THEORY

1) Statement 1: Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in
the absence of theft and other incidents just mentioned, and (b) the cost of inventory when physically
counted.
Statement 2: Purchasing costs arise in preparing and issuing purchase orders, receiving and inspecting
the items included in the orders, and matching invoices received, purchase orders, and delivery records
to make payments
a) Statement 1 is True, Statement 2 is False
b) Statement 1 is False, Statement 2 is True
c) Both Statements are True
d) Both Statement are False
(Horngren, 9th Ed)

2) Which of the following statements about the percent-of-sales method of financial forecasting is true?
a) It is the least commonly used method of financial forecasting.
b) It is a much more precise method of financial forecasting than a cash budget would be.
c) It involves estimating the level of an expense, asset, or liability for a future period as a percent of
the forecast for sales revenues.
d) It projects all liabilities as a fixed percentage of sales.
(Titman, 11th Ed)

3) Which of the following could cause return on assets to decline when net profit margin is increasing?
A. sale of investments at year-end C. purchase of a new building at year-end
B. increased turnover of operating assets D. a stock split
(Bobadilla, 2015)
4) The chief financial officer of Smith Glass Inc. follows the policy of matching the maturity of assets
with the maturity of financing. The implications of this policy include all of the following except that
a) The seasonal expansion of cash, receivables, and inventory should be financed by short-term debt
such as vendor payables and bank debt.
b) The minimum level of cash, receivables, and inventory required to stay in business can be
considered permanent, and financed with long-term debt or equity.
c) Cash, receivables, and inventory should be financed with long-term debt or equity.
d) Long-term assets, like plant and equipment, should be financed with long-term debt or equity.
(Wiley, 2016)
5) The optimal size of the safety stock is defined by the point where the
a) costs of carrying the safety stock equal stockout costs.
b) setup costs equal stockout costs.
c) ordering costs equal stockout costs.
d) reorder point equals safety stock.
(Raiborn, 2nd Ed)
6) Which of the following statements regarding price elasticity is false?
a) The concept of price elasticity is an extension of the economic pricing model.
b) Demand is elastic if a price change has a large negative impact on sales volume.
c) Demand is elastic if price changes have no impact on sales volume.
d) Measuring price elasticity is an important objective of market research.

(Hilton, 9th Ed)

7) The degree of financial leverage for April Company is 3.0, and the degree of financial leverage for
August Corporation is 6.2. According to this information, which firm is considered to have greater
overall (total) risk?
a) April Company.
b) August Corporation.
 c) The degree of financial leverage is a measure of financial risk, so the only conclusion that can be
made with the information given is that August Corporation has greater financial risk than April
Company -- we cannot tell which firm has greater total risk.
d) To determine which firm has the greater total risk, we need to know the financial breakeven point
of each firm.
(Bobadilla, 2015)

8) Consider the following statements about pricing:

I. Prices are often determined by the market, subject to the constraint that costs must be covered in the
long run.
II. Prices are often based on costs, subject to the constraint that customers and competitors will exert
an influence.
III. A balance of market forces and cost is important when making pricing decisions.
Which of the above statements is (are) true?
a) I only.
b) II only.
c) I and III.
d) I, II and III
(Hilton, 9th Ed)

9) A method of budgeting in which the cost of each program must be justified, starting with the one most
vital to the company, is
a) Flexible budgeting.
b) Zero-based budgeting.
c) Continuous budgeting.
d) Probabilistic budgeting
(CMA 0694 3-15)

10) Recently the CJ Company has been having problems. As a result, its financial situation has
deteriorated. CJ approached the First National Bank for a badly needed loan, but the loan officer
insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even
consider granting the credit. Which of the following actions would do the most to improve the ratio in
the short run?
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
D. Purchasing additional inventory on credit (accounts payable).
(Bobadilla, 2015)
11) An advantage of incremental budgeting when compared with zero-base budgeting is that incremental
budgeting
a) Encourages adopting new projects quickly.
b) Accepts the existing base as being satisfactory.
c) Eliminates functions and duties that have outlived their usefulness.
d) Eliminates the need to review all functions periodically to obtain optimum use of resources.
(CMA 1296 3-1)

