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MULTIPLE CHOICE: Which of the following statements is correct? a. The stockholder’s equity is a major component of working capital. b. Net working capital is the difference between quick assets and current liabilities. c. Working capital is a measure of long-term solvency. d. Net working capital is ...

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MULTIPLE CHOICE: 1. Which of the following statements is correct? a. The stockholder’s equity is a major component of working capital. b. Net working capital is the difference between quick assets and current liabilities. c. Working capital is a measure of long-term solvency. d. Net working capital is the difference between current assets and current liabilities. 2. The primary objective of working capital management is to. a. Maximize the company’s total current assets. b. Minimize the company’s total current liabilities. c. Balance the amount of current assets and current liabilities. d. Achieve a balance between risk and return. 3. In a conservative or relaxed working capital financing policy, a. Operations are conducted on a minimum amount of working capital. b. Operations are operated with too much working capital. c. Short-term liabilities are used to finance not only temporary current assets, but also part or all of the payment current assets requirements. d. The company is exposed to risk of illiquidity because of low working capital position. 4. Financing inventory build-up with long-term debt is an example of a. A conservative working capital policy, b. Matching policy c. An aggressive working capital policy d. Hedging policy 5. The hedging approach to financing involves a. The use of long-term debt to finance current assets b. The use of short-term debt to finance non-current assets c. Matching maturities of debt with specific financing needs d. Issuance of common stocks to raise funds or working capital requirements 6. Which of the following is incorrect? a. Profitability varies directly with liquidity b. The greater the risk, the greater is the potential for larger return c. Long-term financing has less liquidity risk than short-term financing, but has a higher explicit cost, hence lower return d. More current assets lead to greater liquidity, but yield lower returns 7. Which of the following statements is true? a. Short-term debt is usually more expensive than long-term debt b. Liquid assets do not ordinarily earn higher returns relative to long-term assets, so holding the former will maximize the return on total assets c. A conservative working capital policy is characterized by higher current ratio and acid-test ratio. d. Determining the appropriate level of working capital for a firm requires changing the firm’s capital structure and dividend policy

8. The length of time it takes for the initial cash outflows for goods and services to be realized as cash inflows from sales is called a. Product life cycle c. Vicious cycle b. Manufacturing cycle d. Cash conversion cycle 9. If the average age of accounts payable is 15 days, the average age of accounts receivables is 60 days, and the average age of inventory is 10 days, the number of days in the operating cash conversion cycle is a. 70 days c. 55 days b. 85 days d. 60 days 10. The following dare are given taken from the records of Apple Corporation for the year ended December 31, 200B Net credit sales P576,000 Average materials 8,000 Average finished goods inventory 12,000 Average accounts receivable 80,000 Average accounts payable 5,000 Net credit purchases 120,000 Raw materials used 96,000 Gross profit rate 25% What is the average number of days in the company’s operating cash conversion cycle? (Use a 360-day year) 11. An objective of cash management is to a. Maximize the cash balance to avoid the risk of illiquidity b. Minimize the cash balance to maximize the return from the idle cash c. Invest cash for a return while retaining sufficient liquidity to satisfy future needs d. Reserve as much cash as possible for potential investment opportunities 12. In cash management, the difference between the bank balance for a firm’s account and the cash balance that the firm shows on its own books is called a. Float c. Interest income b. Bank charges d. Reconciling item 13. Banks sometimes require its borrowers to maintain a certain percentage of the face amount of a loan which the bank requires its borrowers to keep in a non-interest bearing current account. This is called compensating balance, which a. Decreases the effective rate of interest paid by the borrower b. Compensates the bank for services rendered by providing it with deposits of funds c. Represents repaid interest on a loan d. Cannot be used for disbursements by both the borrower and the bank 14. A working capital technique that increases the payable float and therefore delays the outflow of cash is a. Electronic data interchange (EDI)

