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THEORY C. Finance fluctuating assets with long-term financing.

Working capital D. Minimize the amount of funds held in very liquid assets.
1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs 5. The working capital financing policy that subjects the firm to the greatest risk of being unable
could increase its working capital by the to meet the firm’s maturing obligations is the policy that finances
A. Prepayment of $50,000 of next year's rent. A. Fluctuating current assets with long-term debt.
B. Collection of $50,000 of accounts receivable. B. Fluctuating current assets with short-term debt.
C. Purchase of $50,000 of temporary investments for cash. C. Permanent current assets with long-term debt.
D. Refinancing of $50,000 of short-term debt with long-term debt. D. Permanent current assets with short-term debt.

Working capital policy Cash conversion cycle

2. Determining the appropriate level of working capital for a firm requires 6. Ignoring cost and other effects on the firm, which of the following measures would tend to
A. Changing the capital structure and dividend policy for the firm. reduce the cash conversion cycle?
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the A. Take discounts when offered.
return on total investments. B. Forgo discounts that are currently being taken.
C. Offsetting the profitability of current assets and current liabilities against the probability of C. Maintain the level of receivables as sales decrease.
technical insolvency. D. Buy more raw materials to take advantage of price breaks.
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more
expensive than long term debt. 7. An increase in sales resulting from an increased cash discount for prompt payment would be
E. Evaluating the risks associated with various levels of fixed assets and the types of debt expected to cause
used to finance these assets. A. An increase in the operating cycle.
B. A decrease in purchase discounts taken.
3. Compared to other firms in the industry, a company that maintains a conservative working C. A decrease in the cash conversion cycle.
capital policy will tend to have a D. An increase in the average collection period.
A. Higher total asset turnover.
B. Greater percentage of short-term financing. Cash management system
C. Higher ratio of current assets to fixed assets. 8. A precautionary motive for holding excess cash is
D. Greater risk of needing to sell current assets to repay debt. 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.
4. A firm following an aggressive working capital strategy would
C. To enable a company to avail itself of a special inventory purchase before prices rise to
A. Hold substantial amount of fixed assets.
higher levels.
B. Minimize the amount of short-term borrowing.

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D. To avoid having to use the various types of lending arrangements available to cover
projected cash deficits. Marketable securities Management
14. All of the following are valid reasons for a business to hold cash and marketable securities
9. The amount of cash that a firm keeps on hand in order to take advantage of any bargain except to
purchases that may arise is referred to as its A. Meet future needs.
A. Compensating balance. C. Speculative balance. B. Satisfy compensating balance requirements.
B. Precautionary balance. D. Transactions balance. C. Earn maximum returns on investment assets.
D. Maintain adequate cash needed for transactions.
10. Which of the following is not a major function in cash management?
A. Cash flow control C. Maximizing sales 15. When managing cash and short-term investments, a corporate treasurer is primarily
B. Cash surplus investment D. Obtaining financing services concerned with
A. Minimizing taxes.
11. Which of the following actions would not be consistent with good management? B. Liquidity and safety.
A. Minimize the use of float. C. Maximizing rate of return.
B. Increased synchronization of cash flows. D. Investing in Treasury bonds since they have no default risk.
C. Use of checks and drafts in disbursing funds.
D. Maintaining an average cash balance equal to that required as a compensating balance or 16. Which of the following investments is not likely to be a proper investment for temporary idle
that which minimizes total cost. cash?
A. Treasury bills.
12. The following are desirable in cash management except: B. Commercial paper.
A. Cash is collected at the earliest time possible. C. Treasury bonds due within one year.
B. Post-dated checks are not deposited on time upon maturity. D. Initial public offering of an established profitable conglomerate.
C. All sales are properly receipted and promptly deposited intact.
D. Most sales are on cash basis and receivables are aged “current” 17. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
the optimal mix between cash and marketable securities. The EOQ model assumes all of the
13. A lock-box system following except
A. Accelerates the inflow of funds. A. Cash flow requirements are random.
B. Provides security for late night deposits. B. The total demand for cash is known with certainty.
C. Reduces the need for compensating balances. C. An opportunity cost is associated with holding cash, beginning with the first dollar.
D. Reduces the risk of having checks lost in the mail. D. The cost of a transaction is independent of the dollar amount of the transaction and

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interest rates are constant over the short run. receivables.