12) The preparation of pro forma financial statements accomplishes which of the following objectives?
a) It allows management to pinpoint a firm's optimal stock price.
b) It is essential if the firm is to accurately estimate its weighted average cost of capital.
c) It assists management in making decisions with respect to raising the capital that is needed for
growth.
d) It pinpoints periods when the firm will have short-term cash surpluses.
(Titman, 11th Ed)
13) If a company uses a cost-plus approach to pricing, it will find:
a) There are several different definitions of cost and the higher the cost, the higher the markup
percentage.
b) There are several different definitions of cost and the higher the cost, the lower the markup
percentage.
c) There is one definition of cost, and there is no relationship between cost and the markup
percentage used.
d) There is one definition of cost, and there is no markup percentage with the cost-plus approach.
(Hilton, 9th Ed)
14) Shelf registration of a security is a procedure allowing a firm to

a) Register an issue price on its securities for a specified period of time.

b) Control both the issue price and the secondary market price of its securities by registering these
prices for a specified period of time.
c) Register a security for a specified period of time and then sell the securities on a piecemeal basis.
d) Freeze the market price of its new issues of securities for a specified period of time.
(CMA 0693 1-6)

15) A 10% stock dividend most likely

a) Increases the size of the firm.
b) Increases shareholders' wealth.
c) Decreases future earnings per share.
d) Decreases net income.
(CMA 1296 1-9)

16) All of the following may reduce the coupon rate on a bond issued at par except a
a) Sinking fund.
b) Call provision.
c) Change in rating from Aa to Aaa.
d) Conversion option.
(CMA 0697 1-23)

17) The most commonly held view of capital structure is that the weighted average cost of capital:
a) Falls first with moderate levels of leverage and then increases.
b) Does not change with leverage.
c) Increases proportionately with increases in leverage.
d) Increases with moderate amounts of leverage and then falls.
(Bobadilla, 2015)

18) Which of the following is most likely to occur if a firm over-invests in net working capital?
a) The current ratio will be lower than it should be.
b) The quick ratio will be lower than it should be.
c) The return on investment will be lower than it should be.
d) The times interest earned ratio will be lower than it should be.
(Titman, 11th Ed)

19) Flexible budgets

a) Provide for external factors affecting company profitability.
b) Are used to evaluate capacity use.
c) Are budgets that project costs based on anticipated future improvements.
d) Accommodate changes in activity levels.
(CMA 1296 3-14)

20) A company is deciding whether to purchase an automated machine to manufacture one of its products
cash flows from this decision depend on several factors, interactions among those factors, and the
probabilities associated with different levels of those factors. The method that the company should use
 to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting
from changes in levels of various factors is

a) Simulation and sensitivity analysis.

b) Linear programming.
c) Correlation analysis.
d) Differential analysis.
(CIA 1194 III-61)

21) A lock-box system

a) Reduces the need for compensating balances.
b) Provides security for late night deposits.
c) Reduces the risk of having checks lost in the mail.
d) Accelerates the inflow of funds.
(CMA 1293 1-20)

22) Zap Company follows an aggressive financing policy in its working capital management while Zing
Corporation follows a conservative financing policy. Which one of the following statements is
correct?
a) Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term debt
to total debt.
b) Zap has a low current ratio while Zing has a high current ratio.
c) Zap has less liquidity risk while Zing has more liquidity risk.
d) Zap finances short-term assets with long-term debt while Zing finances short-term assets with
short-term debt.
(Bobadilla, 2015)

23) All of the following are valid reasons for a business to hold cash and marketable securities except to
a) Satisfy compensating balance requirements.
b) Maintain adequate cash needed for transactions.
c) Meet future needs.
d) Earn maximum returns on investment assets.
(CMA 0694 1-22)

24) Which of the following describes a firms credit criteria?

