FINANCIAL MANAGEMENT MIDTERMS EXAMINATION

QUESTION 1 (1 POINT)
A firm buys on terms of 3/10, net 30. What is the cost of trade credit under these
terms?
Answer: 55.7%
QUESTION 2 (1 POINT)
Before discussing specific ratios, the following cautions should be considered, except
Answer: A single ratio generally provide sufficient information from which to judge the
overall performance of the firm
QUESTION 3 (2 POINT)
The following information pertains to Cookie Company:

Month Sales Purchases

January P30,000 P16,000
February P40,000 P20,000
March P50,000 P28,000
1. Cash is collected from customers in the following manner
Month of sale 30%
Month following the sale 70%
1. 40% of purchases are paid for in cash in the month of purchase, and the balance
is paid in the following month
2. Labor costs are 20% of sales. Other operating costs are P15,000 per month
(including P4,000 depreciation). Both of these are paid in the month incurred.
3. The cash balance on March 1 is P4,000
4. A minimum cash balance of P3,000 is required at the end of the month. Money
can be borrowed in multiples of P1,000. How much cash will be collected from
customers in March?
Answer: 43,000
QUESTION 4 (1 POINT)
Vaccine, Inc. has an annual interest expense of P30,000. Vaccine’s times-interest
earned ratio is 4.2. What is Vaccine’s operating income?
Answer: 126,000 (30,000 x 4.2)
QUESTION 5 (1 POINT)
The following are the effects of relaxation of credit standards except:
Answer: Decrease in bad debts
QUESTION 6 (1 POINT)
The following are income statement accounts, except:
Answer: Marketable Securities
QUESTION 7 (1 POINT)
Which of the following industries has the highest average inventory turnover ratio?
Answer: Supermarkets
QUESTION 8 (1 POINT)
Short-term creditors are usually most interested in evaluating
Answer: Liquidity
QUESTION 9 (1 POINT)
GG, Inc. has total assets of P2,575,000, sales of P5,950,000, total liabilities of
P1,855,062, and a net profit margin of 2.9%. What is GG’s return on equity?
Answer: 24.0%
QUESTION 10 (1 POINT)
XXX, Inc, Inc. has the following income statements (in millions):
XXX, Inc, Inc.
Income Statement
For the Year Ended December 31, 2018

Net Sales P180

Cost of Goods Sold 120
Gross Profit 60
Operating Expenses 33
Net Income 27
Using vertical analysis, what percentage is assigned to Cost of Goods Sold?
Answer: 67%
QUESTION 11 (2 POINTS)
SSS Company will use an estimated 50,000 gumbands in its manufacturing process next
year. The carrying cost of gumband inventory is P.04 per unit, and the cost of ordering
gumbands is P50 per order. What is SSS’s economic ordering quality for gumbands
(round to the nearest 100 gumbands)?
Answer: 11,200
QUESTION 12 (2 POINTS)
The following information pertains to Cookie Company:

Month Sales Purchases

January P30,000 P16,000
February P40,000 P20,000
March P50,000 P28,000
1. Cash is collected from customers in the following manner
Month of sale 30%
Month following the sale 70%
1. 40% of purchases are paid for in cash in the month of purchase, and the
balance is paid in the following month
2. Labor costs are 20% of sales. Other operating costs are P15,000 per month
(including P4,000 depreciation). Both of these are paid in the month incurred.
3. The cash balance on March 1 is P4,000
4. A minimum cash balance of P3,000 is required at the end of the month.
Money can be borrowed in multiples of P1,000.
How much cash will be paid to suppliers in March?
Answer: 23,200
QUESTION 13 (1 POINT)
________ measures the speed with which various accounts are converted into sales, or
cash, or inflows, or outflows.
Answer: Activity ratio
QUESTION 14 (1 POINT)
Which of the following is considered to be a permanent source of financing?
Answer: Long-term debt
QUESTION 15 (1 POINT)
Which of the following is most consistent with the hedging principle in working capital
management?
Answer: Accounts receivable should be financed with short-term lines of credit
QUESTION 16 (1 POINT)
The following are profitability ratio, except:
Answer: Price earnings ratio
QUESTION 17 (1 POINT)
A floating lien, a chattel mortgage, and a terminal warehouse receipt have which of the
following in common?
Answer: They all use inventory to secure a loan
QUESTION 18 (1 POINT)
F & A Company opened two sales outlets in Cagayan de Oro City. Payments by dealers
average P230,000 per month in checks sent to the head office by mail. The checks
were received by F & A Company on the third day after they were written. The
company deposited the checks at the bank near the head office two days later. It takes
three days to have check cleared in the banking system. How can F & A Company
reduce its collection float?
Answer: All of these
QUESTION 19 (1 POINT)
In analyzing the financial statements of a company, a single item on the financial
statements
Answer: Is more meaningful if compared to other financial information
QUESTION 20 (2 POINTS)
VVV, Inc. required P270,000 in short-term credit and is currently arranging a loan with
its bank. VVV plans to use the funds for six months, the annual rate on the loan is 12%,
and the bank will require a 10% compensating balance. What is the effective annual
cost of the loan?
Answer: 13.78%
QUESTION 21 (1 POINT)
F & A Company opened two sales outlets in de Oro City. Payments by dealers average
P230,000 per month in checks sent to the head office by mail. The checks were
received by F & A Company on the third day after they were written. The company
deposited the checks at the bank near the head office two days later. It takes three
days to have check cleared in the banking system.
How long is the cash float?
Answer: 8 days
QUESTION 22 (1 POINT)
How much is the Company’s percentage of each sales peso remaining if its Sales is
P650,000, and has paid 55% for the cost of its goods?
Answer: 45%
QUESTION 23 (1 POINT)
Which of the following transactions does not affect the quick ratio?
Answer: Equipment is purchased and is financed by a long-term debt issue
QUESTION 24 (1 POINT)
Which of the following is considered to be a spontaneous source of financing?
Answer: Trade credit
QUESTION 25 (1 POINT)
AA Corporation has current assets of P11,400, Inventories of P4,000, and a current
ratio of 2.6. What is AA’s acid test ratio?
Answer: 1.69
QUESTION 26 (1 POINT)
Which of the following is considered to be a temporary source of financing?
Answer: Short-term notes payable

31. The result of a bank requiring compensating balances when extending a loan to
customer that would not otherwise carry account balance with the bank is to __ the
effective interest rate of the loan to the borrower.
- Increase
32. The following are considered in measuring the firm’s ability to meet all fixed-
payment obligation, except;
- Lease payment
33. Ethyl Account receivable is amounting to 670 000 while its annual sales are
4,190,000. If it operates 360 Days in a year, how long will it able to collect its
receivable?
-57.56 days
34. VVV inc, requires 270,000 in short term credit and is currently arranging a loan with
its bank. VVV plans to use funds for six months, the annual rate on the loan is 12% and
the bank will require a 10% compensating balance. If vvv must have a loan proceeds of
270,000 then it must borrow
-300 000
35. PPP Corporation regularly uses commercial paper in order to finance its current
operations. The firm plans to sell 75 million in commercial paper on which its expects to
pay discounted interest a rate of 7.5% (5,625,000) per annum. In addition, PPP will
incur a cost of 75,000 in fees related to the issuance of the commercial paper. What is
the effective cost of credit to PPP?
- 8.23%
36. Which of the following statements is true?
- The quick ratio is more restrictive measures of a firms liquidity than the current ratio.
37. The question ‘ Did the common stockholders receiver an adequate return on the
their investment?
- Profitability ratios
38. Heng de Inc. has the following data:
- 2.90
39. BB. Inc
- BB’s average collection period is less than CC’s.
40. The primary concern in the management of cash and marketable securities for an
operating company is to
- Be profitable and keep enough cash on hand to buy a computer if it it becomes
QUESTION 27 (1 POINT)
Assume the following sales data for a company:

2019 P945,000
2018 P780,000
2017 P650,000
If 2017 is the base year, what is the percentage increase in sales from 2017 to 2018
Answer: 20% (780,000/650,000 - 1)
QUESTION 28 (1 POINT)
Measures the activity, or liquidity, of a firm’s inventory
Answer: Inventory turnover
QUESTION 29 (1 POINT)
A company which foregoes the discount when credit terms are 4/15 net 70 is essentially
borrowing money from his suppliers for an additional:
Answer: 55 days
QUESTION 30 (1 POINT)
The best method of evaluating the quality of a firm’s accounts receivable is by
monitoring the:
Answer: Aging schedule