D. there is a decrease in the distribution level of your product, and a more aggressive stance
Receivable Management in necessary to retain market share.
18. The one item listed below that would warrant the least amount of consideration in credit and
collection policy decisions is the 22. It is held that the level of accounts receivable that the firm has or holds reflects both the
A. Cash discount given. volume of a firm’s sales on account and a firm’s credit policies. Which one of the following
B. Quantity discount given. items is not considered as part of the firm’s credit policies?
C. Quality of accounts accepted. A. The size of the discount that will be offered.
D. Level of collection expenditures. B. The length of time for which credit is extended.
C. The minimum risk group to which credit should be extended.
19. The goal of credit policy is to D. The extent (in terms of money) to which a firm will go to collect an account.
A. Maximize sales.
B. Minimize bad debt losses. 23. The credit and collection policy of Amargo Co. provides for the imposition of credit block when
C. Minimize collection expenses. the credit line is exceeded and/or the account is past due. During the month, because of the
D. Extend credit to the point where marginal profits equal marginal costs. campaign to achieve volume targets, the general manager has waived the credit block policy
in a number of instances involving big volume accounts. The likely effect of this move is
20. When a company analyzes credit applicants and increases the quality of the accounts A. Increase in the level of receivables only.
rejected, the company is attempting to B. Deterioration of aging of receivables only.
A. Maximize sales. C. Deterioration of aging and increase in the level of receivables.
B. Maximize profits. D. Decrease in collections during the month the move was done.
C. Increase bad-debt losses.
D. Increase the average collection period. 24. A high turnover of accounts receivable, which implies a very short days-sales outstanding,
could indicate that the firm
21. A strict credit and collection policy is in place in Star Co. As Finance Director you are asked to A. Offers small discounts.
advise on the propriety of relaxing the credit standards in view of stiff competition in the B. Has a relaxed (lenient) credit policy.
market. Your advise will be favorable if C. Has an inefficient credit and collection department.
A. The competitor will do the same thing to prevent lost sales. D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
B. The projected margin from increased sales will exceed the cost of carrying the
incremental receivables. 25. Accounts receivable turnover will normally decrease as a result of
C. The account receivable level is improving, so the company can afford the carrying cost of A. An increase in cash sales in proportion to credit sales.

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B. A change in credit policy to lengthen the period for cash discounts. 30. If one optimizes the inventory turnover ratio, which costs will not increase?
C. A significant sales volume decrease near the end of the accounting period. A. Carrying costs C. Total reorder costs
D. The write-off of an uncollectible account (assume the use of the allowance for doubtful B. Stock-out cost D. Unit reorder costs
accounts method).
31. Order-filling costs, as opposed to order-getting costs, include all but which of the following
26. The level of accounts receivable will most likely increase as
items?
A. Cash sales increase and number of says sales.
A. Credit check of new customers.
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
B. Packing ad shipping of sales orders.
C. Credit limits are expanded, cash sales increase, and aging of the receivables is improving.
C. Mailing catalogs to current customers.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain
D. Collection of payments for sales orders.
the same.
27. A change in credit policy has caused an increase in sales, an increase in discounts taken, a
reduction of the investment in accounts receivable, and a reduction in the number of doubtful
32. Which of the following inventory items would be the most frequently reviewed in an ABC
accounts. Based on this information, we know that:
inventory control system?
A. Net profit has increased.
A. Expensive, frequently used, high stock-out cost items with long lead time.
B. Gross profit has declined.
B. Expensive, frequently used, low stock-out cost items with long lead times.
C. The average collection period has decreased.
C. Inexpensive, frequently used, high stock-out cost items with long lead time.
D. The size of the discount offered has decreased.
D. Expensive, frequently used, high stock-out cost items with short lead times.
28. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be
33. In an ABC inventory analysis, the items that are most likely to be controlled with a red-line
expected on the balance sheet of its customer if the firm went to a net cash 30 policy?
system are the
A. Decrease in cash.
A. A items. C. C items.
B. Increased receivables.
B. B items. D. items on a perpetual inventory.
C. Decreased receivables.
D. Increased payables and increased bank loan.
34. The materials control method that is based on physical observation that an order point has
been reached is the:
Inventory Management
A. ABC plan C. min-max method
29. Which condition justifies accepting a low inventory turnover ratio?
B. cycle review method D. two-bin method
A. High carrying costs. C. Low inventory order costs.
B. High stock-out costs. D. Short inventory order lead times.
35. The underlying philosophy of “just-in-time” inventory system is that

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A. The quantities of most stock items are subject to definable limits. A. Is relatively insensitive to error.
B. It is a quest toward continuous improvement in the environmental conditions that B. Is used when product demand, lead-time, and ordering costs are uncertain.
necessitates inventories. C. Should not be used in conjunction with computerized perpetual inventory systems.
C. It is impractical to give equal attention to all stock items, hence the need to classify and D. Should not be used when carrying costs are large in relation to procurement costs.
rank them according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or 41. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
critical items are examined more frequently than low-cost or non-critical items. A. Constant demand, constant ordering cost, constant carrying cost, unlimited production
and inventory capacity.
36. Companies that adopt just-in-time purchasing systems often experience B. Limited production capacity, declining demand, constant ordering cost, constant carrying
A. An increase in carrying costs. cost, and unlimited inventory capacity.
B. Fewer deliveries from suppliers. C. Increasing demand, limited production capacity, increasing ordering cost, increasing
C. A reduction in the number of suppliers. carrying cost, and limited inventory capacity.
D. A greater need for inspection of goods as the goods arrive. D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing
carrying cost, and unlimited inventory capacity.
37. An inventory control system which employs mathematical models as an aid in making
inventory decision is known as
A. Mini-max system C. Statistical inventory control system. 42. The economic order quantity formula can be used to determine the optimum size of
B. Order cycling system D. Two-bin system A. B. C. D.
Production run Yes Yes No No
38. In inventory management, the problem of avoiding excessive investment in inventories and at Purchase order Yes No Yes No
the same time avoiding inventory shortages can be solved by applying a quantitative technique
known as 43. The simple economic production lot size model will only apply to situations in which the
A. Payback analysis C. Probability analysis production
B. Economic order quantity D. High-low point method A. Rate equals the demand rate.
B. Rate is less than the demand rate.
39. Which of the following is used in determining the economic order quantity (EOQ)? C. Rate is greater than the demand rate.
A. Calculus. C. Queuing theory. D. For the period covered equals the projected sales for the period.
B. Markov process. D. Regression analysis.
44. Which one of the following items is not directly reflected in the basic economic order quantity
40. A characteristic of the basic economic order quantity (EOQ) model is that it (EOQ) model?

