CHAPTER 12

WORKING CAPITAL MANAGEMENT

THEORIES:
involves
Working capital management investment and financing decisions
1. related to:
A. plant and equipment and current liabilities.
B.
Current assets and capital structure.
liabilities
C.
current assets and current
sales and credit.
D.
The length of time between the acquisition of inventory and payment for it is
2 called the
A. Operating cycle
Inventory conversion period
B. Accounts receivable period
C.
D. Accounts payable deferral period
Ignoring cost and other effects on the firm, which of the
3.
wWOUld tend to reduce the cash conversion cycle?
following measures
A Forgothe discounts that are currently being taken
B. Maintain the level of receivables as sales decrease
C Buy more raw materials to take advantage of price breaks
D. Take discounts when offered

4. Which of the following actions is likely to reduce the length of a firm's cash
conversion cycle?
A. Adopting a new inventory system that reduces the inventory conversion
period.
B. Adopting a new inventorysystem that increases the inventory conversion
period.
C. Increasing the average days sales outstanding on its accounts receivable.
D. Reducing the amount of time the firm takes to pay its supplier.
5. Ifevery thing else remains constant and a firm increases its cash conversion cycle,
its profitability will likely
A, Increase
B. Increase if earnings are positive.
C. Decrease
D. Not be affected

301
 becomes more conservative with respect to
As a company
6
policy, it would
A. Increase
have a(n)
ternd to
in the ratio ofcurrent liabilities to noncurrent liabilities.
working capital D. Payables policy
cycle.
B Increase in the operating Aa advantage of the use of long-term debt as opposed to short-term deht to
the operating cycle.assets
C. Decrease inthe
13 is
finance current assets
D. Inrease in
ratio of current :liabilities.
to current
A It decreases the risk of the firm
B
Tt generally is less costly than short-term debt
holding cash is the C It generally places fewer restrictions on the firm
7 The transaction motive for
A. A safety cushion D. It is easy to repay
B. Daily operating requirements
requirements wThioh of the following financial instruments generaly provides the largest
C. Compensating balance 14. small firms?
sOurce of short-term credit for
D. None of the given choices Installment loans
A.
the: B. Commercial paper
8 The longer the fira's accounts payable period,
conversion period. C Trade credit
A. Longer the firm's cash
B. Shorter the firm's inventory period. D. Mortgage bonds
C. More the delay in the accounts receivable period.
The prime rate is the
D. Less the firm nust invest in working capital 15.
A Size of the commitment fee on a commercial bank loan
B Effective cost of a commercial bank loan
9. All of the following statements about working capital are correct except: C. Rate charged on business loans to borrOwers with high credit ratings
A Current liabilities are an important source of financing for many small firms. D Rate at which a bank borrows from the Bangko Sentral ng Pilipinas
B. Profitability varies inversely with liquidity.
C. The hedging approach to financing involves matching maturities of debt 16. A compensating balance
with specific financing needs. A. Compensates a financial institution for services rendered by providing it
D. Financing permanent inventory buildup with long-term debt is an example with deposits of funds
of an aggressive working capital policy. B Is used to compensate for possible losses on a marketabie securities portfolio
C. Is a level of inventory held to compensate for variations in usage rate and
10. Short-term financing plans with high liquidity have: lead timne
A. high return and high risk D Is an amount paid by financial institution to compensate large depositors
B. moderate return and moderate risk
C. low profit and low risk 17. Which of the following is true about a firm's float?
D. none of the given choices A. A firm strives to minimize the float for both cash receipts and cash
disbursements.
11 When a firm finances long-term assets with short-term sources of funding, it
A. Reduces the risk of cash shortage B A firm strives to maximize the float for both cash receipts and cash
B. Wil have higher interest disbursements.
and minimize the float
C
expense
Improves the leverage ratio
C A firm strives to maximize the float for cash receipts
D. Is ignoring the principle of matched for cash disbursements.
maturities disbursements and minimize
D. A firm strives to maximize the float for cash
12. The procedures followed by the firm for the float for cash receipts.
receivables are called its ensuring payment of its accounts
increases the payable float and therefore delays
A Discount policy 18. A working capital technique that
B. Collection policy the outflow of cash is
C. Credit policy A. Concentration banking
B A draft
302
303
 nterchange (EDI)
C. Electronic Data
D. A
lockbox system would increase risk?
Which of the followingworking
of capital.
account balance that a firm must
24. A. Raise the level amount of inventory by formulating an effective
19. A minimum checking maintain with a B
Decrease the inventory
commercial bank is a policy. borrowing.
A. Transaction balance Increase the amount of short-term
B. Compensating blance
C.
amount of equity financing.
D
Increase the
C. Precautionary balance
between the cash balance on the firm's books and the balance
D. Speculative balance The difference statement is called:
25 shown on the bank
true about electronic funds transfer compensating balance
20. Which of the following from a cash flow A. the
standpoint? B. a float
a safety cushion
A. Itis always beneficial fromn a cash flow standpoint C. choices
B It is never beneficial from acash flow
standpoint D. none of the given
C is beneficial from á cash receipts standpoint but not from a cask The length of time between payment for inventory and the collection of
cash is
disbursements standpoint 26. referred to as:
D. Itis beneficial from a ash disbursements standpoint but not from a cask deferral period
receipts starndpoint A. payables
receivables conversion period
B.
C. operating cycle
21. Temporary working capital supports D cash conversion cycle
A. the cash needs of the company.
B. payment of long terrn debt. the firm:
27. As a firm's cash conversion cycle increases,
C. acquisition of capital equipment. A. becomes less profitable
D. seasonal peaks. increases its investment in working capital
B
C. reduces its accounts payable period
22. Determining the appropriate level of working capital for a firm requires D. incuts more shortage costs
A. evaluating the risks associated with various levels of fixed assets and the
types of debt used to finance these assets. The average length of time a peso is tied up in current
asset is called the:
28.
B. changing the capital structure and dividend policy of the firm. A. net working capital.
C. maintaining short-term debt at the lowest possible level because it is B. inventory conversion period.
generally more expen_ive than long-term debt.
D. offsetting the benefit of current assets and current liabilities against the C. receivables conversion period.
D. cash conversion cycle.
probability of technical insolvency.
lowers its DS0,
23. Zap Company follows an aggressive financing policy in its working 29. Which of the following statements is most correct? If a company
capital
management while Zing Corporation follows a conservative financing policy.
the
but no changes occur in sales or operating costs, thenratio.
Which one of the following statements is correct? end up with a higher debt
A. company might well lower debt ratio.
A. Zap has low ratioof shott-term debt to
total debt while Zing has a high B. company might well end up with a
a higher ROE.
ratio of short-term debt to total debt.
B. Zap has a low current ratio C company would probably end up with would probably decline.
C. Zap has less liquidity risk while Zing has a high current ratio. D. company's total asset turnover ratio
while Zing has more
D. Zap finances
short-term assets with long-termliquidity risk.
debt while Zing finances 30. Which of the following investnments generally pay the
highest retun
short-term assets with short-term debt A. Money market accounts
B. Treasury notes
C. Treasury bills
304
305
 D. Commercial paper stock by a firm will
The use ofsafety
inventory costs
important
considerations with respect to short-term 38
A. reduce
increase inventory costs
31. The most
A. Return
and
B. Return and
value
risk
investmnents are B
C have no effect
D. none of
on inventory costs
the given
choices

