1. Which of the following statements is correct? c.

Long-term financing has less liquidity risk than short-

a. The stockholder’s equity is a major component of term financing, but has a higher explicit cost, hence
working capital. lower return
b. Net working capital is the difference between quick d. More current assets lead to greater liquidity, but
assets and current liabilities. yield lower returns
c. Working capital is a measure of long-term solvency.
d. Net working capital is the difference between current 7. Which of the following statements is true?
assets and current liabilities. a. Short-term debt is usually more expensive than long-
term debt
2. The primary objective of working capital b. Liquid assets do not ordinarily earn higher returns
management is to. relative to long-term assets, so holding the former will
a. Maximize the company’s total current assets. maximize the return on total assets
b. Minimize the company’s total current liabilities. c. A conservative working capital policy is characterized
c. Balance the amount of current assets and current by higher current ratio and acid-test ratio.
liabilities. d. Determining the appropriate level of working capital
d. Achieve a balance between risk and return. for a firm requires changing the firm’s capital structure
and dividend policy.
3. In a conservative or relaxed working capital financing
policy, 8. The length of time it takes for the initial cash outflows
a. Operations are conducted on a minimum amount of for goods and services to be realized as cash inflows
working capital. from sales is called
b. Operations are operated with too much working a. Product life cycle
capital. b. Manufacturing cycle
c. Short-term liabilities are used to finance not only c. Vicious cycle
temporary current assets, but also part or all of the d. Cash conversion cycle
payment current assets requirements.
d. The company is exposed to risk of illiquidity because 9. If the average age of accounts payable is 15 days, the
of low working capital position. average age of accounts receivables is 60 days, and the
average age of inventory is 10 days, the number of days
4. Financing inventory build-up with long-term debt is in the operating cash conversion cycle is
an example of a. 70 days
a. A conservative working capital policy, b. 85 days
b. Matching policy c. 55 days
c. An aggressive working capital policy d. 60 days
d. Hedging policy
10. The following dare are given taken from the records
5. The hedging approach to financing involves of Apple Corporation for the year ended December 31,
a. The use of long-term debt to finance current assets 200B
b. The use of short-term debt to finance non-current Net credit sales P576,000
assets Average materials 8,000
c. Matching maturities of debt with specific financing Average finished goods inventory 12,000
needs Average accounts receivable 80,000
d. Issuance of common stocks to raise funds or working Average accounts payable 5,000
capital requirements Net credit purchases 120,000
Raw materials used 96,000
6. Which of the following is incorrect? Gross profit rate 25%
a. Profitability varies directly with liquidity What is the average number of days in the company’s
b. The greater the risk, the greater is the potential for operating cash conversion cycle? (Use a 360-day year)
larger return 45 DAYS
11. An objective of cash management is to
a. Maximize the cash balance to avoid the risk of 16. A change in a seller’s credit policy has caused the
illiquidity following:
b. Minimize the cash balance to maximize the return Sales decreased
from the idle cash Discounts taken decreased
c. Invest cash for a return while retaining sufficient Investment in accounts receivable increased
liquidity to satisfy future needs The number of doubtful accounts increased
d. Reserve as much cash as possible for potential Based on this information, we can say that
investment opportunities a. The company increased the rate of discount offered
b. Net profit has decreased
12. In cash management, the difference between the c. Gross profit has increased
bank balance for a firm’s account and the cash balance d. The average collection period has increased
that the firm shows on its own books is called
a. Float 17. For a manufacturing firm, the most direct way of
b. Bank charges preparing a cash budget requires incorporation of the
c. Interest income following, except
d. Reconciling item a. Sales projections and credit terms
b. Collection percentages and other cash receipts
13. Banks sometimes require its borrowers to maintain c. Estimated purchases and payment terms and other
a certain percentage of the face amount of a loan which cash disbursements
the bank requires its borrowers to keep in a non- d. Projected net income and depreciation expenses
interest-bearing current account. This is called
compensating balance, which 18. Belle Company’s average monthly cash receipts is
a. Decreases the effective rate of interest paid by the P1,500,000. Its average collection period is ten(10) days.