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A. Inventory obsolescence. 49. The optimal level of inventory is affected by all of the following except the
B. Interest on invested capital. A. Cost per unit of inventory.
C. Public warehouse rental charges. B. Current level of inventory.
D. Quantity discounts lost on inventory purchases. C. Usage rate of inventory per time period.
D. Cost of placing an order for merchandise.
45. The ______________ would not affect the economic order quantity.
A. cost of a stockout 50. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in,
B. cost of insuring inventory first-out) method would
C. cost of purchase requisition forms A. Not affect the EOQ.
D. company's weighted average cost of capital B. Increase the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
46. The economic order quantity is not affected by the D. Decrease the EOQ in times of rising prices.
A. safety stock level
B. cost of purchase-order forms. 51. The selling price of the product is relatively high and the purchase cost of the product is
C. cost of insuring a unit of inventory for a year. relatively low. In this situation
D. estimate of the annual material consumption. A. The EOQ model will indicate frequent large orders.
B. The EOQ of the product is affected by the selling price.
C. The selling price has nothing to do with the EOQ of the product.
47. The ordering costs associated with inventory management include D. Management must increase the price to cover the cost of carrying higher inventory.
A. Insurance costs, purchasing costs, shipping costs, and obsolescence.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs. 52. Clear View Co. manufactures various glass products including a car window. The setup cost to
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost. produce the car window is $1,200. The cost to carry a window in inventory is $3 per year.
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested. 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,
48. The carrying costs pertaining to inventory include A. the number of setups would decrease.
A. Insurance costs, incoming freight costs and setup costs. B. the total carrying costs would increase.
B. Insurance costs, incoming freight costs and storage costs. C. the economic order quantity would decline.
C. Setup costs and opportunity cost of capital invested in inventory. D. all of the above would occur.
D. Storage costs and opportunity cost of capital invested in inventory.
53. A decrease in inventory order costs will

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A. Increase the reorder point. annual purchase-order costs and total annual carrying cost for an order quantity of 600 units
B. Decrease the economic order quantity. compare to the respective amounts for an order quantity of 500 units?
C. Decrease the holding cost percentage. A. Lower purchase-order cost and lower carrying cost.
D. Have no effect on the economic order quantity. B. Lower purchase-order cost and higher carrying cost.
C. Higher purchase-order cost and lower carrying cost.
54. An increase in inventory holding costs will D. Higher purchase-order cost and higher carrying cost.
A. Increase the economic order quantity.
B. Decrease the economic order quantity. 58. When a specific level of safety stock is carried for an item in inventory, the average inventory
C. Have no effect on the economic order quantity. level for that item
D. Decrease the number of orders issued per year. A. Is not affected by the safety stock.
B. Increases by the amount of the safety stock.
55. The economic order quantity (EOQ) will rise following C. Decreases by the amount of the safety stock.
A. An increase in carrying costs. D. Increases by one-half the amount of the safety stock.
B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory. 59. For inventory management, ignoring safety stocks, which of the following is a valid
D. An increase in the variable costs of placing and receiving an order. computation of the reorder point?
A. The economic order quantity.
56. For its economic order quantity model, a company has a $10 cost of placing an order and a $2 B. The square root of the anticipated demand during the lead time.
annual cost of carrying one unit in stock. If the cost of placing an order increases by 20%, the C. The anticipated demand per day during lead time times lead time in days.
annual cost of carrying one unit in stock increases by 25%, and all other considerations remain D. The economic order quantity times the anticipated demand during the lead time.
constant, the economic order quantity will:
60. The cost of stock-out do not include
A. decrease A. Depreciation and obsolescence. C. Loss of customer goodwill.
B. increase B. Disruption of production schedules. D. Loss of sales.
C. remain unchanged
D. either increase or decrease, depending on the reorder point 61. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The
E. either increase or decrease, depending on the safety stock usual lead-time for the inventory item is six (6) days; however, at times, the lead-time has gone
as high as eight (8) days. Kulasa now desires to adjust its safety stock policy. The likely effect
57. Missile Company has correctly computed its economic order quantity as 500 units. However, on stockout costs and carrying costs, respectively, would be
management feels it would rather order quantities of 600 units. How should Missile’s total A. Increase and increase. C. Decrease and increase.