C. Risk and liquidity

value managing working capital, such as inventory, should be to minimize
D. Growth and 39.
The goal of
the
following is considered in determining credittpolicy? carrying inventory
32. All but which ofthe A. costs of cost of capital
A. Credit standards B. opportunity carrying and shortage costs
B. Credit limits C. aggregate of
spoilage or pilferage
C. Accounts payable deferral period D. amount of
D. Collection efforts level of safety stock is carried for an item in inventory, the
When a specified for that itenm
average inventory level
40.
credit criteria?
Which of the following describes a firm's of the safety stock.
33. purchase. A. decreases by the amount
A. The length of time a buyer is given to pay for payment. is one-half the level of the safety
stock.
B. The percentage of discount allowed for early B
C Increases by one-half the
amount of the safety stock.
C. The diligence to collect slow-paying accounts.customers. D. Increases by the number of urnits
of the safety stock.
D. The required financial strength of acceptable
Which of the following statements is correct for a firm that currently has total
34 The economic order quantity formula assumes that 41.
costs of carrying and ordering inventory that are 50% higher than total carrying
A. periodic demand for the good is known. Costs?
B. carrying costs per unit vary with quantity ordered. A. Current order size is greater than optimal
C. costs of placing an order vary with quantity ordered. B Current order size is less
than optimal
D. purchase costs per unit differ due to quantity discounts. C. Per unit carrying costs are too high
D. The optimal order size is currentiy being used
35. Firms that maintain very low or no inventory levels have
A higher ordering costs Which changes in costs are most conducive to switching from a traditional
42.
B. higher carrying costs inventory ordering system to a just-in-time ordering system?
C. higher ordering and carrying costs
D. lower ordering and carrying costs Cost per Purchase Order Inventory Unit Carrying Cost
36 An example of a carrying cost is A Increasing Increasing
A. Disruption of production schedules B Decreasing Increasing
B. Quantity discounts lost C Decreasing Decreasing
C. Handling costs D Increasing Decreasing
D. Obsolescence
43. To determine the reorder point, calculations normally include the
37 The amount of inventory that a company would tend to hold in stock would A. average daily usage
increase as the
A. B. ordering cost
sales level falls to a permanently lower C. economic order quantity
B. cost of carrying inventory level
C. decreases
variability of sales decreases D. carrying cost
D. cost of running out of stock
decreases
306 307
 Toevaluate the
efficiency of purchase transactions, management
44.
calculate the economic
order quantity for a sample of the
company'sdecides to D. Purchase
of P50,000 marketable securities for cash.

Tocalculate the
economic order quantity, management would need data product
for all sof Tiger, Inc. has current ratio of 0.95 is to 1.00. Which of the following would raise
exceptthe
thefollowing, productsales 50. current ratio?
the company's accounts payable.
A. volumeof
prices ofthe products
B. purchase oforderingproducis
A. Payment of
Purchase merchandise in a 2/10, net 30 open account.
B
C the fixed cost Collection of accounts receivable
D. volume of
products in inventory cash dividend.
D. Declaration of
Pepper Conpany changedfrom atraditional manufacturing philosophy tooajust-
45. expected effects of this change on Pepper's
in-time technology. What are the PROBLEMS
inventory tunover and inventory as a percentage of total assets reported on
receivabloe
Pepper'sbalancesheet?
Inventory Percentage Iuke Company has an inventory conversion period of 60 days, a
Inventory Turnover 1.
conversion period of 45 days, and a payments cycle of 30 days. What is the
Decrease cycle?
A Decrease
Increase
length of the firm's cash conversion
Decrease A. 90 days C. 54 days
B. Decrease D. 105 days
C Increase B 75 days
Increase
D. Increase
Samaritan Supplies, Inc. has Pb million in inventory and P2 milion in accounts
rereivable. Its average daily sales are P100,0C0. The company has P1.5 million în
2. -.
customer's payment decision date?
With credit terms of 3/8, n/30, what is the of
46.
A. Three days after the
invoice is received. accounts payable. Its average daily prchases are P50,000. What is the lenoth
customer's decision date. the company's inventory conversion period?
B. The &th day is the C. 120 days
30th. A. 50 days
C. Anytime during the period, 8th to the D 40 days
D. The 30th day is the primary decision date. B. 90 days

47. Common sources of short-term financing include 3. Using the information in the last question, what is the length of the company's
cash conversion period?
A. stretching payables C 30days
B. issuing bonds A. 50 days
B. 20 days D. 40 days
C reducing inventory
D. all of the given choices of P30 million
4. Julia Company has P5 milion of average inventory and sales
Using a 365-day year, calculate the firm's inventory conversion period
48. Which of the following cash management techniques focuses on cash C. 60.83 days
disbursements? A. 30.25 days
A. Lockbox system B. 45.00 days D. 7244 days
B. Preauthorized checks
system that colets 20
C. Zero-balance account 5 What are the expected annual savings from a lock-box and proessing tine
mailing
D. Depository transfer checks checksper day averaging Pl0,000 each and reduces
inierest is5perent?
by 2.5 and 1.5 days, respectively, if theC.annual
PA44.44
49 Roar Company has current assets of P4,000,000 and current liabilities of A. P40,000
P3,000,000. Which of the following transactions would increase its working B, P20,000 D. P2,000
capital?
A. Prepayment of P50,000 of next year's rent. reguirement of F9.075,000 which are t e
B. 6. Simile nc. has a total annual cash to invest the money at *
Refinancing P500,000 of short term debt with long-term debt. paid uniformly. Simile has the
opportunity
C. Acquisition of land valued at Pl million by issuing new
common stock.
308 309
 spends, on the average, P40 for every
arnum. The company cash What are the expected annual savings from a lock-box system that collects 150
marketable securities.

