MANAGEMENT ADVISORY SERVICES
THEORY
Working capital
1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs
could increase its working capital by the
A. Prepayment of $50,000 of next year's rent.
B. Collection of $50,000 of accounts receivable.
C. Purchase of $50,000 of temporary investments for cash.
D. Refinancing of $50,000 of short-term debt with long-term debt.
Working capital policy
2. Determining the appropriate level of working capital for a firm requires
A. Changing the capital structure and dividend policy for the firm.
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the
return on total investments.
C. Offsetting the profitability of current assets and current liabilities against the probability of
technical insolvency.
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more
expensive than long term debt.
E. Evaluating the risks associated with various levels of fixed assets and the types of debt
used to finance these assets.
3. Compared to other firms in the industry, a company that maintains a conservative working
capital policy will tend to have a
A. Higher total asset turnover.
B. Greater percentage of short-term financing.
C. Higher ratio of current assets to fixed assets.
D. Greater risk of needing to sell current assets to repay debt.
4. A firm following an aggressive working capital strategy would
A. Hold substantial amount of fixed assets.
B. Minimize the amount of short-term borrowing.
C. Finance fluctuating assets with long-term financing.
D. Minimize the amount of funds held in very liquid assets.
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5. 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
A. Fluctuating current assets with long-term debt.
B. Fluctuating current assets with short-term debt.
C. Permanent current assets with long-term debt.
D. Permanent current assets with short-term debt.
Cash conversion cycle
6. Ignoring cost and other effects on the firm, which of the following measures would tend to
reduce the cash conversion cycle?
A. Take discounts when offered.
B. Forgo discounts that are currently being taken.
C. Maintain the level of receivables as sales decrease.
D. Buy more raw materials to take advantage of price breaks.
7. An increase in sales resulting from an increased cash discount for prompt payment would be
expected to cause
A. An increase in the operating cycle.
B. A decrease in purchase discounts taken.
C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.
Cash management system
8. A precautionary motive for holding excess cash is
A. To enable a company to have cash to meet emergencies that may arise periodically.
B. To enable a company to meet the cash demands from the normal flow of business
activity.
C. To enable a company to avail itself of a special inventory purchase before prices rise to
higher levels.
D. To avoid having to use the various types of lending arrangements available to cover
projected cash deficits.
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9. The amount of cash that a firm keeps on hand in order to take advantage of any bargain
purchases that may arise is referred to as its
A. Compensating balance.
C. Speculative balance.
B. Precautionary balance.
D. Transactions balance.
10. Which of the following is not a major function in cash management?
A. Cash flow control
C. Maximizing sales
B. Cash surplus investment
D. Obtaining financing services
11. Which of the following actions would not be consistent with good management?
A. Minimize the use of float.
B. Increased synchronization of cash flows.
C. Use of checks and drafts in disbursing funds.
D. Maintaining an average cash balance equal to that required as a compensating balance
or that which minimizes total cost.
12. The following are desirable in cash management except:
A. Cash is collected at the earliest time possible.
B. Post-dated checks are not deposited on time upon maturity.
C. All sales are properly receipted and promptly deposited intact.
D. Most sales are on cash basis and receivables are aged “current”
13. A lock-box system
A. Accelerates the inflow of funds.
B. Provides security for late night deposits.
C. Reduces the need for compensating balances.
D. Reduces the risk of having checks lost in the mail.
Marketable securities Management
14. All of the following are valid reasons for a business to hold cash and marketable securities
except to
A. Meet future needs.
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B. Satisfy compensating balance requirements.
C. Earn maximum returns on investment assets.
D. Maintain adequate cash needed for transactions.
15. When managing cash and short-term investments, a corporate treasurer is primarily
concerned with
A. Minimizing taxes.
B. Liquidity and safety.
C. Maximizing rate of return.
D. Investing in Treasury bonds since they have no default risk.
16. Which of the following investments is not likely to be a proper investment for temporary idle
cash?
A. Treasury bills.
B. Commercial paper.
C. Treasury bonds due within one year.
D. Initial public offering of an established profitable conglomerate.
17. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
the optimal mix between cash and marketable securities. The EOQ model assumes all of the
following except
A. Cash flow requirements are random.
B. The total demand for cash is known with certainty.
C. An opportunity cost is associated with holding cash, beginning with the first dollar.
D. The cost of a transaction is independent of the dollar amount of the transaction and
interest rates are constant over the short run.
ReceivableManagement
18. The one item listed below that would warrant the least amount of consideration in credit and
collection policy decisions is the
A. Cash discount given.
B. Quantity discount given.
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C. Quality of accounts accepted.
D. Level of collection expenditures.
19. The goal of credit policy is to
A. Maximize sales.
B. Minimize bad debt losses.
C. Minimize collection expenses.
D. Extend credit to the point where marginal profits equal marginal costs.
20. When a company analyzes credit applicants and increases the quality of the accounts
rejected, the company is attempting to
A. Maximize sales.
B. Maximize profits.
C. Increase bad-debt losses.
D. Increase the average collection period.
21. A strict credit and collection policy is in
place in Star Co. As Finance Director youare asked to
advise on the propriety of relaxing the credit standards in view of stiff competition in the
market. Your advise will be favorable if
A. The competitor will do the same thing to prevent lost sales.
B. The projected margin from increased sales will exceed the cost of carrying the
incremental receivables.
C. The account receivable level is improving, so the company can afford the carrying cost of
receivables.
D. there is a decrease in the distribution level of your product, and a more aggressive stance
in necessary to retain market share.
