MANAGEMENT ADVISORY SERVICES HO 013 Working Capital

Management
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1. The goal of a firm’s cash management is to

a. increase the cash conversion cycle.
b. increase the payment period.
c. minimize cash requirement.
d. maximize cash outflows.

2. Other things held constant, which will cause an increase in working capital?
a. cash is used to buy marketable securities
b. cash dividend is declared and paid.
c. merchandise is sold on credit, at a profit
d. long-term bonds are retired with proceeds of preferred stock issue.

3. Which transactions would increase the current ratio & decrease net profit?
a. income tax due last year is paid in the current year
b. a stock dividend is paid
c. uncollectible A/R are written off against allowance account
d. vacant land is sold for less than book value

4. Determining the appropriate level of working capital of the firm requires

a. offsetting the profitability of technical insolvency
b. evaluating the risk associated with various levels of fixed assets and the types of debt used to finance
those assets
c. maintaining a high proportion of liquid assets to total assets to maximize return on total investment
d. changing the capital structure and dividend policy of the firm.

5. 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 assets to repay debt
c. higher ratio of current assets to fixed assets
d. higher total assets turnover

6. Which statement is most correct?

a. Permanent current assets are those current assets that must be increased when sales increase during
an upswing.
b. Temporary current assets are those current assets on hand at the low point of the business cycle.
c. Maturity matching is considered an aggressive financing policy
d. An aggressive current asset financing policy uses a minimum amount of short-term debt.
e. None of above

7. Which is not a use of working capital?

a. repurchase of ordinary shares c. purchase of equipment on account
b. purchase of inventory on account d. repayment of long term debt

8. Which transaction does not change the current ratio & total current assets?
a. cash advance made to a divisional office c. a fully depreciated asset is sold for cash
b. cash dividend is declared d. short term notes payable is paid

9. Firms generally choose to finance temporary assets with short-term debt because
a. matching the maturities of assets and liabilities reduces risk
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily long-term is more apt to be unable to repay the debt than a firm that
borrows heavily short-term
d. the yield curve has traditionally been downward sloping.

10. A precautionary motive for holding excess cash is

a. to meet cash demands from normal flow of business activity
b. to avail special inventory purchase before prices rise to higher levels
c. to meet emergencies that may arise periodically
d. to avoid having to use various types of lending arrangements available to cover projected cash deficits

11. Which statement is most correct?

a. The cash budget and the capital budget are planned separately and although they are both important
to the firm, they are independent of each other
b. Since depreciation is a non-cash charge, it does not appear on nor have an effect on the cash budget
c. Target cash balance is set optimally such that it need not be adjusted for seasonal patterns and
unanticipated fluctuations in receipts, although it is changed to reflect long-term changes in operations

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 d. The typical actual cash budget will reflect interest on loans and income from investment of surplus
cash. These numbers are expected values and actual results might turn out different.

12. Which action is not consistent with good management?

a. Use of checks and drafts in disbursing funds
b. Increased synchronization of cash flows
c. Minimize the use of float
d. Maintaining an average cash balance equal to that required as compensating balance or that which
minimizes total cost

13. In cash management firms should strive to ___ float for cash receipts and ___float for cash
disbursements.
a. minimize, minimize b. maximize, maximize c. maximize, minimize d. minimize, maximize

14. Which company practice will result to a better cash flow?

I. Sales personnel are unequivocally responsible for collecting their credit sales
II. Sales commission are based on collected invoices
III. Statement of A/R is reconciled with customers and regularly sent for confirmation
IV. Automatic transfer of funds is arranged with banks regarding deposits of branches.
a. IV only b. III and IV only c. I, III and IV only d. all practices mentioned above

15. The fundamental analysis of cash flow generated from operations may be determined using any of the
following, except
a. after tax income plus depreciation c. net income plus depreciation
b. net income less depreciation plus taxes d. cash sales less cash expenses & tax paid

16. Which account changes would be classified as a use of funds?

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

17. Which would reduce the additional funds required if all other things are held constant?
a. decrease in the company’s tax rate c. increase in dividends payout ratio
b. increase in expected sales growth rate d. decrease in profit margin

18. A lockbox plan is

a. a method for safe-keeping of marketable securities
b. used to identify inventory safety stocks
c. a system for slowing down the collection of checks written by a firm
d. a system for speeding up a firm’s collections of checks received.
e. all of the above

19. Which action is likely to reduce the length of a firm’s cash conversion cycle?
a. Adopting a new inventory system that reduces the inventory conversion period.
b. Adopting a new inventory system that increases the inventory conversion period.
c. Increasing the average days sales outstanding on its accounts receivable.
d. Reducing the amount of time the firm takes to pay its suppliers.