What is the optimal cash

conversion size?
C. P45,000
conversion to 11.
checks per day averaging P500 each, and reduces mailing and processing times
by 2.5 and
P
1.5 days respectively, if the annual interest rate is 7%7
5,250
C. P 21,000
A. P60,000 A. P 13,125 D. P300,.000
B. P55,000
D. P72,500 B

proposals from ie Company turns out 200caiculators a day at a cost of P250 Der calculase
Newman Products has received several banks to establish a 12 materials and variable conversion cost. It takes the firm 18 days to convert
7 Newman
receipts. receives an average of for materials into calculator. Casies usual credit terms
lockbox system to speed upeach, 700 checks raw
extended to its
averaging P1,800 and its cost of short-term funds is customers is 30 days, and the firm generally pays its suppliers in 20 days.
per day equivalent: 7%
per
Assuming that all proposals will produce processing results and year
A
a %0-dav rear, which one of the following propOsals is optimal for Ne
APO.50 fee per check
using If
Casie
foregoing cycles are
the Company finance?
constant, what amount ot working capttal must

P 900,O00
collected P1,400,000
B A fee of 0.03% of the amount A. D. P1,800,000
Aflat fee of P125,000 per year B. P2,400,000
compensating balance of P1,750,000
A CaiaCompany sells on terms 3/10, net 30. Total sales for the year are Pg00 00
D.

Hvperboe Corporation estimates its total annual cash disbursementet

13.
Borty percent of the customers pay on the tenth day and take discounts: the
other 60 percent pay, on average, 45 days after their purchases.
Pa251.250 which are to be paid uniformly. Hyperbole has the opportunity t amount of receivables?
invest the money at 9% per annum. The company spends, on the average, P25 What is the average C. P77,200
for ever cash conversion to marketable securities and vice versa. A. P70,000
B P77,500 D. P67,500

What is the opportunity cost of keeping cash in the bank account?

A. P3825.00 C. P4,190.00 following data:
B. PM912.50 D. P 188.55 Ouestion Nos. 14 tlrough 16 are based on the
to 3/10. net 30 :m
Sonata Company is considering changing its credit terms from 2/15, net 30
9. The Camp Company has an inverntory conversion period of 60 days, a
order to speed collections. At present, 40 percent of Sonata Company's customers take the 2
receivabie conversion period of 30 days, and apayable payment period of 45 to rise to 50 ercent
nercent discount. Under the new term, discount customers are expected
days. The Camp's variable cost ratio is 60 percent and annual fixed costs of terms, half of the customers who do not take the discount 2re eeted
Regardless of the credit inobe a
P600,000. The current cost of capital for Camp is 12%. late. The change does not
to pay on time, whereas the remainder will pay 10 days are not expected to rse abore thetr
relaxation of credit standards; therefore bad debt losses
If Camp's annual sales are P3,375,000 and all sales are on credit, what is the discount terms are exrected to
firm'scarrying cost on accounts receivable, using 360 days year? present 2 percent level. However, the more generous cash Company's varable cost ratto
increase sales from P2 million to P2.6 million per year. Sonata
A. P281,250 C. P 20,250 in accounts receivable is 9 percent, and the
B. Pl68,750 is 75 percent, the interest rate on funds invested
D. P 56,250
firm'sincome tax rate is 40 percent.
10. What is the inventory period for a firm with an and after the change of
million, M5 million in average inyentory, andannual cost of goods sold of P3 14. What are the days sales outstanding (DSO) before
a cash conversion cycle of 75
days? credit policy?
A 6.56 days C. 52.60 days A. 27.0 days and 22.5 days, respectively
B. 18.75 days B. 22.5 days and 27.0 days, respectively
D. 67.50 days
C. 22.5 days and 21.5 days, respectively
D. 21.5 days and 22.5 days respectively

310
311
 receivable is
carryingcoston
The incremental C. P 643.75
15 days
D. 20 days
15. A. P 843.75 D. P6,667.00 B.
B. P8,889.00 budgetedsales for the coming year are P40,500,000 of which
Palm Company's
expected to be credit sales at terms of n/30. Palm estimates that
profitfrom the change in credit terms is 21.
80% are relaxation of credit standards will increase credit sales by 20% and
incremental aftertax C. P60,615
The proposed
16. A. P68,493 D. P57,615 average collection period from 30 days to 40 days. Based on a 360-
increasethe proposed relaxation of credit to standards will result in an
B. P65,640 the
day year,increasein the average accounts receivable balance of
Conmpany has annual sales of P2,500,000. Its expected C. P2,700,000
La Carlota A. P 540,000
17.
Currently,period
collection average
is 45 days, and bad debts are 3 percent of sales. The credit
and collection manager is considering instituting a stricter collection policy,
B. P 900,000 D. P1,620,000