22. It is held that the level of accounts receivable that the firm has or holds reflects both the
volume of a firm’s sales on account and a firm’s credit policies. Which one of the following
items is not considered as part of the firm’s credit policies?
A. The size of the discount that will be offered.
B. The length of time for which credit is extended.
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C. The minimum risk group to which credit should be extended.
D. The extent (in terms of money) to which a firm will go to collect an account.
23. The credit and collection policy of Amargo Co. provides for the imposition of credit block when
the credit line is exceeded and/or the account is past due. During the month, because of the
campaign to achieve volume targets, the general manager has waived the credit block policy
in a number of instances involving big volume accounts. The likely effect of this move is
A. Increase in the level of receivables only.
B. Deterioration of aging of receivables only.
C. Deterioration of aging and increase in the level of receivables.
D. Decrease in collections during the month the move was done.
24. A high turnover of accounts receivable, which implies a very short days-sales outstanding,
could indicate that the firm
A. Offers small discounts.
B. Has a relaxed (lenient) credit policy.
C. Has an inefficient credit and collection department.
D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
25. Accounts receivable turnover will normally decrease as a result of
A. An increase in cash sales in proportion to credit sales.
B. A change in credit policy to lengthen the period for cash discounts.
C. A significant sales volume decrease near the end of the accounting period.
D. The write-off of an uncollectible account (assume the use of the allowance for doubtful
accounts method).
26. The level of accounts receivable will most likely increase as
A. Cash sales increase and number of says sales.
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
C. Credit limits are expanded, cash sales increase, and aging of the receivables is
improving.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain
the same.
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27. A change in credit policy has caused an increase in sales, an increase in discounts taken, a 32. Which of the following inventory items would be the most frequently reviewed in an ABC
reduction of the investment in accounts receivable, and a reduction in the number of doubtful
inventory control system?
accounts. Based on this information, we know that:
A. Expensive, frequently used, high stock-out cost items with long lead time.
A. Net profit has increased.
B. Expensive, frequently used, low stock-out cost items with long lead times.
B. Gross profit has declined.
C. Inexpensive, frequently used, high stock-out cost items with long lead time.
C. The average collectionperiod hasdecreased.
D. Expensive, frequently used, high stock-out cost items with short lead times.
D. The size of the discount offered has decreased.
33. In an ABC inventory analysis, the items that are most likelyto be controlled with a red-line
28. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be
system are the
expected on the balance sheet of its customer if the firm went to a net cash 30 policy?
A. A items.
C. C items.
A. Decrease in cash.
B. B items.
D. items on a perpetual inventory.
B. Increased receivables.
C. Decreased receivables.
34. The materials control method that is based on physical observation that an order point has
D. Increased payables and increased bank loan.
been reached is the:
A. ABC plan
C. min-max method
Inventory Management
B. cycle review method
D. two-bin method
29. Which condition justifies accepting a low inventory turnover ratio?
A. High carrying costs.
C. Low inventory order costs.
35. The underlying philosophy of “just-in-time” inventory system is that
B. High stock-out costs.
D. Short inventory order lead times.
A. The quantities of most stock items are subject to definable limits.
B. It is a quest toward continuous improvement in the environmental conditions that
30. If one optimizes the inventory turnover ratio, which costs will not increase?
necessitates inventories.
A. Carrying costs
C. Total reorder costs
C. It is impractical to give equal attention to all stock items, hence the need to classify and
B. Stock-out cost
D. Unit reorder costs
rank them according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or
31. Order-filling costs, as opposed to order-getting costs, include all but which of the following
critical items are examined more frequently than low-cost or non-critical items.
items?
A. Credit check of new customers.
36. Companies that adopt just-in-time purchasing systems often experience
B. Packing ad shipping of sales orders.
A. An increase in carrying costs.
C. Mailing catalogs to current customers.
B. Fewer deliveries from suppliers.
D. Collection of payments for sales orders.
C. A reduction in the number of suppliers.
D. A greater need for inspection of goods as the goods arrive.
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37. An inventory control system which employs mathematical models as an aid in making
inventory decision is known as
A. Mini-max system
C. Statistical inventory control system.
B. Order cycling system
D. Two-bin system
42. The economic order quantity formula can be used to determine the optimum size of
A.
B.
C.
D.
Production run
Yes
Yes
No
No
Purchase order
Yes
No
Yes
No
38. In inventory management, the problem of avoiding excessive investment in inventories and at
the same time avoiding inventory shortages can be solved by applying a quantitative
technique known as
A. Payback analysis
C. Probability analysis
B. Economic order quantity
D. High-low point method
43. The simple economic production lot size model will only apply to situations in which the
production
A. Rate equals the demand rate.
B. Rate is less than the demand rate.
C. Rate is greater than the demand rate.
D. For the period covered equals the projected sales for the period.
39. Which of the following is used in determining the economic order quantity (EOQ)?
A. Calculus.
C. Queuing theory.
B. Markov process.
D. Regression analysis.
40. A characteristic of the basic economic order quantity (EOQ) model is that it
A. Is relatively insensitive to error.
B. Is used when product demand, lead-time, and ordering costs are uncertain.
C. Should not be used in conjunction with computerized perpetual inventory systems.
D. Should not be used when carrying costs are large in relation to procurement costs.
41. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
A. Constant demand, constant ordering cost, constant carrying cost, unlimited production
and inventory capacity.
B. Limited production capacity, declining demand, constant ordering cost, constant carrying
cost, and unlimited inventory capacity.
C. Increasing demand, limited production capacity, increasing ordering cost, increasing
carrying cost, and l imited inventory capacity.
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing
carrying cost, and unlimited inventory capacity.
