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Mas 12
Mas 12
CPA Review Batch 41 May 2021 CPA Licensure Examination Week No. 14
MANAGEMENT ADVISORY SERVICES C.P. Lee E.S Arañas K.L. Manuel
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
REQUIRED:
What is the net advantage (disadvantage) of implementing the proposed discount?
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
1. If current assets go up by P 120,000, current liabilities go down by P 50,000, then net working capital
C a. Did not change c. Increased by P 170,000
b. Increased by P 70,000 d. Decreased by P 170,000
2. Which of the following is strictly not a use of working capital?
B a. Repurchase of common stock c. Purchase of equipment on account
b. Purchase of inventory on account d. Repayment of long-term debt
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
3. The net working capital of Philippines Company at December 31, 2020 was P 10,000,000. Selected information for the
year 2021 for Philippines Company is as follows:
Working capital provided from operations P 1,700,000
Capital expenditures 3,000,000
Proceeds from short-term borrowings 1,000,000
Proceeds from long-term borrowings 2,000,000
Payments on short-term borrowings 500,000
Payments on long-term borrowings 600,000
Proceeds from issuance of common stock 1,400,000
Dividends paid on common stock 800,000
What is the net working capital at December 31, 2021?
A a. P 10,700,000 c. P 11,500,000
b. P 11,200,000 d. P 12,000,000
4. China Corporation had income before taxes of P 60,000 for the year. Included in this amount was depreciation of P
5,000, a charge of P 6,000 for the amortization of bond discounts, and P 4,000 for interest expense. What is the
estimated cash flow for the period?
D a. P 49,000 c. P 66,000
b. P 60,000 d. P 71,000
5. USA Co. has an acid test ratio of 1.5 to 1.0. Which of the following will cause this ratio to deteriorate?
B a. Payment of cash dividends previously declared
b. Borrowing short-term loan from a bank
c. Sale of inventory on account
d. Sale of equipment at a loss
6. It is the policy of a company that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are P 400,000 and
the present current ratio is 2 to 1. How much is the maximum level of new short-term loans it can secure without
violating the policy?
A a. P 400,000 c. P 266,667
b. P 300,000 d. P 800,000
7. A firm's current ratio is currently 2.2 to 1. Management knows it cannot violate a working capital restriction contained
in its bond indenture. If the firm's current ratio falls below 2 to 1, technically it will have defaulted. If current liabilities
are P 200,000,000, what is the maximum new commercial paper that can be issued to finance inventory expansion?
B a. P 20 million c. P 180 million
b. P 40 million d. P 240 million
8. Which one of the following transactions would increase the current ratio and decrease net profit?
D a. An income tax payment due from the previous year is paid
b. A stock dividend is declared
c. Uncollectible accounts receivable are written off against the allowance account
d. Vacant land is sold for less than the net book value
9. Which of the following transactions does not change the current ratio and total current assets?
A a. A cash advance is made to a divisional office
b. A cash dividend is declared
c. Short-term notes payable are retired with cash
d. A fully depreciated asset is sold for cash
10. Australia Corporation has 100,000 shares of stock outstanding. Below is part of Australia’s Statement of Financial
Position for the last fiscal year.
Statement of Financial Position as of December 31 – Selected items
Cash P 455,000
Accounts receivable 900,000
Inventory 650,000
Prepaid assets 45,000
Accrued liabilities 285,000
Accounts payable 550,000
Current portion, long-term notes payable 65,000
What is the maximum amount Australia can pay in cash dividends per share and maintain current ratio of 2 to 1?
Assume that all accounts other than cash remain unchanged.
