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THEORY 5. The working capital financing policy that subjects the firm to the greatest risk of being unable
Working capital to meet the firms maturing obligations is the policy that finances
1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs A. Fluctuating current assets with long-term debt.
could increase its working capital by the B. Fluctuating current assets with short-term debt.
A. Prepayment of $50,000 of next year's rent. C. Permanent current assets with long-term debt.
B. Collection of $50,000 of accounts receivable. D. Permanent current assets with short-term debt.
C. Purchase of $50,000 of temporary investments for cash.
D. Refinancing of $50,000 of short-term debt with long-term debt. Cash conversion cycle
6. Ignoring cost and other effects on the firm, which of the following measures would tend to
Working capital policy reduce the cash conversion cycle?
2. Determining the appropriate level of working capital for a firm requires A. Take discounts when offered.
A. Changing the capital structure and dividend policy for the firm. B. Forgo discounts that are currently being taken.
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the C. Maintain the level of receivables as sales decrease.
return on total investments. D. Buy more raw materials to take advantage of price breaks.
C. Offsetting the profitability of current assets and current liabilities against the probability of
technical insolvency. 7. An increase in sales resulting from an increased cash discount for prompt payment would be
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more expected to cause
expensive than long term debt. A. An increase in the operating cycle.
E. Evaluating the risks associated with various levels of fixed assets and the types of debt B. A decrease in purchase discounts taken.
used to finance these assets. C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.
3. Compared to other firms in the industry, a company that maintains a conservative working
capital policy will tend to have a Cash management system
A. Higher total asset turnover. 8. A precautionary motive for holding excess cash is
B. Greater percentage of short-term financing. A. To enable a company to have cash to meet emergencies that may arise periodically.
C. Higher ratio of current assets to fixed assets. B. To enable a company to meet the cash demands from the normal flow of business
D. Greater risk of needing to sell current assets to repay debt. activity.
C. To enable a company to avail itself of a special inventory purchase before prices rise to
4. A firm following an aggressive working capital strategy would
higher levels.
A. Hold substantial amount of fixed assets.
D. To avoid having to use the various types of lending arrangements available to cover
B. Minimize the amount of short-term borrowing.
projected cash deficits.
C. Finance fluctuating assets with long-term financing.
D. Minimize the amount of funds held in very liquid assets.
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9. The amount of cash that a firm keeps on hand in order to take advantage of any bargain B. Satisfy compensating balance requirements.
purchases that may arise is referred to as its C. Earn maximum returns on investment assets.
A. Compensating balance. C. Speculative balance. D. Maintain adequate cash needed for transactions.
B. Precautionary balance. D. Transactions balance.
15. When managing cash and short-term investments, a corporate treasurer is primarily
10. Which of the following is not a major function in cash management? concerned with
A. Cash flow control C. Maximizing sales A. Minimizing taxes.
B. Cash surplus investment D. Obtaining financing services B. Liquidity and safety.
C. Maximizing rate of return.
11. Which of the following actions would not be consistent with good management? D. Investing in Treasury bonds since they have no default risk.
A. Minimize the use of float.
B. Increased synchronization of cash flows. 16. Which of the following investments is not likely to be a proper investment for temporary idle
C. Use of checks and drafts in disbursing funds. cash?
D. Maintaining an average cash balance equal to that required as a compensating balance A. Treasury bills.
or that which minimizes total cost. B. Commercial paper.
C. Treasury bonds due within one year.
12. The following are desirable in cash management except: D. Initial public offering of an established profitable conglomerate.
A. Cash is collected at the earliest time possible.
B. Post-dated checks are not deposited on time upon maturity. 17. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
C. All sales are properly receipted and promptly deposited intact. the optimal mix between cash and marketable securities. The EOQ model assumes all of the
D. Most sales are on cash basis and receivables are aged current following except
A. Cash flow requirements are random.
13. A lock-box system B. The total demand for cash is known with certainty.
A. Accelerates the inflow of funds. C. An opportunity cost is associated with holding cash, beginning with the first dollar.
B. Provides security for late night deposits. D. The cost of a transaction is independent of the dollar amount of the transaction and
C. Reduces the need for compensating balances. interest rates are constant over the short run.
D. Reduces the risk of having checks lost in the mail.
Receivable Management
Marketable securities Management 18. The one item listed below that would warrant the least amount of consideration in credit and
14. All of the following are valid reasons for a business to hold cash and marketable securities collection policy decisions is the
except to A. Cash discount given.
A. Meet future needs. B. Quantity discount given.

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C. Quality of accounts accepted. C. The minimum risk group to which credit should be extended.
D. Level of collection expenditures. D. The extent (in terms of money) to which a firm will go to collect an account.