20. If everything else remains constant and a firm increases its cash conversion cycle, its profitability will
likely
a. Increase b. Increase if earnings are positive c. Decrease d. Not be affected

21. Which is not likely to be a proper investment for temporary idle cash?
a. treasury bills c. treasury bonds due within 1 year
b. commercial paper d. initial public offering of a corporation

22. The most important considerations with respect to short-term investments are
a. Return and value b. Risk and liquidity c. Return and risk d. Growth and value

23. The goal of credit policy is to

a. extend credit to the point where marginal profits equal marginal costs
b. minimize bad debts
c. minimize collection expenses
d. maximize sales

24. Which is not considered as part of the firm’s credit policies?

a. Size of the discount that will be offered
b. Length of time for which credit is extended
c. Extent (in terms of money) to which a firm will go to collect an account
d. Minimum risk group to which credit should be extended

25. If easing a firm’s credit policy lengthens the collection period and results in a worsening of the aging
schedule, then why do firms take such actions?
a. it normally stimulates sales c. to increase deferral period for payables
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 b. to meet competitive pressures d. a and b are correct

26. A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in
the investment in accounts receivable and reduction in the number of doubtful accounts. Based on this
information, the
a. Net profit has increased c. size of discount offered has decreased
b. Bad debts percentage has increased d. average collection period has decreased

27. A firm has been extending trade credit on a 2/10, net 30 basis. What change would be expected on the
balance sheet of its customer if the firm went to a net cash 30 policy?
a. Increased payables and increased bank loan c. decreased receivables
b. Increased receivables d. decreased cash

28. The procedures followed by the firm for ensuring payment of its accounts receivables are called its
a. discount policy b. credit policy c. collection policy d. payables policy

29. Which statement is most correct?

a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit
department
b. If a firm that sells on terms of net 30 changes its policy and begins offering all customers terms of 2/10,
net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably
show some past due accounts
d. A and C are correct.

30. In a set of comparative financial statements, you observed a gradual decline in the net to gross ratio
(ex. Between net sales and gross sales). This indicates that
a. There is stiffening in the grant of discounts to the customers
b. The discount period is being lengthened
c. There is adherence to the collection policies of the company
d. Sales volume is decreasing

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

a. Cash sales increase and number of days sales
b. Credit limits are expanded, credit sales increase and credit terms remain the same.
c. Credit limits are expanded, cash sales increase and aging of receivables improved
d. Cash sales increase, current receivables ratio to past due increases, credit limits remain.

32. S1: The two main types of inventory costs relevant to inventory decision making are carrying costs and
ordering costs. S2: The optimal ordering quantity in the EOQ model occurs at the point where the sum
of the carrying costs and ordering costs are minimized.
a. both are true b. both are false c. S1 is true d. S2 is true

33. Carrying costs associated with inventory management include

a. Insurance, shipping, storage and obsolescence
b. Storage, handling, interest on capital invested and obsolescence
c. Purchasing, shipping, set up, and quantity discount lost
d. Obsolescence, set up, interest on invested capital and purchase order costs.

34. Order costs associated with inventory management include

a. Insurance, purchasing, shipping and obsolescence
b. Obsolescence, set up, quantity discount lost and storage
c. Quantity discount lost, storage, handling and interest on invested capital
d. Purchasing, shipping, set up and quantity discount lost.

35. Increase in the frequency of ordering inventories will normally

a. Reduce total costs c. have no impact on ordering costs
b. Reduce total carrying costs d. have no impact on carrying costs

36. An increase in the inventory carrying costs will

a. Decrease the EOQ c. increase the safety stock required
b. Decrease the number of orders being issued d. have no effect on EOQ

37. Decrease in the inventory order costs will

a. decrease the EOQ c. decrease the holding cost percentage
c. increase the reorder point d. have no effect on EOQ

38. The problem of avoiding excessive investment in inventories and at the same time avoiding inventory
shortages can be solved by applying a quantitative technique known as
a. EOQ model b. High low point model c. payback analysis d. probability analysis

39. Some of the underlying assumptions of EOQ model are:

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 a. Increasing demand, limited production capacity, increasing ordering cost, increasing carrying cost
and limited inventory capacity.
b. Limited production capacity, declining demand, constant ordering cost, constant carrying cost and
unlimited inventory capacity
c. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing carrying
cost and unlimited inventory capacity.
d. Constant demand, constant ordering cost, constant carrying cost, unlimited production and
inventory capacity.