a) The length of time a buyer is given to pay for his/her purchases.
b) The percentage of discount allowed for early payment.
c) The diligence to collect slow-paying accounts.
d) The required financial strength of acceptable customers.
(Wiley, 2016)

25) A firm's average collection period has decreased significantly from the previous year. Which of the
following could possibly explain the results?
a) Customers are paying off their accounts quicker.
b) Customers are taking longer to pay for purchases.
c) The firm has a strict collection policy.
d) Both A and C.
(Titman, 11th Ed)

26) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of
time
a) that has been arranged from the highest number to the lowest number.
b) that has been arranged from the lowest number to the highest number.
c) to determine which items are in error.
d) to determine the amount and/or percentage increase or decrease that has taken place.
(Bobadilla, 2015)
27) An example of a carrying cost is
a) Disruption of production schedules.
b) Quantity discounts lost.
c) Handling costs.
d) Obsolescence.
(Wiley, 2016)

28) JIT seeks to

a) Reduce production cost while increasing quality
b) Radically redesign the production process for effectiveness.
c) Modify all non-value-added activities.
d) All of the above.
(Raiborn, 2nd Ed)

29) Companies A and B are in the same industry and have similar characteristics except that Company
A is more leveraged than Company B. Both companies have the same income before interest and
taxes and the same total assets. Based on this information we could conclude that
a) Company A has higher net income than Company B
b) Company A has a lower return on assets than company B
c) Company A is more risky than Company B.
d) Company A has a lower debt ratio than company B
(Bobadilla, 2015)

30) All else equal, which of the following is the most likely to occur if actual sales are much less than
forecasted sales?
a) The company will be in a better position to pay down most of its debt.
b) The firm's actual investment in inventory will be unchanged from the amount forecasted.
c) Accounts receivable will rise significantly above the forecast.
d) The company might face a cash flow crunch.
(Titman, 11th Ed)

PROBLEM

1) Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000.
The credit manager estimates that 40% of their customers pay on the discount date, 40% on the net due
date, and 20% pay 15 days after the net due date. Assuming uniform sales and a 360-day year, what is
the projected days' sales outstanding (rounded to the nearest whole day)?

a) 20 days.
b) 24 days.
c) 27 days.
d) 30 days.
(CMA 0697 1-9)

Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which
sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf
balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf
Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is
155,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash
investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase order $125.00
Carrying costs per carton per year:
Relevant insurance, materials handling,breakage, etc., per year $ 0.77
2) If Martin's makes an order (1/12 of annual demand) once per month, what are the relevant total costs?
a) $1,500.00
b) $652.50
c) $2,152.50
d) $3,000.00

3) What is the economic order quantity?

a) 180 cartons
b) 270 cartons
c) 273 cartons
d) 300 cartons

4) Purchasing at the EOQ recommended level, how many deliveries will be made during each time
period?
a) 2 deliveries
b) 6 deliveries
c) 8 deliveries
d) 12 deliveries

5) Purchasing at the EOQ recommended level, what are the relevant total costs?
a) $1,500.00
b) $1,978.60
c) $989.37
d) $3,000.00
(Horngren, 9th Ed)

Ria Arellano, the CFO of Non-Formal Wonder Corporation, was in a dilemma as a lot of shareholders are
complaining regarding the growth and progress of the company. Non-Formal Wonder Corporation has been
one of the promising blue chips around the world. As a company that produces one of the worlds first
energy-inducing pill that allows man to unlock his/her inner potential and experience the world in a new
perspective. With the great start of the company, Ms. Camille Huang, CEO of the company wanted the
CFO to try and reproduce various financial ratios so that they may ask one of the leading financial analysts
in the world, Mr. Brent Yao, if their company is having operating in a good manner and has a good and
stable condition. The following data pertain to Non-Formal Wonder Corporation.