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44. Which one of the following items is not directly reflected in the basic economic order quantity
(EOQ) model?
A. Inventory obsolescence.
B. Interest on invested capital.
C. Public warehouse rental charges.
D. Quantity discounts lost on inventory purchases.
45. The ______________ would not affect the economic order quantity.
A. cost of a stockout
B. cost of insuring inventory
C. cost of purchase requisition forms
D. company's weighted average cost of capital
46. The economic order quantity isnotaffected by the
A. safety stock level
B. cost of purchase-order forms.
C. cost of insuring a unit of inventory for a year.
D. estimate of the annual material consumption.
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47. The ordering costs associated with inventory management include
A. Insurance costs, purchasing costs, shipping costs, and obsolescence.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs.
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost.
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested.
48. The carrying costs pertaining to inventory include
A. Insurance costs, incoming freight costs and setup costs.
B. Insurance costs, incoming freight costs and storage costs.
C. Setup costs and opportunity cost of capital invested in inventory.
D. Storage costs and opportunity cost of capital invested in inventory.
49. The optimal level of inventory is affected by all of the following except the
A. Cost per unit of inventory.
B. Current level of inventory.
C. Usage rate of inventory per time period.
D. Cost of placing an order for merchandise.
50. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, firstout) method would
A. Not affect the EOQ.
B. Increase the EOQ in times of rising prices.
C. Increase the EOQ in times of falling prices.
D. Decrease the EOQ in times of rising prices.
51. The selling price of the product is relatively high and the purchase cost of the product is
relatively low. In this situation
A. The EOQ model will indicate frequent large orders.
B. The EOQ of the product is affected by the selling price.
C. The selling price has nothing to do with the EOQ of the product.
D. Management must increase the price to cover the cost of carrying higher inventory.
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52. Clear View Co. manufactures various glass products including a car window. The setup cost to
produce the car window is $1,200. The cost to carry a window in inventory is $3 per year.
Annual demand for the car window is 12,000 units. If the annual demand for the car window
was to increase to 15,000 units,
A. the number of setups would decrease.
B. the total carrying costs would increase.
C. the economic order quantity would decline.
D. all of the above would occur.
53. A decrease in inventory order costs will
A. Increase the reorder point.
B. Decrease the economic order quantity.
C. Decrease the holding cost percentage.
D. Have no effect on the economic order quantity.
54. An increase in inventory holding costs will
A. Increase the economic order quantity.
B. Decrease the economic order quantity.
C. Have no effect on the economic order quantity.
D. Decrease thenumber of orders issuedper year.
55. The economic order quantity (EOQ) will rise following
A. An increase in carrying costs.
B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory.
D. An increase in the variable costs of placing and receiving an order.
56. For its economic order quantity model, a company has a $10 cost of placing an order and a $2
annual cost of carrying one unit in stock. If the cost of placing an order increases by 20%, the
annual cost of carrying one unit in stock increases by 25%, and all other considerations remain
constant, the economic order quantity will:
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A.
B.
C.
D.
E.
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decrease
increase
remain unchanged
either increase or decrease, depending on the reorder point
either increase or decrease, depending on the safety stock
57. Missile Company has correctly computed its economic order quantity as 500 units. However,
management feels it would rather order quantities of 600 units. How should Missile’s total
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units
compare to the respective amounts for an order quantity of 500 units?
A. Lower purchase-order cost and lower carrying cost.
B. Lower purchase-order costand highercarrying cost.
C. Higher purchase-order costand lower carryingcost.
D. Higher purchase-order cost and higher carrying cost.
58. When a specific level of safety stock is carried for an item in inventory, the average inventory
level for that item
A. Is not affected by the safety stock.
B. Increases by the amount of the safety stock.
C. Decreases by the amount of the safety stock.
D. Increases by one-half the amount of the safety stock.
59. For inventory management, ignoring safety stocks, which of the following is a valid
computation of the reorder point?
A. The economic order quantity.
B. The square root of the anticipated demand during the lead time.
C. The anticipated demand per day during lead time times lead time in days.
D. The economic order quantity times the anticipated demand during the lead time.
60. The cost of stock-out do not include
A. Depreciation and obsolescence.
B. Disruption of production schedules.
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C. Loss of customer goodwill.
D. Loss of sales.
61. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The
usual lead-time for the inventory item is six (6) days; however, at times, the lead-time has
gone as high as eight (8) days. Kulasa now desires to adjust its safety stock policy. The likely
effect on stockout costs and carrying costs, respectively, would be
A. Increase and increase.
C. Decrease and increase.
B. Increase and decrease.
D. Decrease and decrease.
62. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the
annual relevant
A. ordering costs and carrying costs.
C. ordering costs and stockout costs.
B. ordering costs and purchasing costs.
D. stockout costs and carrying costs.
Trade Credit
63. A company obtaining short-term financing with trade credit will pay a higher percentage
financing cost, everything else being equal, when
A. The discount percentage is lower.
B. The items purchased have a lower price.
C. The items purchased have a higher price.
D. The supplier offers a longer discount period.
Short-term Loans
64. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not
taking discounts from one of their three biggest suppliers, or a 14.75% per annum renewable
discount loan from its bank for 3 months. The suppliers' terms are as follows:
Fort Co.
1/10, net 30
Riley Manufacturing Co.