19. The goal of credit policy is to 23. The credit and collection policy of Amargo Co. provides for the imposition of credit block when
A. Maximize sales. the credit line is exceeded and/or the account is past due. During the month, because of the
B. Minimize bad debt losses. campaign to achieve volume targets, the general manager has waived the credit block policy
C. Minimize collection expenses. in a number of instances involving big volume accounts. The likely effect of this move is
D. Extend credit to the point where marginal profits equal marginal costs. A. Increase in the level of receivables only.
B. Deterioration of aging of receivables only.
20. When a company analyzes credit applicants and increases the quality of the accounts C. Deterioration of aging and increase in the level of receivables.
rejected, the company is attempting to D. Decrease in collections during the month the move was done.
A. Maximize sales.
B. Maximize profits. 24. A high turnover of accounts receivable, which implies a very short days-sales outstanding,
C. Increase bad-debt losses. could indicate that the firm
D. Increase the average collection period. A. Offers small discounts.
B. Has a relaxed (lenient) credit policy.
21. A strict credit and collection policy is in place in Star Co. As Finance Director you are asked to C. Has an inefficient credit and collection department.
advise on the propriety of relaxing the credit standards in view of stiff competition in the D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
market. Your advise will be favorable if
A. The competitor will do the same thing to prevent lost sales. 25. Accounts receivable turnover will normally decrease as a result of
B. The projected margin from increased sales will exceed the cost of carrying the A. An increase in cash sales in proportion to credit sales.
incremental receivables. B. A change in credit policy to lengthen the period for cash discounts.
C. The account receivable level is improving, so the company can afford the carrying cost of C. A significant sales volume decrease near the end of the accounting period.
receivables. D. The write-off of an uncollectible account (assume the use of the allowance for doubtful
D. there is a decrease in the distribution level of your product, and a more aggressive stance accounts method).
in necessary to retain market share.
26. The level of accounts receivable will most likely increase as
A. Cash sales increase and number of says sales.
22. It is held that the level of accounts receivable that the firm has or holds reflects both the
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
volume of a firms sales on account and a firms credit policies. Which one of the following
C. Credit limits are expanded, cash sales increase, and aging of the receivables is
items is not considered as part of the firms credit policies?
improving.
A. The size of the discount that will be offered.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain
B. The length of time for which credit is extended.
the same.
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27. A change in credit policy has caused an increase in sales, an increase in discounts taken, a 32. Which of the following inventory items would be the most frequently reviewed in an ABC
reduction of the investment in accounts receivable, and a reduction in the number of doubtful inventory control system?
accounts. Based on this information, we know that: A. Expensive, frequently used, high stock-out cost items with long lead time.
A. Net profit has increased. B. Expensive, frequently used, low stock-out cost items with long lead times.
B. Gross profit has declined. C. Inexpensive, frequently used, high stock-out cost items with long lead time.
C. The average collection period has decreased. D. Expensive, frequently used, high stock-out cost items with short lead times.
D. The size of the discount offered has decreased.
33. In an ABC inventory analysis, the items that are most likely to be controlled with a red-line
28. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be system are the
expected on the balance sheet of its customer if the firm went to a net cash 30 policy? A. A items. C. C items.
A. Decrease in cash. B. B items. D. items on a perpetual inventory.
B. Increased receivables.
C. Decreased receivables. 34. The materials control method that is based on physical observation that an order point has
D. Increased payables and increased bank loan. been reached is the:
A. ABC plan C. min-max method
Inventory Management B. cycle review method D. two-bin method
29. Which condition justifies accepting a low inventory turnover ratio?
A. High carrying costs. C. Low inventory order costs. 35. The underlying philosophy of just-in-time inventory system is that
B. High stock-out costs. D. Short inventory order lead times. A. The quantities of most stock items are subject to definable limits.
B. It is a quest toward continuous improvement in the environmental conditions that
30. If one optimizes the inventory turnover ratio, which costs will not increase? necessitates inventories.
A. Carrying costs C. Total reorder costs C. It is impractical to give equal attention to all stock items, hence the need to classify and
B. Stock-out cost D. Unit reorder costs rank them according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or
31. Order-filling costs, as opposed to order-getting costs, include all but which of the following critical items are examined more frequently than low-cost or non-critical items.
items?
A. Credit check of new customers. 36. Companies that adopt just-in-time purchasing systems often experience
B. Packing ad shipping of sales orders. A. An increase in carrying costs.
C. Mailing catalogs to current customers. B. Fewer deliveries from suppliers.
D. Collection of payments for sales orders. C. A reduction in the number of suppliers.
D. A greater need for inspection of goods as the goods arrive.

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37. An inventory control system which employs mathematical models as an aid in making 42. The economic order quantity formula can be used to determine the optimum size of
inventory decision is known as A. B. C. D.
A. Mini-max system C. Statistical inventory control system. Production run Yes Yes No No
B. Order cycling system D. Two-bin system Purchase order Yes No Yes No

38. In inventory management, the problem of avoiding excessive investment in inventories and at 43. The simple economic production lot size model will only apply to situations in which the
the same time avoiding inventory shortages can be solved by applying a quantitative production
technique known as A. Rate equals the demand rate.
A. Payback analysis C. Probability analysis B. Rate is less than the demand rate.
B. Economic order quantity D. High-low point method C. Rate is greater than the demand rate.
D. For the period covered equals the projected sales for the period.
39. Which of the following is used in determining the economic order quantity (EOQ)?
A. Calculus. C. Queuing theory. 44. Which one of the following items is not directly reflected in the basic economic order quantity
B. Markov process. D. Regression analysis. (EOQ) model?
A. Inventory obsolescence.
40. A characteristic of the basic economic order quantity (EOQ) model is that it B. Interest on invested capital.
A. Is relatively insensitive to error. C. Public warehouse rental charges.
B. Is used when product demand, lead-time, and ordering costs are uncertain. D. Quantity discounts lost on inventory purchases.
C. Should not be used in conjunction with computerized perpetual inventory systems.
D. Should not be used when carrying costs are large in relation to procurement costs. 45. The ______________ would not affect the economic order quantity.
A. cost of a stockout
41. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are B. cost of insuring inventory
A. Constant demand, constant ordering cost, constant carrying cost, unlimited production C. cost of purchase requisition forms
and inventory capacity. D. company's weighted average cost of capital
B. Limited production capacity, declining demand, constant ordering cost, constant carrying
cost, and unlimited inventory capacity. 46. The economic order quantity is not affected by the
C. Increasing demand, limited production capacity, increasing ordering cost, increasing A. safety stock level
carrying cost, and limited inventory capacity. B. cost of purchase-order forms.
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing C. cost of insuring a unit of inventory for a year.
carrying cost, and unlimited inventory capacity. D. estimate of the annual material consumption.