40. The EOQ model assumes all of the following, except

a. Total demand for cash is known with certainty
b. Cash flow requirements are random
c. The cost of a transaction is independent of the amount of the transaction and interest rates are
constant over the short run
d. An opportunity cost is associated with holding cash, beginning with the first pesos.

41. Which is not directly reflected in the basic EOQ model?

a. Interest on invested capital c. set up costs of manufacturing runs
b. Public warehouse rental charges d. quantity discounts lost on purchases

42. The EOQ of the main raw material of Moonlight Inc. is computed at 10,000 units. However, the chief
purchasing officer decided to order in quantities of 12,000 units. The probable effect of this decision on
the annual inventory costs as compared to the amounts had the order been made at the EOQ?
a. lower purchase order cost and higher carrying cost
b. lower purchase order cost and lower carrying cost
c. higher purchase order cost and higher carrying cost
d. higher purchase order cost and lower carrying cost

43. If one optimizes the inventory turnover ratio, which costs will not increase?
a. Total reorder costs b. stock out costs c. unit reorder costs d. carrying costs

44. Ignoring safety stock, the valid computation of the reorder point is the
a. EOQ
b. EOQ multiplied by the expected demand during the lead time
c. Anticipated demand during the lead time
d. Square root of the anticipated demand during lead time

45. The cost of stock-out does not include

a. Depreciation and obsolescence c. loss of sales
b. Loss of customer goodwill d. disruption of production schedule

46. When a specific level of stock is carried for an item in inventory, average inventory level for that item
a. Is not affected by the safety stock c. decrease by the amount of safety stock
b. Increase by the amount of safety stock d. increase by half of the safety stock

47. In inventory management, the safety stock will tend to increase if

a. Carrying cost increase c. variability of lead time increase
b. Cost of running out of stock decrease d. fixed order cost decrease

48. When the level of safety stock is increased,

a. Lead time will increase c. carrying costs will decrease
b. Frequency of stock-outs will decrease d. ordering costs will decrease

49. The inventory conversion period is calculated as:

a. average inventory / sales per day c. average inventory / A/R
b. year-end inventory / Sales per day d. average inventory /Cost of sales per day

50. 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 is relatively easy to sell because it is neither a raw material or finished product
b. WIP inventory usually has the highest loan value of the different types of inventory
c. WIP generally has the lowest marketability of the various types of inventory
d. WIP represents a lower investment as opposed to other types of inventory

51. Jumpdisk Company writes checks averaging P15,000 a day, and it takes five days for these checks to clear.
The firm also receives checks in the amount of P17,000 per day, but the firm loses three days while its
receipts are being deposited and cleared. The firm’s net float is?
a. P16,000 b. b. P24,000 c. P32,000 d. P75,000

52. MAS Store prepared the following funds statement on a cash basis.
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 Decrease in working P50,000 Repairs and maintenance P19,500
capital
Depreciation 13,000 Total uses of cash 454,000
Increase in cash 25,000
Calculate the total sources of cash of MAS Store.
a. P467,000 b. P472,500 c. P479,000 d. P492,000

53. Cross collectibles currently fills mail orders from all over the country and receipts come in to its
headquarters. The firm’s average A/R is P2.5 million and is financed by a bank loan with 11% annual
interest. The firm is considering a regional lockbox system to speed up collections that it believes will
reduce A/R by 20%. The annual cost of the system is P15,000. What is the estimated net annual savings to
the firm from implementing the lockbox system?
a. P30,000 b. P40,000 c. P55,000 d. P60,000 e. P500,000

54. DGS makes large cash payments averaging P17,000 daily. The firm changed from using checks to sight
drafts which will permit it to hold its cash for one extra day. If DGS can use the extra cash to earn 14%
annually, what annual peso return will it earn?
a. P6.25 b. P652.10 c. P2,380 d. P6,521