NON-FORMAL WONDER CORPORATION

Comparative Income Statement

This Year Last Year

Sales (all on account) ................................................................. $452,000 $388,000

Less cost of goods sold .............................................................. 260,000 221,000
Gross margin .............................................................................. 192,000 167,000
Less operating expenses............................................................. 104,000 89,000
Net operating income ................................................................. 88,000 78,000
Less interest expense .................................................................. 8,000 8,000
Net income before taxes ............................................................ 80,000 70,000
Less income taxes (30%) ........................................................... 24,000 21,000
Net income ................................................................................. $ 56,000 $ 49,000

NON-FORMAL WONDER CORPORATION

 Comparative Balance Sheet

This Year Last Year

Assets
Current assets:
Cash....................................................................................... $ 42,000 $ 21,000
Marketable securities ............................................................ 32,000 28,000
Accounts receivable, net ....................................................... 84,000 102,000
Inventory ............................................................................... 96,000 70,000
Prepaid expenses ................................................................... 11,000 9,000
Total current assets................................................................. 265,000 230,000
Plant and equipment, net ....................................................... 410,000 380,000
Total assets ............................................................................ $675,000 $610,000

Liabilities and Stockholders Equity

Liabilities:
Current liabilities................................................................... $115,000 $ 90,000
Bonds payable, 10%.............................................................. 80,000 80,000
Total liabilities ...................................................................... 195,000 170,000

Stockholders equity:
Preferred stock, $100 par, 7%............................................... 100,000 100,000
Common stock, $5 par ......................................................... 300,000 300,000
Retained earnings.................................................................. 80,000 40,000
Total stockholders equity..................................................... 480,000 440,000
Total liabilities and stockholders equity ............................. $675,000 $610,000
Additional information:

* In addition to the preferred dividends, dividends of $0.15 per share were declared and paid on the
common stock this year.

6) If a vertical analysis was done on Non-Formal Wonder's financial statements, what percent would be
shown for retained earnings at the end of this year? (rounded if necessary)
a) 9.3%
b) 11.9%
c) 16.7%
d) 17.7%

7) What is Non-Formal Wonder's dividend payout ratio for this year? (rounded if necessary)
a) 18.4%
b) 3.0%
c) 11.2%
d) 16.1%

8) What is Non-Formal Wonder's current ratio at the end of this year? (rounded if necessary)
a) 1.36
b) 1.77
c) 2.30
d) 2.41

9) What is Non-Formal Wonder's acid-test ratio at the end of this year? (rounded if necessary)
a) 0.64
b) 0.77
c) 0.81
 d) 1.37

10) What is Non-Formal Wonder's average collection period (accounts receivable turnover in days) for this
year? (rounded if necessary)
a) 67.8 days
b) 75.1 days
c) 80.8 days
d) 117.9 days

11) What is Non-Formal Wonder's average sale period (inventory turnover in days) for this year? (rounded
if necessary)
a) 67.0days
b) 116.5days
c) 126.0days
d) 134.8days

12) What is Non-Formal Wonder's times interest earned ratio for this year?
a) 6.125
b) 7
c) 10
d) 11

13) What is Cerveza's debt-to-equity ratio at the end of this year? (rounded if necessary)
a) 0.24
b) 0.29
c) 0.41
d) 0.51
(Garrison, 12th Ed)

Lacrimosa Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order
to speed collections. At present, 40 percent of Lacrimosa Companys customers take the 2 percent
discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the
credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the
remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore
bad debt losses are not expected to rise above their present 2 percent level. However, the more generous
cash discount terms are expected to increase sales from P2 million to P2.6 million per year. Lacrimosa
Companys variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is
9 percent, and the firms income tax rate is 40 percent.