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47. The ordering costs associated with inventory management include 52. Clear View Co. manufactures various glass products including a car window. The setup cost to
A. Insurance costs, purchasing costs, shipping costs, and obsolescence. produce the car window is $1,200. The cost to carry a window in inventory is $3 per year.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs. Annual demand for the car window is 12,000 units. If the annual demand for the car window
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost. was to increase to 15,000 units,
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested. A. the number of setups would decrease.
B. the total carrying costs would increase.
48. The carrying costs pertaining to inventory include C. the economic order quantity would decline.
A. Insurance costs, incoming freight costs and setup costs. D. all of the above would occur.
B. Insurance costs, incoming freight costs and storage costs.
C. Setup costs and opportunity cost of capital invested in inventory. 53. A decrease in inventory order costs will
D. Storage costs and opportunity cost of capital invested in inventory. A. Increase the reorder point.
B. Decrease the economic order quantity.
49. The optimal level of inventory is affected by all of the following except the C. Decrease the holding cost percentage.
A. Cost per unit of inventory. D. Have no effect on the economic order quantity.
B. Current level of inventory.
C. Usage rate of inventory per time period. 54. An increase in inventory holding costs will
D. Cost of placing an order for merchandise. A. Increase the economic order quantity.
B. Decrease the economic order quantity.
50. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, first- C. Have no effect on the economic order quantity.
out) method would D. Decrease the number of orders issued per year.
A. Not affect the EOQ.
B. Increase the EOQ in times of rising prices. 55. The economic order quantity (EOQ) will rise following
C. Increase the EOQ in times of falling prices. A. An increase in carrying costs.
D. Decrease the EOQ in times of rising prices. B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory.
51. The selling price of the product is relatively high and the purchase cost of the product is D. An increase in the variable costs of placing and receiving an order.
relatively low. In this situation
A. The EOQ model will indicate frequent large orders. 56. For its economic order quantity model, a company has a $10 cost of placing an order and a $2
B. The EOQ of the product is affected by the selling price. annual cost of carrying one unit in stock. If the cost of placing an order increases by 20%, the
C. The selling price has nothing to do with the EOQ of the product. annual cost of carrying one unit in stock increases by 25%, and all other considerations remain
D. Management must increase the price to cover the cost of carrying higher inventory. constant, the economic order quantity will:

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A. decrease
B. increase 61. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The
C. remain unchanged usual lead-time for the inventory item is six (6) days; however, at times, the lead-time has
D. either increase or decrease, depending on the reorder point gone as high as eight (8) days. Kulasa now desires to adjust its safety stock policy. The likely
E. either increase or decrease, depending on the safety stock effect on stockout costs and carrying costs, respectively, would be
A. Increase and increase. C. Decrease and increase.
57. Missile Company has correctly computed its economic order quantity as 500 units. However, B. Increase and decrease. D. Decrease and decrease.
management feels it would rather order quantities of 600 units. How should Missiles total
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units 62. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the
compare to the respective amounts for an order quantity of 500 units? annual relevant
A. Lower purchase-order cost and lower carrying cost. A. ordering costs and carrying costs. C. ordering costs and stockout costs.
B. Lower purchase-order cost and higher carrying cost. B. ordering costs and purchasing costs. D. stockout costs and carrying costs.
C. Higher purchase-order cost and lower carrying cost.
D. Higher purchase-order cost and higher carrying cost. Trade Credit
63. A company obtaining short-term financing with trade credit will pay a higher percentage
58. When a specific level of safety stock is carried for an item in inventory, the average inventory financing cost, everything else being equal, when
level for that item A. The discount percentage is lower.
A. Is not affected by the safety stock. B. The items purchased have a lower price.
B. Increases by the amount of the safety stock. C. The items purchased have a higher price.
C. Decreases by the amount of the safety stock. D. The supplier offers a longer discount period.
D. Increases by one-half the amount of the safety stock.
Short-term Loans
59. For inventory management, ignoring safety stocks, which of the following is a valid 64. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not
computation of the reorder point? taking discounts from one of their three biggest suppliers, or a 14.75% per annum renewable
A. The economic order quantity. discount loan from its bank for 3 months. The suppliers' terms are as follows:
B. The square root of the anticipated demand during the lead time. Fort Co. 1/10, net 30
C. The anticipated demand per day during lead time times lead time in days. Riley Manufacturing Co. 2/15, net 60
D. The economic order quantity times the anticipated demand during the lead time. Shad, Inc. 3/15, net 90
Using a 360-day year, the cheapest source of short-term financing in this situation is
60. The cost of stock-out do not include A. Fort Co. C. Shad, Inc.
A. Depreciation and obsolescence. C. Loss of customer goodwill. B. Riley Manufacturing Co. D. The bank.
B. Disruption of production schedules. D. Loss of sales.

