FIN 081 P2 QUIZ 1

I. True or False. In the answer sheet, CAPITAL letters, write TRUE if the statement is correct, otherwise, FALSE.
FALSE 1. Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current
ratio minus the quick ratio.
FALSE 2. Net working capital is defined as current assets divided by current liabilities.
TRUE 3. Days of working capital is the amount of net operating working capital required per dollar of daily sales.
TRUE 4. Determining a firm's optimal investment in working capital and deciding how that investment should be
financed are critical to working capital management.
FALSE 5. An increase in any current asset must be accompanied by an equal increase in some current liability.
TRUE 6. A conservative current operating asset financing approach will result in permanent current assets and some
seasonal current assets being financed using long-term securities.
TRUE 7. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-
term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of
using short-term financing.
FALSE 8. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will
lengthen its cash conversion cycle (CCC).
FALSE 9. Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its
cash conversion cycle (CCC).
TRUE 10. Shorter-term cash budgets-say a daily cash budget for the next month-are generally used for actual cash
control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning
purposes.
TRUE 11. The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average
collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working
capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.
FALSE 12. A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the
assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are
concentrated at the beginning of each month.
FALSE 13. An increase in any current asset must be accompanied by an equal increase in some current liability.
FALSE 14. Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is
actually greater than it appears from the dollar amounts shown on balance sheets because banks provide
nonspontaneous funds to firms.
TRUE 15. Determining a firm's optimal investment in working capital and deciding how that investment should be
financed are critical to working capital management.

II. Multiple Choice. In the answer sheet, write your answer in CAPITAL Letter.
1. Other things held constant, which of the following will cause an increase in net working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
C. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.

2. Firms generally choose to finance temporary current operating assets with short-term debt because
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because
short-term debt is often less expensive than long-term capital.
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that
borrows short term.
d. the yield curve is normally downward sloping.
e. short-term debt has a higher cost than equity capital.

3. Janny Thor Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
a. Increase average inventory without increasing sales.
 b. Take steps to reduce the DSO.
c. Start paying its bills sooner, which would reduce the average accounts payable but not affect
d. Sell common stock to retire long-term bonds.
e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

4. Other things held constant, which of the following would tend to reduce the cash conversion cycle?
a. Carry a constant amount of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
C. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
e. Offer longer payment terms to customers.

5. Which of the following actions would be likely to shorten the cash conversion cycle?
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20
days to 10 days.
b. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw
materials to finished goods from 10 days to 20 days.

6. Net working capital is the difference between

a. Current assets and current liabilities
b. Fixed assets and current liabilities
c. Total assets and total liabilities
d. Shareholders' investment and cash

7. As a company becomes more conservative in working capital policy, it would tend to have a(an)
a. Decrease in its acid test ratio
b. Increase in the ratio of current liabilities to non-current liabilities
c. Increase in the ratio of current asset to units of output
d. Increase in funds invested in common stock and a decrease in funds invested in marketable securities

8. Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend to
have a
a. Greater percentage of short-term financing.
b. Greater risk of needing to sell current asset to repay debt
c. Higher current ratio or current asset to fixed assets
d. Higher total asset turnover

9. Which of the following account changes would be classified as a use of funds?

a. An increase in accounts payable
b. An increase in retained earnings
c. A decrease in bonds payable
d. A decrease in accounts receivable

10. During the year, JannyBee Company's current assets increased by P130, current liabilities decreased by P60, and net
working capital
a. Increased by P70 b. Did not change
c. Decreased by P190 d. Increased by P190

11. As a company becomes more conservative in its working capital policy, it would tend to have a(an)
a. Decrease in its acid test ratio
b. Increase in the ratio of current liabilities to noncurrent liabilities
 c. Increase in the ratio of current asset to units of output
d. Increase in funds invested in common stock and a decrease in funds invested in marketable securities