borrower A collection agency has offered to be the company’s
b. Compensates the bank for services rendered by collector and shorten collection period to four (4) days
providing it with deposits of funds for a monthly fee of P1,500. The company can invest its
c. Represents repaid interest on a loan excess funds in money market placement at a rate of
d. Cannot be used for disbursements by both the 8%. If the collection agency’s offer is accepted, Belle
borrower and the bank Company’s net annual benefit (loss) is
a. P6,000
14. A working capital technique that increases the c. P270,000
payable float and therefore delays the outflow of cash is b. (6,000)
a. electronic data interchange (EDI) d. P500
b. Automatic fund transfer (AFT)
c. A draft 19. Onor Corporation had income before tax of
d. Baumol cash management model P100,000 for the year. Included in this amount was
depreciation expense of P20,000, bond discount
15. Company A grants credit terms of 30 days to amortization of P18,000, and the amount paid for
Company B. The operating cycle of Company B is salaries and wages of P30,000. The estimated cash flow
20days. In this case, Company A for the year is
a. Is, in effect, financing more than Company B’s a. P100,000
inventory needs b. P 62,000
b. Is, in effect, financing less than Company B’s c. P138,000
inventory needs d. P120,000
c. Will have a lower level of accounts receivable than
those companies granting shorter credit terms 20. Annabelle Corporation is engaged in a multi-level
d. Can be sure that Company B will be able to convert marketing business that presently requires all sales
its inventories into cash before payment is due agents to mail checks to its Manila office. An average of
three days is required for mailed checks to be received, ITEM 22 and 23 ARE BASED ON THE FOLLOWING
one day for Annabelle Corporation to process them and INFORMATION
three days to clear through its banks. The company’s
treasure proposed a change in the system, where the 22. Using the Baumol Cash Management Model, the
checks will no longer be mailed to Manila office. company’s optimal cash balance is
Instead, checks collected will be deposited on-line in a. P11,757.55
any branch of the company’s depository bank, and the b. P5,878.78
deposit slips, as well as the other pertinent documents c. P142,000.00
will be sent by fax or e-mail to the Manila office on the d. P1,175.76
same day. The original deposit slips and other
documents will be submitted by the sales agents to 23. Using the Baumol Cash Management Model, the
Manila when they attend the Sales Agents Monthly average cash balance is
Meeting. The new system will eliminate the mailing a. P11,757.55
float and the processing time. Annabelle Corporation b. P5,878.78
has an average daily collection of P50,000. If the new c. P142,000.00
system is implemented, Annabelle Corporation’s d. P1,175.76
average cash balance will increase by 24. Which of the following items is not a marketable
a. P50,000 security?
b. P150,000 a. Treasury bills
c. P350,000 b. Commercial papers
d. P200,000 c. Central Bank Certificates of Indebtedness (CBCIs)
d. Convertible Bonds
21. Majority of Aning Company’s customers are farmers
from remote rural areas. Farmers Bank has offered to 25. When managing cash short-term investments in
provide Aning Company a lockbox system at a fixed fee marketable securities, the treasury of a corporation is
of P300 per month and a variable fee of P2 for each primarily concerned with
payment processed by the bank. Aning Company a. Liquidity and safety
receives 30 payments per day, averaging P5,000 per b. Maximizing the rate of return
payment. With the lockbox system, the company’s c. Maximizing risk
collection float will decrease by 3 days. Money market d. Tax avoidance
securities earn 5% per Annum. Should Aning Company
accept Farmers Bank’s offer to provide a lockbox 26. An objective of accounts receivable management is
system? (Use 360 days in a year) to have both the optimal amounts of receivables
a. Yes, because it would earn additional income of outstanding and bad debts. The balance requires the
P22,500 per year trade-off between the benefit of more credit sales and
b. Yes, because it would earn net benefit of P2,700 from a. The cost of sales.
