CORDILLERA CAREER DEVELOPMENT COLLEGE

COLLEGE OF ACCOUNTANCY
Financial Management II

INSTRUCTIONS:
✓ Use Capital Letters Only
✓ Label answers properly
✓ Answers must be handwritten
✓ Present Solutions.
✓ Submit answers through messenger or email.

I. Multiple Choice.
1. The financial ratios “return on assets” and “return on equity” have similar amount of
A. numerator
B. denominator
C. quotient
D. these financial ratios do not have similarities
2. A lock-box system
A. Reduces the need for compensating balances.
B. Provides security for late night deposits.
C. Reduces the risk of having checks lost in the mail.
D. Accelerates the inflow of funds.
3. Ignoring cost and other effects on the firm, which of the following measures would tend to reduce
the cash conversion cycle?
A. Maintain the level of receivables as sales decrease.
B. Buy more raw materials to take advantage of price breaks.
C. Take discounts when offered.
D. Forgo discounts that are currently being taken.
4. Which of the following is not a major function in cash management?
A. Cash flow control C. Cash surplus investment
B. Maximizing sales D. Obtaining financing services
5. A precautionary motive for holding excess cash is
A. To enable a company to meet the cash demands from the normal flow of business activity.
B. To enable a company to avail itself of a special inventory purchase before prices rise to higher
levels.
C. To enable a company to have cash to meet emergencies that may arise periodically.
D. To avoid having to use the various types of lending arrangements available to cover projected
cash deficits.
6. 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. Transactions balance. C. Compensating balance.
B. Precautionary balance. D. Speculative balance.
7. All of the following are valid reasons for a business to hold cash and marketable securities except to
A. Satisfy compensating balance requirements.
B. Maintain adequate cash needed for transactions.
C. Meet future needs.
D. Earn maximum returns on investment assets.
8. Which of the following actions would not be consistent with good management?
A. Increased synchronization of cash flows.
B. Minimize the use of float.
C. Maintaining an average cash balance equal to that required as a compensating balance or
that which minimizes total cost.
D. Use of checks and drafts in disbursing funds.
9. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
A. Maximizing rate of return.
B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
D. Liquidity and safety.
10. 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. The cost of a transaction is independent of the dollar amount of the transaction and interest rates
are constant over the short run.
B. An opportunity cost is associated with holding cash, beginning with the first dollar.
C. The total demand for cash is known with certainty.
D. Cash flow requirements are random.
11. The following are desirable in cash management except:
A. Cash is collected at the earliest time possible.
B. Most sales are on cash basis and receivables are aged “current”
C. Post-dated checks are not deposited on time upon maturity.
D. All sales are properly receipted and promptly deposited intact.
12. 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 inventory is relatively easy to sell because it does not represent a raw material or a finished
product.
B. WIP inventory usually has the highest loan value of the different inventory types.
C. WIP generally has the lowest marketability of the various types of inventories.
D. WIP represents a lower investment by a corporation as opposed to other types of inventories.
13. When a company analyzes credit applicants and increases the quality of the accounts rejected,
the company is attempting to
A. Maximize sales. C. Increase bad-debt losses.
B. Increase the average collection period. D. Maximize profits.
14. A high turnover of accounts receivable, which implies a very short days-sales outstanding, could
indicate that the firm
A. Has a relaxed (lenient) credit policy.
B. Offers small discounts.
C. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
D. Has an inefficient credit and collection department.
15. Accounts receivable turnover will normally decrease as a result of
A. The write-off of an uncollectible account (assume the use of the allowance for doubtful
accounts method).
B. A significant sales volume decrease near the end of the accounting period.
C. An increase in cash sales in proportion to credit sales.
D. A change in credit policy to lengthen the period for cash discounts.
16. The credit and collection policy of DU30 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. Deterioration of aging of receivables only.
B. Increase in the level 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.
17. An increase in sales resulting from an increased cash discount for prompt payment would be
expected to cause
A. An increase in the operating cycle.
B. An increase in the average collection period.
C. A decrease in the cash conversion cycle.
D. A decrease in purchase discounts taken.
18. 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. Increased payables and increased bank loan.
B. Increased receivables.
C. Decreased receivables.
D. Decrease in cash.
19. 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.
20. 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. The average collection period has decreased.
C. Gross profit has declined.
D. The size of the discount offered has decreased.
21. A strict credit and collection policy is in place in TRUMP 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 advice will be favorable if
A. The competitor will do the same thing to prevent lost sales.
B. there is a decrease in the distribution level of your product, and a more aggressive stance in
necessary to retain market share.
C. The projected margin from increased sales will exceed the cost of carrying the incremental
receivables.
D. The account receivable level is improving, so the company can afford the carrying cost of
receivables.
22. BIDEN, 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. The bank. C. Fort Co.
B. Riley Manufacturing Co. D. Shad, Inc.
23. The following characterize management advisory services except
A. involve decision for the future
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm
D. relate to specific problems where expert help is required
24. Which of the following is not classifiable as a management advisory service by CPA?
A. Systems design. C. Project feasibility study.
B. Make or buy analysis. D. Assistance in budget preparation.
25. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the
following sets of ratios characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity
26. The ratio that measures a firm’s ability to generate earnings is
A. times interest earned. C. sales to working capital.
B. days’ sales in receivables. D. operating asset turnover.
27. 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 operating cycle.
D. increase in the ratio of current assets to noncurrent liabilities.
28. MADIK Company follows and aggressive financing policy in its working capital management while
AMMO Corporation follows a conservative financing policy. Which one of the following statements
is correct?
A. MADIK has low ratio of short-term debt to total debt while AMMO has a high ratio of short-term
debt to total debt.
B. MADIK has a low current ratio while AMMO has a high current ratio
C. MADIK has less liquidity risk while AMMO has more liquidity risk.
D. MADIK finances short-term assets with long-term debt while AMMO finances short-term assets with
short-term debt.