2/15, net 60
Shad, Inc. 3/15,
net 90
Using a 360-day year, the cheapest source of short-term financing in this situation is
A. Fort Co.
C. Shad, Inc.
B. Riley Manufacturing Co.
D. The bank.
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65. In assessing the loan value of inventory, a banker will normally be concerned about the portion
of inventory that is work-in-process because
A. WIP generally has the lowest marketability of the various types of inventories.
B. WIP inventory usually has the highest loan value of the different inventory types.
C. WIP represents a lower investment by a corporation as opposed to other types of
inventories.
D. WIP inventory is relatively easy to sell because it does not represent a raw material or a
finished product.
PROBLEMS
Capital Structure
1. Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the
company wishes to maintain it.
Debt
25%
Preferred equity
5%
Common equity
70%
Enert's management is planning to build a $75 million facility that will be financed according to
this desired capital structure. Currently, $15 million of cash is available for capital expansion.
The percentage of the $75 million that will come f rom a new issue of common shares is
A. 50.00%.
C. 56.25%.
B. 56.00%.
D. 70.00%.
Financial statement analysis
2. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current
liabilities are P400,000 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. P266,667
C. P400,000
B. P300,000
D. P800,000
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Internal growth rate
3. Bobo LLC's has an asset base of $1 million. After a dividend payment of $40,000, Bobo added
$50,000 to retained earnings. What is Bobo's internal growth rate?
A. 1%
C. 5%
B. 4%
D. 9%
Working capital policy
4. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset
investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt
and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s
debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets
will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales.
What is the difference in t he projected ROEs between the restricted and relaxed policies?
A. 1.6%
C. 5.4%
B. 3.8%
D. 6.2%
5. Wildthing Amusement Company’s total assets fluctuate between $320,000 and $410,000,
while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or
moderate working capital financing policy, what is the likely level of its long-term financing?
A. $ 90,000
C. $320,000
B. $260,000
D. $410,000
Cash conversion cycle
6. Bully Corporation purchases raw materials on July 1. It converts the raw materials into
inventory by September 30. However, Bully pays for the materials on July 20. On October 31,
it sells the finished goods inventory. Then, the firm collects cash from the sale 1 month later on
November 30. If this sequence accurately represents the average working capital cycle, what
is the firm's cash conversion cycle in days?
A. 92 days.
C. 133 days.
B. 123 days.
D. 153 days.
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Cash Management
7. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these
checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm
loses three days while its receipts are being deposited and cleared. What is the firm’s netfloat
in dollars?
A. $ 24,000
C. $ 75,000
B. $ 32,000
D. $126,000
8. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is
0.02% and the average transaction cost of investing money overnight is $50?
A. $50
C. $400
B. $350
D. $40,000
Questions 9 and 10 are based on the following information.
A company has a 10% cost of borrowing and incurs fixed costs of $500 for obtaining a loan. It has
stable, predictable cash flows, and the estimated total amount of net new cash needed for
transactions for the year is $175,000. The company does not hold safety stocks of cash.
9. When the average cashbalance of the company ishigher, the <List A> thecash balance is
<List B>.
List A
List B
A.
Opportunity cost of holding
Higher
B.
Total transactions costs associated with obtaining
Higher
C.
Opportunity cost of holding
Lower
D.
Total costs of holding
Lower
10. If the average cash balance for the company during the year is $20,916.50, the opportunity
cost of holding cash for the year will be
A. $2,091.65
C. $8,750.00
B. $4,183.30
D. $17,500.00
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11. CMR is a retail mail order firm that currently uses a central collection system that requires all
checks to be sent to its Boston headquarters. An average of 5 days is required for mailed
checks to be received, 4 days for CMR to process them and 1½ days for the checks to clear
through its bank. A proposed lockbox system would reduce the mail and process time to 3
days and the check clearing time to 1 day. CMR has an average daily collection of $100,000. If
CMR should adopt the lockbox system, its average cash balance would increase by
A. $250,000.
C. $650,000.
B. $400,000.
D. $800,000.
12. What are the expected annual savings from a lockbox system that collects 200 checks per day
averaging $500 each, and reduces mailing and processing times by 2.0 and 0.5 days,
respectively, if the annual interest rate is 6%?
A. $6,000
C. $15,000
B. $12,000
D. $250,000
13. A company has daily cash receipts of $150,000. The treasurer of the company has
investigated a lock box service whereby the bank that offers this service will reduce the
company’s collection time by four days at a monthly fee of $2,500. If money market ates
r
average 4% during the year, the additional annual income (loss) from using the lock box
service would be
A. $(12,000).
C. $6,000.
B. $(6,000).
D. $12,000.
14. A banker has offered to set upand operate a lock box system foryour company. Details are
given below.
Average number of daily payments
325
Average size of payments
$1,250
Daily interest rate
0.021%
Saving in mailing time
1.3 days
Saving in processing time
0.9 days
Bank charges
$0.30
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Estimate the annual savings. Assume 250 processing days per year.
A. $3,273
C. $23,500
B. $22,675
D. $47,000
15. QRS makes large cash paymentsaveraging P17,000 daily. The company changedfrom using
checks to sight drafts which will permit it to hold unto its cash for one extra day. If QRS can
use the extra cash to earn 14% annually, what annual peso return will it earn?
A. P6.52
C. P2,380
B. P652.10
D. P6,521.00
Marketable Securities Management
Questions 16 and 17 are based on the following information.
Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment will
satisfy the firm's need for funds during the coming year.
16. If it costs $50 to sell these bills, regardless of the amount, how much should be withdrawn at a
time?
A. $50,000
C. $250,000
B. $100,000
D. $500,000
17. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills?
A. About every 3 days.
C. About every 15 days.
B. About every 9 days.
D. About every 18 days.
Receivables Management
18. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and
the collections department estimates that 30% of the customers pay on the 10th day and take
discounts; 40% pay on the 30th 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.