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B. Increase and decrease. D. Decrease and decrease. C. WIP represents a lower investment by a corporation as opposed to other types of
inventories.
62. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the D. WIP inventory is relatively easy to sell because it does not represent a raw material or a
annual relevant finished product.
A. ordering costs and carrying costs. C. ordering costs and stockout costs.
B. ordering costs and purchasing costs. D. stockout costs and carrying costs.
PROBLEMS
Trade Credit Capital Structure
63. A company obtaining short-term financing with trade credit will pay a higher percentage 1. Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the
financing cost, everything else being equal, when company wishes to maintain it.
A. The discount percentage is lower. Debt 25%
B. The items purchased have a lower price. Preferred equity 5%
C. The items purchased have a higher price. Common equity 70%
D. The supplier offers a longer discount period. Enert's management is planning to build a $75 million facility that will be financed according to
this desired capital structure. Currently, $15 million of cash is available for capital expansion.
Short-term Loans The percentage of the $75 million that will come from a new issue of common shares is
64. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not A. 50.00%. C. 56.25%.
taking discounts from one of their three biggest suppliers, or a 14.75% per annum renewable B. 56.00%. D. 70.00%.
discount loan from its bank for 3 months. The suppliers' terms are as follows:
Fort Co. 1/10, net 30 Financial statement analysis
Riley Manufacturing Co. 2/15, net 60 2. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current
Shad, Inc. 3/15, net 90 liabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximum level
Using a 360-day year, the cheapest source of short-term financing in this situation is of new short-term loans it can secure without violating the policy?
A. Fort Co. C. Shad, Inc. A. P266,667 C. P400,000
B. Riley Manufacturing Co. D. The bank. B. P300,000 D. P800,000

65. In assessing the loan value of inventory, a banker will normally be concerned about the portion
of inventory that is work-in-process because
A. WIP generally has the lowest marketability of the various types of inventories. Internal growth rate
B. WIP inventory usually has the highest loan value of the different inventory types. 3. Bobo LLC's has an asset base of $1 million. After a dividend payment of $40,000, Bobo added

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$50,000 to retained earnings. What is Bobo's internal growth rate? Cash Management
A. 1% C. 5% 7. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these
B. 4% D. 9% checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm
loses three days while its receipts are being deposited and cleared. What is the firm’s net float
Working capital policy in dollars?
4. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset A. $ 24,000 C. $ 75,000
investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt B. $ 32,000 D. $126,000
and equity are each 50 percent of total assets. EBIT is $36,000, 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 8. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is
will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. 0.02% and the average transaction cost of investing money overnight is $50?
What is the difference in the projected ROEs between the restricted and relaxed policies? A. $50 C. $400
A. 1.6% C. 5.4% B. $350 D. $40,000
B. 3.8% D. 6.2%
Questions 9 and 10 are based on the following information.
5. Wildthing Amusement Company’s total assets fluctuate between $320,000 and $410,000, A company has a 10% cost of borrowing and incurs fixed costs of $500 for obtaining a loan. It has
while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or stable, predictable cash flows, and the estimated total amount of net new cash needed for
moderate working capital financing policy, what is the likely level of its long-term financing? transactions for the year is $175,000. The company does not hold safety stocks of cash.
A. $ 90,000 C. $320,000
B. $260,000 D. $410,000 9. When the average cash balance of the company is higher, the <List A> the cash balance is
<List B>.
Cash conversion cycle List A List B
6. Bully Corporation purchases raw materials on July 1. It converts the raw materials into A. Opportunity cost of holding Higher
inventory by September 30. However, Bully pays for the materials on July 20. On October 31, B. Total transactions costs associated with obtaining Higher
it sells the finished goods inventory. Then, the firm collects cash from the sale 1 month later on C. Opportunity cost of holding Lower
November 30. If this sequence accurately represents the average working capital cycle, what D. Total costs of holding Lower
is the firm's cash conversion cycle in days?
A. 92 days. C. 133 days. 10. If the average cash balance for the company during the year is $20,916.50, the opportunity
B. 123 days. D. 153 days. cost of holding cash for the year will be
A. $2,091.65 C. $8,750.00
B. $4,183.30 D. $17,500.00

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Saving in mailing time 1.3 days

Saving in processing time 0.9 days
11. CMR is a retail mail order firm that currently uses a central collection system that requires all Bank charges $0.30
checks to be sent to its Boston headquarters. An average of 5 days is required for mailed
checks to be received, 4 days for CMR to process them and 1½ days for the checks to clear Estimate the annual savings. Assume 250 processing days per year.
through its bank. A proposed lockbox system would reduce the mail and process time to 3 A. $3,273 C. $23,500
days and the check clearing time to 1 day. CMR has an average daily collection of $100,000. If B. $22,675 D. $47,000
CMR should adopt the lockbox system, its average cash balance would increase by
A. $250,000. C. $650,000. 15. QRS makes large cash payments averaging P17,000 daily. The company changed from using
B. $400,000. D. $800,000. checks to sight drafts which will permit it to hold unto its cash for one extra day. If QRS can
use the extra cash to earn 14% annually, what annual peso return will it earn?
12. What are the expected annual savings from a lockbox system that collects 200 checks per day A. P6.52 C. P2,380
averaging $500 each, and reduces mailing and processing times by 2.0 and 0.5 days, B. P652.10 D. P6,521.00
respectively, if the annual interest rate is 6%?
A. $6,000 C. $15,000 Marketable Securities Management
B. $12,000 D. $250,000 Questions 16 and 17 are based on the following information.
Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment will
13. A company has daily cash receipts of $150,000. The treasurer of the company has satisfy the firm's need for funds during the coming year.
investigated a lock box service whereby the bank that offers this service will reduce the
company’s collection time by four days at a monthly fee of $2,500. If money market rates 16. If it costs $50 to sell these bills, regardless of the amount, how much should be withdrawn at a
average 4% during the year, the additional annual income (loss) from using the lock box time?
service would be A. $50,000 C. $250,000
A. $(12,000). C. $6,000. B. $100,000 D. $500,000
B. $(6,000). D. $12,000.
17. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills?
14. A banker has offered to set up and operate a lock box system for your company. Details are A. About every 3 days. C. About every 15 days.
given below. B. About every 9 days. D. About every 18 days.
Average number of daily payments 325
Average size of payments $1,250 Receivables Management
Daily interest rate 0.021% 18. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and

