B. WORKING CAPITAL MANAGEMENT A. Increase in the ratio of current liabilities to noncurrent liabilities.

B. Increase in the operating cycle.

THEORIES: C. Decrease in the operating cycle.
Working capital management D. Increase in the ratio of current assets to current liabilities.
1. Working capital management involves investment and financing decisions Moderate
related to: 3. Short-term financing plans with high liquidity have:
A. plant and equipment and current liabilities. A. high return and high risk
B. current assets and capital structure. B. moderate return and moderate risk
C. current assets and current liabilities. C. low profit and low risk
D. sales and credit. D. none of the above
17. The goal of managing working capital, such as inventory, should be to Temporary & Permanent working capital
minimize the: 4. Temporary working capital supports
A. costs of carrying inventory A. the cash needs of the company. C. acquisition of capital equipment.
B. opportunity cost of capital B. payment of long term debt. D. seasonal peaks.
C. aggregate of carrying and shortage costs Cash Management
D. amount of spoilage or pilferage Motives for holding cash
Working capital financing policy 7. The transaction motive for holding cash is for:
Aggressive A. a safety cushion C. compensating balance requirements
5. Zap Company follows an aggressive financing policy in its working capital B. daily operating requirements D. none of the above
management while Zing Corporation follows a conservative financing policy. Float
Which one of the following statements is correct? 8. The difference between the cash balance on the firm's books and the
A. Zap has low ratio of short-term debt to total debt while Zing has a high balance shown on the bank statement is called:
ratio of short-term debt to total debt. A, the compensating balance C. a safety cushion
B. Zap has a low current ratio while Zing has a high current ratio. B. float D. none of the above
C. Zap has less liquidity risk while Zing has more liquidity risk. Cash conversion cycle
D. Zap finances short-term assets with long-term debt while Zing finances 9. The length of time between payment for inventory and the collection of
short-term assets with short-term debt. cash is referred to as:
6. Which of the following would increase risk? A. payables deferral period C. operating cycle
A. Raise the level of working capital. B. receivables conversion period D. cash conversion cycle
B. Decrease the amount of inventory by formulating an effective inventory 10. As a firm's cash conversion cycle increases, the firm:
policy. A. becomes less profitable
C. Increase the amount of short-term borrowing. B. increases its investment in working capital
D. Increase the amount of equity financing. C. reduces its accounts payable period
Conservative D. incurs more shortage costs
2. As a company becomes more conservative with respect to working capital 11. The longer the firm's accounts payable period, the:
policy, it would tend to have a(n) A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.
12. The average length of time a peso is tied up in current asset is called
the:
A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period.
Receivables management
13. All of these factors are used in credit policy administration except:
A. credit standards C. peso amount of receivables
B. terms of trade D. collection policy
14. Which of the following statements is most correct? If a company lowers
its DSO, but no changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.
15. All but which of the following is considered in determining credit policy?
A. Credit standards C. Accounts payable deferral period
B. Credit limits D. Collection efforts
Inventory management
16. The use of safety stock by a firm will:
A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above
18. When a specified level of safety stock is carried for an item in inventory,
the average inventory level for that item
A. decreases by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock.
19. Which of the following statements is correct for a firm that currently has
total costs of carrying and ordering inventory that are 50% higher than total
carrying costs?
A. Current order size is greater than optimal
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used
Trade credit
20. With credit terms of 3/8, n/30, what is the customers payment decision
date?
A. Three days after the invoice is received.
B. The 8th day is the customers decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.
PROBLEMS
Working capital financing
1. Casie Company turns out 200 calculators a day at a cost of P250 per
calculator for materials and variable conversion cost. It takes the firm 18
days to convert raw materials into calculator. Casies usual credit terms
extended to its customers is 30 days, and the firm generally pays its
suppliers in 20 days. If the foregoing cycles are constant, what amount of
working capital must Casie Company finance?
A. P1,400,000 C. P 900,000
B. P2,400,000 D. P1,800,000
Cash conversion cycle
2. Luke Company has an inventory conversion period of 60 days, a
receivables conversion period of 45 days, and a payments cycle of 30 days.
