NAME: _______________________________________ FIN004 – FINANCIAL MANAGEMENT

COURSE & SECTION: ____________________________

CLASS TIME & SCHEDULE: ________________________ P3 – EXAM 65 POINTS

Inventory Management, Short-Term Financing

PART I. Identification – Theory (2 points each)

______________________1. It is the point where the total ordering costs equal the total carrying cost.
______________________2. It involves deciding the correct quantity and quality, as well as the right time
to order, in order to reduce costs while meeting sales demand.
______________________3. This is computed by multiplying the number of orders with the ordering cost per
order.
______________________4. It is the total number of units of inventory for the period multiplied by the carrying
cost per unit.
______________________5. It is the level of inventory that should be placed at to replenish the inventory.
______________________6. The time it usually takes to obtain product delivery after placing the order.
______________________7. These are expenses arising from the company's inability toward contingencies such
as inaccurate consumption estimate, production delays, receipts of faulty goods and the
like.
______________________8. This is the minimum amount of inventory set for protecting the company from
contingencies such as inaccurate use figures, delays in production, receipts of faulty
goods and the like.
______________________9. It is an inventory system where goods are only completed as ordered by customers
and materials are delivered just in time for manufacture.
_____________________10. This is primarily intended to sustain operations involving short-term investment (or
current assets).
_____________________11. It is the cost of borrowing.
_____________________12. It is a deduction in the invoice price of the merchandise.
_____________________13. These are expenses already incurred but not yet paid off by the company. Examples
include salaries and wages, taxes and interest.
_____________________14. An arrangement requiring a borrower to keep a certain percentage of the amount
borrowed in the borrower's current account.
_____________________15. It is the amount of loan to be paid on maturity date.

Part II. Multiple Choice – Theory (1 point each)

___________16. All, except for one, is not included in the five C’s of credit?
A. Character C. Capital
B. Collections D. Collateral

___________17. One of the following information is not a source of short-term credit.

A. Term credit C. Deferred income
B. Accruals D. Common stock

___________18. I. Interest rate under short-term financing is fixed for a period of one year.
II. Current liabilities are obligations payable beyond one year.
A. both statements are true C. only statement I is true
B. only statement II is true D. both statements are false

___________19. I. Short-term financing is easier to arrange than long-term financing.

II. Under the terms of credit, the length of the credit period and any cash discounts offered are both
included.
A. both statements are true C. only statement I is true
B. only statement II is true D. both statements are false

___________20. It is the average length of time required to convert a firm’s receivables into cash.
A. Days sales outstanding C. Receivables collection period
B. Payables deferral period D. Inventory conversion period

___________21. I. If a firm
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II. A firm should take the cash discount if the firm’s cost of borrowing from the bank is greater than
the cost of giving up a cash discount.
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 A. both statements are true C. only statement II is true
B. only statement I is true D. both statements are false

___________22. I. The effective interest rate on a bank loan depends on whether interest is paid when the loan
matures or in advance.
II. A discount loan is a loan on which interest is paid in advance by deducting it from the loan so that
the borrower actually receives less money than is requested.
A. both statements are true C. only statement I is true
B. only statement II is true D. both statements are false

___________23. I. The effective interest rate for a discount loan is greater than the loan’s stated interest rate.
II. The outright sale of accounts receivable at a discount in order to obtain funds is called pledging
accounts receivable.
A. both statements are true C. only statement I is true
B. both statements are false D. only statement II is true

___________24. I. Accruals are a source of short-term financing.

II. A firm should take the cash discount if the firm’s cost of borrowing from the bank is greater
than the cost of giving up a cash discount.
A. both statements are true C. only statement I is true
B. both statements are false D. only statement II is true

___________25. It is a deduction in the purchase price to serve as an incentive for prompt payment
A. trade discount C. credit term
B. cash discount D. discount period

___________26. It is the cost of borrowing.

A. interest C. maturity value
B. principal D. compensating balance

___________27. This is a deal between two parties: the buyer and the seller.
A. trade credit C. management contract
B. loan agreement D. none of the above

___________28. When factoring accounts receivables, the factor is the:

A. The method of determining how much money is lent to the firm.
B. The financial institution that buys the accounts receivable.
C. The percent deduction in payment to the firm.
D. Negotiated accounts receivable account.

___________29. Which of the following provides a spontaneous source of financing for a firm?
A. Accounts payable C. Accounts receivable
B. Mortgage bonds D. Debentures

___________30. I. Under accrual, expenses are recorded immediately regardless if paid or not.
II. The two main types of inventory cost relevant to inventory-decision making are carrying
costs and ordering costs.
A. both statements are true C. only statement I is true
B. both statements are false D. only statement II is true

___________31. Following are costs related to carrying inventory, except

A. space used C. personal property tax
B. fire & theft insurance D. unloading and inspection cost

___________32. In inventory management, the problem of avoiding excessive investment in inventories and at the
same time avoiding inventory shortages can be solved by applying quantitative techniques known as
A. Payback analysis C. Economic order quantity model
B. Probability analysis D. High-low point method

___________33. The selling price of the product is relatively high and the purchase cost of the product is relatively
low. In this situation:
A. Management must increase the price to cover the cost of carrying higher inventory.
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B. The EOQ model will indicate frequent large orders.
C. The EOQ of the product is affected by the selling price.
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D. The selling price has nothing to do with the EOQ of the product.
 ___________34. An increase in inventory holding costs will
A. Have no effect on the economic order quantity.
B. Increase the economic order quantity.
C. Decrease the number of orders issued per year.
D. Decrease the economic order quantity.

___________35. The ordering costs associated with inventory management include

A. Insurance costs, purchasing costs, shipping costs, and spoilage.
B. Obsolescence, setup costs, quantity discounts lost, and storage costs.
C. Purchasing costs, shipping costs, setup costs, and quantity discounts lost.
D. Shipping costs, obsolescence, setup costs, and capital invested.

Part III. Multiple Choice – Computation (3 points each)

___________36. First Bank just approved a loan application for Fandom Company. The terms of the loan include
a compensating balance of 10% of the approved loan amount of P75,000 and an interest rate on the loan
of 9%. Compute the effective interest rate.
A. 10% C. 11%
B. 12% D. 13%

___________37. Alcaraz Co. is contemplating a change in its trade receivable payment policy to free up cash to
avoid bank financing to sustain operations. The company proposes to forego the discount on the
supplier's credit term of 2/10, n/30. On a 365-day year, what is the nominal cost of the credit should the
proposal gets approved?
A. 37.24% C. 36.25%
B. 38.22% D. 39.19%

For questions 38-40, please refer to the following problem:

A company predicts that 3,200 units of materials will be used during the year. The expected daily usage
is 15 units and delivery is expected after 10 days of placing the order. The purchasing manager is told
that a safety stock of 200 units should be maintained. The cost of materials is P4 per unit. It is estimated
that it will cost P25 to place each order. The annual carrying cost is P1 per unit.

____________38. What is the Reorder Point?

A. 250 units C. 350 units
B. 450 units D. 550 uits

____________39. Compute the EOQ.

A. 200 units C. 300 units
B. 400 units D. 500 units

____________40. What is the total inventory cost (total ordering cost + total carrying cost)?
A. P 200.00 C. P 300.00
B. P 400.00 D. P 500.00

END of P3 EXAM. Good Luck!!!

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