FINANCIAL MANAGEMENT MIDTERMS QUIZ

1. Working capital management involves investment and financing decisions related to:
A. Plant and equipment and current liabilities
B. Current assets and capital structure
C. Current assets and current liabilities
D. Sales and credit
2. As a company becomes more conservative with respect to working capital policy, it would tend to
have a(n)
A. Increase in the ratio of current liabilities to non-current liabilities
B. Increase in the operating cycle
C. Decrease in the operating cycle
D. Increase in the ratio of current assets to current liabilities
3. The transaction motive for holding cash is the
A. A safety cushion
B. Daily operating requirements
C. Compensating balance requirements
D. None of the given choices
4. All of the following statements about working capital are correct except:
A. Current liabilities are an important source of financing for many small firms.
B. Profitability varies inversely with liquidity.
C. The hedging approach to financing involves matching maturities of debt with specific
financing needs.
D. Financing permanent inventory buildup with long-term debt is an example of an aggressive
working capital policy.
5. When a firm finances long-term asset with short-term sources of funding, it:
A. Reduces the risk of cash shortage
B. Will have higher interest expense
C. Improves the leverage ratio
D. Is ignoring the principle of matched maturities.
6. An advantage of the use of long-term debt as opposed to short-term debt to finance current
assets is
A. It decreases the risk of the firm
B. It generally is less costly than the short-term debt
C. It generally places fewer restrictions on the firm
D. It is easy to repay
7. A compensating balance
A. Compensates a financial institution for services rendered by providing it with deposit of funds
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 an amount paid by financial institutions to compensate large depositors
8. Which of the following is true about a firm’s float?
A. A firm strives to minimize the float for both the cash receipts and cash disbursements
B. A firm strives to maximize the float for both the cash receipts and cash disbursements
C. A firm strives to maximize the float for cash receipts and minimize the float for cash
disbursements
D. A firm strives to maximize the float for cash disbursements and minimize the float for cash
receipts
9. All but which of the following is considered in determining credit policy?
A. Credit standards
B. Credit limits
C. Accounts payable deferral period
D. Collection efforts
1. ABC Supplies, Inc. has P5million in inventory and P2 million in accounts receivable. Its average
daily sales are P100,000. The company has P1.5 million in accounts payable. Its average daily
purchases are P50,000. What is the length of the company’s inventory conversion period?
A. 50 days
B. 90 days
C. 120 days
D. 40 days

Annual Sales: 360 days x 100,000 36.0 M

Inventory Turnover 36M/5M 7.2x
Inventory Conversion Period 360/7.2 50 days

2. ABC Company has P5 million of average inventory and sales of P30 million. Using a 365-day
year, calculate the firm’s inventory conversion period.
A. 30.25 days
B. 45.00 days
C. 60.83 days
D. 72.44 days

Average daily sales (30M/365) 82,191.78

Inventory conversion period: 5M/82,191.78 60.83 days

3. What is the expected annual savings from a lock-box system that collects 20 checks per day
averaging P10,000 each and reduces mailing ang processing time by 2.5 and 1.5 days,
respectively, if the annual interest is 5%?
A. P40,000
B. P20,000
C. P444.44
D. P2,000

20 x P10,000 x 4 days x 5% = P40,000

4. What is the expected annual savings from a lock-box system that collects 150 checks per day
averaging P500 each and reduces mailing ang processing time by 2.5 and 1.5 days, respectively,
if the annual interest is 7%?
A. P5,250
B. P13,125
C. P21,000
D. P300,000

Reduction in cash float (2.5+1.5) 4 days

Additional Free Cash (4 days x 150 x P500) P300,000
Annual Savings (P300,000 x 0.07) P21,000

5. ABC Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected
to be credit sales at terms of n/30. ABC estimates that a proposed relaxation of credit standards
will increase credit sales by 20% an increase the average collection period from 30 days to 40
days. Based on a 360-day year, the proposed relaxation of credit standards will result in an
expected increase in the average accounts receivable balance of
A. P540,000
B. P900,000
C. P2,700,000
D. P1,620,000

