Fi

nancial
Management
(
B.Wor
kingCapi
talManagement
)

B. WORKI
NGCAPI
TALMANAGEMENT D.I
ncr
easet
heamountofequi
tyf
inanci
ng.

Conservat
ive
THEORI ES: 2.Asa company becomesmor e conser vat
ive wi
thr espectt o wor
king
Workingcapi t
almanagement capi
talpoli
cy,i
twouldtendtohavea( n)
1. Wor ki
ngcapi t
almanagementi nvolvesinvest
mentandf
inanci
ngdeci
si
ons A.Increaseintherat
ioofcurr
entliabi
li
ti
estononcurrentliabi
l
it
ies.
rel
atedto: B.Increaseintheoperati
ngcycle.
A.pl antandequi pmentandcurrentli
abil
it
ies
. C.Decr easeintheoperat
ingcycle.
B.cur rentassetsandcapit
alst
ructure. D.Increaseintherat
ioofcurr
entassetst ocurr
entl
iabil
it
ies.
C.cur rentassetsandcurr
entli
abil
iti
es.
D.sal esandcr edit
. Moder
ate
3.Short
-ter
mf inanci
ngpl
answit
hhighli
qui
dit
yhave:
1
7.Thegoalofmanagi ngwor ki
ngcapi t
al,suchasi
nvent
ory,shoul
dbet
o A.highreturnandhighri
sk
mini
mizethe: B.moder ateretur
nandmoderat
erisk
A.costsofcarr
yinginvent
ory C.lowpr ofi
tandlowri
sk
B.opportuni
tycostofcapi
tal D.noneoft heabove
C.aggregateofcarryi
ngandshortagecosts
D.amountofspoi l
ageorpil
ferage Temporar
y&Per manentwor ki
ngcapital
4.Temporar
ywor kingcapi
talsuppor
ts
Wor kingcapi t
alfi
nancingpol i
cy A.t
hecashneedsoft hecompany.C.acqui si
ti
onofcapit
alequi
pment
.
Aggr essive B.paymentoflongter
m debt. D.seasonalpeaks.
5.ZapCompanyf ol
l
owsanaggr essi
vef inancingpol i
cyinitswor ki
ngcapital
managementwhi l
e Zing Cor porati
on f ol
lows a conser vative fi
nanci
ng CashManagement
pol i
cy.Whi choneoft hef oll
owingstatement siscorrect
? Motivesforholdi
ngcash
A.Zaphasl ow rati
oofshor t
-term debtt ot ot
aldebtwhi l
eZi nghasa 7.Thet r
ansacti
onmotivef
orhol
dingcashi
sfor
:
highrati
oofshor t-t
erm debtt ototaldebt . A.asaf etycushi
on C.compensati
ng bal
ance
B.Zaphasal owcur r
entr at
iowhi l
eZi nghasahi ghcur r
entr ati
o. requi
rements
C.Zaphasl essli
quidit
yr i
skwhi l
eZi nghasmor eli
quidi
tyrisk. B.dai l
yoperati
ngrequi
rement
s D.noneoftheabove
D.Zap f inances shor t
-term asset s wi t
hl ong-t
er m debtwhi le Zi
ng
fi
nancesshor t
- t
erm assetswi t
hshor t
-term debt. Fl
oat
8.Thedi ff
erencebet
weenthecashbalanceont hefi
rm'sbooksandt
he
6.Whi
chofthef ol
l
owingwouldi
ncreaser i
sk? bal
anceshownonthebankst
atementi
scal
led:
A.Rai
set hel
evelofwor
kingcapit
al. A,thecompensati
ngbal
ance C.asaf et
ycushi
on
B.Decrease the amount of i
nventory by f
ormul
ati
ng an ef
fect
ive B.float D.noneoft heabove
i
nventorypoli
cy.
C.I
ncreasetheamountofshort
-term borr
owi
ng. Cashconver
sioncycl
e

