FINANCIAL MANAGEMENT/WORKING CAPITAL MANAGEMENT by P 31,645.

If the proposed relaxation in credit standards is

implemented, the net benefit (loss) for Siso Corporation is:
1. Which of the following statements is correct? a. 215,000 c.
a. The stockholders’ equity is a major component of working capital. ( 33,075)
b. Net working capital is the difference between quick assets and b. 315,000 d.
current liabilities. (100,000)
c. Working capital is a measure of long term solvency.
d. Net working capital is the difference between current assets and Use the following information for items 12 & 13:
current liabilities. Josie Company sells on terms of 3/10, net 30. Gross sales for the year
are P 1,200,000 and the collection department estimates that 30
2. In a conservative or relaxed working capital financing policy: percent of the customers pay on the tenth day and take discounts;
a. Operations are conducted on a minimum amount of working capital. 40% pay on the thirtieth day; and the remaining 30 percent pay, on
b. Operations are operated with too much working capital. average, 40 days after the purchase. Assume 360 days per year.
c. Short term liabilities are used to finance not only temporary current
assets, but also part or all of the permanent current asset 12. What is the average collection period?
requirements. a. 10 days c. 20
d. The company is exposed to risk of illiquidity because of low working days
capital position. b. 13 days d. 27
days
3. The hedging approach to financing involves: 13. What is the current receivables balance?
a. The use of long term debt to finance current assets. a. 60,000
b. The use of short term debt to finance noncurrent assets. c. 80,000
c. Matching maturities of debt with specific financing needs. b. 75,000
d. Issuance of common stocks to raise funds for working capital d. 90,000
requirements.
Use the following information for questions 14 to 16:
4. Which of the following is incorrect? Sonya Company is considering changing its credit terms from 2/15, net
a. Profitability varies directly with liquidity. 30 to 3/10, net 30 in order to speed collections. At present, 40% of
b. The greater the risk, the greater is the potential for larger return. Sonya’s customers take the 2% discount. Under the new term,
c. Long term financing has less liquidity risk than short term financing, discount customers are expected to rise to 50%. Regardless of the
but has a higher explicit cost, hence lower return. credits terms, half of the customers who do not take the discount are
d. More current assets lead to greater liquidity, but yield lower returns. expected to pay on time, whereas the remainder will pay 10 days late.
The change does not involve a relaxation of credit standards, therefore,
5. If the average age of accounts payable is 15 days, the average age bad debt losses are not expected to rise above their present 2% level.
of accounts receivable is 60 days, and the average age of inventory is However, the more generous cash discount terms are expected to
10 days, the number of days in the operating cash conversion cycle is: increase sales from P 2 million to P 2.6 million per year. Sonya’s
a. 70 days c. 55 variable cost ratio is 75%, the interest rate on funds invested in
days accounts receivable is 9%, and the firm’s income tax rate is 40%.
b. 85 days d. 60 14. What are the days sales outstanding (DSO) before and after the
days change of credit policy?
a. 27.0 days and 22.5 days, respectively. c. 22.5
6. An objective of cash management is to: days and 21.5 days, respectively.
a. Maximize the cash balance to avoid the risk of illiquidity. b. 22.5 days and 27.0 days, respectively. d. 21.5
b. Minimize the cash balance to maximize the return from idle cash. days and 22.5 days, respectively.
c. Invest cash for a return while retaining sufficient liquidity to satisfy
future needs. 15. The incremental carrying cost on receivable is:
d. Reserve as much cash as possible for potential investment a. 843.75 c.
opportunities. 643.75
b. 8,889.00 d.
7. Simon Company’s budgeted sales and budgeted cost of sales for 6,667.00
the coming year are P 212,000,000 and P 132,500,000, respectively.
Short term interest rates are expected to average 5%. If Simon could 16. The incremental after tax profit from the change in credit terms is:
increase inventory turnover from its current 8.0 times per year to 10.0 a. 68,493 c. 60,615
times per year, its expected cost savings in the current year would be: b. 65,640 d. 57,615
a. 165,625 c.
3,312,500 17. Every 15 days a company receives P 10,000 worth of raw
b. 0 d. materials from its suppliers. The credit terms for these purchases are
828,125 2/10, net 30, and payment is made on the 30th day after each delivery.