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65. In assessing the loan value of inventory, a banker will normally be concerned about the portion Internal growth rate
of inventory that is work-in-process because 3. Bobo LLC's has an asset base of $1 million. After a dividend payment of $40,000, Bobo added
A. WIP generally has the lowest marketability of the various types of inventories. $50,000 to retained earnings. What is Bobo's internal growth rate?
B. WIP inventory usually has the highest loan value of the different inventory types. A. 1% C. 5%
C. WIP represents a lower investment by a corporation as opposed to other types of B. 4% D. 9%
inventories.
D. WIP inventory is relatively easy to sell because it does not represent a raw material or a Working capital policy
finished product. 4. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset
investment policy. The firms annual sales are $400,000; its fixed assets are $100,000; debt
and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firms
PROBLEMS debt is 10 percent, and the firms tax rate is 40 percent. With a restricted policy, current assets
Capital Structure will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales.
1. Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the What is the difference in the projected ROEs between the restricted and relaxed policies?
company wishes to maintain it. A. 1.6% C. 5.4%
Debt 25% B. 3.8% D. 6.2%
Preferred equity 5%
Common equity 70% 5. Wildthing Amusement Companys total assets fluctuate between $320,000 and $410,000,
Enert's management is planning to build a $75 million facility that will be financed according to while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or
this desired capital structure. Currently, $15 million of cash is available for capital expansion. moderate working capital financing policy, what is the likely level of its long-term financing?
The percentage of the $75 million that will come from a new issue of common shares is A. $ 90,000 C. $320,000
A. 50.00%. C. 56.25%. B. $260,000 D. $410,000
B. 56.00%. D. 70.00%.
Cash conversion cycle
Financial statement analysis 6. Bully Corporation purchases raw materials on July 1. It converts the raw materials into
2. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current inventory by September 30. However, Bully pays for the materials on July 20. On October 31,
liabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximum level it sells the finished goods inventory. Then, the firm collects cash from the sale 1 month later on
of new short-term loans it can secure without violating the policy? November 30. If this sequence accurately represents the average working capital cycle, what
A. P266,667 C. P400,000 is the firm's cash conversion cycle in days?
B. P300,000 D. P800,000 A. 92 days. C. 133 days.
B. 123 days. D. 153 days.

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Cash Management 11. CMR is a retail mail order firm that currently uses a central collection system that requires all
7. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these checks to be sent to its Boston headquarters. An average of 5 days is required for mailed
checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm checks to be received, 4 days for CMR to process them and 1 days for the checks to clear
loses three days while its receipts are being deposited and cleared. What is the firms net float through its bank. A proposed lockbox system would reduce the mail and process time to 3
in dollars? days and the check clearing time to 1 day. CMR has an average daily collection of $100,000. If
A. $ 24,000 C. $ 75,000 CMR should adopt the lockbox system, its average cash balance would increase by
B. $ 32,000 D. $126,000 A. $250,000. C. $650,000.
B. $400,000. D. $800,000.
8. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is
0.02% and the average transaction cost of investing money overnight is $50? 12. What are the expected annual savings from a lockbox system that collects 200 checks per day
A. $50 C. $400 averaging $500 each, and reduces mailing and processing times by 2.0 and 0.5 days,
B. $350 D. $40,000 respectively, if the annual interest rate is 6%?
A. $6,000 C. $15,000
Questions 9 and 10 are based on the following information. B. $12,000 D. $250,000
A company has a 10% cost of borrowing and incurs fixed costs of $500 for obtaining a loan. It has
stable, predictable cash flows, and the estimated total amount of net new cash needed for 13. A company has daily cash receipts of $150,000. The treasurer of the company has
transactions for the year is $175,000. The company does not hold safety stocks of cash. investigated a lock box service whereby the bank that offers this service will reduce the
companys collection time by four days at a monthly fee of $2,500. If money market rates
9. When the average cash balance of the company is higher, the <List A> the cash balance is average 4% during the year, the additional annual income (loss) from using the lock box
<List B>. service would be
List A List B A. $(12,000). C. $6,000.
A. Opportunity cost of holding Higher B. $(6,000). D. $12,000.
B. Total transactions costs associated with obtaining Higher
C. Opportunity cost of holding Lower 14. A banker has offered to set up and operate a lock box system for your company. Details are
D. Total costs of holding Lower given below.
Average number of daily payments 325
10. If the average cash balance for the company during the year is $20,916.50, the opportunity Average size of payments $1,250
cost of holding cash for the year will be Daily interest rate 0.021%
A. $2,091.65 C. $8,750.00 Saving in mailing time 1.3 days
B. $4,183.30 D. $17,500.00 Saving in processing time 0.9 days
Bank charges $0.30