636
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

9.Thelengthofti
mebet weenpaymentf
orinventor
yandthecol
l
ect
ionof
cashisr
eferr
edtoas: I
nvent
orymanagement
A.payablesdefer
ralperi
od C.operati
ngcycl
e 1
6.Theuseofsafetystockbyafi
rm wi
l
l:
B.receivabl
esconversi
onperi
od D.cashconver si
oncycl
e A.r educei
nventor
ycosts C.havenoeff
ectoni
nvent
orycost
s
B.increasei
nventorycost
s D.noneoft
heabove
1
0.Asafir
m' scashconver si
oncyclei
ncreases
,thef
ir
m:
A.becomesl esspr ofi
tabl
e 1
8.Whenaspeci f
iedl evelofsafet
ystockiscarri
edf oranit
em i
ninvent
ory,
B.increasesit
sinvestmentinworki
ngcapital t
heaverageinventorylevelfort
hatit
em
C.reducesitsaccount spayabl
eperi
od A.decreasesbyt heamountoft hesafetystock.
D.incursmor eshortagecosts B.i
sone- hal
fthel eveloft
hesaf et
ystock.
C.Incr
easesbyone- halft
heamountoft hesaf etystock.
1
1.Thelongert
hef i
rm'
saccountspayableperi
od,the: D.Incr
easesbyt henumberofuni t
softhesaf etystock.
A.longerthefir
m'scashconversioncycl
eis.
B.shor t
erthefi
rm'
sinventor
yper i
odis. 1
9.Whichoft hefoll
owingstat
ement siscor r
ectforafi
rmthatcur
rent
lyhas
C.mor ethedelayint
heaccount srecei
vabl
eper i
od. t
otalcostsofcar ryi
ngandor deri
ngi nventor
ythatare50% hi
gherthan
D.lessthefir
m mustinvesti
nwor ki
ngcapit
al. t
otalcar
ryi
ngcost s?
A.Cur r
entordersizeisgr
eaterthanoptimal
1
2.Theaveragelengt
hoftimeapesoi
sti
edupincur
rentasseti
scal
l
edt he: B.Cur r
entordersizeisl
essthanoptimal
A.networ ki
ngcapit
al. C.recei
vabl
esconversi
onperi
od. C.Perunitcarryi
ngcostsaretoohigh
B.inventor
yconversi
onperi
od. D.cashconver si
onperi
od. D.Theopt imalordersi
zeiscurr
entl
ybei ngused

Recei
vablesmanagement Tradecredit
13.Al
lofthesefactor
sareusedi
ncr
edi
tpol
i
cyadmi ni
str
ati
onexcept: 20.Wit
hcr editt
ermsof3/ 8,n/30,whatist hecust
omer
’
A.creditst
andards C.pesoamountofr ecei
vabl
es dat
e?
B.termsoft r
ade D.col
lect
ionpoli
cy A.Thr eedaysaft
ertheinvoi
ceisreceived.
B.The8t hdayisthecustomer’ .
1
4.Whichofthef
oll
owingstatement si
smostcor rect
?Ifacompanyl ower
sit
s C.Anyt i
medur i
ngtheperiod,8t
htothe30t h.
DSO,butnochangesoccuri nsalesoroperati
ngcost s,then: D.The30t hdayistheprimarydecisi
ondate.
A.thecompanymi ghtwellendupwi thahigherdebtr at
io.
B.thecompanymi ghtwellendupwi thalowerdebtr ati
o. PROBLEMS
C.thecompanywoul dprobablyendupwi t
hahi gherROE. Worki
ngcapi t
alfi
nanci
ng
D.thecompany'st
otalassetturnoverrat
iowouldpr obabl ydecl
i
ne. i
. CasieCompanyt urnsout200cal cul
atorsadayatacostofP250per
cal
culatorformateri
alsandvari
ableconversi
oncost.Itt
akest
hef
ir
m18
1
5.Al
lbutwhi
chofthefol
l
owi
ngi
sconsi
der
edindeter
miningcreditpoli
cy? daystoconver traw mater
ial
sint
ocalculator
.Casie’
A.Credi
tst
andards C.Accountspayabledeferral
peri
od extendedt oitscustomersis30 days,andt hef
ir
m general
l
ypaysi
ts
B.Credi
tl
imit
s D.Coll
ect
ioneffort
s suppli
ersin20days.