B a. P 2.05 c. P 3.35
b. P 2.50 d. P 3.80
11. As a company becomes more conservative in working capital policy, it would tend to have a (an)
C a. Decrease in acid test ratio
b. Increase in the ratio of current liabilities to non-current liabilities
c. Increase in the ratio of current assets to units of output
d. Increase in funds invested in common stock and a decrease in funds invested in securities
12. The firm’s financing requirement can be separated into
A a. Seasonal and permanent c. Current liabilities and long-term funds
b. Current assets and fixed assets d. Current liabilities and long-term debts
13. The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s
maturing obligations is the policy that finances (where: CA = current assets)
D a. Temporary CA with long-term debts c. Permanent CA with long-term debts
b. Fluctuating CA with short-term debts d. Permanent CA with short-term debts
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
14. Which of the following actions would not be consistent with good working capital management?
B a. Increased synchronization of cash flows
b. Minimize the use of float
c. Maintaining an average cash balance equal to that which minimizes total cost
d. Use of checks and drafts in disbursing funds
15. Determining the appropriate level of working capital for a firm requires
D 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 working capital against the probability of technical insolvency
16. The most direct way to prepare a cash budget for a manufacturing firm is to include
D a. Projected sales, credit terms, and net income
b. Projected net income, depreciation and goodwill amortization
c. Projected purchases, percentages of purchases paid, and net income
d. Projected sales and purchases, percentages of collections, and terms of payments
17. Shown below is a forecast of sales for Europe Inc. for the first 4 months of the year (amounts in thousands of pesos).
January February March April
Cash sales P 15 P 24 P 18 P 14
Sales on credit 100 120 90 70
On average, 50% of credit sales are paid for in the month of sale, 30% in the month following the sale, and the
remainder is paid 2 months after the month of sale. Assuming there are no bad debts, what is the expected cash
inflow for Europe in March?
C a. P 138,000 c. P 119,000
b. P 122,000 d. P 108,000
18. Asia Inc. has a pool of cash that it uses to pay bills. When the cash is exhausted, it replenishes its pool by selling T-
bills. The firm disburses P 600,000 in cash every year, and every sale of T-bills costs P 60. The current risk-free rate
is 8%. What is the optimal cash balance for Asia?
C a. P 27,932 c. P 30,000
b. P 48,530 d. P 37,546
19. A firm needs a total of P 30,000,000 in new cash for transaction purposes. The annual interest rate on marketable
securities is 10% and the brokerage fee cost per transaction of selling securities to replenish cash is P 1,000. Which of
the following is closest to the firm’s optimal average cash balance?
B a. P 353,432 c. P 774,597
b. P 387,298 d. P 790,213
20. Africa, Inc. has P 2 million invested in T-bills yielding 8% per annum. This investment will satisfy the firm’s need for
funds during the coming year. It costs P 50 to sell these bills. If Africa needs P 166,667 a month, how frequently
should the company sell off T-bills?
B a. About every 3 days c. About every 15 days
b. About every 9 days d. About every 18 days
21. A firm has an average age in inventory of 60 days, an average collection period of 45 days, and an average payment
period of 30 days. What is the number of days in the cash flow cycle?
D a. 135 days c. 90 days
b. 105 days d. 75 days
22. The company’s cash flow cycle extends up to 50 days. Receivables age is for 20 days. Average age in inventory is
twice as long as days’ receivable. For how long is the company’s payable deferral period?
A a. 10 days c. 5 days
b. 20 days d. 15 days
23. Assume that each day a company writes and receives checks totaling P 10,000. If it takes 5 days for the checks to
clear and be deducted from the company’s account, and only 4 days for the deposits to clear, what is the float?