14) What are the days sales outstanding (DSO) before and after the change of credit policy?
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively

15) The incremental carrying cost on receivable is

A. P 843.75 C. P 643.75
B. P8,889.00 D. P6,667.00

16) The incremental after tax profit from the change in credit terms is
A. P68,493 C. P60,615
B. P65,640 D. P57,615
(Bobadilla, 2015)

17) What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of
equity of P3,000,000, and a market/book ratio of 3.5?
A. P8.57 C. P85.70
B. P30.00 D. P105.00
 (Bobadilla, 2015)

18) Assume you are given the following relationships for the Enigma Company:
Sales/total assets 1.5X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
The Enigma Companys debt ratio is
A. 40% C. 35%
B. 60% D. 65%
(Bobadilla, 2015)

19) The Cthulhu Company has a revolving line of credit of $300,000 with a one-year maturity. The terms
call for a 6% interest rate and a 12% commitment fee on the unused portion of the line of credit. The
average loan balance during the year was $100,000. The annual cost of this financing arrangement is
a) $6,000
b) $6,500
c) $7,000
d) $7,500
(Wiley, 2016)

20) Colombian Manly Cosmetics Inc. (CMC) has a majority of its customers located in the states of
California and Nevada. Keystone National Bank, a major west coast bank, has agreed to provide a
lockbox system to CMC at a fixedfee of $50,000 per year and a variable fee of $.50 for each
payment processed by the bank. On average, CMC receives 50 payments per day, each averaging
$20,000. With the lockbox system, the companys collection float will decrease by 2 days. The annual
interest rate on money market securities is 6%. If CMC makes use of the lockbox system, what would
be the net benefit to the company? Use 365 days per year.
a. $ 51,750
b. $ 60,875
c. $111,750
d. $120,875
(Wiley, 2016)

Solutions

1) Answers: C
[(40% x 15) + (40% x 30) + (20% x 45)].

2) Answer: C
Order Quantity = Annual Demand / 12 =12,960 balls/month = 180 cartons per month
RTC = Ordering Costs + Carrying Costs
Carrying Cost per carton = price invest rate + insurance/handling Carrying Cost per carton = ($.75 72
12%) + $0.77 = $7.25
RTC = (12 $125.00) + ((180/2) $7.25) =$2,152.50

3) Answer: C
Annual Demand / 155,520 / 72 =2,160 cartons
Carrying Cost per carton = ($.75 72 12%) + $0.77 = $7.25
EOQ = The square root of [(2 (155,520/72) $125.00) / ($7.25)]
EOQ = 272.9 cartons - round to 273

4) Answer: C
Deliveries = Annual Demand / EOQ = 7.91 round to 8

5) Answer: B
Annual Demand / 155,520 / 72 =2,160 cartons
 Carrying Cost per carton = ($.75 72 12%) + $0.77 = $7.25
EOQ = The square root of [(2 (155,520/72) $125.00) / ($7.25)]
EOQ = 272.9 cartons - round to 273
989.37+989.26
RTC = [{2160x125)/272.9]+[(272.9x7.25)/2]

6) Answer: C
80,000/675,000 = 11.85% - rounded to 11.9%
7) Answer: A
[9,000/(56,000-7,000)] = 18.4%
8) Answer: C
265,000/115,000 = 2.3
9) Answer: D
158,000/115,000 = 1.37
10) Answer: B
365 x [(84,000+102,000)/2]/452,000 = 75.1 days
11) Answer: B
365 x [(96,000+70,000)/2]/260,000 = 116.5 days
12) Answer: D
88,000/8,000 = 11
13) Answer: C
195,000/480,000 = 0.41
14) Answer: A
Days sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days
15) Answer: A
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75
16) Answer: A
Incremental sales 600,000
Variable cost (.75 x 600,000) ( 450,000)
Additional bad debts (600,000 x 2%) ( 12,000)
Additional carrying cost ( 844)
Additional discounts (2,600,000 x .5 x 03) (2,000,000 x .4 x .02) ( 23,000)
Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493
17) Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M 100,000) P105
18) Answer: A
1 (0.03 0.05) = 40%
19) Answer: C
7,000 = (6% $100,000) + [($300,000 $100,000) 1/2%)].
20) Answer: B
($20,000 average payment 50 payments 2 days 6%) - [$50,000 + (50 payments per day 365
days $0.50)].