b. Automatic fund transfer (AFT) c. A draft d. Baumol cash management model 15. Company A grants credit terms of 30 days to Company B. The operating cycle of Company B is 20 days. In this case, Company A a. Is, in effect, financing more than Company B’s inventory needs b. Is, in effect, financing less than Company B’s inventory needs c. Will have a lower level of accounts receivable than those companies granting shorter credit terms d. Can be sure that Company B will be able to convert its inventories into cash before payment is due 16. A change in a seller’s credit policy has caused the following:  Sales decreased  Discounts taken decreased  Investment in accounts receivable increased  The number of doubtful accounts increased Based on this information, we can say that a. The company increased the rate of discount offered b. Net profit has decreased c. Gross profit has increased d. The average collection period has increased 17. For a manufacturing firm, the most direct way of preparing a cash budget requires incorporation of the following, except a. Sales projections and credit terms b. Collection percentages and other cash receipt c. Estimated purchases and payment terms and other cash disbursement d. Projected net income and depreciations expenses 18. Belle Company’s average monthly cash receipts is P1,500,000. Its average collection period is ten (10) days. A collection agency has offered to be the company’s collector and shorten collection period to four (4) days for a monthly fee of P1,500. The company can invest its excess funds in money market placement at a rate of 8%. If the collection agency’s offer is accepted, Belle Company’s net annual benefit (loss) is a. P6,000 c. P270,000 b. (6,000) D. P500 19. Onor Corporation had income before tax of P100,000 for the year. Included in this amount was depreciation expense of P20,000, bond discount amortization of P18,000, and the amount paid for salaries and wages of P30,000. The estimated cash flow for the year is a. P100,000 c. P138,000 b. P 62,000 d. P120,000

20. Annabelle Corporation is engaged in a multi-level marketing business that presently requires all sales agents to mail checks to its Manila office. An average of three days is required for mailed checks to be received, one day for Annabelle Corporation to process them and three days to clear through its banks. The company’s treasure proposed a change in the system, where the checks will no longer be mailed to Manila office. Instead, checks collected will be deposited on-line in any branch of the company’s depository bank, and the deposit slips, as well as the other pertinent documents will be sent by fax or e-mail to the Manila office on the same day. The original deposit slips and other documents will be submitted by the sales agents to Manila when they attend the Sales Agents Monthly Meeting. The new system will eliminate the mailing float and the processing time. Annabelle Corporation has an average daily collection of P50,000. If the new system is implemented, Annabelle Corporation’s average cash balance will increase by a. P50,000 c. P350,000 b. P150,000 d. P200,000 21. Majority of Aning Company’s customers are farmers from remote rural areas. Farmers Bank has offered to provide Aning Company a lockbox system at a fixed fee of P300 per month and a variable fee of P2 for each payment processed by the bank. Aning Company receive 30 payments per day, averaging P5,000 per payment. With the lockbox system, the company’s collection float will decrease by 3 days. Money market securities earn 5% per annum. Should Aning Company accept Farmers Bank’s offer to provide a lockbox system? (Use 360 days in a year) a. Yes, because it would earn additional income of P22,500 per year b. Yes, because it would earn net benefit of P2,700 from the lockbox system. c. No, because the cost of the lockbox system is P2,700 more than the expected return on money market placements. d. No, because the lockbox system would require the company to spend P25,000 per year. ITEM 22 and 23 ARE BASED ON THE FOLLOWING INFORMATION: Ben Corporation uses the Baumol Cash Management Model to determine its optimal cash balance. The formula is: Optimal Cash Balance =√ 2TD/i Where: T = transaction cost which is a fixed amount per transaction. It includes the cost of securities per transaction or the cost obtaining a loan I = The interest rate in marketable securities or the cost borrowing cash D = total demand of cash over a period of time