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the collections department estimates that 30% of the customers pay on the 10th day and take Ratio of credit sales to total sales 70% 60%
discounts; 40% pay on the 30th day; and the remaining 30% pay, on the average, 40 days Projected sales for the coming year is P100 million and it is estimated that the new policy will
after the purchase. Assuming 360 days per year, what is the average collection period. result in a 5% loss if the new policy is implemented. Assuming a 360-day year, what is the
A. 15 days. C. 27 days. effect of the new policy on accounts receivable?
B. 20 days. D. 40 days. A. No change. C. Decrease of P 6.67 million.
B. Decrease of P5 million. D. Decrease of P13 million.
19. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables
turnover is 4.5, what is the average collection period and the year-end receivables,
respectively (assume a 365-day year)? 23. Simba Corp., whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The
A. 73 days and $108,000. C. 81 days and $120,000. collections manager estimated that 30% of the customers pay on the 10th day and take
B. 73 days and $120,000. D. 81 days and $200,000. discounts; 40% on the 30th day; and the remaining 30% pay, on the average, 40 days after the
purchase. If management would toughen on its collection policy and require that all
20. Best Computers believes that its collection costs could be reduced through modification of
non-discount customers pay on the 30th day, how much would be the receivables balance?
collection procedures. This action is expected to result in a lengthening of the average
A. Zero C. P70,000
collection period from 30 to 35 days; however, there will be no change in uncollectible
B. P60,000 D. P80,000
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
24. Numero 1 Co.’s budgeted sales for the coming year are P96 million, of which 80% are
sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify
expected to be credit sales at terms of n/30. The company estimates that a proposed
changes in collection procedures, the minimum annual reduction of costs (using a 360-day
relaxation of credit standards would increase credit sales by 30% and increase the average
year and ignoring taxes) must be
collection period form 30 days to 45 days. Based on a 360-day year, the proposed relaxation
A. $22,500 C. $125,000
of credit standards would result to an increase in accounts receivable balance of
B. $37,500 D. $375,000
A. P1,920,000 C. P6,080,000
21. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of
B. P2,880,000 D. P6,880,000
35 days, and a payment cycle of 26 days. If its sales for the period just ended amounted to
P972,000, what is the investment in accounts receivable? (Assume 360 days a year.)
25. Phillips Glass Company buys on terms of 2/15, net 30. It does not take discounts, and it
A. P72,450 C. P85,200
typically pays 30 days after the invoice date. Net purchases amount to $720,000 per year. On
B. P79,600 D. P94,500
average, how much “free” trade credit does Phillips receive during the year? (Assume a
360-day year.)
22. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
A. $30,000 C. $50,000
Old New
B. $40,000 D. $60,000
Average number of days collection 75 50

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26. Slippers Mart has sales of P3 million. Its credit period and average collection period are both 29. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He
30 days and 1% of its sales end as bad debts. The general manager intends to extend the estimates the following effects:
credit period to 45 days which will increase sales by P300,000. However, bad debts losses on ⮚ Sales will increase by at least 20%.
the incremental sales would be 3%. Costs of products and related expenses amount to 40% ⮚ Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
exclusive of the cost of carrying receivables of 15% and bad debts expenses. Assuming 360 times.
days a year, the change in policy would result to incremental investment in receivables of ⮚ Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed changes
A. P9,750. C. P65,000. is at P900,000. Variable cost ratio is 55% and desired rate of return is 20%. Fixed
B. P24,704. D. P701,573 expenses amount to P150,000.
Should the company allow the revision of its credit terms?
27. The Liberal Sales Co. budgeted sales for the coming year are P30 million of which 80% are A. No, because losses will increase by P28,000.
expected to be on credit. The company wants to change its credit terms from n/30 to 2/10, B. Yes, because income will increase by P68,850.
n/30. If the new credit terms are adopted, the company estimates that cash discounts would C. No, because income will be reduced by P13,000.
be taken on 40% of the credit sales and the new uncollectible amount would be unchanged. D. Yes, because losses will be reduced by P78,800.
The adoption of the new credit terms would result in expected discount availed of in the
coming year of 30. Wasting Resource Co. has annual credit sales of P4 million. Its average collection period is 40
A. P192,000 C. P480,000 days and bad debts are 5% of sales. The credit and collection manager is considering
B. P288,000 D. P600,000 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
28. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying
respect to credit policy, below is a summary of relevant information: receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change
Old Credit Policy New Credit Policy in the profitability of the company if stricter policy would be implemented would be
Sales P1,800,000 P1,980,000 A. A reduction in net income by P35,400.
Average collection period 30 days 36 days B. A reduction in net income by P38,350.
C. A reduction in net income by P70,000.
The company requires a rate of return of 10% and a variable cost ratio of 60%. D. Zero as the positive and negative effects offset each other.
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 C. P4,080 31. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier
B. P3,000 D. P4,800 customers. It has been estimated that uncollectible expenses would be 15% and collection