A. 15 days.
C. 27 days.
B. 20 days.
D. 40 days.
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19. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables
turnover is 4.5, what is the average collection period and the year-end receivables,
respectively (assume a 365-day year)?
A. 73 days and $108,000.
C. 81 days and $120,000.
B. 73 days and $120,000.
D. 81 days and $200,000.
20. Best Computers believes that its 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 30 to 35 days; however, there will be no change in uncollectible
accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunity
cost of a longer collection period is assumed to be negligible, the company's budgeted credit
sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify
changes in collection procedures, the minimum annual reduction of costs (using a 360-day
year and ignoring taxes) must be
A. $22,500
C. $125,000
B. $37,500
D. $375,000
21. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of
35 days, and a payment cycle of 26 days. If its sales for the period just ended amounted to
P972,000, what is the investment in accounts receivable?(Assume 360 daysa year.)
A. P72,450
C. P85,200
B. P79,600
D. P94,500
22. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
Old
New
Average number of days collection
75
50
Ratio of credit sales to total sales
70%
60%
Projected sales for the coming year is P100 million and it is estimated that the new policy will
result in a 5% loss if the new policy is implemented. Assuming a 360-day year, what is the
effect of the new policy on accounts receivable?
A. No change.
C. Decrease of P 6.67 million.
B. Decrease of P5 million.
D. Decrease of P13 million.
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23. Simba Corp., whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The
collections manager estimated that 30% of the customers pay on the 10th day and take
discounts; 40% on the 30th day; and the remaining 30% pay, on the average, 40 days after
the purchase. If management would toughen on its collection policy and require that all nondiscount customers pay on the 30th day, how much would be the receivables balance?
A. Zero
C. P70,000
B. P60,000
D. P80,000
24. Numero 1 Co.’s budgeted sales for the coming year are P96 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 form 30 days to 45 days. Based on a 360-day year, the proposed relaxation
of credit standards would result to an increase in accounts receivable balance of
A. P1,920,000
C. P6,080,000
B. P2,880,000
D. P6,880,000
25. Phillips Glass Company buys on terms of 2/15, net 30. It does not take discounts, and it
typically pays 30 days after the invoice date. Net purchases amount to $720,000 per year. On
average, how much “free” trade credit does Phillips receive during the year?
(Assume a 360
day year.)
A. $30,000
C. $50,000
B. $40,000
D. $60,000
26. Slippers Mart has sales of P3 million. Its credit period and average collection period are both
30 days and 1% of its sales end as bad debts. The general manager intends to extend the
credit period to 45 days which will increase sales by P300,000. However, bad debts losses on
the incremental sales would be 3%. Costs of products and related expenses amount to 40%
exclusive of the cost ofcarrying receivables of 15% and baddebts expenses. Assuming 360
days a year, the change in policy would result to incremental investment in receivables of
A. P9,750.
C. P65,000.
B. P24,704.
D. P701,573
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27. The Liberal Sales Co. budgeted sales for the coming year are P30 million of which 80% are
expected to be on credit. The company wants to change its credit terms from n/30 to 2/10,
n/30. If the new credit terms are adopted, the company estimates that cash discounts would
be taken on 40% of the credit sales and the new uncollectible amount would be unchanged.
The adoption of the new credit terms would result in expected discount availed of in the
coming year of
A. P192,000
C. P480,000
B. P288,000
D. P600,000
28. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with
respect to credit policy, below is a summary of relevant information:
Old Credit Policy
New Credit Policy
Sales
P1,800,000
P1,980,000
Average collection period
30 days
36 days
The company requires a rate of return of 10% and a variable cost ratio of 60%.
Using a 360-day year, the pre-tax cost of carrying the additional investment in receivables
under the new policy would be
A. P2,880
C. P4,080
B. P3,000
D. P4,800
29. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He
estimates the following effects:

Sales will increase
byturnover
at least 20%.
Accounts
receivable
will be reduced to 8 times from the present turnover of 10
times.
Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed changes
is at P900,000. Variable cost ratio is 55% and desired rate of return is 20%. Fixed
expenses amount to P150,000.
Should the company allow the revision of its credit terms?
A. No, because losses will increase by P28,000.
B. Yes, becauseincome will increase byP68,850.


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C. No, because income will be reduced by P13,000.
D. Yes, becauselosses will bereduced by P78,800.
30. Wasting Resource Co. has annual credit sales of P4 million. Its average collection period is
40 days and bad debts are 5% of sales. The credit and collection manager is considering
instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales,
and the average collection period would fall to 30 days. However, sales would also fall by an
estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying
receivables is 12%. Assuming a tax rate of 35% and 360 daysa year, the incremental change
in the profitability of the company if stricter policy would be implemented would be
A. A reduction in net income by P35,400.
B. A reduction in net income by P38,350.
C. A reduction in net income by P70,000.
D. Zero as the positive and negative effects offset each other.
31. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier
customers. It has been estimated that uncollectible expenses would be 15% and collection
costs 5%. The manufacturing and selling costs are 70% of sales and corporate tax is 35%. If
it pursues this opportunity, the after tax profit will
A. Remain the same.
C. Increase by P65,000.
B. Increase by P35,000.
D. Increase by P97,500.
HILARIO TAN
C. Change to Policy B (means also taking Policy A first).
D. All policies lead to the same total firm profit, thus all policies are equal.
33. A firm that often factors its accounts receivable has an agreement with its finance company
that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of
receivables. The net proceeds would be further reduced by an annual interest charge of 10%
on the monies advanced. Assuming a 360-day year, what amount of cash (rounded to the
nearest dollar) will the firm receive from the finance company at the time a $100,000 account
that is due in 90 days is turned over to the finance company?
