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Determining the appropriate level of working capital for a firm requires

A. Changing the capital structure and dividend policy for the firm.
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments.
C. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long term
E. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these

2. A firm following an aggressive working capital strategy would

A. Hold substantial amount of fixed assets.
B. Minimize the amount of short-term borrowing.
C. Finance fluctuating assets with long-term financing.
D. Minimize the amount of funds held in very liquid assets

3. Ignoring cost and other effects on the firm, which of the following measures would tend to reduce the cash
conversion cycle?
A. Take discounts when offered.
B. Forgo discounts that are currently being taken.
C. Maintain the level of receivables as sales decrease.
D. Buy more raw materials to take advantage of price breaks

4. A precautionary motive for holding excess cash is

A. To enable a company to have cash to meet emergencies that may arise periodically.
B. To enable a company to meet the cash demands from the normal flow of business activity.
C. To enable a company to avail itself of a special inventory purchase before prices rise to higher levels.
D. To avoid having to use the various types of lending arrangements available to cover projected cash deficits.

5. Which of the following is not a major function in cash management?

A. Cash flow control
B. Cash surplus investment
C. Maximizing sales
D. Obtaining financing services

6. The following are desirable in cash management except:

A. Cash is collected at the earliest time possible.
B. Post-dated checks are not deposited on time upon maturity.
C. All sales are properly receipted and promptly deposited intact.
D. Most sales are on cash basis and receivables are aged

7. All of the following are valid reasons for a business to hold cash and marketable securities except to
A. Meet future needs.
B. Satisfy compensating balance requirements.
C. Earn maximum returns on investment assets.
D. Maintain adequate cash needed for transactions.

8. Which of the following investments is not likely to be a proper investment for temporary idle cash?
A. Treasury bills.
B. Commercial paper.
C. Treasury bonds due within one year.
D. Initial public offering of an established profitable conglomerate

9. The one item listed below that would warrant the least amount of consideration in credit and collection policy
decisions is the
A. Cash discount given.
B. Quantity discount given
C. Quality of accounts accepted.
D. Level of collection expenditures

10. When a company analyzes credit applicants and increases the quality of the accounts rejected, the company is
attempting to
A. Maximize sales.
B. Maximize profits.
C. Increase bad-debt losses.
D. Increase the average collection period

11. It is held that the level of accounts receivable that the firm has or holds reflects both the volume of a firm’s sales
on account and a firm’s credit policies. Which one of the following items is not considered as part of the firm’s
credit policies?
A. The size of the discount that will be offered.
B. The length of time for which credit is extended
C. The minimum risk group to which credit should be extended.
D. The extent (in terms of money) to which a firm will go to collect an account

12. A high turnover of accounts receivable, which implies a very short days-sales outstanding, could indicate that
the firm
A. Offers small discounts.
B. Has a relaxed (lenient) credit policy.
C. Has an inefficient credit and collection department.
D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.

13. The level of accounts receivable will most likely increase as

A. Cash sales increase and number of says sales.
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
C. Credit limits are expanded, cash sales increase, and aging of the receivables is improving.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain the same

14. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be expected on the balance
sheet of its customer if the firm went to a net cash 30 policy?
A. Decrease in cash.
B. Increased receivables.
C. Decreased receivables.
D. Increased payables and increased bank loan.

15. If one optimizes the inventory turnover ratio, which costs will not increase?
A. Carrying costs
B. Stock-out cost
C. Total reorder costs
D. Unit reorder

16. Which of the following inventory items would be the most frequently reviewed in an ABC inventory control
A. Expensive, frequently used, high stock-out cost items with long lead time.
B. Expensive, frequently used, low stock-out cost items with long lead times.
C. Inexpensive, frequently used, high stock-out cost items with long lead time.
D. Expensive, frequently used, high stock-out cost items with short lead times.

17. The materials control method that is based on physical observation that an order point has been reached is the:
A. ABC plan
B. cycle review method
C. min-max method
D. two-bin method
18. Companies that adopt just-in-time purchasing systems often experience
A. An increase in carrying costs.
B. Fewer deliveries from suppliers.
C. A reduction in the number of suppliers.
D. A greater need for inspection of goods as the goods arrive.

19. In inventory management, the problem of avoiding excessive investment in inventories and at the same time
avoiding inventory shortages can be solved by applying a quantitative technique known as
A. Payback analysis
B. Economic order quantity
C. Probability analysis
D. High-low point method

20. A characteristic of the basic economic order quantity (EOQ) model is that it
A. Is relatively insensitive to error.
B. Is used when product demand, lead-time, and ordering costs are uncertain.
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.