55. A firm has daily cash receipts of P100,000. A bank has offered to reduce the collection time on the
firm’s deposits by two days for a monthly fee of P500. If money market rates are expected to average
6% during the year, the net annual benefit (loss) from having this service is
a. P0 b. P3,000 c. P6,000 d. P12,000

56. Once each year, B. Smith Inc. receives a P2 million payment. Of this amount, P700,000 is needed for
cash payments made during the next year. Each time Smith deposits money in its account, a charge of
P2.00 is assessed to cover clerical costs. Smith can hold marketable securities which yield 5 percent.
What is the company’s optimal cash balance using the Baumol Model?
a. P 12,649 b. P 7,483 c. P 20,132 d. P 58,333

57. Short Construction offers its customer’s credit terms of 2/10, net 30 days, while Fryman Construction offers
its customer’s credit terms of 2/10, net 45 days. The aging schedules for each of the two companies’
accounts receivable are reported below:
Short Construction Fryman Construction
Age of Value of Percentage of Value of Percentage of
Account (Days) Account Total Value Account Total Value
0-10 P 58,800 60% P 73,500 50%
11-30 19,600 20 29,400 20
31-45 14,700 15 29,400 20
46-60 2,940 3 10,290 7
Over 60 1,960 2 4,410 3
Total Receivables P 98,000 P147,000
Which company has the greatest % of overdue accounts and what is their %?
a. Short; 20% overdue c. Fryman; 30% overdue
b. Short; 40% overdue d. Fryman; 50% overdue

58. ABC Inc. sells on credit terms of 3/10, net 30 days. Gross sales for the year are P2.4 million. The
collections department estimates that 30% of the customers pay on the 10 th day and take discounts,
40% pay on the 30th day and the remaining 30% pay on the average, 40 days after the purchase.
Assuming 360 days per year, what is the average collection period?
a. 15 days b. 20 days c. 27 days d. 40 days

59. GCS Co.’s budgeted sales for the coming year are P30 million, 80% of which is expected to be on
credit. The company wants to change its credit terms from n/30 to 2/10, n/30. If the new credit policy is
adopted, it is estimated that cash discounts would be taken on 40% of the credit sales and the
uncollectible amount would remain the same. The expected discount to be availed by customers if the
new credit policy is adopted would be
a. P192,000 b. P288,000 c. P480,000 d. P600,000

60. KTA Corporation has an inventory conversion period of 60 days, receivable conversion of 35 days and
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)
a. P72,450 b. P79,600 c. P85,200 d. P94,500

61. SMART Inc. instituted new credit policies resulting to the following information:
Old Policy New Policy
Sales P1.8 million P1.98 million
Ave. collection period 30 days 36 days
The company requires a rate of return of 10%. Variable cost ratio is 60%. Using a 360 day year, the
pre-tax cost of carrying the additional investment in receivables under the new policy would be
a. P28,800 b. P30,000 c. P40,800 d. P48,000

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62. The Sales Director of ABC Co. suggests that certain credit terms be modified. He estimates the
following effects:
a. Sales will increase by at least 20%.
b. Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times.
c. Bad debts, now at 1% of sales, will increase to 1.5%.
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and desired rate of return
is 20%. Fixed expenses amount to P150,000.
Should the company allow the revision of its credit terms?
a. Yes, income will increase by P64,800 c. No, income will decrease by P13,000
b. Yes, income will increase by P78,800 d. No, losses will increase by P28,000

63. Premier Inc. budgeted sales for the coming year is P96 million, 80% of which is expected to be credit
sales at terms of n/30. The company estimates that a proposed relaxation of credit standards would
increase credit sales by 30% and increase average collection period from 30 days to 45 days. Based on
a 360 day year, the proposed relaxation of credit standards would result to an increase in accounts
receivable balance of
a. P1,920,000 b. P2,880,000 c. P6,080,000d. P6,880,000

64. Ruth Co. currently has P1,000,000 in A/R. Its days sales outstanding (DSO) is 50 days. The firm wants to
reduce its DSO to industry average of 32 days by pressuring more of its customers to pay their bills on
time. The firm’s CFO estimates that if this policy is adopted the firm’s average sales will fall by 10 %t.
Assuming the firm adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 % of
sales, what will be the A/R following the change? Assume a 365-day year.
a. P50,000 b. P576,000 c. P633,333 d. P900,000