637
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

I
fthe for
egoing cycl
esare const
ant
,whatamountofwor
king capi
tal A.50days C.120days
mustCasieCompanyf i
nance? B.90days D.40days
A.P1,400,000 C.P 900,
000
B.P2,400,000 D.P1
,800,
000 Cashmanagement
Economicconversi
onquanti
ty(ECQ)
Cashconversi
oncycl
e vi
i.Simi
leInc.hasatot
alannualcashrequir
ementofP9,075,
000whichare
i
i. Luke Company has an invent
ory conver
sion per
iod of60 days,a tobepai dunif
orml
y.Similehastheopport
unit
ytoinvestthemoneyat
recei
vabl
esconversi
onperiodof45days,andapayment scycl
eof30 24% perannum.Thecompanyspends,ont heaver
age,P40f orever
y
days.Whatist
helengthofthefi
rm’ ? cashconversi
ontomarketabl
esecuri
ti
es.
A. 90days C. 54days Whatistheopti
malcashconversi
onsize?
B. 75days D.1 05days A.P60, 000 C.P45,000
B.P55, 000 D.P72,500
i
i
i.TheSpadesCompanyhasani nventoryconver
sionper
iodof75days,a
recei
vabl
esconver
sionper
iodof38days ,andapayablepaymentper
iod Opportunitycost
of30days.Whatisthel
engthofthefir
m’ ? vi
i
i.HyperboleCor por at
ionesti
matesitstot
alannualcashdi sbur
sement
sof
A.83days C.67days P3,251,250 whi ch ar e to be pai d uni
formly. Hyperbol
e has the
B.1 13days D.45days opportunit
yt oinvestthemoneyat9% perannum.Thecompanyspends,
ont heaver age,P25f oreverycashconver si
ont omarketabl
esecur
it
ies
i
v.Samarit
an Suppli
es,Inc.hasP5 mi l
li
on i
ninvent
oryand P2 mi l
li
on i
n andvicever sa.
accountsr
eceivabl
e.Itsaveragedail
ysalesareP100,000.Thecompany Whati stheoppor tunit
ycostofkeepingcashinthebankaccount?
hasP1 .
5 mil
li
on in account
spayabl e.It
saverage dai
lypurchasesare A.P3, 825.00 C.P4, 1
90.00
P50,000.Whatisthelengthofthecompany’ ? B.P1 ,912.50 D.P 1 88.55
A.50days C.30days
B.20days D.40days Annual savings
i
x.Whatar et he expect
ed annualsavings f
rom a l ock-box syst
em t hat
Daysinventory col
lects1 50checksperdayaver agingP500each,andr educesmai l
i
ng
v. Whatist heinventor
yperi
odforafir
m wit
hanannualcostofgoodssol
d and pr ocessing ti
mesby2. 5 and 1 .
5 daysr especti
vely,ifthe annual
ofP8mi l
li
on,P1 .
5mi l
l
ioninaver
ageinventor
y,andacashconversi
on i
nterestr ateis7%?
cycl
eof75days? A.P 5, 250 C.P 21 ,000
A. 6.56days C.52.60days B.P 1 3,125 D.P300, 000
B.1 8.
75days D.67.50days
Receivabl
esmanagement
vi
.Samar it
an Suppli
es,Inc.hasP5 mi ll
ion i
ninvent
oryand P2 mi l
li
on i
n Carryi
ngcost
accountsr
eceivabl
e.Itsaveragedail
ysalesareP100,000.Thecompany x. TheCampCompanyhasani nvent
oryconver
sionper
iodof60days,a
hasP1 .
5 mil
li
on in account
spayable.Itsaverage dai
lypurchasesare recei
vabl
econver
sionper
iodof30days,andapayabl
epaymentperi
od
P50,000.Whatisthelengthofthecompany’ ? of45days.TheCamp’