What is the length of the firms cash conversion cycle?
A. 90 days C. 54 days
B. 75 days D. 105 days
3. The Spades Company has an inventory conversion period of 75 days, a
receivables conversion period of 38 days, and a payable payment period of
30 days. What is the length of the firms cash conversion cycle?
A. 83 days C. 67 days
B. 113 days D. 45 days
4. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in
accounts receivable. Its average daily sales are P100,000. The company
has P1.5 million in accounts payable. Its average daily purchases are
P50,000. What is the length of the companys cash conversion period?
A. 50 days C. 30 days
B. 20 days D. 40 days
Days inventory Receivables management
5. What is the inventory period for a firm with an annual cost of goods sold of Carrying cost
P8 million, P1.5 million in average inventory, and a cash conversion cycle of 10. The Camp Company has an inventory conversion period of 60 days, a
75 days? receivable conversion period of 30 days, and a payable payment period of
A. 6.56 days C. 52.60 days 45 days. The Camps variable cost ratio is 60 percent and annual fixed
B. 18.75 days D. 67.50 days costs of P600,000. The current cost of capital for Camp is 12%.
6. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in If Camps annual sales are P3,375,000 and all sales are on credit, what is
accounts receivable. Its average daily sales are P100,000. The company the firms carrying cost on accounts receivable, using 360 days year?
has P1.5 million in accounts payable. Its average daily purchases are A. P281,250 C. P 20,250
P50,000. What is the length of the companys inventory conversion period? B. P168,750 D. P 56,250
A. 50 days C. 120 days Average receivables
B. 90 days D. 40 days 11. Caja Company sells on terms 3/10, net 30. Total sales for the year are
Cash management P900,000. Forty percent of the customers pay on the tenth day and take
Economic conversion quantity (ECQ) discounts; the other 60 percent pay, on average, 45 days after their
7. Simile Inc. has a total annual cash requirement of P9,075,000 which are purchases. What is the average amount of receivables?
to be paid uniformly. Simile has the opportunity to invest the money at 24% A. P70,000 C. P77,200
per annum. The company spends, on the average, P40 for every cash B. P77,500 D. P67,500
conversion to marketable securities. 12. Palm Companys budgeted sales for the coming year are P40,500,000 of
What is the optimal cash conversion size? which 80% are expected to be credit sales at terms of n/30. Palm estimates
A. P60,000 C. P45,000 that a proposed relaxation of credit standards will increase credit sales by
B. P55,000 D. P72,500 20% and increase the average collection period from 30 days to 40 days.
Opportunity cost Based on a 360-day year, the proposed relaxation of credit to standards will
8. Hyperbole Corporation estimates its total annual cash disbursements of result in an expected increase in the average accounts receivable balance of
P3,251,250 which are to be paid uniformly. Hyperbole has the opportunity to A. P 540,000 C. P2,700,000
invest the money at 9% per annum. The company spends, on the average, B. P 900,000 D. P1,620,000
P25 for every cash conversion to marketable securities and vice versa. Investment in receivables
What is the opportunity cost of keeping cash in the bank account? 13. Currently, La Carlota Company has annual sales of P2,500,000. Its
A. P3,825.00 C. P4,190.00 average collection period is 45 days, and bad debts are 3 percent of sales.
B. P1,912.50 D. P 188.55 The credit and collection manager is considering instituting a stricter
Annual savings collection policy, whereby bad debts would be reduced to 1.5 percent of total
9. What are the expected annual savings from a lock-box system that sales, and the average collection period would fall to 30 days. However,
collects 150 checks per day averaging P500 each, and reduces mailing and sales would also fall by an estimated P300,000 annually. Variable costs are
processing times by 2.5 and 1.5 days respectively, if the annual interest rate 75 percent of sales and the cost of carrying receivables is 10 percent.
is 7%? Assume a tax rate of 40 percent and 360 days per year.