C a. (P 10,000) c. P 10,000
b. P 0 d. P 50,000
24. Arctic is a retail mail order firm that currently uses a central collection system. An average of 6 days is required for
mailed checks to be received, 3 days for Arctic to process them, and 2 days for the checks to clear through its bank. A
proposed lockbox system would reduce the mailing and processing time to 2 days and the check-clearing time to 1
day. Arctic has an average daily collection of P 150,000. If Arctic adopts the lockbox system, its average cash balance
will increase by
A a. P 1,200,000 c. P 600,000
b. P 750,000 d. P 450,000
25. America Company is considering implementing a lockbox system at a cost of P 20,000 per quarter. Annual sales are P
90,000,000, and the lockbox system will reduce collection time by 3 days. If America can invest funds at 8%, should it
implement lockbox system? (Assume a 360-day year)
C a. Yes, savings of P 140,000 per year c. No, loss of P 20,000 per year
b. Yes, savings of P 60,000 per year d. No, loss of P 60,000 per year
26. A method of delaying the disbursement of cash by a corporation with a liquidity problem would be to:
D a. Install a lockbox system
b. Utilize a concentration banking program
c. Take as many cash discounts as possible
d. Pay its bills through the use of bank drafts
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
27. A firm has daily cash receipts of P 100,000 and collection time of 2 days. A bank has offered to reduce the collection
time on the firm’s deposit by 2 days for a monthly fee of P 500. If money market rates are expected to average 6%
during the year, the net annual benefit (loss) from having this service is
C a. P 0 c. P 6,000
b. P 3,000 d. P 12,000
28. Peru Company is a newly established firm and the owner is deciding what type of checking account to open. Peru is
planning to keep a P 500 minimum balance in the account for emergencies and plans to write roughly 80 checks per
month. The bank charges P 10 per month and P 0.10 per check charge for a standard business checking account with
no minimum balance. Peru also has the option of a premium business balance that requires a P 2,500 minimum
balance but has no monthly fees or per check charges. If cost of funds is 10%, which account should Peru choose?
D a. Standard account, because the savings is P 34 per year
b. Premium account, because the savings is P 34 per year
c. Standard account, because the savings is P 16 per year
d. Premium account, because the savings is P 16 per year
29. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
D a. Maximizing rate of return
b. Minimizing taxes
c. Investing in treasury bonds since they have no default risk
d. Liquidity and safety
30. Investment instruments used to invest temporarily idle cash balances should have the following characteristics:
C a. High expected return, readily marketable, and no maturity date
b. Low default risk, low marketability, and a short term to maturity
c. Low default risk, readily marketable, and a short term to maturity
d. High expected return, low marketability, and a short term to maturity
31. China Inc. has a majority of its customers located in Metro Manila. Tibetan, a major retail bank, has agreed to provide
a lockbox system to China at a fixed fee of P 50,000 per year and a variable fee of P0.50 for each payment processed
by the bank. On average, China receives 50 payments per day, each averaging P 20,000. With the lockbox system,
the company’s collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If
China makes use of the lockbox system, what would be the net benefit to the company? (Use 365 days per year)
C a. P 50,000 c. P 60,875
b. P 59,125 d. P 120,000
32. The primary objective in management of accounts receivable is
A a. To achieve that combination of sales volume, bad debt experience, and receivables turnover that
maximizes the profits of the firm
b. To coordinate the activities of manufacturing, marketing, and financing so that the firm can
maximize its profits
c. To provide the treasurer of the corporation with sufficient cash to pay for the bills on time
d. To realize no bad debts because of the opportunity costs involved
33. The average collection period for a firm measures the number of days
A a. After a typical credit sale is made until the firm receives the payment
b. For a typical check to ‘clear’ through the banking system
c. Beyond the end of the credit period before a typical customer payment is received
d. Before a typical account becomes delinquent
34. Russia, Inc. sells with terms 3/10, net 30 days. Gross sales for the year are P 2,400,000 and the collections
department estimates that 30% of the customers pay on the tenth day and take discounts; 40% pay on the thirtieth
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?
B a. 40 days c. 20 days
b. 27 days d. 15 days
35. England Company has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a
permanent cycle of 26 days. If its sales for the period just ended amounted to P 972,000, what is investment in
accounts receivable? (Assume 360 days in a year)
D a. P 72,450 c. P 85,200
b. P 79,600 d. P 94,500
36. Italy sells to retail stores on credit terms of 2/10, n/30. Daily sales average 150 units at a price of P 300 each.
Assuming that all sales are on credit and 60% of its customers take the discount and pay on day 10 while the rest of
the customers pay on day 30, what is the amount of Italy’s accounts receivable?