A. $83,700
C. $90,675
B. $90,000
D. $93,000
Questions 34 through 36 are based on the following information.
Flesher, Inc.'s credit manager studied the bill-paying habits of its customers and found that 90% of
them were prompt. She also discovered that 22% of the slow payers and 5% of the prompt ones
subsequently defaulted. The company has 3,000 accounts on its books, none of which has yet
defaulted.
34. Calculate the total number of expected defaults, assuming no repeat business is on the
horizon.
A. 66
C. 201
B. 135
D. 795
32. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are
35. Given average revenues from sales of $1,200 and the cost of sales of $1,100, what is the
available. Policy A would increase sales by $500,000, but bad debt losses on additional sales
average expected profit or loss from extending credit to slow payers?
would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad
A. $100 profit.
C. $220 loss.
debt losses on the additional $120,000 of sales would be 15%. The average collection period
B. $164 loss.
D. $264 loss.
will remain at 60 days (6 turns per year) no matter the decision made. The profit margin will be
20% of sales and no other expenses will increase. Assume an opportunity cost of 20%. What
36. Given revenues from sales of $1,200 and the cost of sales of $1,100, what would the average
should the firm do?
level of revenues that makes i t worthwhile to extend credit to slow payers?
A. Make no policy change.
A. $1,364.00
C. $1,410.26
B. Change to only Policy A.
B. $1,389.74
D. $1,510.26
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Inventory Management
37. The following data refer to various annual costs relating to the inventory of a single-product
company:
Unit transportation-in on purchases
$0.20
Storage per unit
0.12
Insurance per unit
0.10
Annual interest foregone from alternate investment of funds
$800
Annual number of units required
10,000
What is the annual carrying cost per unit?
A. $0.30
C. $0.42
B. $0.32
D. $0.50
38. Phonic Goods is a distributor of videotapes. Tape-Disk Mart is a local retail outlet which sells
blank and recorded videos. Tape-Disk Mart purchases tapes from Phonic Goods at $3.00 per
tape; tapes are shipped in packages of 20. Phonic Goods pays all incoming freight, and TapeDisk Mart does not inspect the tapes due to Phonic Goods' reputation for high quality. Annual
demand is 104,000 tapes at a rate of 4,000 tapes per week. Tape-Disk Mart earns 20% on its
cash investments. The purchase-order lead time is two weeks. The following cost data are
available:
Relevant ordering costs per purchase order
$90.50
Carrying costs per package per year:
Relevant insurance, materials handling, breakage, etc., per year
$ 4.50
What is the required annual return on investment per package?
A. $0.60
C. $12.00
B. $2.50
D. $60.00
39. Penguin Company manufactures winter jackets. Setup costs are $2.00. Penguin
manufactures 4,000 jackets evenly throughout the year. Using the economic order quantity
approach, the optimal production run would be 200 when the cost of carrying one jacket in
inventory for one year is:
A. $0.05
C. $0.20
B. $0.10
D. $0.40
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40. A company has estimated its economic order quantity for Part A at 2,400 units for the coming
year. If ordering costs are $200 and carrying costs are $0.50 per unit per year, what is the
estimated total annual usage?
A. 2,400 units
C. 7,200 units
B. 6,000 units
D. 28,800 units
41. The following information are given:
Optimal production run in units
Average inventory in units
Number of production runs
Cost per unit produced
Desired annual return on inventory investment
Set-up costs per production run
2,000
1,000
5
P75
18%
P5,000
If the units will be required evenly throughout the year, the total annual relevant costs using
the economic-order-quantity approach is
A. P5,000
C. P75,000
B. P38,500
D. P150,000
42. One of the products that Nature Way Health Products sells is a magnetic back support. The
ordering cost related to this product is P12.50 per order. The cost of carrying one item of
inventory for one year is P16.00. The business sells 40,000 of this type of product evenly
throughout the year. How much is the total ordering costs per year and the total carrying costs
per year at t he economic order quantity?
A.
B.
C.
D.
Ordering costs
P1,562.50
P1,562.50
P2,000.00
P4,000.00
Carrying costs
P1,562.50
P2,560.00
P2,000.00
P4,000.00
43. The economic order quantity is the size of the order that minimizes total inventory costs,
including ordering and carrying costs. If the annual demand decreases by 36%, the optimal
order size will
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A. Decrease by 6%.
B. Decrease by 20%.
HILARIO TAN
C. Increase by 6%.
D. Increase by 20%.
44. As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of
raw materials by 80%. What is the effect of this safety stock reduction on Dee’s economic
order quantity.
A. No effect.
C. 64% decrease.
B. 20% increase.
D. 80% decrease.
45. A&B Co.’s financial plan for next year shows sales of P72 million and cost of sales of P45
million. It expects short term interest rates to average 10% for the coming year. It aims to
increase inventory turnover from the present level of 9 times to 12 times next year. If its plans
and objectives would be carried out, how much is the cost savings for the coming year?
A. P125,000
C. P375,000
B. P300,000
D. P500,000
46. Marita works for a local ceramics company. She just completed her accountancy degree and
learned the EOQ model in oneof her subjects. She suggested to heremployer to adopt it.
The company sells 20,000 pieces of specialty ceramic items each year. Traditionally, they
have produced these items four times a year, making 5,000 pieces at a time.