21. The economic order quantity formula can be used to determine the optimum size of
A. Production run – Yes; Purchase order – Yes
B. Production run – Yes; Purchase order – No
C. Production run – No; Purchase order – Yes
D. Production run – No; Purchase order – No

22. Which one of the following items is not directly reflected in the basic economic order quantity (EOQ)model?
A. Inventory obsolescence.
B. Interest on invested capital.
C. Public warehouse rental charges.
D. Quantity discounts lost on inventory purchases

23. The economic order quantity is not affected by the

A. safety stock level
B. cost of purchase-order forms.
C. cost of insuring a unit of inventory for a year.
D. estimate of the annual material consumption.

24. The carrying costs pertaining to inventory include

A. Insurance costs, incoming freight costs and setup costs.
B. Insurance costs, incoming freight costs and storage costs.
C. Setup costs and opportunity cost of capital invested in inventory.
D. Storage costs and opportunity cost of capital invested in inventory

25. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, first- out) method
A. Not affect the EOQ.
B. Increase the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
D. Decrease the EOQ in times of rising prices.

26. Clear View Co. manufactures various glass products including a car window. The setup cost to produce the car
window is P1,200. The cost to carry a window in inventory is P3 per year. Annual demand for the car window is
12,000 units. If the annual demand for the car window was to increase to 15,000 units,
A. the number of setups would decrease.
B. the total carrying costs would increase.
C. the economic order quantity would decline.
D. all of the above would occur.

27. An increase in inventory holding costs will

A. Increase the economic order quantity.
B. Decrease the economic order quantity.
C. Have no effect on the economic order quantity.
D. Decrease the number of orders issued per year

28. For its economic order quantity model, a company has a P10 cost of placing an order and a P2 annual cost of
carrying one unit in stock. If the cost of placing an order increases by 20%, the annual cost of carrying one unit in
stock increases by 25%, and all other considerations remain constant, the economic order quantity will:
A. decrease
B. increase
C. remain unchanged
D. either increase or decrease, depending on the reorder point
E. either increase or decrease, depending on the safety stock

29. When a specific level of safety stock is carried for an item in inventory, the average inventory level for that item
A. Is not affected by the safety stock.
B. Increases by the amount of the safety stock.
C. Decreases by the amount of the safety stock.
D. Increases by one-half the amount of the safety stock.

30. The cost of stock-out do not include

A. Depreciation and obsolescence.
B. Disruption of production schedules.
C. Loss of customer goodwill.
D. Loss of sales.

31. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant
A. ordering costs and carrying costs.
B. ordering costs and purchasing costs.
C. ordering costs and stockout costs.
D. stockout costs and carrying costs

32. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not taking discounts from
one of their three biggest suppliers, or a 14.75% per annum renewable discount loan from its bank for 3 months. The
suppliers' terms are as follows:
Fort Co. 1/10, net 30
Riley ManufacturingCo. 2/15, net 60
Shad, Inc. 3/15, net 90

Using a 360-day year, the cheapest source of short-term financing in this situation is
A. Fort Co.
B. Riley Manufacturing Co.
C. Shad, Inc.
D. The bank

33. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are
P400,000 and the present current ratio is 2 to 1. How much is the maximum level of new short-term loans it can
secure without violating the policy?
A. P266,667
B. P300,000
C. P400,000
D. P800,000
34. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The
firm’s annual sales are P400,000; its fixed assets are P100,000; debt and equity are each 50 percent of total assets.
EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a
restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent
of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
A. 1.6%
B. 3.8%
C. 5.4%
D. 6.2%

35. Bully Corporation purchases raw materials on July 1. It converts the raw materials into inventory by September
30. However, Bully pays for the materials on July 20. On October 31, it sells the finished goods inventory. Then, the
firm collects cash from the sale 1 month later on November 30. If this sequence accurately represents the average
working capital cycle, what is the firm's cash conversion cycle in days?
A. 92 days.
B. 123 days.
C. 133 days.
D. 153 days.

36. What is the opportunity cost of keeping a cash balance of P2 million, if the daily interest rate is 0.02% and the
average transaction cost of investing money overnight is P50?
A. P50
B. P350
C. P400
D. P40,000

37. If the average cash balance for the company during the year is P20,916.50, the opportunity cost of holding cash
for the year will be
A. P2,091.65
B. P4,183.30
C. P8,750.00
D. P17,500.00

38. What are the expected annual savings from a lockbox system that collects 200 checks per day averaging P500
each, and reduces mailing and processing times by 2.0 and 0.5 days, respectively, if the annual interest rate is 6%?
A. P6,000
B. P12,000
C. P15,000
D. P250,000

39. A banker has offered to set up and operate a lock box system for Your company. Details are given below.
Average number of daily payments 325 Average size of payments P1,250 Daily interest rate 0.021% Saving in
mailing time 1.3 days Saving in processing time 0.9 days Bank charges P0.30 Estimate the annual savings. Assume
250 processing days per year.
A. P3,273
B. P22,675
C. P23,500
D. P47,000

40. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and the collections
department estimates that 30% of the customers pay on the 10th day and take discounts; 40% pay on the 30th day;
and the remaining 30% pay, on the average, 40 days after the purchase. Assuming 360 days per year, what is the
average collection period.
A. 15 days.
B. 20 days.
C. 27 days.
D. 40 days.