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Estimate the annual savings. Assume 250 processing days per year. 19. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables
A. $3,273 C. $23,500 turnover is 4.5, what is the average collection period and the year-end receivables,
B. $22,675 D. $47,000 respectively (assume a 365-day year)?
A. 73 days and $108,000. C. 81 days and $120,000.
15. QRS makes large cash payments averaging P17,000 daily. The company changed from using B. 73 days and $120,000. D. 81 days and $200,000.
checks to sight drafts which will permit it to hold unto its cash for one extra day. If QRS can
20. Best Computers believes that its collection costs could be reduced through modification of
use the extra cash to earn 14% annually, what annual peso return will it earn?
collection procedures. This action is expected to result in a lengthening of the average
A. P6.52 C. P2,380
collection period from 30 to 35 days; however, there will be no change in uncollectible
B. P652.10 D. P6,521.00
accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunity
cost of a longer collection period is assumed to be negligible, the company's budgeted credit
Marketable Securities Management
sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify
Questions 16 and 17 are based on the following information.
changes in collection procedures, the minimum annual reduction of costs (using a 360-day
Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment will
year and ignoring taxes) must be
satisfy the firm's need for funds during the coming year.
A. $22,500 C. $125,000
B. $37,500 D. $375,000
16. If it costs $50 to sell these bills, regardless of the amount, how much should be withdrawn at a
21. Ten Qs Inc. has an inventory conversion period of 60 days, a receivable conversion period of
time?
35 days, and a payment cycle of 26 days. If its sales for the period just ended amounted to
A. $50,000 C. $250,000
P972,000, what is the investment in accounts receivable? (Assume 360 days a year.)
B. $100,000 D. $500,000
A. P72,450 C. P85,200
B. P79,600 D. P94,500
17. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills?
A. About every 3 days. C. About every 15 days.
22. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
B. About every 9 days. D. About every 18 days.
Old New
Average number of days collection 75 50
Receivables Management
Ratio of credit sales to total sales 70% 60%
18. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and
Projected sales for the coming year is P100 million and it is estimated that the new policy will
the collections department estimates that 30% of the customers pay on the 10th day and take
result in a 5% loss if the new policy is implemented. Assuming a 360-day year, what is the
discounts; 40% pay on the 30th day; and the remaining 30% pay, on the average, 40 days
effect of the new policy on accounts receivable?
after the purchase. Assuming 360 days per year, what is the average collection period.
A. No change. C. Decrease of P 6.67 million.
A. 15 days. C. 27 days.
B. Decrease of P5 million. D. Decrease of P13 million.
B. 20 days. D. 40 days.

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23. Simba Corp., whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The 27. The Liberal Sales Co. budgeted sales for the coming year are P30 million of which 80% are
collections manager estimated that 30% of the customers pay on the 10th day and take expected to be on credit. The company wants to change its credit terms from n/30 to 2/10,
discounts; 40% on the 30th day; and the remaining 30% pay, on the average, 40 days after n/30. If the new credit terms are adopted, the company estimates that cash discounts would
the purchase. If management would toughen on its collection policy and require that all non- be taken on 40% of the credit sales and the new uncollectible amount would be unchanged.
discount customers pay on the 30th day, how much would be the receivables balance? The adoption of the new credit terms would result in expected discount availed of in the
A. Zero C. P70,000 coming year of
B. P60,000 D. P80,000 A. P192,000 C. P480,000
B. P288,000 D. P600,000
24. Numero 1 Co.s budgeted sales for the coming year are P96 million, of which 80% are
expected to be credit sales at terms of n/30. The company estimates that a proposed 28. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with
relaxation of credit standards would increase credit sales by 30% and increase the average respect to credit policy, below is a summary of relevant information:
collection period form 30 days to 45 days. Based on a 360-day year, the proposed relaxation Old Credit Policy New Credit Policy
of credit standards would result to an increase in accounts receivable balance of Sales P1,800,000 P1,980,000
A. P1,920,000 C. P6,080,000 Average collection period 30 days 36 days
B. P2,880,000 D. P6,880,000
The company requires a rate of return of 10% and a variable cost ratio of 60%.
25. Phillips Glass Company buys on terms of 2/15, net 30. It does not take discounts, and it Using a 360-day year, the pre-tax cost of carrying the additional investment in receivables
typically pays 30 days after the invoice date. Net purchases amount to $720,000 per year. On under the new policy would be
average, how much free trade credit does Phillips receive during the year? (Assume a 360- A. P2,880 C. P4,080
day year.) B. P3,000 D. P4,800
A. $30,000 C. $50,000
B. $40,000 D. $60,000 29. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He
estimates the following effects:
26. Slippers Mart has sales of P3 million. Its credit period and average collection period are both Sales will increase by at least 20%.
30 days and 1% of its sales end as bad debts. The general manager intends to extend the Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
credit period to 45 days which will increase sales by P300,000. However, bad debts losses on times.
the incremental sales would be 3%. Costs of products and related expenses amount to 40% Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed changes
exclusive of the cost of carrying receivables of 15% and bad debts expenses. Assuming 360 is at P900,000. Variable cost ratio is 55% and desired rate of return is 20%. Fixed
days a year, the change in policy would result to incremental investment in receivables of expenses amount to P150,000.
A. P9,750. C. P65,000. Should the company allow the revision of its credit terms?
B. P24,704. D. P701,573 A. No, because losses will increase by P28,000.
B. Yes, because income will increase by P68,850.
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C. No, because income will be reduced by P13,000. C. Change to Policy B (means also taking Policy A first).
D. Yes, because losses will be reduced by P78,800. D. All policies lead to the same total firm profit, thus all policies are equal.

