
Doug Corp offers terms of 1/10, net 30. Ernst Inc. offers of 2/10, net 60. Mama Corporation would have to
borrow at a bank at an annual rate of 12% in order to take any cash discounts. Which one of the following
would be the most attractive for Ma Corp.? (Assume 360 days in a year)
A. Purchase from Doug Corp and pay in 30 days.
B. Purchase from Core Co., pay in 15 days and borrow any money needed from the bank.
C. Purchase from Core Co., pay in 30 days and borrow any money needed from the bank.
D. Purchase from Ernst Inc., pay in 60 days and borrow any money needed from the bank.
End of Handouts
“Success is getting what you want, happiness is wanting what you get” ― W.P. Kinsella

Page 23 of 24

Universal College of Parañaque: Working Capital Management

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UCP :MAS 13_WORKING CAPITAL MANAGEMENT BATCH 2019

UNIVERSAL COLLEGE OF PARAÑAQUE

MS13 – WORKING CAPITAL MANAGEMENT

External Financing Needed / Additional Financing Needed

Management Advisory Services by Karim G. Abitago, CPA

A. What is the length of Samson's cash conversion cycle?

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

• Total cost = carrying cost + expected stockout cost

Management Advisory Services by Karim G. Abitago, CPA

Short-term Financing Alternatives

Management Advisory Services by Karim G. Abitago, CPA

b. Minimize the amount of short-term borrowing.

Management Advisory Services by Karim G. Abitago, CPA

27. Which of the following is not an element in the EOQ formula?

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

QUIZZER (DO-IT-YOURSELF DRILL)

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

A. The competitor will do the same thing to prevent lost sales.

Management Advisory Services by Karim G. Abitago, CPA

B. B items. D. items on a perpetual inventory.

B. cost of purchase-order forms.

54. An increase in inventory holding costs will

Management Advisory Services by Karim G. Abitago, CPA

A. Lower purchase-order cost and lower carrying cost.

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

54. M&L Co. has the following information on inventory:

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

Management Advisory Services by Karim G. Abitago, CPA

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