EDUARDO M AÑONUEVO, MD

Course: MHoA – Paramount D

FINANCIAL MANAGEMENT ASSIGNMENT

I. ACCOUNTS RECEIVABLE MANAGEMENT

Problem 11-B14 – Using an Accounts Receivables Aging Schedule
When Cow Breeder Association, Inc. was set up by Fred Vaca, he hired his
aging spinster aunt, Morena Santiago, to be its finance manager. Cow Breeder’s
business involved selling yearlings to farmers’ cooperatives who were often
uncooperative when it came to paying their bills. Santiago kept track of the paying
behavior of each customer in the area by preparing her own aging schedule.
The cooperatives set up the company only last May. Cow Breeder purchased
stocks of yearlings from Masbate and resold them to cooperatives located all over the
province. Its total accounts receivable as of September 30 was P152,000.00 A
breakdown of this accounts receivable according to the month of the credit sale is as
follows:
Month of Sale Amount
September P10,000
August 25,000
July 36,000
June 49,000
May 32,000
TOTAL 152,000

Cow Breeder sold yearlings to the cooperatives on 30-day credit term. When
asked by the management to report on the status of the receivable, Santiago said” “Our
collection rate is 100 percent. It takes one year to grow yearlings before they are ready
for the market. The cooperatives maybe slow payers but they do pay. Remember, I’m in
control of this company!”

Management noted Santiago’s comment. It also noted that cash was dwindling
fast and that month-to-month sales of yearlings were also rapidly declining.

QUESTIONS:
a. What percentage of accounts receivable was: less than 30 days old? 30-
60 days old? 60-90 days old? 90-120 days old?
Schedule of Accounts
Receivable
Percentage of
Month of sale Amount Maturity status
total
amount
May P 32,000 21.05%
June P 49,000 32.24% 90 – 120 days
July P 36,000 23.68% 60 – 90 days
August P 25,000 16.45% 30 – 60 days
September 30 P 10,000 6.58% <30 days
Total P 152,000 100%

1. Less than 30 days: (10,000/152,000) x 100 = 6.57%

2. 30-60 days: (36,000+25,000) x 100 = 40.13%

152,000

3. 60-90 days: (49,000+36,000) x 100 = 55.92%

 152,000

4. 90-120 days: (32,000+49,000) x 100 = 53.24%

152,000

b. Estimate the average accounts receivable period of collection of the

company.

= 365 x 30,400 = 73 days

152,000

c. How efficient was credit management at Cow Breeder’s Association?

The credit management is not efficient because most of the account

receivables are more than 30 days and the funds is dwindling down however
the sales is declining which means less cash flow for operational expenses.

II. CAPITAL BUDGETING ANALYSIS OF RELEVANT CASH FLOWS

Problem: 15-B17 Cost-savings replacements
Funny Girl Company manufactured mannequins for department stores. It planned to
replace its entire set of shop-floor tools with a mechanized tool set. Management
expected to reduce labor costs with the new tools. The present tools had a remaining
life of 5 years, a book value of P21,540, and zero scrap value.
The new equipment could be purchased at a price of 285,000. It had a useful life of 5
years and a salvage value of P20,000. Funny Girl Company’s management believed
that it could sell the new equipment after 5 years of use to other mannequin shops for
P35,000.
Funny Girl sold about 100 mannequins annually at a selling price of 2,500 per
mannequin. With the new mechanized tools, direct labor would be reduced from P2,250
per unit to P1,650. All other costs except for depreciation would remain as previous
levels. The income tax rate of the company was 35 percent.
REQUIRED:
a. Determine the investment cash flow of the proposal.
Investment Cash flow - P285,000.00
Additional:
Net Operating Cash inflow per Year
= (Labor Cost without new equipment - labor cost with new equipment) x
100 mannequins per year
= (2,250 – 1,650) x 100
= P60,000 per year
Terminal Cash inflow = 35,000.00 at the end of 5 years

b. Estimate the incremental cash flow of the proposal.

Incremental Cash flow = (Revenue - Expense) x (1-tax rate)
= (250,000 - 165,000) x (1-35%)
= 85,000 x 65%
= 55,250.00
 c. What will be the periodic cash flow of the project?

