Financial Management II..............................................................

Addis Ababa University

Addis Ababa University

College of Business and Economics
Department of Accounting and Finance
Submission date: 20/05/2022
Part I: True/ False Questions

________1. Positive float is usually associated with the collection process.

________2. Just-in-time inventory system relies on large safety stocks.
________3. An increase in the lead-time would raise the inventory reorder point.
________4. In the EOQ model, an increase in cost per unit of inventory would decrease the
economic order quantity.
________5. A lock system is a means of speeding up cash collections.
_______ 6. Determining the EOQ involves a trade-off between the economies of a large
quantity per order and the costs of carrying a larger inventory.

Part II: Multiple Choice Items

Instruction: Select the correct answer from the given alternatives and write letter of the answer
on the provided space.
1. Which One of the following is not taken as inventory management costs
a. Ordering costs
b. Carrying costs
c. Bad debts
d. Stock out costs
2. If EOQ = 360 units, order costs are $5 per order, and carrying costs are $0.20 per unit,
what is the usage in units?
a. 129,600units
b. 2,592units
c. 25,920units
d. 18,720 units
3. Increasing the credit period from 30 to 60 days, in response to a similar action taken
by all of our competitors, would likely result in:
a. an increase in the average collection period.
b. a decrease in bad debt losses.
c. an increase in sales.
d. higher profits.
4. An increase in the firm's receivable turnover ratio means that:
a. it is collecting credit sales more quickly than before.
b. cash sales have decreased.
c. it has initiated more liberal credit terms.

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Financial Management II..............................................................Addis Ababa University

d. inventories have increased.

5. EOQ is the order quantity that          over our planning horizon.
a. minimizes total ordering costs
b. minimizes total carrying costs
c. minimizes total inventory costs
d. the required safety stock
6. One of the following is not the technique that is commonly used in managing inventory a.
Materials Requirement Planning (MRP) System
b. the ABC system
c. the basic Economic Order Quantity (EOQ) Model
d. the Just-In-Time (JIT) system.
e. None of the above

Part III: Short Answer Questions

Short Answer questions

Instruction: Answer the following questions.
1. What is meant by working capital management?
2. What are the determinants of working capital requirement of an enterprise?
3. What do you understand by working capital cycle?
4. Discuss the various sources of working capital funds.
5. Write a detailed note on analysis and control of working capital. What are the various
methods of working capital analysis?
6. Discuss the various approaches to determine the appropriate financing mix of working
capital.
7. What is receivables management? Discuss the factors which influence size of
receivables.
8. What should be considerations in forming credit policy?
9. Discuss the various aspects or dimensions of Receivable management.
10. What is inventory management?
11. Discuss in detail the objectives of inventory management.
12. Explain various tools and techniques of inventory management.
13. Write short notes on: a) ABC analysis b) EOQ c) JIT system.
14. “Efficient cash management will aim at maximizing the cash inflows and slowing cash
outflows.” Discuss.

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Financial Management II..............................................................Addis Ababa University

15. Explain the a) William J. Baumol’s Model b) Miller and Orr model of cash management.
16. What do you mean by cash management? What are the motives of holding cash?
17. What are some pros and cons of holding high levels of current assets in relation to sales?
Use the DuPont equation to help explain your answer.
18. What does it mean to adopt a maturity matching approach to financing assets, including
current assets? How would a more aggressive or a more conservative approach differ
from the maturity matching approach, and how would each affect expected profits and
risk? In general, is one approach better than the others?
19. Aggressive working capital financing strategy is better than Conservative working capital
strategy. Do you agree? If yes, Why? If not, Why not?
20. Summarize Working capital management in not more than one paragraph.

Part IV: Workout Questions.

Instruction: Solve each of the following workout questions on separate sheet of paper. Show all
the necessary steps.
1. A firm buys casting equipment from outside suppliers@ Br 30/unit. Total annual needs are
800 units. You have with you following further data:
i. Annual return on investment, 10%
ii. Rent, insurance, taxes per unit per year, Br 1
iii. Cost of placing an order, Br 100
Required: How will you determine the economic order quantity?
2. The annual demand for a product is 6,400 units. The unit cost is Br 6 and inventory carrying
cost per unit per annum is 25% of the average inventory cost. If the cost of procurement is Br 75,
determine:
a. Economic Order Quantity (EOQ)
b. Number of orders per annum
c. Time between two consecutive orders
3. CASH CONVERSION CYCLE of Aboma Mitiku Corporation has an inventory conversion
period of 75 days, an average collection period of 38 days, and a payables deferral period of 30
days.
a. What is the length of the cash conversion cycle?

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 Financial Management II..............................................................Addis Ababa University

b. If Aboma’s annual sales are $3,421,875 and all sales are on credit, what is the investment
in accounts receivable?
c. How many times per year does Aboma turn over its inventory?
4. Over the past year, ABC company’s Accounts receivable have averaged 160-day sales and
inventories have averaged 120 days. The company has paid its creditors, on average, 50 days
after receiving the bill. Production is evenly spread over the year and the company expects to
spend Birr 36,000,000 million during the year for materials and supplies.

 Compute the following: Cash cycle, Cash turnover and Minimum cash balance.

5. ABC co. has cash out flows of $200 per day, seven days a week. The interest rate is 10 percent,
and the fixed cost of replenishing cash balances is $20 per transaction. Using the Baumol
model and assuming 360 days in a year,
 Determine, a) The optimal cash balance. b) The total cost of holding cash.

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