would be reduced to 1.5 percent of total sales, and the its Credít poicy. The new policy wil decrease the
plans to tightencollection
whereby bad debts sales Acompany from 75 to 50 days and reduce the ratio of
period would| fall to 30 days. However, would also 22. of days in
average numbertotal revenue from 70% to 60%. The company estimates that
average collection
annually. Variable costs are 75 percent of sales fall
by ancostestimated
the P300,000
of carrying receivablesis 10 percent. Assume a tax rate of 40 percent and credit sales to
would be 5% less if the proposed new credit policy were
projected sales fim's short-term interest cost is 10%. Projected sales forthe
implemented. The
and 360 days per year. million.
coming year are P50
investment in receivables if the chaneo
What would be the decrease in impact on accounts receivable of this
Assuming a 360-day year, calculate the peso
made?
A. P 9,688
C. P 96,875 proposed change in creditpolicy.
D. P129,975 A. P3,819,445 decrease
B. P 12,988 B. P3,333,334 decrease
C. P6,500,000 decrease
payable on the tenth day and enjovs
18. Escape Company regularly pays its accounts net 30. Because of an oversight, one D. P18,749,778 increase
the 2 percent cash discount, term: 2/10, the annual cost
supplier's invoice is not paid within the discount period. What is agreement with a firm who will factor the
companv's
of that incident of paying an invoice on the 30th day, instead
of the tenth day? 23. A company enters into an buy the company's receivables, which
accounts receivable. The factor agrees to
Use 360 days ayear. average collection period of 30 days.
A. 36.73% C. 30.02% average PM00,000 per month and have anface value of receivables at an annual
The factor will advance up to 80% of the
B. 2448% D. 2.04%
all receivables purchased. The controller
rate of 10% and charge a fee of 2% on
company would save P18,000 in collection
19. Escape Company regularly pays its accounts payable on the tenth day and enjoys of the company estimates that the interest are not deducted in advance.
the 2percent cash discount, term: 2/10, net 30. Because of an oversight, one expenses over the year. Fees and
supplier's invoice is not paid within the discount period but paid 10days after. annual cost of financing?
What is the annual cost of that incident of paying an invoice on the 20th day, Assuming a 360-day year, what is theC. 16.0%
instead of the tenth day? Use 360 days a year. A. 10.0%
A. 7344% D. 17.5%
C. 30.02% B. 14.0%
B. 36.73% D. 2.04% The firm
trade credit terms of 3/15,net 45.
24. Paramount Corporation is offered account after 67 days.
20. Mercado offers its customers credit terms of 5/10, net 20. discount, and it pays the
customers take the cash discount and the remaining customersOne-third of the does not take advantage of the nominal annual cost of not taking discount?
On average, 20 units are sold per day, priced at P10.000 pay on day 2. Using a 365-day year, what is the C. 23.48%
uniform throughout the year. Using a 360-day year, the each. The rate of sales is A. 18.2%
D. 2645%
sales outstanding in accounts receivable, to the company has days B 21.71%
A. 13 days C. 17 days
nearest full day,of

312
313
 quantityfor the following
sells
What32,000
economic order inventory
is the bags of premiumsugar per year.,]The cost per order is policy:
P200 andAthe and P4,
respectively. The following data have been gathered in an attempt to
25. bag. firm determine an appropriate safety stock level:
carrying cost ofPO.80per Because of Excess
Units Short Number of Times Short
firm experiencesa C. 8,000 bags Demand during the Lead in the last 40 Reorder
A. 2,000 bags D. 16,000 bags Time Period Cycles
B. 4,000 bag 100 8

determined the following for a given year: 200 10

Marsman Co. has 300 J4
26.
quantity (standard order size) 5.000 units 400
Economic order year
place purchase orders for the P40,000 stock level?
Total cost to
purchase order
P 100 What is the optimal safety C. 200 units
Cost to place one for one year
4 A. 100 units
D. 400 units
Cost to carry one unit B
300units
units?
estimated annual usage in uses about 200,000 yards of a particular fabric
What is Marsman's 500,000 Durable Furniture Company
A. L000,000
C 30. e2ch vear. The fabric costs P25 per yard. The current policy is to order the
D. 1,500,000
fabric four times a year. Incremental ordering costs are about P200 per order.
B. 2,000,000
about Po.75 per yard, much of which
oulok and inCremental carrying costs are
videotapes. Pirate Mart is a local retail represents the opportunity cost of the funds tied
up in inventory.
27. BIBO Company is a distributor of Pirate Mart purchases tapes from BIRO
which sells blank and recorded videos. packages of 20. BIBO associated with the current inventory policv?
Company at P300.00 per tape; tapes are shipped in How much total annual costs are
Company pays all incoming freight, and Pirate Mart does not inspect the tapes A. P19,550
C. P38,300
high quality. Annual demand is 104,000 D. P62,500
due to BIB0 Company's reputation forweek. Pirate Mart earns 20% on its cash
B. P18,750
tapes at arate of 4,000 tapes per to level production. Cost efficiencies
investments. The purchase-order lead time is two
weeks.
31. Narra Company is considering a switchafter tax cost would decline by P70,000
willoccur under level production andP1,000,000 to P1,800,000. Narra would
but inventory would increase
from
The following cost data are available: at a cost of 10.5 percent.
Relevant ordering costs per purchase order P80
have to finance the extra inventory
3
Carying costs per package per year rate that makes level production
feasible?
Relevant insurance, materials handling, What is the maximum interest
C. 8.75 percent
breakage, etc., per year A. 7.00 percent
D. 10.00 percent
B. 5.83 percent
What is the required annual return on investment per package? the cost to the firm
A. P6,000 C. P1,200 credit terms of 2/10, net 30, then
B. P 250 32. If a firm is given a trade
D. P 600
failing to take the discount is: C. 36.7%
28. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. b A. 2.0%. D. 10.0%.
B. 30.0%.
average inventory (taking into account the safety stock) is 12,000 pounds. What
is the apparent order quantity?
on credit terms of 2/10, n/60 is
A. 18,000 lbs. C. 14,000 lbs. 33. The cost of discounts missed C. 124 percent
B 6,000 lbs. A: 2.0 percent
D. 24,000 Ibs. D. 21.2 percent
B. 14.9 percent
29 Paeng Company uses the EOQ model for inventory control. The comnpany has
an annual demand of 50,000 units for
optimal lot size of 6,250 units. Per-unitpart number 6702 and has
carrying costs and stockoutcomputed
ai
costs are >y
314 315
 credit terms of 1/10,
P100,000 purchase has n/40, A
An invoice of a
arranged at any time. When should the bank loan for A. 22.15% C. 25.05%
34.
8 percent
invoice?
can be
customer pay the B 24.00% D. 12.70%

the 1st What is the effective rate of a 15% discounted loan for 9O days, P200,000, with
A. Payon
Pay on the 10th 40 comnpensating balance? Assume 360 days per year.
B. 10%
C. Payon the40th A.
20.0% C. 17.4%
the60th D. 22.2%
D. Pavon B. 15.0%