Labor Cost Cost Terminal Net Cash

Year Investment
Without With Saving Value Flow
0 285,000
1 0 225,000.00 165,000.00 60,000.00 60,000.00

2 0 225,000.00 165,000.00 60,000.00 60,000.00

3 0 225,000.00 165,000.00 60,000.00 60,000.00

4 0 225,000.00 165,000.00 60,000.00 60,000.00

5 0 225,000.00 165,000.00 60,000.00 35,000.00 95,000.00

III. CASH MANAGEMENT

Problem 10-A14 Collection float

Fastrack Cola Company, a beverage company, billed and collected from its credit
customers from a central department and several regional branches. The company
found its current collection float of four days under the present system problematic.

Oriental Bank had a nationwide branch network, and it happened to have a

branch near every distribution outlet of Fastrack Cola. Oriental Bank proposed to accept
collections at its branches, without any need to transfer collections to the regional
offices. The proposed system promised to reduce the average collection float by two
days for which Oriental Bank was to charge an annual fee of P200,000. Under this
arrangement, Fastrack Cola was to keep the regional offices for other functions and
expected to reduce its collection costs by a total of P85,000 per year. Any additional
cash made available under the scheme could be invested at the time deposit rate of 14
percent, net of tax. Fastrack Cola’s average daily collection was about P900,000.

Given:

Fastrack Cola Company – collecting Php 900,000.00 daily with present float of 4
days

Oriental Bank proposed collecting system with Php 200,000.00 Annual fee

Proposed Benefit –

 reduced average collection float by 2 days

 reduced collection cost of Php 85,000.00/year
 Investment of freed up funds by 14% annual

Required:

a. How much savings will result from the proposed service by the Oriental bank?
b. Should Fastrack Cola accept the proposal?

Solution:

Weekly Freed-up Funds = Daily collection x average collection float reduced

= Php 900,000.00 x 2 days

 = Php 1,800,000.00

Annual Freed-up Funds = Weekly Freed-up Funds x 52 Weeks

= Php 1,800,000.00 x 52

= Php 93,600,000.00

Annual Opportunity Benefit = Php 93,600,000.00 x 14%

= Php 13,104,000.00

Additional Cost = Php 200,000.00 (Annual Fee/Service) to be subtracted

Additional Savings = Php 85,000.00 (Reduced Collection Cost) to be added

NET SAVINGS = Annual Opportunity Benefit – Additional Cost + Additional

Savings

= Php 13,104,000.00 - Php 200,000.00 + Php 85,000.00

= Php 12,989,000.00

Answers:

a. The net savings of Php 12,989,000.00 will result from the proposed service by
the Oriental bank.
b. Fastrack Cola should accept the proposal because it reduces the cost of
collections and the average collection float of 2 days. Additional freed up funds
may also be used for investment which the company will benefit from savings
and interest rate.

IV. WORKING CAPITAL POLICY AND MANAGEMENT

Prob. 9-A11: Role of Short-term bank loan
Good Earth Poultry Company had sales of P4.4 million last year and current assets and
liabilities as follows (in thousand pesos):
Cash P 60,000 Accounts Payable 160,000
Receivable 120,000 Bank loan 260,000
Inventory 900,000
Total: 1,080,000 Total 420,000

Credit Line 300K

Good Earth Poultry’s current assess and accounts payable changed in proportion to
sales. Because of the nature of the poultry growing business. The company had an
existing credit time with its local bank for a maximum amount of P300,000.
REQUIRED:
a. Calculate the net working capital and current ratio of Good Earth Poultry.
Net working Capital = Current assets less Current Liabilities
Current assets 1,080,000
Less: Current Liabilities 420,000
Net working Capital 660,000
b. If sales increase to P6 million, what will happen to the current ratio? Ignore
any possible effects of profits.
*Computation of Current asset and Accounts payable:
Current Asset = 1,080,000 x 6Million/4.4 million = 1,472,727
Accounts payable = 160,000 x 6million/4.4 million = 218,182
* New Current Ratio = CA/CL = 1,472,727/478,182 = 3.08
Effect: If sales increase, then the current assets and current ratio will also
increase.

c. If sales fall to P3 million, what will happen to the current ratio? Ignore any
possible effects of profit.
*Computation of Current asset and Accounts payable:
Current Asset = 1,080,000 x 3Million/4.4 million = 736,364
Accounts payable = 160,000 x 3million/4.4 million = 109,091
*New Current Ratio = CA/CL = 736,364/369,091 = 1.99
Effect: If sales fall, then the current assets and current ratio will also
decrease.

d. Suppose that sales increased by 20 percent and Good Earth Poultry

wanted to keep its current ratio to the present level. How much additional
bank loan can it afford? Is this amount within the existing credit limit? How
was the increase in current assets financed?
*Compute for sales increased by 20 percent:
Sales increased by 20 percent = 4.4million x 1.20% = 5,280,000

*Computation of Current asset and Accounts payable:

Current Asset = 1,080,000 x 5.28Million/4.4 million =1,296,000
Accounts payable = 160,000 x 5.28million/4.4 million = 192,000

*If Current ratio maintained to the present level at 2.57.