They carry no
safety stock as customers do not mind waiting for orders. The average piece of ceramic items
costs P400 to make and ocsts the company P20 to carry ininventory for a year. The set up
costs for each production run total P80. The company should
A. Adopt EOQ due to savings of P35,675.
B. Adopt EOQ due to savings of P42,320.
C. Continue the existing system due to P38,950 advantage.
D. Continue the existing system due to P41,820 advantage.
47. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals.
Information concerning this item is as follows:
Cost of placing an order
P10
Annual demand
20,000 units
Purchasing price per unit
P0.50
The cost of holding the stock items amounts to 20% of the stock value per annum.
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What annual cost saving would result if RODENSTOCK used the economic order quantity for
order sizes instead of their current policy?
A. P 80
C. P150
B. P 90
D. P240
48. A company annually consumes 10,000 units of Part C. The
carrying cost of this part is $2 per
year and the ordering costs are $100. The company uses an order quantity of 500 units. By
how much could the company reduce its total costs if it purchased the economic order quantity
instead of 500 units?
A. $0
C. $2,000
B. $500
D. $2,500
49. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average
inventory (taking into account the safety stock) is 8,000 pounds. What is the apparent order
quantity?
A. 6,000 lbs.
C. 16,000 lbs.
B. 10,000 lbs.
D. 21,000 lbs.
50. D&R Corp. consumes 300,000 units of spare part V
per year. The average purchase lead
time is 20 working days while the maximum is 27 working days. The company’s annual
operations cover 240 days allowing for shutdowns for plant maintenance, holidays and
Sundays. The company would like to keep safety stock or extra stock to guard against stockouts. How much is the safety stock?
A. 1,250 units.
C. 25,000 units.
B. 8,750 units.
D. 33,750 units.
51. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work
year. The usual lead time for the part is six days. However, at times, the lead time has gone
as high as eight days. Scholas now desires to adjust its safety stock
policy. The increase in
safety stock size is
A. 2,800 units.
C. 7,200 units.
B. 5,600 units.
D. 16,800 units.
52. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000
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units. The cost per unit of inventory is $5, and the carrying cost is 10% of the average value of
inventory. The annual inventory carrying cost for the organization is
A. $3,000
C. $5,000
B. $3,500
D. $6,000
53. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of
T at 500 lbs., and its order point is 1,500 lbs., what would be the total annual carrying costs
assuming the carrying cost per unit is $0.20?
A. $100
C. $1,000
B. $600
D. $1,100
54. DF Tires Unlimited is a business enterprise located in the city of Cagayan de Oro. The market
price per unit is P3,000. Since Cagayan de Oro is avery progressive rural place, the business
sells an average of 36,000 tires annually. Based on a company study covering the last five
years of its operation, it was found out that annual carrying cost per tire is P5.00 and the
ordering cost is P100 per order. The store is open 7days a week (which includes Sundays
and holidays). The delivery time per order (tires are ordered from Manila) is 5 days. Since it
normally takes time before an order is placed, filled up and delivered, the manager has
decided to keep a safety stock of 3,000 tires which is equivalent to a month’s sales. The
average inventory is
A. 1,200 tires
C. 3,493 tires
B. 3,000 tires
D. 3,600 tires
55. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of
T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50
lbs.?
A. 10 days
C. 30 days
B. 20 days
D. 100 days
56. Information regarding the usage of material Y which shall be required evenly throughout the
year by GAC Company
Annual usage in units
30,000
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Working days per year
Safety stock in units
Normal lead time in working days
The re-order point is
A. 3,000
B. 4,200
250
1,200
25
C. 5,700
D. 6,250
57. M&L Co. has the following information on inventory:
Sales
20,000 units per year
Order quantity
4,000 units
Safety stock
2,600 units
Lead time
4 weeks
What is the re-order point? (For calculation purposes, use 50-week year)
A. 1,600 units.
C. 4,200 units.
B. 2,600 units.
D. 5,600 units.
58. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below:
Selling price per bag
P2.50
Purchase cost per bag
P1.50
Ordering cost per order
P5.40
Carrying cost
20% of unit cost
Number of days the company operates in a year
250
Average lead time on purchases
6 days
What is the reorder point if the company will keep a 10-day safety stock of inventory?
A. 2,400 bags
B. 5,400 bags
C. 6,400 bags
D. 8,800 bags
59. JASMIN Products, Inc. gathered the following information related to one of its materials:
Order quantity
1,500 units
Normal use per day
500 units
Maximum use per day
600 units
Minimum use per day
100 units
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If the lead time is five days, the order point is
A. 500 units
C. 2,500 units
B. 1,500 units
D. 3,000 units
60. Inventory data for a certain raw material is as follows:
Annual usage in units 25,000
Working days per year 250
Normal lead timein working days 30
Maximum lead time in working days
50
Assuming that this raw material will be required evenly throughout the year, the order point will
be
A. 3,000
C. 5,000
B. 4,000
D. 8,000
61. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen on
the proper cases to be ordered and the frequency of call. From the route book and other
records, the following are available: prior year’s purchases, 50,000 cases; carrying cost per
case of inventory, P1.20; distributor’s discount, 1 case for every 10 cases bought; cost of
placing an order, P3.00; weekly demand is approximately 962 cases.
Safety stock required is
140 cases. No change in demand is expected this year. (Use a 365-day, 52-week year).
Determine the economic order quantity (EOQ), and the reorder point assuming a two-day
lead-time.
A.
B.
C.
D.
EOQ
250 cases
481 cases
500 cases
962 cases
Reorder point
280 cases
500 cases
414 cases
64. Vera Cruz Corporation seeks to determine the quantity of safety stock for product ST that they
should maintain that will result in the lowest cost to the company. Each stockout will cost
P600 and the carrying cost of each unit of safety stock will be P8. Product ST will be ordered
five times a year. Which of the following will produce the lowest cost?