Credit sale = 40,500,000 x 80% 32,400,000

Increased credit sales: 23,400,000 x 1.2 38,880,000

New Average AR 38,880,000/360 x 40 4,320,000

Old Average AR 32,400,000/360 x 30 2,700,000
Increase in Average AR 1,620,000
6. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the
discount is:
A. 2.0%
B. 30.0%
C. 36.7%
D. 10.0%

2% 360
36.7% = 𝑥
100% − 2% 3 − 10

7. The cost of discount missed on credit terms of 2/10, n/60 is

A. 2.0%
B. 14.69%
C. 12.4%
D. 21.2%

2% 360
14.9% = 𝑥
100% − 2% 60 − 10

8. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8% can be
arranged at any time. When should the customer pay the invoice?
A. Pay on the 1st
B. Pay on the 10th
C. Pay on the 40th
D. Pay on the 60th

1% 360
12.12% = 𝑥
100% − 1% 40 − 10

The cost of discount missed is more than the 8% that the bank charges.
9. Salary payment of ABC Company is made every 15th and 30th of the month through issuances of
checks. It pays P6,750,000 per payroll. However, based on the historical clearing of checks
issued on salary; 40% will be presented on the day itself; 30% four days from the salary date,
10% 7 days from the salary date and the remaining balance on the tenth day after the salary
date. If the interest rate on market is 12% per annum, how much is the incremental income of
ABC Company if the entire amount is not deposited?

6,750,000 x 60% x 12% x 4/360 5,400

6,750,000 x 30% x 12% x 3/360 2,025
6,750,000 x 20% x 12% x 3/360 1,350
Total 8,775

10. ABC 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. P530,000
B. P790,000
C. P810,000
D. P1,070,000

Cost of Units Sold (0.65 x P800,000) 520,000

Add: Desired Ending Inventory 140,000
Total cost of goods available for sale 660,000
Less: Beginning Inventory 130,000
Budgeted Purchases 530,000
11. ABC Company plans to sell 400,000 units of finished product in July and 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. 1,328,000
C. 1,331,440
D. 1,424,050

Sales for the 3-month period:

July 400,000
August 400,000 x 1.05 420,000
September 420,000 x 1.05 441,000
Total

Inv, Sept 30 (441,000 x 1.05 x .8) 370,440

Total Requirements 1,631,440
Less: July Inventory 300,000
Budgeted Production 1,331,440
12. ABC Company sells balks of fabric to retailers for P8,000 per balk. The company’s accountant
has prepared the following sales forecast (in bolts) for the first quarter of 2010:

January 600 balks

February 1,000 balks
March 700 balks

Historically, the cash collection of sales has been as follows: 60 percent in the month of
sale, 30 percent in the month following the sale, and 9 percent in the second month following the
sale.

Cash receipts for March are expected to be:

A. P6,192,000
B. P8,216,000
C. P3,360,000
D. P5,784,000

Cash from sale of:

March 700 x 8,000 x 0.6 3,360,000
February 1,000 x 8,000 x 0.3 2,400,000
January 600 x 8,000 x 0.09 432,000
Total 6,192,000
13. ABC 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.
Barat Company expects 20% of its sales on cash and the remainder on account. Of the sales un
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 Barat receive from sales in
March?
A. P304,800
B. P294,000
C. P388,800
D. P295,200

Cash sales (March) 0.2 x P420,000 84,000

Collections of account sales:
March (420,000 x 0.8 x 0.7) 235,200
February (300,000 x 0.8 x 0.25) 60,000
January (240,000 x 0.8 x 0.05 9,600
Total Cash from Sales 388,800
14. ABC 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.P73,000

C.P80,640

D.P85,440

Beginning Cash 20,000

Add: Cash collected on June’s sales (300,000 x .8 x .98) 235,200
Cash collected on May’s sales (300,000/1.25) x .2 48,000 283,200
Total 303,200
Less: Cash paid on June’s purchases (240,000 x .6 x .99) 142,560
Cash paid on May’s purchases (200,000 x .4) 80,000 222,560
Ending cash balance 80,640
 15. ABC 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
• 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 2010 are shown below:

July P60,000
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.P230,000

C.P265,400

D.P251,400

October 90,000 x .95 85,500

November 100,000 x .85 85,000
December 85,000 x .70 59,500
4th Quarter Sales collected in 4th Quarter 230,000