30. Wasting Resource Co. 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%. Assuming a tax rate of 35% and 360 days a year, the incremental change
in the profitability of the company if stricter policy would be implemented would be
A. A reduction in net income by P35,400.
B. A reduction in net income by P38,350.
C. A reduction in net income by P70,000.
D. Zero as the positive and negative effects offset each other.
31. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier
customers. It has been estimated that uncollectible expenses would be 15% and collection
costs 5%. The manufacturing and selling costs are 70% of sales and corporate tax is 35%. If
it pursues this opportunity, the after tax profit will
A. Remain the same. C. Increase by P65,000.
B. Increase by P35,000. D. Increase by P97,500.
33. A firm that often factors its accounts receivable has an agreement with its finance company
that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of
receivables. The net proceeds would be further reduced by an annual interest charge of 10%
on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the
nearest dollar) will the firm receive from the finance company at the time a $100,000 account
that is due in 90 days is turned over to the finance company?
A. $83,700 C. $90,675
B. $90,000 D. $93,000
Questions 34 through 36 are based on the following information.
Flesher, Inc.'s credit manager studied the bill-paying habits of its customers and found that 90% of
them were prompt. She also discovered that 22% of the slow payers and 5% of the prompt ones
subsequently defaulted. The company has 3,000 accounts on its books, none of which has yet
defaulted.
34. Calculate the total number of expected defaults, assuming no repeat business is on the
horizon.
A. 66 C. 201
B. 135 D. 795

32. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are 35. Given average revenues from sales of $1,200 and the cost of sales of $1,100, what is the
available. Policy A would increase sales by $500,000, but bad debt losses on additional sales average expected profit or loss from extending credit to slow payers?
would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad A. $100 profit. C. $220 loss.
debt losses on the additional $120,000 of sales would be 15%. The average collection period B. $164 loss. D. $264 loss.
will remain at 60 days (6 turns per year) no matter the decision made. The profit margin will be
20% of sales and no other expenses will increase. Assume an opportunity cost of 20%. What 36. Given revenues from sales of $1,200 and the cost of sales of $1,100, what would the average
should the firm do? level of revenues that makes it worthwhile to extend credit to slow payers?
A. Make no policy change. A. $1,364.00 C. $1,410.26
B. Change to only Policy A. B. $1,389.74 D. $1,510.26

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Inventory Management 40. A company has estimated its economic order quantity for Part A at 2,400 units for the coming
37. The following data refer to various annual costs relating to the inventory of a single-product year. If ordering costs are $200 and carrying costs are $0.50 per unit per year, what is the
company: estimated total annual usage?
Unit transportation-in on purchases $0.20 A. 2,400 units C. 7,200 units
Storage per unit 0.12 B. 6,000 units D. 28,800 units
Insurance per unit 0.10
Annual interest foregone from alternate investment of funds $800 41. The following information are given:
Annual number of units required 10,000 Optimal production run in units 2,000
What is the annual carrying cost per unit? Average inventory in units 1,000
A. $0.30 C. $0.42 Number of production runs 5
B. $0.32 D. $0.50 Cost per unit produced P75
Desired annual return on inventory investment 18%
38. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells Set-up costs per production run P5,000
blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per
tape; tapes are shipped in packages of 20. Phonic Goods pays all incoming freight, and Tape-
Disk Mart does not inspect the tapes due to Phonic Goods' reputation for high quality. Annual If the units will be required evenly throughout the year, the total annual relevant costs using
demand is 104,000 tapes at a rate of 4,000 tapes per week. Tape-Disk Mart earns 20% on its the economic-order-quantity approach is
cash investments. The purchase-order lead time is two weeks. The following cost data are A. P5,000 C. P75,000
available: B. P38,500 D. P150,000
Relevant ordering costs per purchase order $90.50
Carrying costs per package per year: 42. One of the products that Nature Way Health Products sells is a magnetic back support. The
Relevant insurance, materials handling, breakage, etc., per year $ 4.50 ordering cost related to this product is P12.50 per order. The cost of carrying one item of
What is the required annual return on investment per package? inventory for one year is P16.00. The business sells 40,000 of this type of product evenly
A. $0.60 C. $12.00 throughout the year. How much is the total ordering costs per year and the total carrying costs
B. $2.50 D. $60.00 per year at the economic order quantity?
A. B. C. D.
39. Penguin Company manufactures winter jackets. Setup costs are $2.00. Penguin Ordering costs P1,562.50 P1,562.50 P2,000.00 P4,000.00
manufactures 4,000 jackets evenly throughout the year. Using the economic order quantity Carrying costs P1,562.50 P2,560.00 P2,000.00 P4,000.00
approach, the optimal production run would be 200 when the cost of carrying one jacket in
inventory for one year is: 43. The economic order quantity is the size of the order that minimizes total inventory costs,
A. $0.05 C. $0.20 including ordering and carrying costs. If the annual demand decreases by 36%, the optimal
B. $0.10 D. $0.40 order size will