D a. P 1,350,000 c. P 900,000
b. P 990,000 d. P 810,000
37. Mexico Company has the opportunity to increase annual sales by P 1 million by selling to new riskier customers. It has
been estimated that uncollectible expenses would be 15% and collection costs, 5%. The manufacturing and other
selling costs are 70% of sales and corporate tax rate is 35%. What will be effect on the after-tax profit?
C a. Increase by P 35,000 c. Increase by P 65,000
b. Increase by P 97,500 d. Remain the same
38. A company’s budgeted sales for the coming year are P 96 million, of which 80% are 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 the average collection period from 30 to 45 days. Based on a 360-day year, the proposed relaxation
of credit standards would result to an increase in AR balance by
B a. P 6,880,000 c. P 2,880,000
b. P 6,080,000 d. P 1,920,000
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
39. Singapore Corporation plans to tighten its credit policy. Below is the summary of changes:
OLD policy NEW policy
Average number of days collection 75 50
Ratio of credit sales to total sales 70% 60%
Projected sales for the coming year are P 50 million and it is estimated that the company’s credit sales to be 5% less if
the new policy is implemented. Assuming a 360-day year, what is the effect of the new policy on accounts receivable?
A a. P 3,333,333 decrease c. P 6,500,000 decrease
b. P 3,817,445 decrease d. P 18,749,778 increase
40. Iran Computers believes that is collection costs could be reduced through modification of collection procedures. This
action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there
will be no change in uncollectible accounts. The company’s budgeted credit sales for the coming year are P
27,000,000, and short-term interest rates are expected to average 8%. To make the changes in collection procedures
cost beneficial, what would be the minimum savings in collection costs (using a 360-day year) for the coming year?
B a. P 30,000 c. P 180,000
b. P 36,000 d. P 360,000
41. A company with P 4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase
credit sales by P 720,000. The company’s average collection period for new customers is expected to be 75 days, and
the payment behavior of the existing customers is not expected to change. Variable costs are 80% of sales. The
firm’s opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s benefit (loss) on the
planned change in credit terms?
C a. P 0 c. P 120,000
b. P 28,800 d. P 144,000
42. Based on a 360-day year, what is the current price of P 100 Treasury bill in 180 days on a 6% discount basis?
B a. P 100.00 c. P 94.00
b. P 97.00 d. P 93.00
43. The forms of short-term borrowing that are unsecured credit are
D a. Floating lien, revolving credit, chattel mortgage, and commercial paper
b. Factoring, chattel mortgage, bankers’ acceptances, and line of credit
c. Floating lien, chattel mortgage, bankers’ acceptances, and line of credit
d. Revolving credit, bankers’ acceptances, line of credit, and commercial paper
44. Sweden Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier
credit terms are 2/10, n/30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not
taken and Sweden pays net 30?
D a. 24.0% c. 36.0%
b. 24.5% d. 36.7%
45. Norway buys on terms of 2/10, net/30, but generally does not pay until 40 days after the invoice date. Its purchases
total P 1,080,000 per year. How much non-free trade credit does the firm use each year?
B a. P 120,000 c. P 60,000
b. P 90,000 d. P 30,000
46. Finland plans to acquire an equipment costing P 2,400,000. A bank loan can finance the acquisition with a 10%
discounted interest. Alternatively, the company may delay payment to its suppliers. Presently, the company buys
under terms of 2/10, net 40, but it believes payment could be delayed 30 additional days, without penalty (i.e.,
payment could be made in 70 days). What should the company do?
A a. Borrow since it is cheaper by 1.13% than delaying payment to suppliers.
b. Borrow since it is cheaper by 2.5% than delaying payment to suppliers.
c. Delay payments to suppliers since it would cost 12% as against bank loan of 10%.
d. Delay payments to suppliers since it does not cost anything.