receives P10,000 worth of raw materials Caylor Inc. needsto borrow P300,000 for the next 6 months. The company has a
Every 15 days
suppliers. a company
The credit terms for these purchases are 2/10. net 30, Írom its
and payment is
35 with a bank that allows the comparny to borrow funds with a 10%
made on the 30th day after each delivery. Thus, the company 1s consideringa 41. line of credit
interest rate subject to a 25% of loan compensating balance. Currently, Caylor
1-vear bank loanfor P9,800(98% of the invoice amount). If the effective annual on deposit with the bank and will need the loan to cover the
Inc. has no funds
12%, what will| be the net peso savings over balance as well as theirrother financing needs.
interest rate onthis loan is discount on the materials? the year compensating
by borrowing and then taking the C. P4,800 need to borrow?
How much will Caylor Inc.
A. P3,.624 D. P1,224 A. P330,000 C. P225,000
B. PI,176 P400,000 D. P375,000
B.
Acompany has aCcounts payable of P5 million with terms of 2% discount
36
can borrow funds from a b Tleing Cavlor Inc. in #41, what will be the annual percentage rate, or APR. for thie
within 15 davs,net 30 days (2/15 net 30). It 42.
day whern it will rereive financing?
an anruai rate of 12 %, or it can wait until the 30th 10.00% C. 10.67%
revenues to cover the payment.
it borrows funds on the last day of the A.
D. 13.33 %
total cost will be B. 12.12%
discount period in order to obtain the iscount, its
C. P 75,500 less
A. P 51 000 less No. 41, what the annual percentage rate for this
D. P 24,500 more Using the information in
B. PIO,000 less 43.
financing schemeassuming the interest is discounted?
A. 14.29%
C. 16.67%
37. Diesei Fashion estimates that 90,000 zippers will be needed in the manufacture B. 13.98%
D. 20.00%
of high seling products for the coming year. Its supplier quoteda price of P25
per zipper. Diesel planned to purchase 7,500 units per month but its supplier bank loan for Pl,000,000 at an
The Premiere Company obtained a short-term loan, Premiere is required to
could not guarantee this delivery schedule. In order to ensure availability of 44.
annual interest rate 12%. As a condition of the
these zippers, Diesei is considering the purchase of ali these 90,000 units on its checking account. The
january 1. Assuming Diesel can invest cash at 12%, the company's opportunity maintain a compensating balance of P300,000 in rate of 3%. Premiere would
annual
checking account earns interest at an
cost of purchasing the 90,000 units at the beginning of the year is checking account for transactional
A. PI27,500 C. P123,750 otherwise maintain only P100,000 in its is
of the loan
B. P135,000 D. P264,000 purposes. Premniere's effective interest costs
C. 16.30%
A. 12.00%
38 D. 15.86%
You plan to borrow P10,000 from your bank,which offers to lend you the money B. 14.25%
at a10percent nominal, or stated, rate on a one-year loan. What is the effective
Island Corporation agreed to the following
interest rate if the loan is a discount loan?
A. 10.00%
45. The Peninsula Commercial Bank and
C. 12.45%
B. 11,11% loan proposal: one-year discounted loan; and
D. 14.56% Stated interest rate of 10% on a current account to
loan as compensating balance on zero-interest
39 Perlas Company borrowed from a bank an 15% of the
Corporation with Peninsula Commercial Bank.
charged a 12% stated rate in an add-on amount of P,000,000. The bank be maintained by sland of P1.5 million. What is the
principal amnount
monthly installments. arrangement, payable in 12 equal Ihe loan requires a net proceeds
agreement?
of loan applied for as part of the loan
316
317
 A. P1,666,667 C. P1,764,706
B. P2,000,000 D. P1125,000 D. 10.38%
B 8.98%

The Clay Company has a

revolving line of credit of P300,000 Tuno Industrial Supply has a P250,000 line of credit at a 9 percent interest rate.
46.
maturity. The terms callfor a6%
interest rate and a 2
percent with aone-year 51. The loan agreement requires a3 percent compensating balance, which is based on

balacnceommitdurimenntg thefee
the credit line. The average loan the total amount borrowed, and which will be held in an interest-free account.
on the unused portion of What is the effective interest rate if(the firm borrows P160,000 on the line of credit
root WasP100,000. The annual cost of this financing arrangement is for oneyear?
A. P6,000 C. P7,000 C. 9.03%
8.67%
D. P7500 A. D. 9.28%
B. P6,500 B
8.78%

received a P300,000 line of Mahogany Company has a totallannual cash requirement of P6,075,000 which are
On January 1, Ricablanca Corporation and
47.
12% from ESQ Bank drew down the entire Credit at an 52 uniformly. Mahogany has the opportunity to invest the money at 8
interest rate of
February 1. The line of credit agreement requires that an amount equal to 15% onof amount to be paid
percent Per annum. The company spends, on the average, P45 for every cash
versa.
the loan be deposited into a çompensating balance accournt. What is the effectiye conversion to cash and vice
annual cost of credit for this loan arrangement? conversion size for cash?
A. 11.00% C. 12.94% What is the optimal C. P82,670
B 12.00%
D. 14.12% A P58,457 D. P41335
B. P60,000
48. Echo borrowed P100,000 from a bank on a one-year 8% term loan, with interect IE he firm borrows P185,000 at 8 percent on a
one-year discounted loan, what is
compounded quarterly. What is the effective annual interest on the loan? 53.
the effective interest
rate?
A. 8% C. 9.12% C. 9.07 percent
A. 8.00 percent
B. 8.24% D. 10.41% D. 741 percent
B. 8.70 percent
Shalom Company borrows from
49. The Friendly Bark offers AB United a P200,000 line of credit with an interest rate What is the estimated annual effective rate if interest, payable
54. percent add-on
of 2.25 percent per quarter. The credit line also requires that 2 percent of the Money Finance Company P200,000 at a term of 5
unused portion of the credit line be deposited ina non-interest bearing account as monthly for one year? C. 9.23%
a compensating balance. AB United's short-term investments are paying 1.5 A. 4.76% D. 12.50%
percent per quarter. Assume any funds borrowed or invested use compound B. 5.26%
interest.
company borrows P200,000 on a 6 percent
What is the effective rate if the
55 compensating balance for 3 months?
What is the effective annual interest rate on this arrangement if the line of Credit discounted loan with a 10 percent
goes unused all year? A. 7.14 percent C. 6.78 percent
A. 5.92% C. 6.08% B. 6.00 percent D. 6.44 percent
B. 6.00% D. 6.14%