A. P 5,250 C. P 21,000 What would be the decrease in investment in receivables if the change were
B. P 13,125 D. P300,000 made?
A. P 9,688 C. P 96,875 18. Marsman Co. has determined the following for a given year:
B. P 12,988 D. P129,975 Economic order quantity (standard order size) 5,000 units
Comprehensive Total cost to place purchase orders for the year P40,000
Question Nos. 14 through 16 are based on the following data: Cost to place one purchase order P 100
Sonata Company is considering changing its credit terms from 2/15, net 30 Cost to carry one unit for one year P4
to 3/10, net 30 in order to speed collections. At present, 40 percent of What is Marsmans estimated annual usage in units?
Sonata Companys customers take the 2 percent discount. Under the new A. 1,000,000 C. 500,000
term, discount customers are expected to rise to 50 percent. Regardless of B. 2,000,000 D. 1,500,000
the credit terms, half of the customers who do not take the discount are Required annual return on investment
expected to pay on time, whereas the remainder will pay 10 days late. The 19. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail
change does not involve a relaxation of credit standards; therefore bad debt outlet which sells blank and recorded videos. Pirate Mart purchases tapes
losses are not expected to rise above their present 2 percent level. from BIBO Company at P300.00 per tape; tapes are shipped in packages of
However, the more generous cash discount terms are expected to increase 20. BIBO Company pays all incoming freight, and Pirate Mart does not
sales from P2 million to P2.6 million per year. Sonata Companys variable inspect the tapes due to BIBO Company's reputation for high quality. Annual
cost ratio is 75 percent, the interest rate on funds invested in accounts demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart
receivable is 9 percent, and the firms income tax rate is 40 percent. earns 20% on its cash investments. The purchase-order lead time is two
14. What are the days sales outstanding (DSO) before and after the change weeks.
of credit policy?
A. 27.0 days and 22.5 days, respectively The following cost data are available:
B. 22.5 days and 27.0 days, respectively Relevant ordering costs per purchase order P80 P90.50
C. 22.5 days and 21.5 days, respectively Carrying costs per package per year 3
D. 21.5 days and 22.5 days respectively Relevant insurance, materials handling, breakage,
15. The incremental carrying cost on receivable is etc., per year 2 P 4.50
A. P 843.75 C. P 643.75 What is the required annual return on investment per package?
B. P8,889.00 D. P6,667.00 A. P6,000 C. P1,200
16. The incremental after tax profit from the change in credit terms is B. P 250 D. P 600
A. P68,493 C. P60,615 Order quantity
B. P65,640 D. P57,615 20. For Raw Material L12, a company maintains a safety stock of 5,000
Inventory management pounds. Its average inventory (taking into account the safety stock) is
EOQ 12,000 pounds. What is the apparent order quantity?
17. What is the economic order quantity for the following inventory policy: A A. 18,000 lbs. C. 14,000 lbs.
firm sells 32,000 bags of premium sugar per year. The cost per order is B. 6,000 lbs. D. 24,000 lbs
P200 and the firm experiences a carrying cost of P0.80 per bag.
A. 2,000 bags C. 8,000 bags Optimal safety stock level
B. 4,000 bags D. 16,000 bags 21. Each stockout of a product sold by Arnis Co. costs P1,750 per
Annual demand occurrence. The companys carrying cost per unit of inventory is P5 per
year, and the company orders 1,500 units of product 20 times a year at a order, and incremental carrying costs are about P0.75 per yard, much of
cost of P100 per order. The probabilities of a stockout at various levels of which represents the opportunity cost of the funds tied up in inventory.
safety stock are: How much total annual costs are associated with the current inventory
policy?
A. P19,550 C. P38,300
Units of Safety Stock Probability of Stockout B. P18,750 D. P62,500
0. 0.50 Maximum interest rate
100. 0.30 24. Narra Company is considering a switch to level production. Cost
200. 0.14 efficiencies will occur under level production and after tax cost would decline
300. 0.05 by P70,000 but inventory would increase from P1,000,000 to P1,800,000.
400. 0.01 Narra would have to finance the extra inventory at a cost of 10.5 percent.
What is the maximum interest rate that makes level production feasible?