638
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

cost
sofP600,000.Thecur
rentcostofcapi
talforCampis12%. wer
emade?
I
fCamp’ ,
375,000andal lsal
esareoncredi
t,whati
s A.P 9,688 C.P 96,
875
thef
ir
m’ ,usi
ng360daysyear? B.P 1
2,988 D.P129,
975
A.P281 ,
250 C.P 20, 250
B.P1 68,
750 D.P 56, 250 Compr ehensive
Questi
onNos.1 4through1 6arebasedont hef oll
owingdat a:
Averager eceivabl
es SonataCompanyi sconsi deri
ngchangi ngi tscr editt
er msf rom 2/ 15,net30
xi
.Caj aCompanysel l
sont erms3/10,net30.Tot alsal
esfort
heyearare to3/10,net30 i nor dert ospeedcol lections. Atpr esent,40per centof
P900, 000.For t
yper centoft
hecustomerspayont hetent
hdayandtake SonataCompany‘ scustomer staket he2per centdiscount .Undert henew
discounts;the other60 percentpay,on average,45 daysaf
terthei
r ter
m,di scountcustomer sareexpect edtor iset o50per cent.Regar dlessof
purchases. thecreditterms,hal foft hecustomer swhodonott aket hedi scountar e
Whati stheaverageamountofr eceivabl
es? expectedt opayont i
me,wher east heremai nderwi l
lpay1 0daysl ate.The
A.P70, 000 C.P77, 200 changedoesnoti nvolvear el
axati
onofcr editstandar ds;thereforebaddebt
B.P77, 500 D.P67, 500 l
ossesar enotexpect edtor i
seabovet heirpr esent2per centlevel
.However ,
themor egenerouscashdi scounttermsar eexpect edt oincreasesal esf r
om
xi
i
.Pal m Company’ ,
500,000of P2mi l
li
ont oP2.6mi l
li
onperyear .Sonat aCompany’
which 80% ar e expect
ed to be creditsalesatt ermsofn/ 30. Palm 75per cent,theinterestrateonf undsinvest edinaccount sr eceivableis9
esti
matest hatapr oposed relaxat
ion ofcr editstandardswil
lincrease percent,andthefirm’ .
credi
tsalesby20% andi ncreasetheaver agecol lecti
onper
iodf r
om 30
daysto40days.Basedona360- dayyear ,thepr oposedrel
axati
onof xi
v.Whatar et hedayssalesout standi
ng( DSO)bef
oreandaftert
hechange
credi
tto standardswi l
lresultinanexpect ed increaseintheaver age ofcreditpoli
cy?
accountsreceivabl
ebalanceof A.27. 0daysand22. 5days ,respecti
vely C. 22.5 daysand 21
.5
A.P 540, 000 C.P2,700, 000 days,respect
ivel
y
B.P 900, 000 D.P1 ,
620, 000 B.22. 5daysand27. 0days,respecti
vely D. 21.
5 daysand 22.5
daysr espect
ivel
y
Invest
menti nr
eceivabl es
xii
i.
Cur r
ently,La Car l
ota Companyhasannualsal esofP2, 500,000. I ts
averagecol l
ectionper i
odis45days,andbaddebt sar e3per centof xv.Thei
ncremental
car
ryi
ngcostonr
ecei
vabl
eis
sales. The cr edi tand collection managerisconsi dering insti
tuti
ng a A.P 843.75 C.P 643.75
str
ictercollecti
onpol icy,wher ebybaddebt swouldber educedt o1 .
5 B.P8,889.
00 D.P6,
667.00
percentoft otalsal es,andt heaver agecoll
ecti
onper iodwoul df allt
o30
days.However ,saleswoul dalsof all
byanest i
matedP300, 000annual ly. xvi
.Thei
ncr
ement
alaf
tert
axpr
ofi
tfr
om t
hechangeincr
edi
tter
msi
s
Variable costs ar e 75 per centof sales and t he costof car ryi
ng A.P68,
493 C.P60,615
receivablesis10per cent.Assumeat axrat
eof40per centand360days B.P65,
640 D.P57,615
peryear .
Whatwoul dbet hedecr easei ninvestmentinreceivablesi fthechange I
nvent
orymanagement

639
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

EOQ xx.ForRaw Mat er

ialL1
2,acompanymai nt
ainsasafetystockof5,
000
xvi
i
. Whati stheeconomicor derquanti
tyf
orthefol
lowinginvent
orypoli
cy: pounds.Itsaverageinvent
ory(t
akingintoaccountthesafet
yst
ock)i
s
Afi
rm sel
l
s32,000bagsofpr emium sugarperyear.Thecostperorderis 12,
000pounds.Whati st
heapparentor
derquantit
y?
P200andthefi
rm exper
iencesacarryi
ngcostofP0.80perbag. A.1 8,000lbs. C.14,000lbs.
A. 2,000bags C. 8, 000bags B.6, 000lbs. D.24,000lbs
B. 4,000bags D.1 6,
000bags
Optimalsafetystockl evel
Annual
demand xxi
.Each stockoutof a pr oductsol d by Arni
s Co.cost s P1,750 per
xvi
i
i. Mar smanCo.hasdet erminedthefol
l
owi ngforagivenyear: occurrence.Thecompany’
Economi cor derquantit
y(st
andardordersize) 5,000unit
s year,andt hecompanyor der s1,500unit
sofproduct20timesayearata
Totalcosttoplacepur chaseorder
sfortheyear P40,
000 costofP1 00peror der.Thepr obabil
i
ti
esofastockoutatvar
iouslevel
sof
Costtopl aceonepur chaseorder P 100 safet
yst ockare:
Costtocar ryoneunitforoneyear P 4 UnitsofSaf etyStock Pr
obabil
i
tyofStockout
WhatisMar sman’ ? 0. 0.
50
A.1,000,000 C.500, 000 100. 0.
30
B.2,000,000 D.1 ,
500,000 200. 0.
14
300. 0.
05
Requiredannual returnoni nvestment 400. 0.
01
xi
x.BIBO Companyi sadi str
ibutorofvi deotapes.Pi r
ateMar tisal ocalr etai
l Theopt imalsaf etystockl evelforthecompanybasedont heunitsof
outletwhi ch sel l
sbl ank and r ecorded videos.Pi r
ate Mar tpur chases safet
yst ocklevel aboveis
tapesf rom BI BO CompanyatP300. 00pert ape;tapesar eshi ppedi n A.200uni ts C.1 00uni
ts
packagesof20.BI BO Companypaysal lincomi ng fr
eight,andPi rate B.300uni ts D.400uni t
s
Mar tdoesnoti nspectthet apesduet oBI BO Company' sreputationf or
highqual i
ty.Annualdemandi s1 04,000t apesatar at
eof4, 000t apes xxi
i
. Paeng Company usest he EOQ modelf orinventory control. The
perweek.Pi rateMar tearns20% oni tscashi nvestments.Thepur chase- companyhasanannualdemandof50, 000uni t
sf orpartnumber6702
orderleadt i
mei stwoweeks. andhascomput edanopt imallotsi
zeof6, 250uni ts. Per-unitcarryi
ng
Thef ol
lowingcostdat aareavailable: cost
sandst ockoutcostsareP9andP4,r especti
vely.Thef oll
owi ngdata
Relevantor deri
ngcost sperpur chaseor der P80P90. 50 havebeengat hered i
nanat temptto determineanappr opriatesaf et
y
Carryingcost sperpackageperyear 3 st
ocklevel:
Relevanti nsurance,mat eri
alshandl i
ng,breakage,et c.,peryear2 UnitsShortBecauseofExcess NumberofTi mesShor t
P4. 50 Demanddur ingtheLeadTime i
nt helast40Reor derCycl es
Whati sther equi r
edannual ret
ur noni nvestmentperpackage? Peri
od
A.P6, 000 C.P1 ,200 100 8
B.P 250 D.P 600 200 10
300 14
Or
derquant
it
y 400 8

