COLEGIO DE DAGUPAN

Arellano Street, Dagupan City

School of Business and Accountancy

FINANCIAL MANAGEMENT
Prelims Examination
AY 2021-2022
SET A

A. Multiple Choice

1.)
Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007. The increase in
net income of P300,000:
a. can be stated as 0%
b. cannot be stated as a percentage
c. can be stated as 100% increase
d. can be stated as 200% increase

2.)
A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of
$22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm’s ROA?
a. 8.4%
b. 10.9%
c. 12.0%
d. 13.3%

3.)
The Wilson Corporation has the following relationships:

Sales/Total assets 2.0

Return on assets (ROA) 4.0%
Return on equity (ROE) 6.0%

What is Wilson’s profit margin and debt ratio?

a. 2%; 0.33
b. 4%; 0.33
c. 4%; 0.67
d. 2%; 0.67

4.)
Iken Berry Farms has $5 million in current assets, $3 million in current liabilities, and its initial inventory level is $1
million. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as
notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets
will not change. The company’s bond covenants require it to maintain a current ratio that is greater than or equal to 1.5.
What is the maximum amount that the company can increase its inventory before it is restricted by these covenants?

a. $0.50 million
b. $1.00 million
c. $1.33 million
d. $1.66 million

5.)
Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the
firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of
these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that
sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same
proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent. If the resulting
increase in accounts receivable must be financed externally, how much external funding will Cannon need? Assume
a 365-day year.

a. $ 41,096
b. $ 51,370
c. $ 47,359
d. $106,471

6.)
Humphrey Hotels’ operating income (EBIT) is $40 million. The company’s times interest earned (TIE) ratio is 8.0, its tax
rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company’s return on
assets (ROA)?

a. 6.45%
b. 5.97%
c. 5.25%
d. 5.56%

7.)
Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60
days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm’s return on
equity (ROE)? Assume a 365-day year.

a. 7.1%
b. 33.4%
c. 3.4%
d. 71.0%

8.)
A firm that has an equity multiplier of 4.0 will have a debt ratio of
a. 4.00
b. 3.00
c. 1.00
d. 0.75

9.)
The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various
components that went into this calculation. You are given the following information: total debt/total assets = 0.35
and total assets turnover = 2.8. What is the profit margin?

a. 3.48%
 b. 5.42%
c. 6.96%
d. 2.45%

10.)
Cartwright Brothers has the following balance sheet (all numbers are expressed in millions of dollars):

Cash $ 250 Accounts payable $ 300

Accounts receivable 250 Notes payable 300
Inventories 250 Long-term debt 600
Net fixed assets 1,250 Common stock 800
Total assets $2,000 Total claims $2,000

Cartwright’s average daily sales are $10 million. Currently, Cartwright’s days sales outstanding (DSO) is well
above the industry average of 15. Cartwright is implementing a plan that is designed to reduce its DSO to 15
without reducing its sales. If successful the plan will free up cash, half of which will be used to reduce notes
payable and the other half will be used to reduce accounts payable. What will be the current ratio if Cartwright
fully succeeds in implementing this plan?

a. 1.00
b. 0.63
c. 1.30
d. 1.25

11.) An analysis in which all the components of an income statement are expressed as a percentage of net sales is
called
a. vertical analysis
b. horizontal analysis
c. liquidity analysis
d. common-size analysis

12.)
A balance sheet that displays only component percentages is called
a. trend balance sheet
b. comparative balance sheet
c. condensed balance sheet
d. common-sized balance sheet
13.)
One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to
a. judge the relative potential of two companies of similar size in different industries.
b. determine which companies in a single industry are of the same value.
c. determine which companies in a single industry are of the same size.
d. make a better comparison of two companies of different sizes in the same industry.

14.)
Under which of the following cases may a percentage change be computed?
a. There is no amount in the base year.
b. There is a negative amount in the base year and a negative amount in the subsequent year.
c. The trend of the amounts is decreasing but all amounts are positive.
d. There is a negative amount in the base year and a positive amount in the subsequent year.