41. Best Computers believes that its collection costs could be reduced through modification of collection procedures.
This action is expected to result in a lengthening of the average collection period from 30 to 35 days; however, there
will be no change in uncollectible 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 sales for
the coming year are P45,000,000, and the required rate of return is 6%. To justify changes in collection procedures,
the minimum annual reduction of costs (using a 360-day year and ignoring taxes) must be
A. P22,500
B. P37,500
C. P125,000
D. P375,000

42. Prest Corp. plans to tighten its credit policy. Below is the summary of changes: Old New Average number of
days collection 75 50 Ratio of credit sales to total sales 70% 60% Projected sales for the coming year is P100
million and it is estimated that the new policy will result in a 5% loss if the new policy is implemented. Assuming a
360-day year, what is the effect of the new policy on accounts receivable?
A. No change.
B. Decrease of P5 million.
C. Decrease of P 6.67 million.
D. Decrease of P13 million.

43. 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 relaxation of credit standards would increase credit
sales by 30% and increase the average collection period form 30 days to 45 days. Based on a 360-day year, the
proposed relaxation of credit standards would result to an increase in accounts receivable balance of
A. P1,920,000
B. P2,880,000
C. P6,080,000
D. P6,880,000

44. Slippers Mart has sales of P3 million. Its credit period and average collection period are both 30 days and 1% of
its sales end as bad debts. The general manager intends to extend the credit period to 45 days which will increase
sales by P300,000. However, bad debts losses on the incremental sales would be 3%. Costs of products and related
expenses amount to 40% exclusive of the cost ofcarrying receivables of 15% and badebts expenses. Assuming 360
days a year, the change in policy would result to incremental investment in receivables of
A. P9,750.
B. P24,704.
C. P65,000.
D. P701,573

45. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with respect to credit policy,
below is a summary of relevant information:
Old Credit Policy New Credit Policy
Sales P1,800,000 P1,980,000
Average collection period 30 days 36 days
The company requires a rate of return of 10% and a variable cost ratio of 60%. Using a 360-day year, the pre-tax
cost of carrying the additional investment in receivables under the new policy would be
A. P2,880
B. P3,000
C. P4,080
D. P4,800

46. 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 dayas 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 byP70,000.
D. Zero as the positive and negative effects offset each other

47. A firm currently sells P500,000 annually with 3% bad debt losses. Two alternative policies are available. Policy
A would increase sales by P500,000, but bad debt losses on additional sales would be 8%. Policy B would increase
sales by an additional P120,000 over Policy A and bad debt losses on the additional P120,000 of sales would be
15%. The average collection period 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 should
the firm do?
A. Make no policy change.
B. Change to only Policy A.
C. Change to Policy B (means also taking Policy A first).
D. All policies lead to the same total firm profit, thus all policies are equal

48. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells blank and
recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at P3.00 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 demand is 104,000 tapes at a rate of 4,000 tapes per week. Tape-
Disk Mart earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data
are available:
Relevant ordering costs per purchase order P90.50
Carrying costs per package per year:
Relevant insurance, materials handling, breakage, etc., per year P4.50 What is the required annual return on
investment per package?
A. P0.60
B. P2.50
C. P12.00
D. P60.00

49. A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If ordering
costs are P200 and carrying costs are P0.50 per unit per year, what is the estimated total annual usage?
A. 2,400 units
B. 6,000 units
C. 7,200 units
D. 28,800 units

50. One of the products that Nature Way Health Products sells is a magnetic back support. The ordering cost related
to this product is P12.50 per order. The cost of carrying one item of inventory for one year is P16.00. The business
sells 40,000 of this type of product evenly throughout the year. How much is the total ordering costs per year and the
total carrying costs per year at the economic order quantity?
A. Ordering costs P1,562.50; Carrying costs P1,562.50
B. Ordering costs P1,562.50; Carrying costs P2,560.00
C. Ordering costs P2,000.00; Carrying costs P2,000.00
D. Ordering costs P4,000.00; Carrying costs P4,000.00

51. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of raw materials by
80%. What is the effect of this safety stock reduction on Dee’s economic order quantity.
A. No effect.
B. 20% increase.
C. 64% decrease.
D. 80% decrease.