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A. Decrease by 6%. C. Increase by 6%. What annual cost saving would result if RODENSTOCK used the economic order quantity for
B. Decrease by 20%. D. Increase by 20%. order sizes instead of their current policy?
A. P 80 C. P150
44. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of B. P 90 D. P240
raw materials by 80%. What is the effect of this safety stock reduction on Dees economic
order quantity. 48. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per
A. No effect. C. 64% decrease. year and the ordering costs are $100. The company uses an order quantity of 500 units. By
B. 20% increase. D. 80% decrease. how much could the company reduce its total costs if it purchased the economic order quantity
instead of 500 units?
45. A&B Co.s financial plan for next year shows sales of P72 million and cost of sales of P45 A. $0 C. $2,000
million. It expects short term interest rates to average 10% for the coming year. It aims to B. $500 D. $2,500
increase inventory turnover from the present level of 9 times to 12 times next year. If its plans
and objectives would be carried out, how much is the cost savings for the coming year? 49. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average
A. P125,000 C. P375,000 inventory (taking into account the safety stock) is 8,000 pounds. What is the apparent order
B. P300,000 D. P500,000 quantity?
46. Marita works for a local ceramics company. She just completed her accountancy degree and A. 6,000 lbs. C. 16,000 lbs.
learned the EOQ model in one of her subjects. She suggested to her employer to adopt it. B. 10,000 lbs. D. 21,000 lbs.
The company sells 20,000 pieces of specialty ceramic items each year. Traditionally, they
have produced these items four times a year, making 5,000 pieces at a time. They carry no 50. D&R Corp. consumes 300,000 units of spare part V per year. The average purchase lead
safety stock as customers do not mind waiting for orders. The average piece of ceramic items time is 20 working days while the maximum is 27 working days. The companys annual
costs P400 to make and costs the company P20 to carry in inventory for a year. The set up operations cover 240 days allowing for shutdowns for plant maintenance, holidays and
costs for each production run total P80. The company should Sundays. The company would like to keep safety stock or extra stock to guard against stock-
A. Adopt EOQ due to savings of P35,675. outs. How much is the safety stock?
B. Adopt EOQ due to savings of P42,320. A. 1,250 units. C. 25,000 units.
C. Continue the existing system due to P38,950 advantage. B. 8,750 units. D. 33,750 units.
D. Continue the existing system due to P41,820 advantage.
51. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work
47. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals. year. The usual lead time for the part is six days. However, at times, the lead time has gone
Information concerning this item is as follows: as high as eight days. Scholas now desires to adjust its safety stock policy. The increase in
Cost of placing an order P10 safety stock size is
Annual demand 20,000 units A. 2,800 units. C. 7,200 units.
Purchasing price per unit P0.50 B. 5,600 units. D. 16,800 units.
The cost of holding the stock items amounts to 20% of the stock value per annum. 52. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000
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units. The cost per unit of inventory is $5, and the carrying cost is 10% of the average value of Working days per year 250
inventory. The annual inventory carrying cost for the organization is Safety stock in units 1,200
A. $3,000 C. $5,000 Normal lead time in working days 25
B. $3,500 D. $6,000 The re-order point is
A. 3,000 C. 5,700
53. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of B. 4,200 D. 6,250
T at 500 lbs., and its order point is 1,500 lbs., what would be the total annual carrying costs
57. M&L Co. has the following information on inventory:
assuming the carrying cost per unit is $0.20?
Sales 20,000 units per year
A. $100 C. $1,000
Order quantity 4,000 units
B. $600 D. $1,100
Safety stock 2,600 units
Lead time 4 weeks
54. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The market
What is the re-order point? (For calculation purposes, use 50-week year)
price per unit is P3,000. Since Cagayan de Oro is a very progressive rural place, the business
A. 1,600 units. C. 4,200 units.
sells an average of 36,000 tires annually. Based on a company study covering the last five
B. 2,600 units. D. 5,600 units.
years of its operation, it was found out that annual carrying cost per tire is P5.00 and the
ordering cost is P100 per order. The store is open 7 days a week (which includes Sundays
58. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
and holidays). The delivery time per order (tires are ordered from Manila) is 5 days. Since it
Selling price per bag P2.50
normally takes time before an order is placed, filled up and delivered, the manager has
Purchase cost per bag P1.50
decided to keep a safety stock of 3,000 tires which is equivalent to a months sales. The
Ordering cost per order P5.40
average inventory is
Carrying cost 20% of unit cost
A. 1,200 tires C. 3,493 tires
Number of days the company operates in a year 250
B. 3,000 tires D. 3,600 tires
Average lead time on purchases 6 days
What is the reorder point if the company will keep a 10-day safety stock of inventory?
55. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of
A. 2,400 bags C. 6,400 bags
T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50
B. 5,400 bags D. 8,800 bags
lbs.?
A. 10 days C. 30 days
59. JASMIN Products, Inc. gathered the following information related to one of its materials:
B. 20 days D. 100 days
Order quantity 1,500 units
Normal use per day 500 units
56. Information regarding the usage of material Y which shall be required evenly throughout the
Maximum use per day 600 units
year by GAC Company
Minimum use per day 100 units
Annual usage in units 30,000