the lockbox system. b. More bad debts
c. No, because the cost of the lockbox system is P2,700 c. The cost of accounts receivable, such as collection,
more than the expected return on money market interest and cost of bad debts
placements. d. A high account receivable turnover
d. No, because the lockbox system would require the
company to spend P25,000 per year. 27. Following are ways of accelerating collection of
accounts receivables, except
Ben Corporation uses the Baumol Cash Management a. Shorten credit terms
Model to determine its optimal cash balance. b. Minimize negative float
For the coming year, the expected cash disbursements c. Age accounts receivables
total P432,000. The interest rate on marketable d. Offer special discounts to those who pay promptly
securities is 5% per annum. The fixed cost of selling
marketable securities is P8 per transaction,
28. The average collection period for a firm measures 32. To make the changes in collection procedures cost
the number of days after a typical credit sale is made beneficial, the minimum savings in collection cost for
until the firm receives the payment. It should be related the coming year should be
to the firm’s credit terms. For example, a firm that a. P900,000
allows term 2/10, net 30 should have an average b. P81,000
collection period of c. P8,100
a. Thirty days d. P90,000
b. Ten days
c. Twenty days 33. A Company’s president requested the credit and
d. Somewhere between 10 days and 30 days collection manager to submit proposals on how to
change the company’s credit policy. The credit and
29. Which of the following represents a firm’s average collection manager submitted two proposals. In both
gross receivables balance? proposals, sales, profits, andcollection periods will
I. Average age in days of receivables x average daily change although by different figures. Bad debt
sales experience will remain the same despite the proposed
II. Average daily sales x average collection period changes. In making a decision on which proposal should
III. Annual credit sales ÷ accounts receivable turnover be implemented, the president should consider the
a. I only following factors, except
b. I and II only a. The impact of the proposed changes on the current
c. II only customers of the company
d. I, II, and II b. The cost of short-term credit
c. The company’s current bad debts experience
30. A change in credit policy accelerated the collection d. The change in credit terms to be imposed by banks
of accounts receivables. As result, the company which provide short-term financing to the company
experienced the following, except
a. An increase in discounts taken by customers ITEMS 34 and 35 ARE BASED ON THE FOLLOWING
b. An increase in the average collection period INFORMATION:
c. A decrease in the receivable balance
d. A decrease in bad debts Che-Che Corporation is planning to change its credit
policy.
ITEMS 31 and 32 ARE BASED ON THE FOLLOWING The proposed change is expected to:
INFORMATION: Shorten the collection period from 50 days to 30 days
Elaine Corporation is planning to introduce changes in Increase the ratio of cash sales to total sales from 20%
its collection procedures. The new procedures are to decrease total sales by 10%
expected to make the collection period longer by 10
days, although there will be no change in bad debts.For 34. If projected sales for the coming year is P40M, what
the coming year, Elaine Corporation’s budgeted sales is the peso impact on the average accounts receivable
are P32,400,000 or P90,000 per day. Short-term interest balance of the proposed change in credit policy? (Use
rates are expected to average at 9% per annum. 360 days in a year)
a. P2,344,444 decrease
31. As a result of the changes in collection procedures, b. P2,100,000 decrease
Elaine Corporation’s average accounts receivable c. P6,800,000 decrease
balance will increase (decrease) by d. P18,889 decrease
a. P900,000
b. 90,000 35. What is the impact of the proposed credit policy on
c. (P 900,000) the company’s accounts receivable turnover?
d. 32,400,000 a. Decrease by 7.2
b. Increase by 4.8
c. Decrease by 20 days
d. Increase to 4.8 times losses are anticipated to be 4% of the incremental sales;
ad collection cost will increase by P31,645.