12. Janny Cemon has current assets of P300,000 and current liabilities of P200,000. Janny Cemon could increase working
capital policy by the
a. Prepayment if P50,000 of the next year's rent
b. Refinancing of P50,000 of short term debt with long term debt
c. Acquisition of land valued at P50,000 through the issuance of common shares
d. Purchase of P50,000 of financial assets held for trading for cash

13. Which one of the following would increase the working capital of a company?
a. Cash payment of payroll taxes payable
b. Refinancing a short term note payable with a two year note payable
c. Cash collection of accounts receivable
d. Payment of a 20-year mortgage payable with cash

14. All of the following statements in regards to working capital are correct except
a. Current liabilities are an important source of financing for many small firms
b. Profitability varies inversely with liquidity
c. The hedging approach to financing involves matching maturities of debt with specific financing needs
d. Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital
policy

15. The following transactions occurred during a company's first year of operations:
i.Purchased of deliver van for cash
ii.Borrowed money by issuance of short term debt
iii.Purchased treasury stock
Which of the items above caused a decrease in the amount of working capital?
a. I only b. II and III only
c. I and III only d. I, II and III

16. Which of the following is correct?

a. The stockholder's equity is a major component of working capital.
b. Net working capital is the difference between quick assets and current liabilities.
c. Working capital is a measure of long-term solvency.
d. Net working capital is the difference between the current assets and current liabilities.

17. The primary objective of working capital management is to

a. Maximize the company's total current assets
b. Minimize the company's total current liabilities
c. Balance the amount of current assets and current liabilities
d. Achieve a balance between risk and return.

18. In a conservative or relaxed working capital financing policy

a. Operations are conducted on a minimum amount of working capital
b. Operations are operated with too much working capital
c. Short-term liabilities are used to finance not only temporary current assets, but also part or all the permanent
current asset requirements
d. The company is exposed to risk of illiquidity because of low working capital position

19. Financing inventory build-up with long-term debt is an example of

a. A conservative working capital policy b. Matching policy
c. An aggressive working capital policy d. Hedging policy
20. The matching or hedging approach to financing involves
a. The use of long-term debt to finance current assets.
b. The use of short-term debt to finance non-current assets.
c. Matching maturities of debt with specific financing needs.
d. Issuance of common stocks to raise funds for working capital requirements.

21. Which of the following is incorrect?

a. Profitability varies directly with liquidity.
b. The greater the risk, the greater the potential for larger return
c. Long-term financing has less liquidity risk than short-term financing, but has a higher explicit cost, hence lower
return.
d. More current assets lead to greater liquidity but yield lower returns.

22. Which of the following statements is true?

a. Short-term debt is usually more expensive than long-term debt.
b. Liquid assets do not ordinarily earn higher returns relative to long-term assets, so holding the former will
maximize the return on total assets.
c. A conservative working capital policy is characterized by higher current ratio and acid-test ratio.
d. Determining the appropriate level of working capital for a firm requires changing the firm's capital structure
and dividend policy.

23. The length of time it takes for the initial cash outflows for goods and services to be realized as cash inflows from sales
is called
a. Product Life Cycle b. Manufacturing Cycle
c. Vicious Cycle d. Cash Conversion Cycle

24. The length of time between the acquisition of inventory and payment for it is called the
a. Operating Cycle b. Inventory Conversion Period
c. Accounts Receivable Period d. Accounts Payable Deferral Period

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

26. Temporary working capital supports

a. The cash needs of the company. b. Payment of long-term debt.
c. Acquisition of capital equipment. d. Seasonal peaks.

27. Determining the appropriate level of working capital for a firm requires
a. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these
assets.
b. Changing the capital structure and dividend policy of the firm.
c. Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term
debt.
d. Offsetting the benefit of current assets and current liabilities against the probability of technical solvency.

28. ABC Company follows an aggressive financing policy in its working capital management while XYZ Corporation
follows a conservative financing policy. Which of the following statements is correct?
a. ABC has low ratio of short-term debt to total debt while XYZ has a high ratio of short-term debt to total debt.
b. ABC has a low current ratio while XYZ has a high current ratio.
 c. ABC has less liquidity risk while XYZ has more liquidity risk.
d. ABC finances short-term assets with long-term debt while XYZ finances short-term assets with short-term
debt.

