UNIVERSIDAD DE MANILA

COLLEGE OF BUSINESS ADMINISTRATION

Financial Management

Name: ___________________________________ Section: __________

Student Number: __________________________

MULTIPLE CHOICE (10 pts):

1. Which of the following is not one of the five Cs of credit?

a. Character c. capital
b. Capacity d. credit scoring

2. Smart Products is considering changing its credit terms from net 30 to 2/10 net 30. The firm’s financial
managers need to evaluate
a. the increased investment in accounts receivable due to increased sales
b. the reduced level of bad debt expense as customers pay sooner
c. the increased contribution margin as customers pay sooner
d. all of the above

3. The one item listed below that would warrant the least amount of consideration in credit and collection policy
decisions is the
a. Quality of accounts accepted c. Cash discount given
b. Quantity discount given d. Level of collection expenditures

4. The primary objective in the management of accounts receivable is to

a. realize no bad debts because of the opportunity cost involved
b. provide the treasurer of the corporation with sufficient cash to pay the company’s bills on time
c. coordinate the activities of the manufacturing marketing and financing so that the corporation can
maximize its profits
d. achieve that combination of sales volume, bad debt experience, and receivables turnover that maximizes
the profits of the corporation

5. An increase in a 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

6. Changing a firm’s credit terms from 2/10, n/60 to 2/10, n/30 will generally
a. reduce the average collection period and reduce sales.
b. increase the average collection period and reduce sales.
c. reduce the average collection period and increase sales.
d. increase the average collection period and increase sales.

7. The collection of accounts receivable can be accelerated by the use of

a. bank drafts c. remittance advices
b. a lockbox system d. turnaround documents

8. The average collection period for a firm measures the number of days
a. before a typical account becomes delinquent
b. for a typical check to clear through the banking system
c. after a typical credit sale is made until the firm receives payment
d. beyond the end of the credit period before a typical customer payment is received

9. It indicates the number of times an average amount of receivables is collected during the period and the
efficiency of collection
a. aging of receivables c. average accounts receivable

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 b. average collection period d. accounts receivable turnover

10.It is the average length of time required to convert a firm’s receivables into cash
a. cash conversion cycle c. payables deferral period
b. receivables collection period d. days sales outstanding

PROBLEMS (20 pts.):

I. The Sales Director of Sweet Bites suggests that certain credit terms be modified. He estimates that sales will
increase by at least 20% and 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.
a. How much is the increase in profit from the sales? (2pts)
b. How much is the cost of marginal investment in accounts receivable? (2pts)
c. How much is the cost of marginal bad debt? (2pts)

II. Kisha Company 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%. (Assume 360 days a year)
a. How much is the decrease in profit from the sales? (2pts)
b. How much is the savings from marginal investment in accounts receivable? (2pts)
c. How much is the savings from marginal bad debt? (2pts)

III. GGEM offers branded designer prescription eyeglasses. All sales are currently on credit and with no cash
discount. The firm is considering a 2% cash discount for payment within 10 days. The firm's current average
collection period is 90 days, sales are 700 units per year, selling price is ₱25,000 per unit, variable cost per
unit is ₱18,750, and the average cost per unit is ₱21,000. The firm expects that the change in credit terms
will result in a minor increase in sales of 15 units per year, that 75% of the sales will take the discount, and
the average collection period will drop to 72 days. The firm's bad debt expense is expected to become
negligible under the proposed plan. The bad debt expense is currently 0.025% of sales. The firm's required
return on equal-risk investments is 20%. (Assume a 360-day year)
a. How much is the cost of the marginal cash discount? (2pts)
b. How much is the net benefit (cost) of increasing the cash discount? (2pts)

IV. Werpa Inc, after computing the annualized cost of the credit terms is considering relaxing its credit standards
to encourage more sales. As a result, sales are expected to increase by 15 percent from the current 600 units
per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are
expected to double the current 3 percent level. The selling price per unit is ₱1,550, the variable cost per
canoe is ₱750 and the average cost per unit at the 600 unit level is ₱900. The firm's required return on
investment is 20 percent. (Assume a 300-day year; for intermediate computations, use 2 decimal point.)
a. What is the firm's additional profit contribution from sales under the proposed relaxation of credit
standards? (2pts)
b. What is the net result of implementing the proposed plan? (2pts)

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