Thus, the company is considering a 1-year bank loan for P 9,800 (98%
8. X Publishing is considering a change in its credit terms from n/30 to of the invoice amount). If the effective annual interest rate on this loan
2/10, n/30. The company’s budgeted sales for the coming year are P is 12%, what will be the net peso savings over the year by borrowing
24,000,000, of which 90% are expected to be made on credit. If the and then taking the discount on the materials?
new credit terms are adopted, X estimates that discounts would be a. 3,624 c. 4,800
taken on 50% of the credit sales, however, uncollectible accounts b. 1,176 d. 1,224
would be unchanged. The new credit terms would result in expected
discounts taken in the coming year of: 18. The Sales Director of Go Company suggests that certain credit
a. 216,000 c. terms be modified. He estimates the following effects:
240,000 “Sales will increase by at least 20%; Accounts receivable turnover will
b. 432,000 d. be reduced to 8 times from the present turnover of 10 times; Bad
480,000 debts, now at 1% of sales increase to 1.5%. Sales before the proposed
changes is at P 900,000. Variable cost ratio is 55% and desired rate of
9. Three suppliers of baseball equipment offer different credit return is 20%. Fixed expenses amount to P 150,000.” Should the
terms to City Sports. X Co. offers terms of 1 ½ /15, net 30. Z Inc. company allow the revision of its credit terms?
offers terms of 2/10, net 60. City Sports would have to borrow a. Yes, because income will increase by P 64,800 c. No,
from a bank at an annual rate of 10% in order to take any cash because income will be reduced by P 13,000
discounts. Which one of the following would be the most b. Yes, because losses will be reduced by P 78,800.
attractive for City Sports? d. No, because losses will be increased by P 28,000
a. Purchase from X and pay in 30 days.
b. Purchase from X, pay in 15 days, and borrow any 19. The sales manager of Roger Company feels confident that, if the
money needed from the bank. credit policy at Roger’s were changed, sales would increase and,
c. Purchase from Y and pay in 30 days. consequently, the company would utilize excess capacity. The two
d. Purchase from Z and pay in 60 days. credit proposals being considered are as follows:
Proposal A
10. ABC is a retail mail order firm that currently uses a central Proposal B
collection system that requires all checks to be sent to its flotation Increase in sales 500,000
headquarters. An average of 6 days is required for mailed checks 600,000
to be received, 3 days for ABC to process them, and 2 days for the Contribution margin 20%
checks to clear through its bank. A proposed lockbox system 20%
would reduce the mailing and processing time to 2 days and the Bad debts percentage 5%
check clearing time for 1 day. ABC has an average daily collection 5%
of P 150,000. Increase in operating profits 75,000
If ABC adopts the lockbox system, its average cash balance will 90,000
increase by: Desired return on sales 15%
a. 1,200,000 c. 15%
600,000 Currently, payment terms are net 30. The proposed payment terms for
b. 750,000 d. Proposal A and Proposal B are net 45 and net 90, respectively. An
450,000 analysis to compare these two proposals for the change in credit policy
would include all of the following factors except the:
11. Siso Corporation has the following data: a. Cost of funds for Roger
Selling price per unit b. Current bad debt experience.
70 c. Impact on the current customer base of extending
Variable cost per unit terms to only certain customers.
45 d. Bank loan covenants on days’ sales outstanding.
Annual credit sales
50,400 20. Con Enterprises uses 84,000 units of Part 256 in
Collection period manufacturing activities over a 300-day work year. The usual
30 days lead-time for the part is six days, occasionally, however, the lead
Rate of return time has gone as high as eight days. The company now desires
20% to adjust its safety stock policy. The safety stock size and the
Siso Corporation is considering easing its credit standards. If likely effect on stockout costs and carrying costs, respectively,
it does, sales will increase by 25%; collection period will would be:
increase to 45 days, bad debt losses are anticipated to be a. 560 units, decrease, increase c. 1,680 units,
4% of the incremental sales and collection costs will increase decrease, increase
b. 560 units, decrease, decrease d. 1,680 units,
increase, no change