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costs 5%. The manufacturing and selling costs are 70% of sales and corporate tax is 35%. If defaulted.
it pursues this opportunity, the after tax profit will
A. Remain the same. C. Increase by P65,000. 34. Calculate the total number of expected defaults, assuming no repeat business is on the
B. Increase by P35,000. D. Increase by P97,500. horizon.
A. 66 C. 201
32. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are B. 135 D. 795
available. Policy A would increase sales by $500,000, but bad debt losses on additional sales
would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad 35. Given average revenues from sales of $1,200 and the cost of sales of $1,100, what is the
debt losses on the additional $120,000 of sales would be 15%. The average collection period average expected profit or loss from extending credit to slow payers?
will remain at 60 days (6 turns per year) no matter the decision made. The profit margin will be A. $100 profit. C. $220 loss.
20% of sales and no other expenses will increase. Assume an opportunity cost of 20%. What B. $164 loss. D. $264 loss.
should the firm do?
A. Make no policy change. 36. Given revenues from sales of $1,200 and the cost of sales of $1,100, what would the average
B. Change to only Policy A. level of revenues that makes it worthwhile to extend credit to slow payers?
C. Change to Policy B (means also taking Policy A first). A. $1,364.00 C. $1,410.26
D. All policies lead to the same total firm profit, thus all policies are equal. B. $1,389.74 D. $1,510.26
Inventory Management
33. A firm that often factors its accounts receivable has an agreement with its finance company 37. The following data refer to various annual costs relating to the inventory of a single-product
that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of company:
receivables. The net proceeds would be further reduced by an annual interest charge of 10% Unit transportation-in on purchases $0.20
on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the Storage per unit 0.12
nearest dollar) will the firm receive from the finance company at the time a $100,000 account Insurance per unit 0.10
that is due in 90 days is turned over to the finance company? Annual interest foregone from alternate investment of funds $800
A. $83,700 C. $90,675 Annual number of units required 10,000
B. $90,000 D. $93,000 What is the annual carrying cost per unit?
A. $0.30 C. $0.42
Questions 34 through 36 are based on the following information. B. $0.32 D. $0.50
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 38. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells
subsequently defaulted. The company has 3,000 accounts on its books, none of which has yet blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per

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tape; tapes are shipped in packages of 20. Phonic Goods pays all incoming freight, and Set-up costs per production run P5,000
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 If the units will be required evenly throughout the year, the total annual relevant costs using the
are available: economic-order-quantity approach is
Relevant ordering costs per purchase order $90.50 A. P5,000 C. P75,000
Carrying costs per package per year: B. P38,500 D. P150,000
Relevant insurance, materials handling, breakage, etc., per year $ 4.50
What is the required annual return on investment per package? 42. One of the products that Nature Way Health Products sells is a magnetic back support. The
A. $0.60 C. $12.00 ordering cost related to this product is P12.50 per order. The cost of carrying one item of
B. $2.50 D. $60.00 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
39. Penguin Company manufactures winter jackets. Setup costs are $2.00. Penguin per year at the economic order quantity?
manufactures 4,000 jackets evenly throughout the year. Using the economic order quantity A. B. C. D.
approach, the optimal production run would be 200 when the cost of carrying one jacket in Ordering costs P1,562.50 P1,562.50 P2,000.00 P4,000.00
inventory for one year is: Carrying costs P1,562.50 P2,560.00 P2,000.00 P4,000.00
A. $0.05 C. $0.20
B. $0.10 D. $0.40 43. The economic order quantity is the size of the order that minimizes total inventory costs,
40. A company has estimated its economic order quantity for Part A at 2,400 units for the coming including ordering and carrying costs. If the annual demand decreases by 36%, the optimal
year. If ordering costs are $200 and carrying costs are $0.50 per unit per year, what is the order size will
estimated total annual usage? A. Decrease by 6%. C. Increase by 6%.
A. 2,400 units C. 7,200 units B. Decrease by 20%. D. Increase by 20%.
B. 6,000 units D. 28,800 units
44. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of
41. The following information are given: raw materials by 80%. What is the effect of this safety stock reduction on Dee’s economic
Optimal production run in units 2,000 order quantity.
Average inventory in units 1,000 A. No effect. C. 64% decrease.
Number of production runs 5 B. 20% increase. D. 80% decrease.
Cost per unit produced P75
Desired annual return on inventory investment 18% 45. A&B Co.’s financial plan for next year shows sales of P72 million and cost of sales of P45