640
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

Whati
stheopt
imal
saf
etyst
ockl
evel
? B.P1
35,
000 D.P264,
000
A.100unit
s C.200uni
ts
B.300unit
s D.400uni
ts Tradecredi
t
xxvi
. Ifafir
mi sgivenatr
adecredi
ttermsof2/
10,net30,t
hent
hecostt
o
Annual i
nventorycost s thef
irmfai
li
ngtotaket
hedi
scounti
s:
xxi
i
i. Dur ableFur nit
ureCompanyusesabout200, 000yardsofapar ti
cular A. 2.0%. C.36.
7%
fabri
ceachyear .Thef abr
iccost
sP25peryar d.Thecurrentpoli
cyist o B.30.0%. D.10.
0%.
orderthef abri
cf ourt i
mesayear .I
ncrementalor
deringcostsareabout
P200peror der,andi ncrement
alcar
ryi
ngcostsareaboutP0.75peryar d, xxvi
i
. Thecostofdi
scount
smi
ssedoncr
edi
tter
msof2/10,n/
60i
s
muchofwhi chr epresentstheopport
unitycostofthefundstiedupi n A. 2.
0percent C.12.4per
cent
i
nventory. B.14.
9percent D.21.2per
cent
How mucht ot
alannualcost sareassociat
edwi t
hthecur r
entinventory
poli
cy? Bankl oans
A.P1 9,550 C.P38, 300 Discountloan
B.P1 8,750 D.P62, 500 xxvii
i
.Youpl ant
obor r
ow P1 0,
000f r
om yourbank,whichoffer
stolendyou
themoneyata1 0per centnomi nal,orstat
ed,r
ateonaone- yearloan.
Maximum i nterestrate Whati stheef
fect
iveint
erestrat
eiftheloanisadi
scountl
oan?
xxi
v. Nar raCompanyi sconsidering aswi t
cht ol evelproducti
on. Cost A.1 0.00% C.12.45%
eff
ici
enci eswi l
loccurunderl evelproductionandaf tert
axcostwoul d B.1 1.11% D.14.56%
decli
nebyP70, 000 butinventorywouldi ncreasef rom P1,000,
000 to
P1,800,000.Nar rawouldhavet ofi
nancet heextrainventoryatacostof Discountl
oanwit
hcompensatingbalance
10.
5per cent. xxix. Whati st
he ef
fecti
ve rat
e ofa1 5% di scount
ed l
oan f
or90 days,
Whati sthemaxi mum i
nter
estratethatmakesl evelproducti
onfeasi
ble? P200,
000,wi
th10% compensatingbalance?Assume360daysperyear .
A.7. 00per cent C.8.75per cent A.20.0% C.1 7.
4%
B.5. 83per cent D.10.00per cent B.15.0% D.22.2%