A. A safety stock of 15 units which is associated with a 35% probability of running out of
stock during an order period.
B. A safety stock of 25 units which is associated with a 25% probability of running out of
stock during an order period.
C. A safety stock of 35 units which is associated with a 10% probability of running out of
stock during an order period.
D. A safety stock of 75 units associated with a 5% probability of running out of stock during
an order period.
275 cases
62. If Ferry Company has a safety stock of 160 units and the average daily demand is 20 units,
how many days can be covered if the shipment from the supplier is delayed by 12 days?
A. 6.7 days
C. 10.0 days
B. 8.0 days
D. 12.0 days
63. Each stockout of Product AXsold by Axiom Inc. costs P87,500 per occurrence.The carrying
cost per unit of inventory is P250 per year, and the company orders 1,500 units of product 24
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times a year at a cost of P5,000 per order. The probability of stockout at various levels of
safety stock is
Units of Safety Stock
Probability of a stockout
0
0.50
100
0.30
200
0.14
300
0.05
400
0.01
The optimal safety stock level for the company is
A. 0 units.
C. 300 units.
B. 100 units.
D. 400 units.
65. Arnold Enterprises uses theEOQ model for inventory control. The company hasan annual
demand of 50,000 units for part number 101 and has computed an optimal lot size of 6,250
units. Per-unit carrying costs and stockout costs are $13 and $3, respectively. The following
data have been gathered in an attempt to determine an appropriate safety stock level:
Number of Times Short
Units Short Because of Excess
in the last 40 Reorder Cycles
Demand during the Lead Time Period
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200
6
300
12
400
6
The annual cost of establishing a 200-unit safety stock is expected to be
A. $2,600
C. $4,040
B. $4,260
D. $5,200
Trade Credit
66. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15,
net 40. Phranklin Pharms has gross purchases of $800,000 per year. What ismaximum
the
amount of costly trade credit Phranklin could get, assuming they abide by the suppliers credit
terms? (Assume a 360-day year.)
A. $32,666.70
C. $54,444.50
B. $52,266.67
D. $87,111.20
67. On cash discounts, all of the following statements do not apply except
A. The cost of not taking a cash discount is always higher than the cost of a bank loan.
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
C. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of
credit.
D. If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount
period, the amount paid would be P9,000.
68. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of
convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting
until Day 30. You point out that the nominal cost of not taking the discount and paying on Day
30 is around 37 percent. But since your firm is not taking discounts and is paying on Day 20,
what is the effective annual cost of your firm’s current practice, using a 360-day year?
A. 36.7%
C. 106.9%
B. 73.4%
D. 43.6%
69. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate
that this policy effectively costs your firm $157,500 each year, what is the firm’s average
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accounts payable balance?
A. $157,500
B. $625,000
C. $750,000
D. $1,234,000
Bank loans
70. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that
has monthly payments?
A. 9%
C. 9.81%
B. 9.38%
D. 10.94%
71. Corbin, Inc. can issue 3-month commercial paper with a face value of $1,000,000 for
$980,000. Transaction costs will be $1,200. The effective annualized percentage cost of the
financing, based on a 360-day year, will be
A. 2.00%.
C. 8.48%.
B. 8.00%.
D. 8.66%.
Short-term financing alternatives
72. ABC Company finances all of its seasonal inventory needs from the local bank at an effective
interest cost of 9%. The firm’s supplier promises to extend trade credit on terms that will
match the 9% bank credit rate. What terms would the supplier have to offer (approximately)?
A. 2/10, n/60.
C. 2/10, n/100.
B. 2/10, n/90.
D. 3/10, n/60.
73. A company has accounts payable of $5 million with terms of 2% discount within 15 days, net
30 days (2/15 net 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, its total cost will be
A. $24,500 more.
C. $75,500 less.
B. $51,000 less.
D. $100,000 less.
74. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day after
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each delivery. Thus, the company is considering a 1-year bank loan for $9,800 (98% of the
invoice amount). If the effective annual interest rate on this loan is 12%, what will be the net
dollar savings over the year by borrowing and then taking the discount on the materials?
A. $1,176
C. $3,624
B. $1,224
D. $4,800
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Theory
1. D
2. C
3. C
4. D
5. D
6. B
7. C
8. A
9. C
10. C
11. A
12. B
13. A
14. C
15. B
16. D
17. A
18. B
19. D
20. B
21. B
22. A
23. C
24. D
25. B
Problems
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
B
C
D
B
A
C
A
C
D
B
C
C
B
A
A
A
A
C
D
A
A
C
D
B
A
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
C
B
B
B
D
A
B
B
C
A
C
D
D
C
A
1. B
2. C
3. C
4. C
5. C
6. C
7. A
8. B
9. A
10. A
11. C
12. C
13. B
14. B
15. C
16. A
17. B
18. C
19. C
20. A
21. D
22. C
23. D
24. C
25. A
26. C
27. A
28. A
29. B
30. B
31. C
32. C
33. C
34. C
35. B
36. C
37. A
38. C
39. D
40. C
41. B
42. C
43. B
44. A
45. A
46. B
47. B
48. B
49. A
50. B
Page 18 of 18
51. B
52. B
53. B
54. D
55. B
56. B
57. C
58. C
59. D
60. C
61. C
62. B
63. D
64. C
65. C
66. D
67. C
68. C
69. C
70. B
71. D
72. B
73. C
74. C