52. Marita works for a local ceramics company. She just completed her accountancy degree and learned the EOQ
model in one of her subjects. She suggested to her employer to adopt it. 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 safety stock as customers do not mind waiting for orders. The average piece of
ceramic items costs P400 to make and costs the company P20 to carry in inventory for a year. The set up costs for
each production run total P80. The company should
A. Adopt EOQ due to savings of P35,675.
B. Adopt EOQ due to savings of P42,320.
C. Continue the existing system due to P38,950 advantage.
D. Continue the existing system due to P41,820 advantage

53. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the
ordering costs are P100. The company uses an order quantity of 500 units. By how much could the company reduce
its total costs if it purchased the economic order quantity instead of 500 units?
A. P0
B. P500
C. P2,000
D. P2,500

54. D&R Corp. consumes 300,000 units of spare part V per year. The average purchase lead time is 20 working days
while the maximum is 27 working days. The company’s annual operations cover 240 days allowing for shutdowns
for plant maintenance, holidays and Sundays. The company would like to keep safety stock or extra stock to guard
against stock- outs. How much is the safety stock?
A. 1,250 units.
B. 8,750 units.
C. 25,000 units.
D. 33,750 units

55. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000 units. The cost per
unit of inventory is P5, and the carrying cost is 10% of the average value of inventory. The annual inventory
carrying cost for the organization is
A. P3,000
B. P3,500
C. P5,000
D. P6,000

56. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The market price per unit is
P3,000. Since Cagayan de Oro is a very progressive rural place, the business sells an average of 36,000 tires
annually. Based on a company study covering the last five 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 7days a week(which
includes Sundays and holidays). The delivery time per order (tires are ordered from Manila) is 5 days. Since it
normally takes time before an order is placed, filled up and delivered, the manager has decided to keep a safety
stock of 3,000 tires which is equivalent to a month’s sales. The average inventory is
A. 1,200 tires
B. 3,000 tires
C. 3,493 tires
D. 3,600 tires

57. Information regarding the usage of material Y which shall be required evenly throughout the year by GAC
Annual usage in units 30,000
Working days per year 250
Safety stock in units 1,200
Normal lead time in working days 25
The re-order point is
A. 3,000
B. 4,200
C. 5,700
D. 6,250

58. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
Selling price per bag P2.50
Purchase cost per bag P1.50
Ordering cost per order P5.40
Carrying cost 20% of unit cost
Number of days the company operates in a year 250
Average lead time on purchases 6 days
What is the reorder point if the company will keep a 10-day safety stock of inventory?
A. 2,400 bags
B. 5,400 bags
C. 6,400 bags
D. 8,800 bags

59. Inventory data for a certain raw material is as follows: Annual usage in units 25,000 Working days per year 250
Normal lead time in working days 30 Maximum lead time in working days 50 Assuming that this raw material will
be required evenly throughout the year, the order point will be
A. 3,000
B. 4,000
C. 5,000
D. 8,000

60. If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units, how many days can
be covered if the shipment from the supplier is delayed by 12 days?
A. 6.7 days
B. 8.0 days
C. 10.0 days
D. 12.0 days

61. 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 P600 and the carrying cost of each unit of
safety stock will be P8. Product ST will be ordered five times a year. Which of the following will produce the lowest
A. A safety stock of 15 units which is associated with a 35% probability of running out of stock during an order
B. A safety stock of 25 units which is associated with a 25% probability of running out of stock during an order
C. A safety stock of 35 units which is associated with a 10% probability of running out of stock during an order
D. A safety stock of 75 units associated with a 5% probability of running out of stock during an order period.

62. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40. Phranklin
Pharms has gross purchases of P800,000 per year. What is the maximum amount of costly trade credit Phranklin
could get, assuming they abide by the suppliers credit terms? (Assume a 360-day year.)
A. P32,666.70
B. P52,266.67
C. P54,444.50
D. P87,111.20

63. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your
firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the
nominal cost of not taking the discount and paying on Day 30 is around 37 percent. But since your firm is not taking
discounts and is paying on Day 20, what is the effective annual cost of your firm’s current practice, using a 360-day
A. 36.7%
B. 73.4%
C. 106.9%
D. 43.6%

64. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that has monthly
A. 9%
B. 9.38%
C. 9.81%
D. 10.94%

65. ABC Company finances all of its seasonal inventory needs from the local bank at an effective interest cost of
9%. The firm’s supplier promises to extend trade credit on terms that will match the 9% bank credit rate. What terms
would the supplier have to offer (approximately)?
A. 2/10, n/60.
B. 2/10, n/90.
C. 2/10, n/100.
D. 3/10, n/60.

66. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The credit terms for these
purchases are 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 P9,800 (98% of the invoice amount). If the effective annual interest rate on this
loan is 12%, what will be the net dollar savings over the year by borrowing and then taking the discount on the
A. P1,176
B. P1,224
C. P3,624
D. P4,800