1. In horizontal analysis, the current year is the base
Minimize the cash balance to maximize the
year.
2. Solvency analysis focuses on the ability of a business
to pay its current and noncurrent liabilities.
3. Current assets refer to the firm’s resources which
are convertible to cash in a short period of time,
which is within one year or normal operating cycle,
whichever is shorter.
4. Heavy use of long-term financing generally leads to
lower financing cost.
5. 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
6. 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
7. Financing inventory build-up with long term debt is
an example of
a. Conservative working capital policy
b. Matching policy
c. An aggressive working capital policy
d. Hedging policy
8. 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 for
working capital requirements
9. An objective of cash management is to
a. Maximize the cash balance to avoid the risk of
illiquidity
b.
return from 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
10. Which of the following statements is false?
a. The cost of inventory itself, as well as any
quantity discounts lost on inventory purchases,
is directly reflected in the EOQ model.(not a
component of EOQ)
b. A decrease in inventory order cost will decrease
the EOQ
c. An increase in inventory carrying cost will
decrease the EOQ
d. An increase in the variable cost of placing and
receiving an order will increase the EOQ
11. If the average age of accounts payable is 15 days,
the average age of accounts receivable is 60 days,
and the average age of inventory is 10 days, what is
the number of days in the cash conversion cycle?
12. Kings company’s average monthly cash receipts is
P1,500,000. Its average collection period is 10 days.
A collection agency has offered to be the company’s
collector and shorten collection period to 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,
what is Kings company’s net annual benefit (loss)?
13. Kings Corporation uses the Baumol Cash
Management Model to determine its optimal cash
balance. 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. What is the company’s optimal cash
balance?
14. Using the above information, what if King’s average
cash balance?
15. Queens Company 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 30%
 Decrease total sales by 10%
 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)
16. Using the above statement, what is the impact of
the proposed credit policy on the company’s
accounts receivable turnover?
17. Kings Company’s average collection period is 20
days. The average daily sales is P5,000. All of the
company’s customers pay by credit card. How much
is the company’s average accounts receivable
balance?
18. Kings Company sells phone cases which it buys from
a local manufacturer. Kings sells 24,000 cases evenly
throughout the year. The cost of carrying one unit in
inventory for one year is P11.52 and the order cost
per order is P38.40. What is the economic order
quantity?
19. Using the above statement, if Kings would buy in
economic order quantities, what is the total order
cost?
20. The following information is available for Queens
Company’s Material X
Annual Usage--------------------------------12,600 units
Working days per year---------------------360 days
Normal Lead Time---------------------------20 days
What is the reorder point?
21. Assuming that occasionally, the company exercises
delay in the delivery of Material X, such that the lead
time reaches a maximum of 30 days, how many
units of safety stock should the company maintain
and what is the reorder point?
22. A company purchases merchandise from its supplier
on credit terms of 3/10, net 30. What is the
equivalent annual interest rate (use a 360-day year) if
the company foregoes the discount and pays on the
30th day?
23. What is the current price of a P100,000 treasury bill
due in 180 days on an 8% discount basis?
24. A company received a P500,000 line of credit from its
bank. Some information about the credit line is as
follows:
Stated interest rate----------------------------------10%
Compensating balance requirement-------------20%
Assuming that the company drew down the entire
amount at the beginning of the year, and that the
loan is discounted, what is the effective interest rate
on the loan?
25. Kings Products has an average accounts payable
balance of P850,000 and its annual cost of goods sold
is P8,750,000. Assume 365 days per year. What is the
firm’s payables deferral period?
26. Kings Company’s budgeted sales for the coming year
is P40.5 million of which 80% are expected to be
credit sales at terms of n/30. Kings estimates that a
proposed relaxation of credit standards would
increase credit sales by 20% and increase the average
collection period from 30 days to 40 days. Based on a
360-day year, the proposed relaxation of credit
standards would result in an expected increase in the
average accounts receivable balance of how much?
27. A firm is offered trade credit terms of 3/15, net 45
days. The firm does not take the discount, and it pays
after 67 days. What is the nominal annual cost of not
taking the discount? Assume a 365-day year.
28. Kings Co. has received proposals from several banks
to establish a lockbox system to speed up receipts.
The firm receives an average of 700 checks per day
averaging P1,800 each and its cost of short term
funds is 7% per year. If all proposals will produce
equivalent processing results, which bank proposed
charges is best to be adopted?
a. A fee of 0.03% of the amount collected
b. A compensating balance of P1,750,000
c. P0.50 fee per check
d. A flat fee of P125,000 a year