36. Donny Traders sells on credit terms of 2/10, net 30. If the proposed relaxation is credit standards is
Average daily credit sales is P50,000. On the average, implemented, the net benefit (loss) for SIsa Corporation
70% of the customers' avail of the discount and pay on is
the 10th day after purchase, while the rest pays on the a. P215,000
last day of the credit term. How much is the company’s b. P315,000
account receivable balance? c. (33,075)
a. P1,500,000 d. (P100,000)
b. P450,000
c.P800,000 40. Inventory management is the formulation and
d. P1,050,000 administration of plans and policies to efficiently and
satisfactorily meet production and merchandising
37. Flint Company’s average collection period is 20 days. requirements and minimize costs relative to inventories.
The average daily sales is P5,000. All of the company’s One of its objectives it to
average accounts receivable balance? a. Maximize the units in inventory
a. P0 b. Maximize sales
b. P100,000 c. Minimize production costs
c. P50,000 d. Maintain inventory at a level that best balance the
d.P5,000 estimates of actual savings, the cost of carrying
additional inventory, and the efficiency of inventory
38. May Corporation’s average daily sales is P6,400,000, control
10% of which is cash sales. The variable cost ratio is
60%. Starting next year, May Corporation will relax its 41. Inventory costs, in addition to the costs of the
credit standards. The relaxation in credit standards is purchased items, have been traditionally classified as
expected to cause the following changes:Total credit follows, except
sales will increase by 20%The collection period for a. Order cists
incremental sales is 60 days. (The payment behavior of b. Carrying costs
the existing customers will not change).The variable c. Stockout costs
cost ratio, even for the incremental sales, will be the d. Order-filling costs
same as in the past. The cost of borrowing is estimated
at 25% per year. The company uses 360 days in a year in 42. Inventory management requires the firms to
all its computations. What is May Corporation’s balance the quantity of inventory on hand for
expected benefit (loss) from the planned relaxation in operations with the investment in inventory. Two cost
credit policy? categories in the inventory management are order costs
a. P1,152,000 and carrying costs.
b. P460,800 a. The carrying costs include handling costs, interest on
c. (P27,520) capital invested, and obsolescence.
d. P432,000 b. The order costs include quantity discounts lost,
handling costs, and setup costs for a production run.
39. Sisa Corporation has the following data: c. The carrying costs include purchasing costs, shipping
Selling price per unit is P70 costs, quantity discounts lost, and setup costs.
Variable cost per unit P45 d. The order costs include insurance costs, shipping
Annual credit sales P50,400 costs, and obsolescences
Collection period 30 days
Rate of return 20% 43. The following data are taken from the records of
Sisa Corporation is considering easing its credit Chikoy Corporation for year 200A:
standards. If it does, sales will increase by 25%; Sales P25,200,000
collection period will increase to 45 days; bad debts Cost of sales P14,400,000
Inventory turnover 9 times per year (ELS) or Economic Productions Quantity (EPQ)Which of
for 200B, budgeted sales and cost of sales are the same the following statements about the ELS is incorrect?
as in 200A actual data, although the company will try to a. The objective of the ELS models is to minimize the
increase its inventory turnover to 12 times per year. If sum of inventory carrying costs and the costs of
short-term interest rates are expected to average at 8%, production runs or setup costs.
what is the company’s expected savings due to the b. In the ELS model, the production rate is deemed to
increase in inventory turnover? be instantaneous
a. P400,000 c. In the ELS model, the demand is assumed to occur at
b. P700,000 a constant rate over some period of time
c. P32,000 d. The ELS model is used to maximize contribution
d. P56,000 margin or minimize costs given resources constraints.