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If the lead time is five days, the order point is times a year at a cost of P5,000 per order. The probability of stockout at various levels of
A. 500 units C. 2,500 units safety stock is
B. 1,500 units D. 3,000 units Units of Safety Stock Probability of a stockout
0 0.50
60. Inventory data for a certain raw material is as follows:
100 0.30
Annual usage in units 25,000
200 0.14
Working days per year 250
300 0.05
Normal lead time in working days 30
400 0.01
Maximum lead time in working days 50
The optimal safety stock level for the company is
Assuming that this raw material will be required evenly throughout the year, the order point will
A. 0 units. C. 300 units.
be
B. 100 units. D. 400 units.
A. 3,000 C. 5,000
B. 4,000 D. 8,000
64. Vera Cruz Corporation seeks to determine the quantity of safety stock for product ST that they
should maintain that will result in the lowest cost to the company. Each stockout will cost
61. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen on
P600 and the carrying cost of each unit of safety stock will be P8. Product ST will be ordered
the proper cases to be ordered and the frequency of call. From the route book and other
five times a year. Which of the following will produce the lowest cost?
records, the following are available: prior years purchases, 50,000 cases; carrying cost per
A. A safety stock of 15 units which is associated with a 35% probability of running out of
case of inventory, P1.20; distributors discount, 1 case for every 10 cases bought; cost of
stock during an order period.
placing an order, P3.00; weekly demand is approximately 962 cases. Safety stock required is
B. A safety stock of 25 units which is associated with a 25% probability of running out of
140 cases. No change in demand is expected this year. (Use a 365-day, 52-week year).
stock during an order period.
Determine the economic order quantity (EOQ), and the reorder point assuming a two-day
C. A safety stock of 35 units which is associated with a 10% probability of running out of
lead-time.
stock during an order period.
A. B. C. D.
D. A safety stock of 75 units associated with a 5% probability of running out of stock during
EOQ 250 cases 481 cases 500 cases 962 cases
an order period.
Reorder point 280 cases 500 cases 414 cases 275 cases
65. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual
62. If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units,
demand of 50,000 units for part number 101 and has computed an optimal lot size of 6,250
how many days can be covered if the shipment from the supplier is delayed by 12 days?
units. Per-unit carrying costs and stockout costs are $13 and $3, respectively. The following
A. 6.7 days C. 10.0 days
data have been gathered in an attempt to determine an appropriate safety stock level:
B. 8.0 days D. 12.0 days
Number of Times Short
Units Short Because of Excess in the last 40 Reorder Cycles
63. Each stockout of Product AX sold by Axiom Inc. costs P87,500 per occurrence. The carrying
Demand during the Lead Time Period
cost per unit of inventory is P250 per year, and the company orders 1,500 units of product 24
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200 6 accounts payable balance?

300 12 A. $157,500 C. $750,000
400 6 B. $625,000 D. $1,234,000
The annual cost of establishing a 200-unit safety stock is expected to be
A. $2,600 C. $4,040 Bank loans
B. $4,260 D. $5,200 70. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that
has monthly payments?
Trade Credit A. 9% C. 9.81%
66. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, B. 9.38% D. 10.94%
net 40. Phranklin Pharms has gross purchases of $800,000 per year. What is the maximum
71. Corbin, Inc. can issue 3-month commercial paper with a face value of $1,000,000 for
amount of costly trade credit Phranklin could get, assuming they abide by the suppliers credit
$980,000. Transaction costs will be $1,200. The effective annualized percentage cost of the
terms? (Assume a 360-day year.)
financing, based on a 360-day year, will be
A. $32,666.70 C. $54,444.50
A. 2.00%. C. 8.48%.
B. $52,266.67 D. $87,111.20
B. 8.00%. D. 8.66%.
67. On cash discounts, all of the following statements do not apply except
Short-term financing alternatives
A. The cost of not taking a cash discount is always higher than the cost of a bank loan.
72. ABC Company finances all of its seasonal inventory needs from the local bank at an effective
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
interest cost of 9%. The firms supplier promises to extend trade credit on terms that will
C. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of
match the 9% bank credit rate. What terms would the supplier have to offer (approximately)?
credit.
A. 2/10, n/60. C. 2/10, n/100.
D. If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount
B. 2/10, n/90. D. 3/10, n/60.
period, the amount paid would be P9,000.
73. A company has accounts payable of $5 million with terms of 2% discount within 15 days, net
68. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait
convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting
until the 30th day when it will receive revenues to cover the payment. If it borrows funds on the
until Day 30. You point out that the nominal cost of not taking the discount and paying on Day
last day of the discount period in order to obtain the discount, its total cost will be
30 is around 37 percent. But since your firm is not taking discounts and is paying on Day 20,
A. $24,500 more. C. $75,500 less.
what is the effective annual cost of your firms current practice, using a 360-day year?
B. $51,000 less. D. $100,000 less.
A. 36.7% C. 106.9%
B. 73.4% D. 43.6%

69. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate
74. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The
that this policy effectively costs your firm $157,500 each year, what is the firms average
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day after
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each delivery. Thus, the company is considering a 1-year bank loan for $9,800 (98% of the
invoice amount). If the effective annual interest rate on this loan is 12%, what will be the net Theory Problems
dollar savings over the year by borrowing and then taking the discount on the materials? 1. D 26. B 51. C 1. B 26. C 51. B
A. $1,176 C. $3,624 2. C 27. C 52. B 2. C 27. A 52. B
B. $1,224 D. $4,800 3. C 28. D 53. B 3. C 28. A 53. B
4. D 29. B 54. B 4. C 29. B 54. D
5. D 30. A 55. D 5. C 30. B 55. B
6. B 31. C 56. A 6. C 31. C 56. B
7. C 32. A 57. B 7. A 32. C 57. C
8. A 33. C 58. B 8. B 33. C 58. C
9. C 34. D 59. C 9. A 34. C 59. D
10. C 35. B 60. A 10. A 35. B 60. C
11. A 36. C 61. C 11. C 36. C 61. C
12. B 37. C 62. D 12. C 37. A 62. B
13. A 38. B 63. D 13. B 38. C 63. D
14. C 39. A 64. C 14. B 39. D 64. C
15. B 40. A 65. A 15. C 40. C 65. C
16. D 41. A 16. A 41. B 66. D
17. A 42. A 17. B 42. C 67. C
18. B 43. C 18. C 43. B 68. C
19. D 44. D 19. C 44. A 69. C
20. B 45. A 20. A 45. A 70. B
21. B 46. A 21. D 46. B 71. D
22. A 47. C 22. C 47. B 72. B
23. C 48. D 23. D 48. B 73. C
24. D 49. B 24. C 49. A 74. C
25. B 50. A 25. A 50. B

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