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million. It expects short term interest rates to average 10% for the coming year. It aims to instead of 500 units?
increase inventory turnover from the present level of 9 times to 12 times next year. If its plans A. $0 C. $2,000
and objectives would be carried out, how much is the cost savings for the coming year? B. $500 D. $2,500
A. P125,000 C. P375,000
B. P300,000 D. P500,000 49. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average
46. Marita works for a local ceramics company. She just completed her accountancy degree and inventory (taking into account the safety stock) is 8,000 pounds. What is the apparent order
learned the EOQ model in one of her subjects. She suggested to her employer to adopt it. quantity?
The company sells 20,000 pieces of specialty ceramic items each year. Traditionally, they A. 6,000 lbs. C. 16,000 lbs.
have produced these items four times a year, making 5,000 pieces at a time. They carry no B. 10,000 lbs. D. 21,000 lbs.
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 50. D&R Corp. consumes 300,000 units of spare part V per year. The average purchase lead time
costs for each production run total P80. The company should is 20 working days while the maximum is 27 working days. The company’s annual operations
A. Adopt EOQ due to savings of P35,675. cover 240 days allowing for shutdowns for plant maintenance, holidays and Sundays. The
B. Adopt EOQ due to savings of P42,320. company would like to keep safety stock or extra stock to guard against stock-outs. How
C. Continue the existing system due to P38,950 advantage. much is the safety stock?
D. Continue the existing system due to P41,820 advantage. A. 1,250 units. C. 25,000 units.
B. 8,750 units. D. 33,750 units.
47. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals.
Information concerning this item is as follows: 51. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work
Cost of placing an order P10 year. The usual lead time for the part is six days. However, at times, the lead time has gone
Annual demand 20,000 units as high as eight days. Scholas now desires to adjust its safety stock policy. The increase in
Purchasing price per unit P0.50 safety stock size is
The cost of holding the stock items amounts to 20% of the stock value per annum. A. 2,800 units. C. 7,200 units.
What annual cost saving would result if RODENSTOCK used the economic order quantity for B. 5,600 units. D. 16,800 units.
order sizes instead of their current policy? 52. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000
A. P 80 C. P150 units. The cost per unit of inventory is $5, and the carrying cost is 10% of the average value of
B. P 90 D. P240 inventory. The annual inventory carrying cost for the organization is
A. $3,000 C. $5,000
48. A company annually consumes 10,000 units of Part C. The carrying cost of this part is $2 per B. $3,500 D. $6,000
year and the ordering costs are $100. 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 53. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of

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T at 500 lbs., and its order point is 1,500 lbs., what would be the total annual carrying costs A. 3,000 C. 5,700
assuming the carrying cost per unit is $0.20? B. 4,200 D. 6,250
A. $100 C. $1,000
57. M&L Co. has the following information on inventory:
B. $600 D. $1,100
Sales 20,000 units per year
Order quantity 4,000 units
54. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The market
Safety stock 2,600 units
price per unit is P3,000. Since Cagayan de Oro is a very progressive rural place, the business
Lead time 4 weeks
sells an average of 36,000 tires annually. Based on a company study covering the last five
What is the re-order point? (For calculation purposes, use 50-week year)
years of its operation, it was found out that annual carrying cost per tire is P5.00 and the
A. 1,600 units. C. 4,200 units.
ordering cost is P100 per order. The store is open 7 days a week (which includes Sundays
B. 2,600 units. D. 5,600 units.
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
58. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
decided to keep a safety stock of 3,000 tires which is equivalent to a month’s sales. The
Selling price per bag P2.50
average inventory is
Purchase cost per bag P1.50
A. 1,200 tires C. 3,493 tires
Ordering cost per order P5.40
B. 3,000 tires D. 3,600 tires
Carrying cost 20% of unit cost
Number of days the company operates in a year 250
55. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of
Average lead time on purchases 6 days
T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50
What is the reorder point if the company will keep a 10-day safety stock of inventory?
lbs.?
A. 2,400 bags C. 6,400 bags
A. 10 days C. 30 days
B. 5,400 bags D. 8,800 bags
B. 20 days D. 100 days
59. JASMIN Products, Inc. gathered the following information related to one of its materials:
56. Information regarding the usage of material Y which shall be required evenly throughout the
Order quantity 1,500 units
year by GAC Company
Normal use per day 500 units
Annual usage in units 30,000
Maximum use per day 600 units
Working days per year 250
Minimum use per day 100 units
Safety stock in units 1,200
Normal lead time in working days 25
If the lead time is five days, the order point is
The re-order point is
A. 500 units C. 2,500 units