The optimal safety stock level for the company based on the units of safety A. 7.00 percent C. 8.75 percent
stock level above is B. 5.83 percent D. 10.00 percent
A. 200 units C. 100 units Opportunity cost
B. 300 units D. 400 units 25. Diesel Fashion estimates that 90,000 zippers will be needed in the
22. Paeng Company uses the EOQ model for inventory control. The manufacture of high selling products for the coming year. Its supplier quoted
company has an annual demand of 50,000 units for part number 6702 and a price of P25 per zipper. Diesel planned to purchase 7,500 units per month
has computed an optimal lot size of 6,250 units. Per-unit carrying costs and but its supplier could not guarantee this delivery schedule. In order to
stockout costs are P9 and P4, respectively. The following data have been ensure availability of these zippers, Diesel is considering the purchase of all
gathered in an attempt to determine an appropriate safety stock level: these 90,000 units on January 1. Assuming Diesel can invest cash at 12%,
the companys opportunity cost of purchasing the 90,000 units at the
beginning of the year is
Units Short Because of Excess Number of Times Short A. P127,500 C. P123,750
Demand during the Lead Time Period in the last 40 Reorder Cycles B. P135,000 D. P264,000
100 8 Trade credit
200 10 26. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the
300 14
firm failing to take the discount is:
400 8
A. 2.0% . C. 36.7%
B. 30.0%. D. 10.0%.
What is the optimal safety stock level?
27. The cost of discounts missed on credit terms of 2/10, n/60 is
A. 100 units C. 200 units
A. 2.0 percent C. 12.4 percent
B. 300 units D. 400 units
B. 14.9 percent D. 21.2 percent
Annual inventory costs
Bank loans
23. Durable Furniture Company uses about 200,000 yards of a particular
Discount loan
fabric each year. The fabric costs P25 per yard. The current policy is to order
the fabric four times a year. Incremental ordering costs are about P200 per
28. You plan to borrow P10,000 from your bank, which offers to lend you the considering a 1-year bank loan for P9,800 (98% of the invoice amount). If
money at a 10 percent nominal, or stated, rate on a one-year loan. What is the effective annual interest rate on this loan is 12%, what will be the net
the effective interest rate if the loan is a discount loan? peso savings over the year by borrowing and then taking the discount on the
A. 10.00% C. 12.45% materials?
B. 11.11% D. 14.56% A. P3,624 C. P4,800
Discount loan with compensating balance B. P1,176 D. P1,224
29. What is the effective rate of a 15% discounted loan for 90 days, 34. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank
P200,000, with 10% compensating balance? Assume 360 days per year. loan for 8 percent can be arranged at any time. When should the customer
A. 20.0% C. 17.4% pay the invoice?
B. 15.0% D. 22.2% A. Pay on the 1st. C. Pay on the 40th
Compensating balance with interest B. Pay on the 10th D. Pay on the 60th
30. The Premiere Company obtained a short-term bank loan for P1,000,000 35. The Peninsula Commercial Bank and Island Corporation agreed to the
at an annual interest rate 12%. As a condition of the loan, Premiere is following loan proposal:
required to maintain a compensating balance of P300,000 in its checking Stated interest rate of 10% on a one-year discounted loan; and
account. The checking account earns interest at an annual rate of 3%. 15% of the loan as compensating balance on zero-interest current account
Premiere would otherwise maintain only P100,000 in its checking account to be maintained by Island Corporation with Peninsula Commercial Bank.
for transactional purposes. Premieres effective interest costs of the loan is The loan requires a net proceeds of P1.5 million. What is the principal
A. 12.00% C. 16.30% amount of loan applied for as part of the loan agreement?
B. 14.25% D. 15.86% A. P1,666,667 C. P1,764,706
Add-on B. P2,000,000 D. P1,125,000
31. Perlas Company borrowed from a bank an amount of P1,000,000. The
bank charged a 12% stated rate in an add-on arrangement, payable in 12
equal monthly installments.
A. 22.15% C. 25.05%
B. 24.00% D. 12.70%
Financing alternative
32. A company has accounts payable of P5 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. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more
33. Every 15 days a company receives P10,000 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 each delivery. Thus, the company is