For the coming year, the expected cash disbursements total P432,000. The interest rate on marketable securities is 5% per annum. The fixed cost of selling marketable securities is P8 per transaction, 22. Using the Baumol Cash Management Model, the company’s optimal cash balance is a. P11,757.55 c. P142,000.00 b. P5,878.78 d. P1,175.76 23. Using the Baumol Cash Management Model, the average cash balance is a. P11,757.55 c. P142,000.00 b. P5,878.78 d. P1,175.76 24. Which of the following items is not a marketable security? a. Treasury bills b. Commercial papers c. Central Bank Certificates of Indebtedness (CBCIs) d. Convertible Bonds 25. When managing cash short-term investments in marketable securities, the treasury of a corporation is primarily concerned with a. Liquidity and safety c. Maximizing risk b. Maximizing the rate of return d. Tax avoidance 26. An objective of accounts receivable management is to have both the optimal amounts of receivables outstanding and bad debts. The balance requires the trade-off between the benefit of more credit sales and a. The cost of sales. b. More bad debts c. The cost of accounts receivable, such as collection, interest and cost of bad debts d. A high account receivable turnover 27. Following are ways of accelerating collection of accounts receivables, except a. Shorten credit terms b. Minimize negative float c. Age accounts receivables d. Offer special discounts to those who pay promptly 28. The average collection period for a firm measures the number of days after a typical credit sale is made until the firm receives the payment. It should be related to the firm’s credit terms. For example, a firm that allows term 2/10, net 30 should have an average collection period pf a. Thirty days c. Twenty days b. Ten days d. Somewhere between 10 days and 30 days 29. Which of the following represents a firm’s average gross receivables balance? I. Average age in days of receivables x average daily sales II. Average daily sales x average collection period III. Annual credit sales ÷ accounts receivable turnover a. I only c. II only b. I and II only d. I,II, and III

30. A change in credit policy accelerated the collection of accounts receivables. As result, the company experienced the following, except a. An increase in discounts taken by customers b. An increase in the average collection period c. A decrease in the receivable balance d. A decrease in bad debts ITEMS 31 and 32 ARE BASED ON THE FOLLOWING INFORMATION: Elaine Corporation is planning to introduce changes in its collection procedures. The new procedures are expected to make the collection period longer by 10 days, although there will be no change in bad debts. For the coming year, Elaine Corporation’s budgeted sales is P32,400,000 or P90,000 per day. Short-term interest rates are expected to average at 9% per annum. 31. As a result of the changes in collection procedures, Elaine Corporation’s average accounts receivable balance will increase (decrease) by a. P900,000 c. (P 900,000) b. 90,000 d. 32,400,000 32. To make the changes in collection procedures cost beneficial, the minimum savings in collection cost for the coming year should be a. P900,000 c. P8,100 b. P81,000 d. P90,000 33. A Company’s president requested the credit and collection manager to submit proposals on how to change the company’s credit policy. The credit and collection manager submitted two proposals. In both proposals, sales, profits, and collection periods will change although by different figures. Bad debts experience will remain the same despite the proposed changes. In making a decision on which proposal should be implemented, the president should consider the following factors, except a. b. c. d.

The impact of the proposed changes on the current customers of the company The cost of short-term credit The company’s current bad debts experience The change in credit terms to be imposed by banks which provide short-term financing to the company

ITEMS 34 and 35 ARE BASED ON THE FOLLOWING INFORMATION: Che-Che Corporation is planning to change its credit policy. The proposed change is expected to: 

Shorten the collection period from 50 days to 30 days

 Increase the ratio of cash sales to total sales from 20% to decrease total sales by 10% 34. If projected sales for the coming year is P40M, what is the peso impact on the average accounts receivable balance of the proposed change in credit policy? (Use 360 days in a year) a. P2,344,444 decrease c. P6,800,000 decrease b. P2,100,000 decrease d. P18,889 decrease 35. What is the impact of the proposed credit policy on the company’s accounts receivable turnover? a. Decrease by 7.2 c. Decrease by 20 days b. Increase by 4.8 d. Increase to 4.8 times 36. Donny Traders sells on credit terms of 2/10, net 30. Average daily credit sales is P50,000. On the average, 70% of the customers avail of the discount and pay on the 10 th day after purchase, while the rest pays on the last day of the credit term. How much is the company’s account receivable balance? a. P1,500,000 c.P800,000 b. P450,000 d. P1,050,000 37. Flint Company’s average collection period is 20 days. The average daily sales is P5,000. All of the company’s average accounts receivable balance? a. P0 c. P50,000 b. P100,000 d.P5,000 38. May Corporation’s average daily sales is P6,400,000, 10% of which is cash sales. The variable cost ratio is 60%. Starting next year, May Corporation will relax its credit standards. The relaxation in credit standards is expected to cause the following changes:  Total credit sales will increase by 20%  The collection period for incremental sales is 60 days. (The payment behaviour of the existing customers will not change). The variable cost ratio, even for the incremental sales, will be the same as in the past. The cost of borrowing is estimated at 25% per year. The company uses 360 days in a year in all its computations. What is May Corporation’s expected benefit (loss) from the planned relaxation in credit policy? a. P1,152,000 b. P460,800 39. Sisa Corporation has the following data: Selling price per unit Variable cost per unit Annual credit sales Collection period Rate of return

c. (P27,520) d. P432,000 P70 P45 P50,400 30days 20%

Sisa Corporation is considering easing its credit standards. If it does, sales will increase by 25%; collection period will increase to 45 days; bad debts losses are anticipated to be 4% of the incremental sales; ad collection cost will increase by P31,645. If the proposed relaxation is credit standards is implemented, the net benefit (loss) for SIsa Corporation is

40.