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B. 1,500 units D. 3,000 units times a year at a cost of P5,000 per order. The probability of stockout at various levels of
safety stock is
60. Inventory data for a certain raw material is as follows:
Units of Safety Stock Probability of a stockout
Annual usage in units 25,000
0 0.50
Working days per year 250
100 0.30
Normal lead time in working days 30
200 0.14
Maximum lead time in working days 50
300 0.05
Assuming that this raw material will be required evenly throughout the year, the order point will
400 0.01
be
The optimal safety stock level for the company is
A. 3,000 C. 5,000
A. 0 units. C. 300 units.
B. 4,000 D. 8,000
B. 100 units. D. 400 units.
61. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen on
64. Vera Cruz Corporation seeks to determine the quantity of safety stock for product ST that they
the proper cases to be ordered and the frequency of call. From the route book and other
should maintain that will result in the lowest cost to the company. Each stockout will cost P600
records, the following are available: prior year’s purchases, 50,000 cases; carrying cost per
and the carrying cost of each unit of safety stock will be P8. Product ST will be ordered five
case of inventory, P1.20; distributor’s discount, 1 case for every 10 cases bought; cost of
times a year. Which of the following will produce the lowest cost?
placing an order, P3.00; weekly demand is approximately 962 cases. Safety stock required is
A. A safety stock of 15 units which is associated with a 35% 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
B. A safety stock of 25 units which is associated with a 25% probability of running out of
lead-time.
stock during an order period.
A. B. C. D.
C. A safety stock of 35 units which is associated with a 10% probability of running out of
EOQ 250 cases 481 cases 500 cases 962 cases
stock during an order period.
Reorder point 280 cases 500 cases 414 cases 275 cases
D. A safety stock of 75 units associated with a 5% probability of running out of stock during
an order period.
62. 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?
65. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual
A. 6.7 days C. 10.0 days
demand of 50,000 units for part number 101 and has computed an optimal lot size of 6,250
B. 8.0 days D. 12.0 days
units. Per-unit carrying costs and stockout costs are $13 and $3, respectively. The following
data have been gathered in an attempt to determine an appropriate safety stock level:
63. Each stockout of Product AX sold by Axiom Inc. costs P87,500 per occurrence. The carrying
Number of Times Short
cost per unit of inventory is P250 per year, and the company orders 1,500 units of product 24

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Units Short Because of Excess in the last 40 Reorder Cycles B. 73.4% D. 43.6%
Demand during the Lead Time Period
200 6 69. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate
300 12 that this policy effectively costs your firm $157,500 each year, what is the firm’s average
400 6 accounts payable balance?
The annual cost of establishing a 200-unit safety stock is expected to be A. $157,500 C. $750,000
A. $2,600 C. $4,040 B. $625,000 D. $1,234,000
B. $4,260 D. $5,200
Bank loans
Trade Credit 70. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that
66. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, has monthly payments?
net 40. Phranklin Pharms has gross purchases of $800,000 per year. What is the maximum A. 9% C. 9.81%
amount of costly trade credit Phranklin could get, assuming they abide by the suppliers credit B. 9.38% D. 10.94%
terms? (Assume a 360-day year.)
71. Corbin, Inc. can issue 3-month commercial paper with a face value of $1,000,000 for
A. $32,666.70 C. $54,444.50
$980,000. Transaction costs will be $1,200. The effective annualized percentage cost of the
B. $52,266.67 D. $87,111.20
financing, based on a 360-day year, will be
67. On cash discounts, all of the following statements do not apply except
A. 2.00%. C. 8.48%.
A. The cost of not taking a cash discount is always higher than the cost of a bank loan.
B. 8.00%. D. 8.66%.
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
Short-term financing alternatives
C. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of
72. ABC Company finances all of its seasonal inventory needs from the local bank at an effective
credit.
interest cost of 9%. The firm’s supplier promises to extend trade credit on terms that will
D. If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount
match the 9% bank credit rate. What terms would the supplier have to offer (approximately)?
period, the amount paid would be P9,000.
A. 2/10, n/60. C. 2/10, n/100.
B. 2/10, n/90. D. 3/10, n/60.
68. 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
73. A company has accounts payable of $5 million with terms of 2% discount within 15 days, net
until Day 30. You point out that the nominal cost of not taking the discount and paying on Day
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait
30 is around 37 percent. But since your firm is not taking discounts and is paying on Day 20,
until the 30th day when it will receive revenues to cover the payment. If it borrows funds on the
what is the effective annual cost of your firm’s current practice, using a 360-day year?
last day of the discount period in order to obtain the discount, its total cost will be
A. 36.7% C. 106.9%
A. $24,500 more. C. $75,500 less.

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B. $51,000 less. D. $100,000 less. Theory Problems

1. D 26. B 51. C 1. B 26. C 51. B
2. C 27. C 52. B 2. C 27. A 52. B
3. C 28. D 53. B 3. C 28. A 53. B
74. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The 4. D 29. B 54. B 4. C 29. B 54. D
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day after 5. D 30. A 55. D 5. C 30. B 55. B
each delivery. Thus, the company is considering a 1-year bank loan for $9,800 (98% of the 6. B 31. C 56. A 6. C 31. C 56. B
invoice amount). If the effective annual interest rate on this loan is 12%, what will be the net
7. C 32. A 57. B 7. A 32. C 57. C
dollar savings over the year by borrowing and then taking the discount on the materials?
8. A 33. C 58. B 8. B 33. C 58. C
A. $1,176 C. $3,624
B. $1,224 D. $4,800 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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