29. Which of the following would increase risk?

a. Raise the level of working capital.
b. Decrease the amount of inventory by formulating an effective inventory policy
c. Increase the amount of short-borrowings
d. Increase the amount of equity financing

30. As a firm's cash conversion cycle increases, the firm

a. Becomes less profitable
b. Increases its investment in working capital
c. Reduces its accounts payable period
d. Incurs more shortage costs

III. Problem solving. Write your answer in the box provided in the answer sheet.
1. Your consulting firm was recently hired to improve the performance of Janny Bee Corporation, which is highly
profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to
determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's
present cash conversion cycle? (2 points)
Average inventory = P75.000
Annual sales = P600,000
Annual cost of goods sold = P360,000
Average accounts receivable = P160,000
Average accounts payable = P25,000
ANSWER: 148 DAYS

2. Hi Mhie Cemon Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding
(DSO) on its cash flow cycle. Hi Mhie Cemon's 2024 sales (all on credit) were P150,000; and it earned a net profit of 6%,
or P9,000. It turned over its inventory 6 times during the year, and its DSO was 36.5 days. The firm had fixed assets
totaling P35,000. Hi Mhie Cemon's payables deferral period is 40 days.
a. Calculate Hi Mhie Cemon's cash conversion cycle. (2 points) ANSWER: 57 DAYS
b. Assuming Hi Mhie Cemon holds negligible amounts of cash and marketable securities, calculate its total assets
turnover and ROA. (2 points) ANSWER: TAT= 2.02x ROA=12.00%
c. Suppose Hi Mhie Cemon's managers believe that the inventory turnover can be raised to 7.3 times. What
would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had
been 7.3 for 2024? (2 points) ANSWER: CCC= 47 DAYS TAT=2.0x ROA=12.00%
3. Christian Field's has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Christian Field has
the opportunity to invest the money at 24% per annum. The company sends, on the average, P40 for every cash
conversion to marketable securities. What is the optimal cash conversion cycle? (2 points) ANSWER: P55,000

4. What are the expected annual savings from a lock-box system that collects 20 checks per day averaging P10,000 each
and reduces mailing and processing time by 2.5 and 1.5 days, respectively, if the annual interest is 5%?
a. P40,000.00 b. P20,000.00 c. P444.44.00 d. P2,000.00

5. ABC Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable conversion
cost. It takes the firm 18 days to convert raw materials into calculator. ABC's usual credit terms extended to its customers
is 30 days, and the firm generally pays its suppliers in 20 days. If the foregoing cycles are constant, what amount of
working capital must ABC Company finance?
a. P1,400,000 b. P2,400,000 c. P900,000 d. P1,800,000

6. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 million in average
inventory and a cash conversion cycle of 75 days?
a. 6.56 days b. 18.75 days c. 52.60 days d. 67.50 days

The condensed balance sheet as of December 31, 2022 of San Matias Company is given below. Figures shown by a
question mark (?) may be computed from the additional information given:
ASSETS LIAB. & STOCKHOLDERS EQUITY
Cash P 60,000 Accounts payable P ?
Trade receivable-net ? Current notes payable 40,000
Inventory ? Long-term payable ?
Fixed assets-net 252,000 Common stock 140,000
Retained earnings ?
Total Assets P 480,000 Total L & SHE P 480,000

Additional information:
Current ratio (as of Dec. 31, 2022) 1.9 to 1
Ratio of total liabilities to total stockholders' equity 1.4
Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold and ending inventory 10 times
Gross margin for 2022 P500,000

7. What is the balance of Accounts payable as of December 31, 2022? ANSWER: P80,000
8. What is the balance of Retained earnings as of December 31, 20227 ANSWER: P60,000
9. What is the balance of inventory as of December 31, 2022? ANSWER: P100,000