50. New Town Bank offers a P25,000 line of credit with an interest rate of 2.5 percent
per quarter. The loan agreement also requires that 5 percent of the unusea
portion of the credit line be deposited in a non-interest bearing account as a
compensating balance. Short-term investments are currently paying 1.6 percent
per quarter. Assume any funds borrowed or invested use
compound interest.
What is the effective annual interest rate on the line of
credit if a customer
borrows the entire P25,000 for one year?
A. 6.56% C. 9.87%

318 319
 WORKING CAPITAL MANAGEMENT
Increase inin sales due to
Increase Suggested Answers Solutions
sales due to seling price
4,600,000
Total increase in4.000,000change quantity
in
sales 31. C 36 41. A 46. B
47. A
The 26. D 42. B
givesincrease
32. C 37. B
in 21. D 48., C
the sales due to 16. A 27. B 33. D 38. B 43. A

Jsing 15
percentage increase change
in
in
quantty quantity
sold,
of
P600.000
THEORIESs
11
12
B
17. D
18.
22..D
23. B
24. C
28.
29.
D
B 34. A
35. A
39. C
40. D
44
45. C 50. B

Cost of percent
goods
of goods sold soldincrease
in in
quantity, (600,000 +4M) orwhen15 percent
divided by Pa mil on 15200 7. B
8. D
43 A 49.
20. C
25. B
30. D

2011
due to changeshould have
in quantity
assuming
been the unit cost of
P3M x 1.15 or the product sales in 2010 10 B 41.B 46.C 51.D

orP3,450.000 wuda
36.C
45
Answer. A should be P450,000 31.C
37.C 42.D 47.D 52.C

(3.450.000-3Therefore, theCnange.
inceasehentin Costhe
PROBLEMS
11.C
21.D
22.B
32.C
33.B 38.B 43.A
44.B
48.B
49.D
53.B
54.C
Assuming
have been
that the only factor
that changed was
6.B 12.A
23.D
24.B
34.B 39.A
40.C 45.B 50.D 55.0

selling price P1.760,000

1.E 7. 13.B 35.A
or quantity Sold, the amount
is
P176,000. (1,584,000 0.9). Therefore, the increase in peso sales
sales in
due to ch 2011 Snotd
2A
30
8.B
9.C
14.A
15.A
25.B

The change in quantity spld is 10 shotd 10.D

increase in quantity, without percent or

(1,760,000- sOLUTIONS:
P1.056,000 or (1,600,000 x 1.10). increase in unit cost, the1,600,cOst000)/of1,6goods
Cost should be a
an
Hence, the change in cost of
00,000. Using the 40
sold Answer: B collection period + Inventory
cycle dayS - Ave. Accounts
Payable
decrease of P128,000 or goods sold due toshould haur
the chanoe in ur Conversion Cycle
= Ave.
(928,000-1,056,000). 1.
Cash
paymentdays
60 days
45 days
cycle in days 105 days
Inventory
ge collection period 30 days
Average 75 days
Operating cycle
payable payment days
Deduct Accounts
Cash conversion cycle

Answer: A 36.0M
2
days x 100,000
Annual sales 360 7.2x
Inventory turnover 36M/5M
50.0 days
360/7.2
Inventory conversion period

3. Answer: D
50.0 days
Inventory conversion period (See #4) 20.0 days
Average collection period (2MWO.1M) 70.0 days
Operating cycle
Less: Ave. Accounts Payable payment 30.0 days
Days (1.5M/O.5M)
40.0 days
Cash conversion period
4
Answer: C
average inventory by tne
ventory conversion period can be calculated by either dividing the
average daily sales or by dividing the days' year by the inventory tumnover.
82,191.78
Average daly sales (30M/365)
Inventory conversion period: 60.83 days
5W82,191.78

499
498
5
Answer A
20 x Answer: B
P10,000 x 4 days x 5% (60 x 45)
31 days
6
Answer, B Ds0 =
(.4x 10) +
900,000/360x31 davs P7Z,500
Optimal Cash AverageAR:
Conversion Size
7
Answer. D =2x9,075,000 x
40/0.24 = 55,000
Answer: A
Days'salesoutstanding
(4x 15) + (3 x30)+ (,3 x
40) 27.0 days
The Old policy:
cost isalternative of maintaining a (,25 x 30) + (25
x 40) 22.5 days
(P1,750,000 x 0.07) P122,500compensating
per annum.balance of New policy (.5 x 10) +
The costs for other
Choice proposals
A: 360 days x are
P1,750,000 is the least costly Answer: A
higher than P122,500 as ts
ChoiceB.
Choice C: 0.0003
x
700 checks x PO.50
Flat fee 700 checks x P1,800 360
x
follows: opportunity 15
Average receivable
2.6M/360x 22.5 162,500

8
Newpolicy: 2.0M/360 x 27 150,000
Answer: B Old policy: Accounts Receivable
Incremental 12,500
P126,136,000080 Incremental carrying cost
on receivable
12,500 x 0.75 x 0.09
B43.75
OTS: V2x P3.251.250
125,000
x P25+ Answer: A
0.09 =
P42,500 16
Opportunity cost: P42,500 + 2 x0.09 Incremental sales
600,000)
600,000
(450,000)
Answer: C Variable cost (.75 x (600,000 x 2%) ( 12,000)
Additional bad debts 844)
Additional carrying cost
Average AR P1912.50 Additionai discounts
3,375,000/360 x30 days (2,600,000 x.5 x03)-(2,000,000 x.4 x
.02) (.23.000)
Average investment: 281,250 x 0.60 Before tax increase in income 114,156
281,250 Less tax
Incremental inconme
45.663
68,493
Carrying cost: 168,750 x 0.12
10.
168,750
Answer: D Answer: C
20,250 17

Inventory turnover. Change in average accounts receivables:

Planned: 2,200,000/360x30 183,333
Cost of goods sold/Ave. Inventory Present: 2,500,000/360x45
(8M/1.5M) Decrease in AR balance
312,500
129,667
Inventory conversion period (360 days/5.33) 5.33% Variable cost ratio 75%
11. 67.5 days
Answer: C Decrease in investment in AR 96.875
Reduction in cash float (2.5 + 1.5) 18 Answer: A
4.0 days
Additional free cash (4 days x 150 x P500) P300.000
Approximate annual cost: 2/98 x 360/20 36.73%

Annual savings (P300,000 x 0.07) P. 21.000 19

Answer. A
12. Answer: A
Approximate annual cost: 2/98 x 36O/10 73.44%
Daily working capital required: 200 x 250 50,000 20
Answer: C
Total working capital needed: 28 days x 50,000 1,400,000
Tne average collection period can be calculated
28 days collecion through computing the weighted average the
pattern. All customers who avail the discount
CCC =18 + 30 -20 period. pay on the 10 day, the last day of the discount

Payment within the discount period (1/3 x 10)

Payment without any discount (2/3 x 20) 3.33 days
Average collection period 13.33 days
16.66 days

500 501
 21. Answer: D Answer: G 12,000
Averageinventoryunits 5,000
26
Credit sale = 40,500,000 x 80% Z000
Increased credit sales: 32,400,000 x 1.2= Lesssafetyunits on EOO
inventorybased
Average 14,000
New Average AR 38,880,000/360 x 40 =
32,400,000 x2
Old Average AR 32,400,000/36O x 30 =
Increase in Average AR 384,,8320,0,00000 Ordersize
Answer: B
7,000

represents the level that gives the lowest sum of stock out costs and
22. Answer: B
2700,
1820,000000,
29
The
stock level
optimal safety costs.
carrying
Based on the
level
computation below, the lowest combined costs is P3,340,
Annual credit sales + Days' year x DSO additional 300-unit
correspondingto
probability of demand. Starting with 100-unit level
Average collection period under each credit policy stockout costs based on given
compute the additional demand is 200, the company has stockout of 100 units.
First
stock,ifthe
Present: 0.7 x P50M + 360 x 75 as safety
Proposed: 0.6 x0.95 x P50M + 360 x 50 x 0.35)
0.25) + (200 x 329)
Decrease in Accounts receivable balance P7,3,9258,91,363367 100: (100 x 32* x (100 x
0.20) +
4,960
+ (300x 32 x
x 9)
23. Answer: D P3.333.334 200: (100x 32 x 0.35)
+ (200 x 32 x 0.20) + (200
4,200

3,340
The annual effective cost of this financing scheme can be 0.20) + (300 x 9)
the net proceeds. The annual interest is based on the calculated by relating the annual net t 300: (100 x 31 x
average loan balance of P80,000. The seniet 3,600
is 2% and on the average, there are 12 transactions in one year. 400: (400 x 9)
per year.
The annual net costs consist of: stockout per unit x 8 orders
Interest (100,000 x0.80 x 0.10 8,000
Annual service fee 100,000 x 0.02 x 12 months 24.000 30
Answer: A
Total interest and service fee 32.000 800
Less savings on collection expenses 18,00 Ordering costs 4 x P200 18,750
0.75
Net annual cost 14.000 Carrying costs (50,000 + 2 x 19,550
Total
Annual effective rate 14,000 + 80,000 17.5%
31 Answer: C
24. Answer. B
Savings in Expensesladditional Investment in Inventory
The discOunt that the entity foregoes is a cost of trade financing (opportunity cost). Had the company = Maximum Interest Rate
8.75%
15" day, it should have paid only 97 percent of the invoice price. The 3 percent 70,000 / (1,800,000 1,000,000)
paid the account on the using supplier's credit during the non-free period (tolal
discount that the company forfeits is the cost of
outstanding less the discount period). The cost per period of 52 days is 3/97 or Answer:C
days the account is foregoing the discount is 3.093 x 365/52 or 21.71 percent
3.093. Hence, the nominal annual cost of 36.7%
k= (2+98) x (360 + 20)
25. Answer. B
ne soluUon assumes that the company foregoes the discount only once during the year.
4.000 bags 33
EOQ = 2x 32,000 x 200.8 Answer: B
400
26. Answer B Wth credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the netpy oh
2.000.000
Unvolce price minus the cash discount) at the rateof 2 percent for 50 days, paying the loan on ne cou
00 day. The annualized rate of foregoing the discount is 14.9 percer.
Number of orders made 40,000/1
400 x 5,000 k= 2/98 x 14.9%%
Annual requirement 365/50
34.
P6,000 Answer. B
27. Answer: C
PL,200 The cost of that the bank charges. The
Investment in 1 package (20 x
P300)
Company discounts
bank on theshould
missed is 12.3% which is more than the 8 percent
borrow on the 10th, pay the invoice, and ffinance at 8% for the next 30 days (pay off the
Required annual return: P6,000 x 0.2 40th).
Cost of foregoing discount (1 + 12.31%
99) x (360+ 30)