15.)
In a common size balance sheet the 100 percent figure is
a. total property, plant and equipment.
b. total current assets.
c. total liabilities.
d. total assets.

16.)
Horizontal analysis is a technique for evaluating financial statement data
a. for one period of time.
b. over a period of time.
c. on a certain date.
d. as it may appear in the future.

17.)
In horizontal analysis each item is expressed as a percentage of the
a. base year figure.
b. retained earnings figure.
c. total assets figure.
d. net income figure.

18.)
Vertical analysis is also known as
a. perpendicular analysis.
b. trend analysis.
c. common size analysis
d. straight-line analysis.

19.)
The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to
as
a. solvency and leverage
b. solvency and profitability
c. solvency and liquidity
d. solvency and equity

20.) The following information is available for Watson Company.

2007
Market price per share of common stock $25.00
Earnings per share on common stock 1.25
Which of the following statements is correct?
a. The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per
share at the end of 2007.
b. The price-earnings ratio is 5.0% and a share of common stock was selling for 5.0% more than the amount of
earnings per share at the end of 2007.
c. The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per
share at the end of 2007.
d. The market price per share and the earnings per share are not statistically related to each other.

21.)
The concept of “management by exception” refers to management’s consideration of
a. only those items that vary materially from expectations.
b. only rare events.
c. samples selected at random.
d. only significant unfavorable deviations.

22.)
A formal written statement of management’s plans for the future, packaged in financial terms, is a:
a. Responsibility report.
b. Cost of production report.
c. Performance report.
d. Budget.

23.)
Budgets are related to which of the following management functions?
a. Planning
b. Control
c. Performance evaluation
d. all of these

24.)
Which of the following is least likely a reason why a company prepares its budget?
a. To provide a basis for comparison of actual performance
b. To communicate the company’s plans throughout the entire business organization
c. To control income and expenditure in a particular period.
d. To make sure the company expands its operations.

25.)
The budgets that are based on a very high levels of performance, like expected costs using ideal standards,
a. assist in planning the operations of the company
b. stimulate people to perform better than they ordinarily would
c. are helpful in evaluating the performance of managers
d. can lead to low levels of performance

26.)
Which of the following statements is incorrect?
a. An imposed budget is the same as a participative budget.
b. Preparation of the budget would be the responsibility of each responsibility unit.
c. Top management’s support is necessary to promote budget participation.
d. The top management should review and approve each responsibility unit’s budget.

27.)
A variant of fiscal-year budgeting whereby a twelve-month projections into the future is maintained at all times:
a. Forecasting.
b. Continuous budgeting.
c. Zero-based budgeting.
d. Calendar budgeting.

28.)
“Incremental budgeting” refers to
a. line-by-line approval of expenditures
b. setting budget allowances based on prior year expenditures
c. requiring top management approval of increases in budgets
d. using incremental revenues and costs in budgeting

29.)
The process of developing budget estimates by requiring all levels of management to estimate sales, production, and
other operating data as though operations were being initiated for the first time is referred to as:
a. Forecasting.
b. Continuous budgeting.
c. Zero-based budgeting.
d. Program budgeting.

30.)
Zero-base budgeting requires managers to
a. Justify expenditures that are increases over the prior period’s budgeted amount.
b. Justify all expenditures, not just increases over last year’s amount.
c. Maintain a full-year budget intact at all times.
d. Maintain a budget with zero increases over the prior period.

31.)
A static budget is not appropriate in evaluating a manager's effectiveness if a company has
a. substantial fixed costs.
b. substantial variable costs.
c. planned activity levels that match actual activity levels.
d. no variable costs.