41.

42.

43.

a. P215,000 c. (33,075) b. P315,000 d. (P100,000) Inventory management is the formulation and administration of plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories. One of its objectives it to a. Maximize the units in inventory b. Maximize sales c. Minimize production costs d. Maintain inventory at a level that best balance the estimates of actual savings, the cost of carrying additional inventory, and the efficiency of inventory control Inventory costs, in addition to the costs of the purchased items, have been traditionally classified as follows, except a. Order cists c. Stockout costs b. Carrying costs d. Order-filling costs Inventory management requires the firms to balance the quantity of inventory on hand for operations with the investment in inventory. Two cost categories in the inventory management are order costs and carrying costs. a. The carrying costs include handling costs, interest on capital invested, and obsolescence. b. The order costs include quantity discounts lost, handling costs, and setup costs for a production run. c. The carrying costs include purchasing costs, shipping costs, quantity discounts lost, and setup costs. d. The order costs include insurance costs, shipping costs, and obsolescences. The following data are taken from the records of Chikoy Corporation for year 200A: Sales

P25,200,000

Cost of sales

P14,400,000

Inventory turnover

9 times per year

For 200B, budgeted sales and cost of sales are the same as in 200A actual data, although the company will try to increase its inventory turnover to 12 times per year. If short-term interest rates are expected to average at 8%, what is the company’s expected savings due to the increase in inventory turnover? a. P400,000

c. P32,000

44.

45.

46.

47.

48.

49.

50.

b. P700,000 d. P56,000 Which inventory costing system will result in a high inventory turnover ratio in period of rising prices? a. FIFO c. Perpetual b. LIFO d. Periodic In inventory management, a decrease in the frequency of ordering will normally a. Increase total carrying costs b. Increase the total ordering cost c. Have no effect on total carrying costs d. Have no effect on total ordering costs A company would be willing to gave a low inventory turnover ratio if the a. Inventory order costs is low b. Carrying cost of inventory is high c. Cost of stock out is high d. Lead time is short The EOQ model is a deterministic model that calculates the ideal order quantity (or production lot) given specified periodic demand, the cost per order or production run, and the periodic carrying costs per unit. The EOQ model a. Minimizes the sum of inventory carrying costs and either ordering or production setup costs b. Minimizes the sum of ordering costs and production setup costs c. Minimizes the sum of carrying costs and handling costs d. Minimize the level of average inventory units The Economic Order Quantity (EOQ) model can be used to establish inventory policy. In the case of a manufacturer, the EOQ is called the Economic Lot Size (ELS) or Economic Productions Quantity (EPQ) Which of the following statements about the ELS is incorrect? a. The objective of the ELS models is to minimize the sum of inventory carrying costs and the costs of production runs or setup costs. b. In the ELS model, the production rate is deemed to be instantaneous c. In the ELS model, the demand is assumed to occur at a constant rate over some period of time d. The ELS model is used to maximize contribution margin or minimize costs given resources constraints. Which of the following is not an element in the EOQ formula? a. Yearly demand c. Safety stock b. Variable cost per order d. Periodic carrying cost per unit Which of the following statements is false? a. The cost of inventory itself, as well as ant quantity discounts lost on inventory purchases, is directly reflected in the EOQ model b. A decrease in inventory order costs will decrease the EOQ c. An increase in inventory carrying cost will decrease the EOQ

d. An increase in the variable costs of placing and receiving and order will increase the EOQ 51. The economic order quantity (EOQ) formula does not assume that a. Demand is known b. Usage is uniform c. The cost of placing an order is constant d. The cost of inventory itself is constant 52. In the EOQ model, the return on capi...