Oppor t
unitycost Compensat ingbalancewi t
hinter
est
xxv. Di eselFashionestimat esthat90, 000zi pper swillbeneededi nthe xxx. The Pr emier
e Company obt ai
ned a short-
term bank l oan for
manuf actureofhi ghsell
ingpr oductsfort hecomi ngyear.Itssupplier P1,000,000atanannuali nterestrate12%.Asacondi ti
onoft heloan,
quotedapr i
ceofP25perzi pper.Diesel plannedt opurchase7,
500uni ts Premierei srequiredtomai ntai
nacompensat i
ngbal anceofP300, 000in
permont hbuti t
ssuppliercouldnotguar anteet hi
sdel i
ver
yschedule.I n i
tschecki ngaccount .Thechecki ngaccountearnsinter
estatanannual
ordert o ensureavail
abil
ityoft hesezi pper s,Dieselisconsi
dering t
he rat
eof3%. Pr emi erewoul d ot
herwisemaintai
nonl yP1 00,
000 inits
purchaseofal lthese90, 000uni t
sonJanuar y1 .Assumi ngDieselcan checking accountf ortransacti
onalpurposes. Pr emiere’
i
nvestcashat1 2%,thecompany’ i
nterestcost softheloanis
90,000uni tsatthebeginningoftheyeari s A.1 2.00% C.16.
30%
A.P1 27,500 C.P1 23,750 B.1 4.25% D.15.
86%

641
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

fol
l
owingloanpr oposal:
Add-on  Stat
edi nterestrat
eof1 0% onaone- yeardi scount
edloan;and
xxxi
. PerlasCompanybor rowedfrom abankanamountofP1 ,
000,000.  15% oft hel oanascompensat i
ngbal anceonzer o-i
nterestcurrent
Thebankchargeda1 2% stat
edrat
einanadd-onar
rangement
,payable accountt o be maintained by I
sl
and Cor porati
on with Peninsula
i
n12equal monthl
yinst
all
ments. Commer cialBank.
A.22.15% C.25.
05% Theloanrequiresanetpr oceedsofP1 .5mi l
l
ion. Whati sthe pr i
ncipal
B.24.00% D.12.
70% amountofloanappl iedforaspartoftheloanagr eement ?
A.P1 ,
666,667 C.P1 ,
764, 706
Financingalternative B.P2,000,000 D.P1 ,
1 25,000
xxxii
. A companyhasaccount spayableofP5 mi l
l
ionwi t
ht er
msof2%
discountwi thi
n1 5days,net30days(2/1
5net30) .Itcanborrow funds
from abankatanannualr ateof12%,oritcanwai tunti
lthe30thday i
. Answer:A
wheni twi l
lreceiver
evenuestocovert
hepayment.Ifi
tborrowsfundson Dai
lyworki
ngcapi
tal
requi
red:200x250 50,000
thel astdayoft hedi
scountperi
odinor
dertoobtai
nthediscount,i
tstotal Tot
alworki
ngcapi
tal
needed:28daysx50,
000 1
,400,000
costwi llbe CCC=1 8+30–20 28days
A.P 51 ,000l ess C.P 75,500less
B.P1 00, 000l ess D.P 24,500mor e i
i
. Answer:B
CashConver si
onCycle=Ave.collect
ionper
iod+I
nvent
orycycl
edays–
xxxi
ii
.Ever y1 5daysacompanyr eceivesP1 0,000wor thofraw material
s Ave.AccountsPayablepaymentdays
from i
tssupplier
s.Thecreditt
ermsf orthesepur chasesare2/10,net30, I
nventorycycl
eindays 60days
and paymenti smadeont he30t hdayaf tereachdel i
ver
y.Thus,t he Aver
agecol l
ecti
onperiod 45days
companyi sconsideri
ng a 1-yearbankl oan forP9,800 (98% oft he Operati
ngcycle 105days
i
nvoiceamount ).I
ftheeff
ecti
veannuali nterestrat
eont hi
sloanis1 2%, DeductAccountspayablepaymentdays 30days
whatwi llbethenetpesosavi ngsovert heyearbybor rowi
ngandt hen Cashconversioncycl
e 75days
taki
ngthedi scountonthematerial
s?
A.P3, 624 C.P4, 800 i
i
i.Answer:A
B.P1 ,176 D.P1 ,
224 I
nventorycycl
eindays 75days
Aver
agecol l
ecti
onperiod 38days
xxxi
v.Ani nvoi
ceofaP1 00,
000pur
chasehascredi
tter
msof1/1
0,n/40.A Operati
ngcycle 1
13days
bankloanfor8percentcanbearr
angedatanytime.Whenshoul
dthe DeductAccountspayablepaymentdays 30days
cust
omerpaytheinvoi
ce? Cashconversioncycl
e 83days
A.Payont he1st
. C.Payont he40t
h
B.Payont he10t
h D.Payont he60t
h i
v.Answer:D
I
nventoryconversi
onperi
od(See#4) 50.
0days
Aver
agecol l
ecti
onperi
od(2M/0.1
M) 20.
0days
xxxv. ThePeni
nsul
aCommer
cialBankandI
sl
andCor
por
ati
onagr
eedt
othe Operati
ngcycle 70.
0days