32.)
The basic difference between a master budget and a flexible budget is that a
a. Flexible budget considers only variable costs but a master budget considers all costs.
b. Flexible budget allows management latitude in meeting goals whereas a master budget is based on a fixed
standard.
c. Master budget is for an entire production facility but a flexible budget is applicable to single department only.
d. Master budget is based on one specific level of production and a flexible budget can be prepared for any
production level within a relevant range
33.)
A budget that identifies revenues and costs with an individual controlling their incurrence is
a. Master budget
b. Product budget
c. Responsibility budget
d. None of the above

34.)
The difference between an individual's submitted budget projection and his or her best estimate of the item being
projected is an example of
a. padding the budget
b. adhering to zero-based budgeting assumptions
c. creating budgetary slack
d. being incongruent with participative budgeting

35.)
Budget slack is a condition in which
a. Demand is low at various times of the year
b. Excess machine capacity exists in some areas of the plant
c. There is an intentional overestimate of expenses or an underestimate of revenues
d. Managers grant favored employees extra time-off

36.)
PTO Company desires an ending inventory of P140,000. It expects sales of P800,000 and has
a beginning inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases are
a. P 530,000
b. P 810,000
c. P 790,000
d. P1,070,000

37.)
Calypso Co. has projected sales to be P600,000 in January, P750,000 in February, and
P800,000 in March. Calypso wants to have 50% of next month’s sales needs on hand at
the end of a month. If Calypso has an average gross profit of 40%, what are the February
28 purchases?
a. P465,000
b. P775,000
c. P310,000
d. P428,000

38.)
Blue Company budgeted purchases of P100,000. Cost of sales was P120,000 and the desired
ending inventory was P42,000. The beginning inventory was
a. P20,000
b. P42,000
c. P32,000
d. P62,000

39.)
Montalban Company’s sales budget shows the following expected sales for the following year:
 Quarter Units
First 120,000
Second 160,000
Third 90,000
Fourth 110,000
Total 480,000
The inventory at December 31 of the prior year was budgeted at 36,000 units. The
quantity of finished goods inventory at the end of each quarter is to equal 30% of the next
quarter’s budgeted sales of units.
How much should the production budget show for units to be produced during the first
quarter?
a. 48,000
b. 132,000
c. 96,000
d. 144,000

40.)
Lorie Company plans to sell 400,000 units of finished product in July an anticipates a growth
rate in sales of 5% per month. The desired monthly ending inventory in units of finished
product is 80% of the next month’s estimated sales.
There are 300,000 finished units in the inventory on June 30. Each unit of finished product
requires four pounds of direct materials at a cost of P2.50 per pound. There are 800,000
pounds of direct materials in the inventory on June 30.
How many units should be produced for the three-month period ending September 30?
a. 1,260,000
b. 1,331,440
c. 1,328,000
d. 1,424,050

41.)
If the required direct materials purchases are 8,000 pounds and the direct materials required
for production is three times the direct materials purchases, and the beginning direct
materials are three and a half times the direct materials purchases, what are the
desired ending direct material in pounds?
a. 20,000
b. 12,000
c. 4,000
d. 32,000

42.)
If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are desired
for inventory at December 31, and 180,000 pounds are required for annual production,
how many pounds of raw material should be purchased during the year?
a. 150,000 pounds
b. 120,000 pounds
c. 240,000 pounds
d. 210,000 pounds

43.)
Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods at
 75% the coming month’s budgeted sales. It also keeps its inventory of raw materials at 50%
of the coming month’s budgeted production. Each unit of product requires two pounds of
materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; august,
1,600. Raw material purchases in July would be
a. 1,525 pounds
b. 2,550 pounds
c. 2,900 pounds
d. 3,050 pounds

44.)
Generous Company began its operations on January 1 of the current year. Budgeted sales
for the first quarter are P240,000, P300,000, and P420,000, respectively, for January,
February and March. Generous Company expects 20% of its sales cash and the
remainder on account. Of the sales on account, 70% are expected to be collected in the
month of sale, 25% in the month following the sale, and the remainder in the following
month.
How much should Generous receive from sales in March?
a. P304,800
b. P388,800
c. P294,000
d. P295,200