503
502
 35. Answer: A Answer. D
this loan, with the interest payable in six months
2 annual interest rate for should be 13.33 percent,
Purchase discount 10,000 x 0.02 x 200 The
calculatedasfollows:
Interest on borrowed money 9,800 x 0.12 purchases x0.5)+ 300,000 x 2 periods.
Savings (400,000x0.1
4,800 theinterest is payable Upon maturity, even if the term of the loan is shorter than 1 year, the
Number of purchases: 360 days/15-day interval 1178 Notethatifcan be simplified by just dividing the
calculation annual interest based on the amount of principal by the
Answer: C
3.624 (0.1+ 300,000 =13.33%).
proceeds, (400,.0000 x
36. net
200
Discount 5M x 0.02 An_wer: A
Interest (5M x 0.98 x 0.12) x 15/360
Inasmuch that the loan of P400,000 is discounted, the net proceeds are now decreased further by the
43
Savings six months, (300,000 20,000) or P280,000. The annual
100,24,500000 amount of
interest for
and not similar to the atenative solution in the
detail
effective interest should
preceding question.
37. Answer: C
76,500, hecalculatedin
000
months 20,000/280. 7.1429%
Number of units to be purchased in advance: Interest rate per 6
90,000-7.500
Annualized rate: 2 x 7.1429 x 2 periods 14.29%
Average investments in working capital:
82,500 x0.5* x P25 82,500 Answer. B
Opportunity cost 1,031,250 x 0:12 1,031,250 44.
Interest expense 1Mx0.12
*The average investment is one-half (82,500 + 0) +2 123,750 income on additional CA
balance 120,000
Less interest
(200,000 x 0.03) 6,000
38 Answer: B Net interest cost 114,000
Effective interest rate
k = 10+ (100- 10) 114,000/(1,000,000- 200,000) 14.25%
1111%
39 Answer: A Answer; B
45
Interest for 1 year 1Mx 12% 120,000 Net proceeds in pesos P1,500,000
Divided by net proceeds percentage
Average Principal: [1M + (1 M/12)] + 2 541,667 1.00 0.1 -0.15 0.75
Principal amount P2.000,000
Estimated effective rate 120,000/541,667 22.15%
46 Answer. C
Alternative solution for approximate effective rate:
Principal]
(2x No. of payments x Interest) + [(1 + No. of payments) x 22.152
The total cost of the loan borrowing should be the sum of annual interest on average loan balance,
(2x 12 x P120,000)+ (13 x P1M) (P100,000 x 0.06), P6,000 and the commitment fee on unused portion of the credit line, (200,000 x
0.005), P1,000.
Answer: C 47
Z500 Answer: D

Interest: 200,000 x 0.15 x 90/360 200,000 The effective cost of this financing scheme is based on the net amount of cash P300,000 less 15 percent
(7,500) Compensating balance. released to the Ricablanca Company. The amount of interest to be paid by
Principal (20,000) Ricablanca is P36,000 (0.12 x P300.000). Hence. the annual effective rate is 14.12 percent (36,000 +
Less: Discount 172.500 255,000).
Compensating balance 4
12.4% Answer: B
Net proceeds
x 360/90
Effective rate: (7,500/172,500) ne compounded interest rate is calculated
using the following formula:
The interes
the loan applied for. Where: (1+i)-1
41 Answer: B
P300,000, represents 75 percent ofsix months. The company neeoS i=nominal
monthiy or quarterly rate
of the loan, principal, at the end of n= number of
Ihe net proceeds
payable, together with the compounding periods
assumed to be 0.75). Ine nominal
calculated as (300,000-+ quarteriy rate is 8% + 4
apply P400,000, quarters or 2%0.
Annual effective rate:
1.021 824%

504 505
 PERFORMANCE MEASURES
Answer: D
49 Suggested Answers @ Solutions
The shorter calculation uses the fomuia
in oompounding the periodic nominal rate as
(1 + i)"-1, therefore, the rate = 1.015 1 6.14%
follows: THEORIEs
41. D 51. C
21. D 31. B 61. A
A detaiBed computation can be made as folows: 11. C 32. C 42. D 52. C 62 C
71. B 81. B
1. B 12. B 22 72. C
33. A 43. C 53. B 63. D 82. A
A 23. B 73. C
Principal, Beginning 13. B 24. C 34. D 44. A 54. A 64. C 83. D
Qtr. of Quarter Quarterly1.5%
Interst at New Amount, End of
4. D 44. B 35. C 45. A 55. C 65. A
74. A
75. B
84. C
200,000 4. 15. C 36. B 46. D 56. D 66. B 85. D
26. C 76. A
203,000 3,000
3,045 Quarter
203,000
5. A
6. B
16. C
17. C 27. D 37.
38.
A
B
47.
48.
D
C
57.
58.
C
C
67.
68.
C
B
77. B
86.
87.
C
D
206,045 7. C 28. C 78. A
209,136 3,091 206,045 18. C
29. D 39. C 49. B 59. D 69. A 79
88. C
3,137 209,136
212,237
8. B
9. C
19. C
30. B 40. D 50. B 60. B 70. D 80. D
89.
90.
C
C
Effective interest rate: (212,237 -200,000) + 200,000 or 6.14% 10.B 20. A

50. Answer: D PROBLEMS

16. B 21. G 26. B 31. D 36. A 41. C
A 11. B 46. D
The solution would not consider any 1. A
,6.
12. B 17. A 22. A 27. A 32. A 37. A 42. B
acount is onty required in case there is opportunity cost because a deposit in 7. C 47. B
28. B 33. C
unused portion of the line. The credit linenon-ineresting bearinn 2. G 13. C 18. C 23. C 38. B 43. C 48. D
is fuly used during the 8 B 29. D 34. D
year. 3. A 14. C 19. D 24. A 39. D 44. A
9. 25. B 30. C 35. C 40. A
15. A 20. A 45. A
5. D 10. B
The 2.5 percent quarterly rate should be compounded annually as follows:
SOLUTIONS:
(1 + 0.025)* - 1 1
0.38 percent
16 Answer: A
51 Answer: D
Return on Sales: 18% +3
Interest based on actual loan (160,000 x 0.09) 14,400
17 Answer: C
Net proceeds (P160,000 x 0.97) 155.200
ROI= Operating Profit + Average investrnent
Effective rate: 14,400/155,200 9.28% Average Operating assets: (P1,000,000+ 2) P500.000

ROI: (P100,000 + P500,000) 20%

52. Answer: C
18 Answer: A
6,075,000 x 45 + 08) 82,670.28
Optimal Conversion Size = Square root of (2 x
Return on sales Profit + Net sales
53. Answer: B P100,000+ P1,000,000 10%
8.70%
19 Answer: B
8/(100-8)
Total assets = Sales + ASset
Answer: C 9.23% turmover
54. P1,000,000 +2 P500,000
Effective rate = 5/[100+(100/12)]y2
20.
Answer: D
3,000
Answer: C NO, because the manager's bonus would ao down
55.
177,000 21 because the company's ROIIS 20 pereet oy*
Interest (discount) 0.06 x 200,000/12 x 3 Answer: A
6.78
Net proceeds: (200,000
x 0.90) -3,000 % Operating profit
Le[s Required P100.000
3,000/177,000 x 12/3 return on average
Interest rate (effective) P500,000x15%) assets:
Residual income 75,000
P25.000

S07
506