65. GC Company's A/R were P430,000 on Jan. 1 and P480,000 at year-end. Cash sales were P175,000 for
the year. The accounts receivable turnover was 5. GC Company's total sales for the year were:
a. P2,275,000 b. P2,450,000 c. P2,575,000 d. P3,150,000

66. On average, a firm sells P2,000,000 in merchandise a month. It keeps inventory equal to one-half of its
monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm’s
inventory conversion period (in days)?
a. 10.5 b. 15.2 c. 30.3 d. 182.5

67. Ral Co. sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory for
one year is P8 and the purchase order cost per order is P32. What is the economic order quantity?
a. 200 b. 283 c. 400 d. 625

68. The ordering costs related to a product are P12.50 per order. The cost of carrying one item of inventory
for one year is P16. The business sells 40,000 units of the product evenly throughout the year. At EOQ,
total ordering costs per year and total carrying costs per year, respectively, must be
a. P1,562.50 ; P1,562.50 b. P1,562.50 ; P2,560.00 c. P2,000 ; P2,000 d. P4,000 ; P4,000

69. SOS uses 300,000 units of part X a year. Average purchase lead time is 20 working days while
maximum is 27 working days. The firm’s annual operations cover 240 days allowing for shutdowns for
plant maintenance, holidays and Sundays. The firm wants to keep safety stock to guard against stock
outs. What is the safety stock in units?
a. 1,250 b. 8,750 c. 25,000 d. 33,750

70. The following information pertains to material X that is used by Sage Co.: Annual usage in units 20,000
Working days per year: 250 Safety stock in units: 800 Normal lead time in working days: 30 units of
material X will be required evenly throughout the year. The order point is
a. 800 b. 1,600 c. 2,400 d. 3,200

71. Video City sells 200 units of discs per week. Purchase order lead time is 3 weeks and EOQ is 450 units.
What is the reorder point (in units)?
a. 425 b. 600 c. 1,750 d. 2,250

72. DAM Co. provided the following information related to inventory:

Annual sales 20,000 units Safety stock 2,600 units
Order quantity 4,000 units Lead time 4 weeks
Assuming a 50 week year, the reorder point must be (in units)
a. 1,600 b. 2,600 c. 4,200 d. 5,600

73. Triple T Inc. sells 100,000 tea bags a year. Other data are as follows:
Selling price/bag P2.50 Carrying cost 20% of unit cost
Purchase cost/bag P1.50 Operating days per year 250
Ordering cost P5.40/order Ave. lead time on purchases 6 days
What is the reorder point (in bags) if the firm keeps a safety stock of 3,000 units of inventory?
a. 2,400 b. 5,400 c. 6,400 d. 8,800

74. The following data relate to inventories for a given year of Cloud Company:
EOQ 7,500 units Total costs of purchase orders per year P15,000
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 Cost per purchase order P75 Carrying cost per unit P6
The estimated annual usage in units would be
a. 1,250,000 b. 2,000,000 c. 2,250,000 d. 5,625,000

75. AB Company’s budgeted sales and cost of sales for the coming year are P72 million and P45 million
respectively. Short term interest rates are expected to average 10%. If the company can increase inventory
turnover from its current level of 9 times per year to 12 times per year, its cost savings in the coming year
are expected to be
a. P125,000 b. P300,000 c. P375,000 d. P500,000

76. Eagle Sporting Goods has P5 million in inventory and P2 million in A/R. If average daily sales are
P100,000 and payables deferral period is 30 days, what is the firm’s cash conversion period?
a. 100 days b. 60 days c. 50 days d. 40 days

77. Ammer Products has an average accounts payable balance of P850,000 and its annual cost of goods sold is
P8,750,000. Using 365 days a year, the payables deferral period (in days) is
a. 25.50 b. 30.50 c. 35.46 d. 42.33 e. 50.00

78. A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an
average payment period of 30 days. The firm’s operating cycle is _________ days.
a. 110 b. 130 c. 120 d. 70

79. A firm has an average age of inventory of 60 days, an average collection period of 45 days, and an
average payment period of 30 days. The firm’s cash conversion cycle is _________ days.
a. 15 b. 45 c. 75 d. 135

80. As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paid every
two weeks instead of every week. A major firm employing hundreds of clerical workers had a weekly
payroll of P1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession
was to delay clearing time by one week. Due to the concession, the firm
a. realized an annual loss of P120,000.
b. realized an annual savings of P120,000.
c. increased its cash cycle.
d. decreased its cash turnover.

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