45.)
Adel Company has the following sales forecasts for the selected three-month period in 2007:
Month Sales
April P12,000
May 7,000
June 8,000
Seventy percent of sales are collected in the month of the sale, and the remainder is
collected in the following month.
Accounts receivable balance (April 1, 2007) P10,000
Cash balance (April 1, 2007) 5,000
Minimum cash balance is P5,000. Cash can be borrowed in P1,000 increments from the
local bank (assume no interest charges).
How much cash would be collected in June from sales?
a. P 7,700
b. P 8,000
c. P 8,500
d. P10,000

46.)
The Avelina Company has the following historical pattern on its credit sales.
70 percent collected in month of sale
15 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
2 percent uncollectible
The sales on open account have been budgeted for the last six months of 2007 are shown
below:
July P 60,000
 August 70,000
September 80,000
October 90,000
November 100,000
December 85,000
The estimated total cash collections during the fourth calendar quarter from sales made on
open account during the fourth calendar quarter would be
a. P172,500
b. P265,400
c. P230,000
d. P251,400

47.)
Ironman Company is preparing its cash budget for the month ending November 30. The
following information pertains to Ironman’s past collection experience from its credit sales:
Current month’s sales 12%
Prior month’s sales 75%
Sales two months prior to current month 6%
Sales three months prior to current month 4%
Cash discounts (2/30, net/90) 2%
Doubtful accounts 1%
Credit sales:
November – estimated P2,000,000
October 1,800,000
September 1,600,000
August 1,900,000
How much is the estimated credit to Accounts Receivable as a result of collections
expected during November?
a. P1,730,200
b. P1,762,000
c. P1,757,200
d. P1,802,000

48.)
Albatross Company started its commercial operations on September 30 of the current year.
Projected manufacturing costs for the first three months of operations are P1,568,000,
P1,952,000, and P2,176,000, respectively. Depreciation, insurance, and property taxes
represent P288,000 of the estimated manufacturing costs. Insurance was paid on
September 30, and property taxes will be paid in July next year. Seventy-five percent of
the remainder of the manufacturing costs are expected to be paid in the month in which
they are incurred, with the balance to be paid in the following month. The cash payments
for manufacturing costs in the month of November are:
a. P1,568,000
b. P1,664,000
c. P1,952,000
d. P1,856,000
49.)
Albania Company expects its June sales to be P300,000, which is 25% higher than its May
sales. Purchases were P200,000 in May and are expected to be P240,000 in June. All sales
are on credit and are collected as follows: 80% in the month of the sale and 20% in the
following month. All payments in the month of sales are given 2% discount. Sixty percent of
purchases are paid in the month of purchase to take advantage of purchase term of 1/10,
n/40. The remaining amount is paid in the following month. The beginning cash balance on
June 1 is P20,000. The ending cash balance on June 30 would be:
a. P64,160
b. P80,640
c. P73,000
d. P85,440

50.)
The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per
thousand. Irine Tee, the major stockholder, manages the inventory and finances of the
company. She estimates sales for the following months to be:

January P263,500 (1,700,000 fasteners)

February P186,000 (1,200,000 fasteners)
March P217,000 (1,400,000 fasteners)
April P310,000 (2,000,000 fasteners)
May P387,500 (2,500,000 fasteners)

Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December
(1,500,000 fasteners).

Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing
for the first quarter. Based on her sales forecast and the following information she has provided,
you have to prepare a monthly cash budget, a monthly and quarterly pro forma income
statement, a pro forma quarterly balance sheet, and all necessary supporting schedules for the
first quarter.

Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the
normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two
months after the sale). It pays for its materials 30 days after receipt. In general, Ms. Tee likes to
keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of
December was 2,600,000 units. (This was not equal to her desired two-month supply.)
The major cost of production is the purchase of raw materials in the form of steel rods, which
are cut, threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but
Ms. Tee has just been notified that material costs have risen, effective January 1, to P60 per
1,000 fasteners. The Ingo Corporation uses FIFO inventory accounting. Labor costs are
relatively constant at P20 per thousand fasteners, since workers are paid on a piecework basis.
Overhead is allocated at P10 per thousand units, and selling and administrative expense is 20
percent of sales. Labor expense and overhead are direct cash outflows paid in the month
incurred, while interest and taxes are paid quarterly.

The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess
cash into marketable securities. The average tax rate is 40 percent, and the company usually
pays out 50 percent of net income in dividends to stockholders. Marketable securities are sold
before funds are borrowed when a cash shortage is faced. Ignore the interest on any short-term
borrowings. Interest on the long-term debt is paid in March, as are taxes and dividends.

As of year-end, the Ingo Corporation balance sheet was as follows:

Ingo Corporation
Balance Sheet
December 31, 2006

ASSETS
Current assets:
Cash P 30,000
Accounts receivable 320,000
Inventory 237,800
Total current assets 587,800
Plant and equipment, net of accumulated depreciation of P200,000 800,000
Total Assets P1,387,800

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable P 93,600
Long-term debt, 8% 400,000
Common stock 504,200
Retained earnings 390,000
Total Liabilities and Stockholders’ Equity P1,387,800

The budgeted production respective to each month of the first quarter of the coming year are:
a. 1,400,000; 2,000,000; 2,500,000
b. 2,500,000; 2,000,000; 1,400,000
c. 1,400,000; 2,500,000; 2,000,000
d. 2,000,000; 1,400,000; 2,500,000

51.)
Which of the following is considered a causal method of forecasting?
a. exponential smoothing
b. moving average
c. Delphi method
d. none of the above

52.)
Enrolment in a particular class for the last four semesters has been 120, 126, 110 and 130.
Suppose a one-semester moving average was used to forecast enrolment (naïve
forecast). Thus, the forecast for the second semester would be 120, for the third
semester it would be 126, and for the last semester it would be 110. What would the
mean squared error be for this situation?
a. 196
b. 230.67
c. 100
d. 42

53.)
Daily demand for newspapers for the last 10 days has been as follows: 12, 13, 16, 15, 12,
18, 14, 12, 13, 15 (from oldest to most recent). Forecast sales for the next day using a
two-day moving average.
a. 14
b. 13
c. 15
d. None of the above.

54.)
Which of the following is not considered to be one of the components of a time series?
a. trend
b. seasonality
c. variance
d. cycles

55.)
A time series forecasting model in which the forecast for the next period is the actual value
for the current period is the
a. Delphi model
b. Holt’s model
c. naïve model
d. exponential smoothing model

56.)
A judgmental forecasting technique that uses decision makers, staff personnel, and
respondent to determine a forecast is called
a. exponential smoothing
b. Delphi method
c. consumer market survey
d. jury of executive opinion

57.)
Daily demand for newspaper for newspapers for the last 10 days has been as follows: 12,
13, 16, 15, 12, 18, 14, 12, 13, 13, 15 (from oldest to most recent). Forecast sales for the
next day using a three-day weighted moving average where the weights are 3, 2, and 1
(the highest weight is for the most recent number)
a. 12.8
b. 13
c. 70
d. 14

58.)
Which time-series component is said to fluctuate around the long-term trend and is fairly
irregular in appearance?

a. Trend.
b. Cyclical.
c. Seasonal.
d. Irregular.

59.)
Which of the following smoothing constants would make an exponential smoothing forecast
equivalent to a naive forecast?
a. 0
b. .01
c. .1
d. 1.0

60.)
Simple exponential smoothing is being used to forecast demand. The previous forecast of
66 turned out to be four units less than actual demand. The next forecast is 66.6,
implying a smoothing constant, alpha, equal to:
a. .01
b. .10
c. 15
d. .20

-END-