44. Which inventory costing system will result in a high 49. Which of the following is not an element in the EOQ
inventory turnover ratio in period of rising prices? formula?
a. FIFO a. Yearly demand
b. LIFO b. Variable cost per order
c. Perpetual c. Safety stock
d. Periodic d. Periodic carrying cost per unit

45. In inventory management, a decrease in the 50. Which of the following statements is false?
frequency of ordering will normally a. The cost of inventory itself, as well as ant quantity
a. Increase total carrying costs discounts lost on inventory purchases,is directly
b. Increase the total ordering cost reflected in the EOQ model
c. Have no effect on total carrying costs b. A decrease in inventory order costs will decrease the
d. Have no effect on total ordering costs EOQ
c. An increase in inventory carrying cost will decrease
46. A company would be willing to give a low inventory the EOQ
turnover ratio if the d. An increase in the variable costs of placing and
a. Inventory order costs is low receiving and orders will increase the EOQ
b. Carrying cost of inventory is high
c. Cost of stock out is high 51. The economic order quantity (EOQ) formula does
d. Lead time is short not assume that
a. Demand is known
47. The EOQ model is a deterministic model that b. Usage is uniform
calculates the ideal order quantity (or production lot) c. The cost of placing an order is constant
given specified periodic demand, the cost per order or d. The cost of inventory itself is constant
production run, and the periodic carrying costs per unit.
The EOQ model 52. In the EOQ model, the return on capital that is
a. Minimizes the sum of inventory carrying costs and foregone when it is invested in inventory is a (an)
either ordering or production setup costs a. Order cost
b. Minimizes the sum of ordering costs and production b. Carrying cost
setup costs c. Exclusion in the EOQ computation
c. Minimizes the sum of carrying costs and handling d. Irrelevant cost
costs
d. Minimize the level of average inventory units ITEMS 53 to 55 ARE BASED ON THE FOLLOWING
INFORMATION:
48. The Economic Order Quantity (EOQ) model can be Emil Traders, Inc. Sells cellphone cases which it buys
used to establish inventory policy. In the case of a from a local manufacturer. Emil Traders sells24,000
manufacturer, the EOQ is called the Economic Lot Size cases evenly throughout the year. The cost of carrying
one unit in inventory for one year is P11.52 and the
order cost per order is P38.40 58. Assuming that occasionally, the company
experiences delay in the delivery of material X, such
53. What is the economic order quantity? that the lead time reaches a maximum of 30 days, how
a. 400 many units of safety stock should the company maintain
b. 283 and what is the reorder point?
c. 200 Safety Stock Reorder point
d. 625 a. 350 1,050
b. 350 700
54. If Emil Traders would buy in economic order c. 0 1,050
quantities, the total order costs is d. 1,050 700
a. P921,600
b. P2,304 59. The following information pertains to Annie
c.P76,800 Corporation’s Material X:
d. P460,800 Annual usage 25,200 units
working days per year 360 days
55. If Emil Traders would buy in economic order normal lead time in working days 30 days
quantities, the total inventory carrying costs per year is Safety stock 1,050 units.
a. P276,480
b. P 2,304 The maximum lead time working days and the order
c. P23,040 point for Material X are the
d. P138,240 maximum Lead Time Reorder point
a. 30 days 2,100
56. The basic EOQ models equals the square root of the b. 15 days 1,050
(1) product of twice the demand times the cost per c. 45 days 3,150
order, (2) divided by the periodic carrying cost per unit. d. 45 days 2,100
If the annual demand increases by 44% the EOQ will
increase (decrease) by 60. Using the EOQ model, Ram Corporation determined
a. 6.63% the economic order quantity for a merchandise item to
b. 20% be 800 units. To avoid stockouts costs, its remains 200
c. 9.38% units in safety stock. What is Ram Corporation’s average
d. 12% inventory of such merchandise items?
a. 400 units
ITEMS 57and 58 ARE BASED IN THE FOLLOWING b. 600 units
INFORMATION: c. 500 units
d. 1,000 units
The following information is available for Edgar
Corporation’s Material X
Annual usage 12,600 units
Working days per year 360 days
Normal lead time 20 days
The units of Material X are required evenly throughout
the year

57. What is the reorder point?

a. 35 units
b. 20th day
c. 700 units
d. 630 units