642
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

Less:Ave.Account
sPayabl
epaymentdays(
1.5M/
0.5M)30.
0days Credi
tsale=40,500,000x80% = 32,
400,
000
Cashconversi
onperi
od 40.
0days I
ncreasedcredi
tsal
es:32, 400,
000x1.2= 38,
880,
000
NewAver ageAR38, 880,000/360x40= 4,
320,
000
v. Answer:D Ol
dAver ageAR32, 400,000/360x30 = 2,
700,
000
I
nventor
yturnover: I
ncreaseinAverageAR 1,
620,
000
Costofgoodssold/Ave.I
nventor
y(8M/1.
5M) 5.
33x
I
nventor
yconversionperi
od (360days
/5.
33) 67.
5days xi
i
i.Answer :C
Changeinaver ageaccountsrecei
vabl
es:
vi
.Answer:A Pl
anned:2, 200,000/360x30 183,
333
Annualsal
es360daysx1 00,000 36.0M Present
:2, 500,000/360x45 312,
500
I
nventorytur
nover36M/5M 7.2x DecreaseinARbal ance 129,667
I
nventoryconver
sionper
iod 360/
7.2 50.
0days Vari
ablecostrati
o 75%
DecreaseininvestmentinAR 96,875
vi
i
.Answer:B
Opt
imal
cashconver
sionsi
ze= (
9,075,
000x40/0.
24)
^1/
2=55,
000 xi
v.Answer:A
Days’
vi
i
i.Answer:B Ol
dpolicy:(
.4x1
5)+(.
3x30)+(.3x40) 27.
0days
OTS: (2xP3,251,
250xP25÷0.09)
^1/
2 = P42,
500 Newpol i
cy(
.5x10)+(
.25x30)+(.
25x40) 22.
5days
Oppor
tuni
tycost:P42,
500÷2x0.09 P1,91
2.50
xv.Answer:A
i
x.Answer:C Averagerecei
vable
Reduct
ionincashf l
oat(2.
5+1.5) 4.0days Newpol i
cy: 2.6M/ 360x22.5 162,
500
Addi
ti
onal f
reecash(4daysx1
50xP500) P300,000 Oldpoli
cy: 2.0M/ 360x27 150,
000
Annualsavi
ngs( P300,
000x0.07) P 21,000 I
ncrementalAccountsRecei
vable 12,
500
I
ncrementalcarr
yingcostonrecei
vabl
e12,
500x0.
75x0.
09
x. Answer:C 843.75
AverageAR 3,375,
000/360x30days 281,
250
Averagei
nvestment:281,
250x0.
60 168,
750 xvi
.Answer:A
Carr
yingcost
:1 68,
750x0. 1
2 20,
250 I
ncrement alsales 600,000
Var
iablecost( .75x600, 000) (450,000)
xi
.Answer:B Addit
ionalbaddebt s( 600,000x2%) (1 2,000)
DSO = (
.4x1
0)+ (.
60 x45) 31days Addit
ionalcarryingcost ( 844)
Aver
ageAR:900,
000/360x31days P77,500 Addit
ionaldiscounts ( 2,
600,000x.
5x03)–(
2,000,
000x. 4x .02)
( 23,000)
xi
i
.Answer
:D Befor
et axincreaseinincome 11
4,156

643
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

Lesst
ax 45,
663 xxi
i
. Answer :B
I
ncrement
ali
ncome 68,
493 Theopt imalsafetystockl evelrepresentsthelevelthatgivesthelowest
sum ofst ockoutcost sand addi tionalcarr
ying costs. Based on the
xvi
i
. Answer
:B comput ati
onbel ow,thelowestcombi nedcostsisP3, 340,corr
esponding
EOQ= (2x32,
000x200.
8)^1
/2=4,
000bags to300- uni
tlevel
Fir
stcomput et hestockoutcost sbasedongi venprobabi l
it
yofdemand.
xvi
i
i. Answer:B Start
ingwi t
h1 00- uni
tlevelassaf etystock,iftheaddi ti
onaldemandi s
Numberoforder
smade40,000/100 400 200,thecompanyhasst ockoutof1 00uni t
s.
Annual
requi
rement400x5,000 2,
000,
000 100: ( 100x32*x0. 25)+( 200x32x0. 35)+( 300x32x0. 20)+
(100x9) 4,960
xi
x.Answer:C 200:( 100x32x0. 35)+( 200x32x0. 20)+( 200x9) 4,200
Invest
mentin1package (20xP300) P6,
000 300:( 100x31x0. 20)+( 300x9) 3,340
Requiredannual
ret
urn:P6,000x0.
2 P1,
200 400:( 400x9) 3,600
stockoutperunitx8or dersperyear .
xx.Answer:C
Averageinvent
oryuni
ts 1
2,000 xxi
i
i. Answer:A
Lesssafetyuni
ts 5,000 Orderi
ngcost
s4xP200 800
Averageinvent
orybasedonEOQ 7,
000 Carryi
ngcost
s(50,
000÷2x0.
75 18,
750
Ordersi
ze 7,000x2 14,
000 Total 1
9,550