*Compute for total current liabilities:

CL = Current asset/Current Ratio
= 1,296,000/2.57
= 504,300
*Compute for additional Bank loan:
= Total Liabilities less Accounts payable and Bank loan
= 504,300 - 452,000
= 52,300
If all current assets are financed by the company, they will exceed the credit
limit of P300,000. The increase in current assets can only be financed by
loans of up to P40,000, and if there is any excess, the company will seek
alternative funding.

e. Suppose that sales increased by 15 percent and Good Earth Poultry

wanted to finance all of the increase in current assets with a bank loan.
How much additional bank loan would the company need? What will
happen to the current ratio?
*Compute for sales increased by 15 percent
Sales increased by 15 percent = 4.4million x 1.15% = 5,060,000

*Computation of Current asset and Accounts payable:

Current Asset = 1,080,000 x 5.06 Million/4.4 million =1,242,000
Accounts payable = 160,000 x 5.06 million/4.4 million = 184,000
 *Current Company additional loan would be 162,000. (Increased in asset from
1,080,000 to 1,242,000)

*Current ratio = 1,242,000/606,000 = 2.05

*Current ratio is decreasing and company margin of safety in paying the short-
term obligation is also unfavorable.

V..0 TIM.E VALUE ANALYSIS

Problem: 3-A24: Time Value uneven cash flows
Max Bok was in business of mining graphite rocks in the hill sides of Bukidnon. Due to
erratic weather, the condition of equipment and limited availability of skilled labor, he
expected the following pattern of net cash flows from his business.
YEAR NET CASH FLOWS (Pesos)
0 (40,000)
1 25,000
2 40,000
3 (10,000)
4 30,000

Bok would like to know whether the cash flows justified his going on with the business.
Alternatively, he could invest the P40,000 he held now in a time deposit account to yield
12 percent after tax. Bok was hoping to retire with tidy sum of money at the end of four
years.
a. What is the present value of the business’ cash flows?
PV of Cash flows= PV ( 1 )
(1 + i)n
PV of Cash flows = 45,000 ( 1 )
(1 + 0.12)4
PV= 28,598.31

b. How much is the “tidy sum of money” that awaits Bok at the end of four
years?
FV= (1 + i) n
FV= (1+0.12) 4
FV= 1.57351936
FV of 40,000 = 40, 000 (1.57351936)
FV of 40,000 = 62,940.77

c. Determine the equal amount of cash flows that is equivalent to the above cash
flow.
40,000/4= 10, 000 cash flows invested annually
d. Should Bok pursue the business or deposit his money in the bank?
 Bok should just deposit his money in the bank because time deposit earned
more from the 40,000. The mining gave outflow of cash thus reducing FV.
VI. COST AND PROFIT PLANNING
Problem: 14-A7: Break-even sales with target income
Remole Company, Inc., manufactures glass bottles for beverage companies. The
company had fixed costs of P48 million per year. Its variable cost was P2.50 per bottle
while its selling price was P7.50 per bottle. Julio Remole, general of the company,
desired a net profit of P5 million for the year. The corporate tax rate was 35 percent.
Calculate the break-even in units and pesos.
a. What is the break-even point of the company without the profit target?
Selling Price 7.5
Variable Cost 2.5
Gross Margin 5.0
48,000,000 / 5 = 9,600,000 units
X 7.5
Sales in Peso 72,000,000

b. What is the break-even point of the company with the profit target but
without taxes?
48,000,000+5,000.000 = 53,000,000.00
Divide: Gross Margin = 5
10,600,000.00 units
Selling Price/unit = 7.5
Sales in Peso = 79,500,000.00
c. What is the break-even point of the company with the profit target and with
taxes?
48,000,000 + (5,000,000 / .65) = 55,692,307.69
Gross Margin 5
Total Sales in Units 11,138,462
Selling Price 7.5
Total Sales in Peso 83,538,465
Variable Cost (Units x 2.5) 27,846,155
Gross Profit 55,692,310
Less: Fixed Cost 48,000,000
Profit 7,692,310
Tax 2,692,310
Net Income 5,000,000