41) Sanitizer Company’s beginning inventory is P301,000 and its inventory at the end of
the month is P277,000. If its inventory turnover is 7.2, how much is the Cost of Sales?
Answer: P2,080,800
42) ___ is a policy that calls for relatively large amounts of current assets to be carried
because sales are stimulated by the use of a credit policy that provides liberal financing
to customers and a corresponding high level of receivables.
Answer: Relaxed current asset investment policy
43) Determine the effective annualized cost of foregoing the trade discount on terms
3/10 net 90
Answer: 13.9%
44) A firm will borrow P1 million for six months on a discount basis. The annual interest
rate on the loan is 12%. What is the effective annual rate (rEAR) of the loan?
Answer: 12.77%
45) Assume that liquid funds can be invested to yield 12%. If annual remittance checks
total P2 billion, what is it worth for the firm to reduce float by one day? (Use 365 days
and round off answer)
Answer: P354,000
46) Which of the following will help an analyst determine how well a firm is able to
meet its debt obligation?
Answer: Time-interest-earned
47) Which of the following costs is not included in inventory costing policy
Answer: marketing manager’s salary
48) Which of the following could be determined by using the economic order quantity
formula?
Answer: optimum order size of inventory
49) JJJ Corp. has estimated sales of P12 million next year. All sales will be on a credit
basis. The present average collection period is 45 days. JJJ is considering a change in
selling terms from net 30 days to 2/10, net 30 in order to speed up the collection of its
receivables. Studies indicate that one half of the firm’s customers will take the discount.
If JJJ offers the discount how much will it cost next year? Assume a 365-days year.
Answer: P87,000
50) The management of inventory is important because
Answer: carrying too much inventory can result in a loss of efficiency and profitability

51) Which of the following is a source of short-term funds?

Answer: All of these (Commercial paper, Bank loan, Accounts payable)
52) The precautionary motive for holding cash assumes that balances are held:
Answer: for buffer against contingencies
53) The records of Quarantine Company shows the following data:
Net profits after taxes 231
Decrease in Inventories 11
Depreciation 239
Increase in Accounts Rec. 138
Decrease in Notes Payable 20
Increase in accruals 45
Which is not used in computing for the cash provided by operating activities?
Answer: Depreciation
54) Which of the following is not used to assess the ethical viability of a proposed
action?
Answer: Does the action maximizes the company’s profit?
55) Which of the following is most likely to occur if a firm under-invest in net working
capital?
Answer: All of these (The firm might not have sufficient cash to pay its bill in a timely
manner, The firm could be losing sales because its terms of sales are too strict, The
firm might not have adequate inventory to meet the needs of its customers)
56) KKK Merchandising is projecting annual sales of P37 million next year, from which it
expects to generate pre-tax profits of 8%. All sales are on a credit basis. The firm is
very conservative and strict with its credit standards. Therefore, management is
evaluating the prospect of liberalizing its credit policies in order to attract new
customers. Studies indicate that if KKK proceeds with this change, the sales projection
will increase to P42 million, its pre-tax profit margin will remain the same, but bad
debts are expected to rise by P210,000. If KKK proceeds, what will the firm’s pre-tax
profit be?
Answer: P3,150,000
57) The following information pertains to Cookie Company:
Month Sales Purchases
January P30,000 P16,000
February P40,000 P20,000
March P50,000 P28,000

1. Cash is collected from customers in the following manner:

Month of sale 30%
Month following the sale 70%

1. 40% of purchases are paid for in cash in the month of purchase, and the balance
is paid in the following month
2. Labor costs are 20% of sales. Other operating costs are P15,000 per month
(including P4,000 depreciation). Both of these are paid in the month incurred
3. The cash balance on March 1 is P4,000
4. A minimum cash balance of P3,000 is required at the end month. Money can be
borrowed in multiples of P1,000
How much cash will be disbursed in March?
Answer: P44,200
58) A construction firm that accumulates cash in anticipation of a significant drop in
lumber costs is an example of the ____motive for holding cash.
Answer: speculative
59) Green Cross Company has the following data:
Book value per share (common stock) P25
Book value per share (preferred stock) P54
Common Stock Equity P1,754,000
How many is the shares of common stock outstanding?
Answer: 70,160