29. Sale of a piece of equipment at book value for cash will:

A. increase working capital. C. decrease the debt-to-equity ratio
B. decrease working capital. D. increase net income
30. If a firm has a high current ratio but a low acid-test ratio, one can conclude that:
A. the firm has a large outstanding accounts receivable balance.
B. the firm has a large investment in inventory.
C. the firm has a large amount of current liabilities.
D. the firm's financial leverage is very high.
31. MABAIT Co., managed by Studyanti presently has a current ratio of 1.2 to 1 and an acid-test ratio
of 0.8 to 1. Prepaying next year's office rent of P50,000 will:
A. have no effect on either the company's current ratio or its acid-test ratio.
B. have no effect on the company's current ratio but will decrease its acid-test ratio.
C. decrease the company's current ratio and decrease its acid-test ratio.
D. increase the company's current ratio and increase its acid-test ratio.
32. The RICH KID Company paid off some of its accounts payable using cash. The company's current
ratio is greater than 1.0 to 1. The company’s current ratio would:
A. increase.
B. decrease.
C. remain unchanged.
D. impossible to determine from the information given.

33. ONLINE Company has a current ratio of 1.75 to 1. This ratio will decrease if ONLINE Company
A. borrows cash using a six-month note.
B. pays the taxes payable which have been a current liability.
C. pays the following month's rent on the last day of the year.
D. sells inventory for more than their cost.
34. Which of the following accounts would be included in the calculation of the acid-test ratio?
Accounts Receivable Prepaid Expense Inventory
A. yes yes no
B. no yes yes
C. no no yes
D. yes no no

35. FINMAN Company's average collection period for accounts receivable was 40 days last year, but
increased to 60 days this year. Which of the following would most likely account for this change?
A. a decrease in accounts receivable relative to sales.
B. a decrease in sales.
C. a relaxation of credit policies.
D. an increase in sales.
II. Multiple Choice Problems: NO/WRONG SOLUTIONS WILL BE GIVEN NO CREDIT.

Fender Corporation has the following budget estimates for its second year of operations:
Projected Sales: P3,500,000
Projected Income Before Tax: 12% of sales
Estimated Selling and Administrative Expenses: 25% of sales
Direct Labor and Factory Overhead are budgeted at 70% of Total Manufacturing Cost.
Inventories are estimated as follows:
Raw Materials Goods in Process Finished Goods
Beginning P220,000 P 250,000 P 350,000
Ending P270,000 P 300,000 P 420,000
1. The estimated Cost of Goods Sold would be:
a. P 2,275,000 c. P 2,325,000
b. P 2,205,000 d. P 1,750,000

2. The estimated purchases of raw materials would be:

a. P 967,500 c. P697,500
b. P 732,500 d. P 747,500

The Sales manager of Singaporean Trading has budgeted the following sales for the third quarter of
2021:
July P 1,235,000
August P 1,560,000
September P 2,080,000

Other Budget Estimates:

All merchandises are to sell at its invoice cost plus 30% markup. Beginning inventories of each month
are budgeted at 40% of that month’s projected cost of goods sold.

3. The projected merchandise purchases for the month of July would be:
a. P 995,500 c. P 950,000
b. P 850,000 d. P 1,050,000

4. The projected merchandise purchases for the month of August would be:
a. P 1,237,500 c. P 1,360,000
b. P 1,040,000 d. answer not given

5. At 40,000 units of sales, Luna Corporation had an operating loss of P3.00 per unit. When sales were
70,000 units, the company had a profit of P1.20 per unit. The number of units to breakeven is:
a. 56,647 c. 57,467
b. 45,000 d. 57,647

III. STRAIGHT PROBLEMS. NO/WRONG SOLUTIONS WILL BE GIVEN NO CREDIT.

(1) Assume the following data:

Unit Selling Price: P300
Unit Variable Cost P120
Fixed Cost P1,080,000
Quantity Sold: 10,000

Compute for the following:

c. Unit Contribution Margin :

d. Contribution Margin Ratio
e. Breakeven Point in units
f. Breakeven Point in Pesos
 g. Margin of Safety in units
h. Margin of Safety in Pesos
i. Degree of Operating Leverage

(2) The Information shown below reflects the Squid Game Company’s current financial position:
Fixed Assets P 1,200,000
Long-Term Debt P 900,000
Equity P 1,100,000
Sales P 1,400,000
Earnings after taxes P 197,500
Current Asset Turnover 1.25

Suppose that Squid Game’s financial manager decides to adopt a more aggressive working capital
policy by liquidating some current assets and using the proceeds to pay off some long-term debt. Assume
that the current assets are perfectly liquid. If the target current ratio is 1.5, What amount of current assets
must be liquidated?