47. A compensating balance
A a. Compensates a financial institution for services rendered by providing it with fund deposits
b. Is used to compensate for possible losses on a marketable securities portfolio
c. Is a level of inventory held to compensate for variations in usage rate and lead time
d. Is the amount of prepaid interest on a loan
48. Romania Company’s bank requires a compensating balance of 20% on a P 100,000 loan. If the stated interest on the
loan is 7%, what is the effective cost of the loan?
D a. 5.83% c. 8.40%
b. 7.00% d. 8.75%
49. Belgium Company got a recent quote on a commercial bank loan of 16% discounted rate with a 20% compensating
balance. The term of the loan is one year. What is the effective cost of borrowing?
D a. 19.05% c. 22.85%
b. 20.00% d. 25.00%
50. A bank loans P 1,000,000 to Ireland for 180 days, with interest of P 60,000 to be paid. The bank also requires a
P200,000 compensating balance for the loan period. What is the effective annual rate?
B a. 16.22% c. 14.00%
b. 15.00% d. 13.00%
51. Assume that a bank has lent a firm a P 200,000 for 60 days at 10% interest. The loan is discounted, and the bank
requires a 20% compensating balance. What is the effective annual rate?
B a. 14.60% c. 10.17%
b. 12.76% d. 10.00%
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY MAS-12
Week No. 14: WORKING CAPITAL MANAGEMENT
54. The Brunei Bank and Lugina Corp. signed a loan agreement subject to the following terms:
Stated interest rate of 18% on one-year discounted loan
15% compensating non-interest bearing checking account balance to be maintained by Lugina with Brunei Bank.
The net proceeds of the loan totaled P 1,000,000. What was the principal amount of the loan?
A a. P 1,492,537 c. P 1,176,471
b. P 1,219,512 d. P 1,000,000
55. Chile Co. obtained a short-term bank loan for P 250,000 at an annual interest of 6%. Under the loan, the company is
required to maintain a compensating balance of P 50,000 in its savings account that earns interest at an annual rate of
2%. The company would otherwise maintain only P 25,000 in the savings account for transaction purposes. What is
the effective interest rate of the loan?
B a. 5.80% c. 6.66%
b. 6.44% d. 7.00%
56. A company has accounts payable of P 5 million with terms of 2% discount within 15 days, net 30 days (2/15, n/30). It
can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it will receive revenues
to cover the payment. If it borrows funds on the last day of the discount period in order to obtain the discount, what
will be its total cost?
C a. P 24,500 more c. P 75,500 less
b. P 51,000 less d. P 100,000 less
57. Brazil Co. can issue 3-month commercial paper with a face value of P 1,000,000 for P 980,000. The transaction costs
would be P 1,200. What would be the annualized percentage cost of financing?
D a. 2.17% c. 8.48%
b. 8.00% d. 8.66%
58. A company enters into an agreement with a firm that will factor the company’s accounts receivable. The factor agrees
to buy the receivables, which average P 100,000 per month and have an average collection period of 30 days. The
factor will advance up to 80% of the face value of the receivables at an annual rate of 10% and charge a fee of 2% on
all receivables purchased. The company controller estimates that the company would save P 18,000 in collection
expenses over the year. Fees and interest are not deducted in advance. Based on a 360-day year, what is the annual
cost of financing?
D a. 10.0% c. 14.0%
b. 12.0% d. 17.5%
59. A firm often factors its accounts receivable. Its finance company requires a 6% reserve and charges a 1.4%
commission on the amount of the receivables. The remaining amount to be advanced is further reduced by an annual
interest charge of 15%. What proceeds will the firm receive from the finance company at the time a P 100,000
account due in 60 days is factored?
B a. P 85,000 c. P 92,600
b. P 90,285 d. P 96,135
60. Greece, Inc. plans to factor its receivable and has collected data on the following finance companies:
Required reserves Commissions Annual interest charge
Company A 6% 1.4% 15%
Company B 7% 1.2% 12%
Company C 5% 1.7% 20%
Company D 8% 1.0% 5%
Which company will give Greece the highest proceeds from a P 100,000 account due in 60 days?
A a. Company A c. Company C
b. Company B d. Company D
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