xxi
.Answer:D xxi
v. Answer :C
Saf
etyst
ock St
ockoutCost
s Car
ryi
ngCosts@ Tot
al SavingsinExpenses/
addit
ionalI
nvest
menti
nInvent
ory =Maxi
mum
(
1 ) P5 I
nterestRate
100 1
0, 500 500 P11,
000 70,000/(1,800,
000–1 ,
000,000)=8.75%
200 4,900 1,000 5,
900
300 1,750 1,500 3,
250 xxv. Answer :C
400 350 2,000 2,
350 Numberofuni t
stobepurchasedinadvance:90,000–7,500
82,500
StockoutCosts Averageinvestmentsinworki
ngcapital:82,
500x0.5*xP25
100 1750 x.30x20orders =10,500 1,
031 ,
250
200 1750 x.05x20 = 4,900 Opportunit
ycost1 ,
031,
250x0. 1
2 123,
750
300 1750 x.05x20 = 1 750 *Theaver ageinvest
mentisone-hal
f(82,500+0)÷2
400 1750 x.01x20 = 350
Opt
imalsafet
ystocki
s400-uni
tlevelwi
thacostofonl
yP2,
350cost
. xxvi
. Answer
:C
k=(
298)x(
36020=36.
7%

644
 Fi
nancial
Management
(
B.Wor
kingCapi
talManagement
)

Thesol
uti
onassumest
hatt
hecompanyf
oregoest
hedi
scountonl
yonce Esti
matedeff
ecti
verat
e1 20,000/541,667 22.
15%
dur
ingt
heyear. Al
ternati
vesol
uti
onforapproxi
mat eeffecti
verat
e:
(2xNo.ofpaymentsxI nt
erest
)÷[ (
1+No.ofpayment
s)xPri
nci
pal
]
xxvi
i. Answer :B (2x1 2xP120,
000)÷(13xP1 M)=22. 15%
Withcreditter
msof2/ 10,n/60onemustpayont he10thdaychoosi
ngto
fi
nancet he netpayment( invoi
cepr i
cemi nusthecashdiscount
)atthe xxxi
i
. Answer :C
rat
e of2 per centfor50 days ,paying t
he loan on t
he 60t
h day.The Discount5M x0.02 100,
000
annual
izedr at
eofforegoi
ngt hediscounti
s1 4.
9percent
. I
nterest(5M x0.
98x0.
12)x1
5/360= 24,
500
k=2/ 98x365/ 50=1 4.
9% Savings= 75,
500

xxvi
i
i.Answer
:B xxxi
i
i. Answer:A
k=10÷(100–1
0)=1
1.1
1% Purchasediscount10,000x0.
02x200purchases 4,
800
Int
erestonborrowedmoney 9,800x0.
12 1,
176
xxi
x. Answer
:C Savings 3,
624
Pr
inci
pal Numberofpur chases:360days/
15-
dayint
erval 200
200,
000
Less:Di
scount200,
000x0.
15x90/
360 xxxi
v.Answer :B
( 7,
500) Thecostofdi scountsmi ssedis12.3% whi
chismoret hant he8percent
Compensat
ingbal
ance thatt
hebankchar ges. Thecompanyshoul dbor
row ont he1 0t
h,paythe
(20,
000) i
nvoice,andf i
nanceat8% f orthenext30days(payof fthebankont he
Netpr
oceeds 40th).
1
72,
500 Costofforegoingdiscount:( 199)x(36030)= 12.31%
Ef
fect
iver
ate:(
7,500/
172,
500)x360/
90
1
7.4% xxxv. Answer ;B
Netproceedsinpesos P1,
500,
000
xxx. Answer :B Di
videdbynetproceedsper
cent
age 1
.00–0.
1–0.
15 0.
75
I
nterestexpense 1 M x0.
12 120,000 Pri
ncipalamount P2,
000,
000
Lessi nteresti
ncomeonaddi t
ionalCAbal
ance(
200,000x0.03)
6,000
Neti nterestcost 114,000
Effectiveinter
estr
ate114,000/(1,
000,
000–200,000) 14.
25%

xxxi
. Answer:A
I
nter
estfor1year 1
M x12% 120,
000
Aver
agePr i
nci
pal
:[1M +(1
M/1
2)]÷2 541,
667

645