La Consolacion College Manila

REINVENTING EDUCATION OF THE FUTURE

School of Business & Accountancy

FINANCIAL MANAGEMENT 1

FINAL REVIEWER

Instruction: Identify the letter that best completes the statement or answers the question.
Shade the box letter of your choice. ERASURES NOT ALLOWED.

Items 1 to 5 True or False

If the statement is TRUE shade box “A” if FALSE shade box “D”

1. Cost-volume-profit analysis assumes that over the relevant range selling prices are unchanged.

2. An income statement showing only component percentages is known as Common-size income

statement.

3. With regards to inventory management, an increase in the frequency of ordering will normally
reduce the total carrying cost

4. The goal of credit policy is to Extend credit to the point where marginal profits equal marginal
costs.

5. The percentage change in earning before interest and taxes associated with the percentage
change in revenues is the degree of operating leverage.

6. State whether the following statement are true or false

Statement 1 – The two main types of inventory cost relevant to inventory decision making are
carrying costs and ordering cost.
Statement 2 – The optional ordering quantity in the EOQ model occurs at the point where the
sum of the carrying cost and ordering cost are minimized.
Statement 1 Statement 2
a. False True
b. True False
c. False False
d. True True

7. The carrying cost pertaining to inventory include:

a. Insurance cost, incoming freight cost and storage cost
b. Insurance cost, incoming freight cost and setup cost
c. Setup cost and opportunity cost of capital invested in inventory

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 d. Storage cost and opportunity cost of capital invested in inventory

8. The order sized determined by the economic order quantity formula minimizes the annual
inventory cost which is comprised of ordering cost and
a. Safety stock cost c. Stockout cost
b. Carrying cost d. No answer

9. Love Corp. is operationally, a highly leveraged company, that is, is has high fixed costs and low
variable costs. As much, small changes in sales volume result in

a. Proportionate change in net income

b. Large changes in net income
c. Negligible change in net income
d. No change in net income

10. Cost components of capital structure may include:

a. accounts payable
b. retained earnings
c. bonds
d. b and c above

11. If a company reports a net loss, it

a. will not be able to get a loan.

b. may still have a net increase in cash.
c. will not be able to pay cash dividends.
d. will not be able to make capital expenditures.

12. A liquidity ratio measures the

a. income or operating success of an enterprise over a period of time.
b. ability of the enterprise to survive over a long period of time.
c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for
cash.
d. number of times interest is earned.

13. The acquisition of land by issuing Ordinary share is

a. a noncash transaction and would be reported in the body of a statement of cash flows.
b. a noncash transaction that is not reported in the body of a statement of cash flows.
c. a cash transaction and would be reported in the body of a statement of cash flows.
d. only reported if the statement of cash flows is prepared using the direct method.

14. Operating budgets include all of the following EXCEPT:

a. the revenues budget
b. the budgeted income statement
c. the administrative costs budget
d. the budgeted balance sheet

15. Which of the following is not an ordering cost?

a. cost of receiving inventory
b. cost of preparing the order
c. cost of the merchandise ordered
d. cost of storing the inventory

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16. In which order are the following developed? First to last:
A = Production budget B = Direct materials costs budget
C = Budgeted income statement D = Revenues budget
a. ABDC
b. DABC
c. DCAB
d. CABD

17. Financial budgets include the:

a. capital expenditures budget
b. production budget
c. marketing costs budget
d. administrative costs budget

18. When using the graph method, if unit outputs exceed the breakeven point
a. Expenses are extremely high relative to revenues
b. There is loss because the total cost line exceeds the total revenue line
c. Total sales exceed total cost
d. There is profit since the total cost line exceeds the total revenue line

19. The most important use of the cost-volume-profit graph is to show

a. The breakeven point
b. The cost/margin ratio at various levels of sale activity
c. The relationship among volume, cost, revenues, over wide ranges of activity
d. The determination of cross over point

20. A change in credit policy has a caused an increase in sales, an increase in discounts taken, a
reduction in the investment in accounts receivables, and a reduction in the number of doubtful
accounts. Based on this information we know that:
a. the net profit has increased
b. the bad debt percentage has increased
c. the size of the discount offered ha decreased.
d. The average collection period has decreased.

21. Blanchard Corp. operates its factory 300 days per year. Its annual consumption of Material Y is
1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12
business days. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per gallon per
year is $.25, what is the total annual carrying cost for Material Y?
a. $3,750
b. $7,500
c. $6,250
d. $10,000

22. GOOD Corp. consumes 1,200,000 gallons of Material Y per year. Its order quantity is 30,000
gallons. It maintains a safety stock of 10,000 gallons and its annual carrying costs are $0.25 per
gallon per year. If the ordering cost is $20 per order, what are the total annual ordering costs?
a. $600
b. $800
c. $8,300
d. $1,200

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23. 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. 30 days
b. 100 days
c. 10 days
d. 20 days

24. 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. 16,000 lbs.
b. 6,000 lbs.
c. 10,000 lbs.
d. 21,000 lbs.

Question 25 & 26 are based on the following information. Moorehead Manufacturing Company produces
two products for which the following data have been tabulated. Fixed manufacturing cost is applied at
rate of P1.00 per machine hour.
Per Unit XY-7 BD-4
Selling price P4.00 P3.00
Variable manufacturing costs P2.00 P1.50
Fixed manufacturing costs P .75 P .20
Variable selling costs P1.00 P1.00
The sales manager had a P160, 000 increases in the money to the most profitable products.
Products are not substitute for one another in the eyes of the company's costumer.

25. Suppose the sales manager chooses to devote the entire P160, 000 to increase advertising for
XY-7. The minimum increase in sales units of XY-7 required to offset the increased advertising is
a. 640,000 units c. 128,000 units
b. 160,000 units d. 80,000 units

26. Suppose the sales manager chooses to devote the entire P160, 000 to increase advertising for
BD-4. The minimum increase in revenues of BD-4 required of offset the increased advertising
would be
a. P160, 000 c. P960, 000
b. P320, 000 d. P1, 600,000

Question 27 & 28 are based on the following information. An organization sells a single product for P40
per unit that is purchase for P20. The salesperson receives a salary plus a commission of 5% of sales.
Last year the organization’s net income (after taxes) was P108, 800. The organization is subject to an
income tax rate of 30%. The fixed costs of the organization are
Advertising P124, 000
Rent 60,000
Salaries 180,000
Other fixed costs 32,000
Total P396, 000

27. The breakeven point in unit sales for the organization is

a. 8,800 units c. 19,800 units
b. 18,000 units d. 22,000 units

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 28. The organization is considering changing the compensation plan for sales personnel. If the
organization increases the commission to 10% of revenues and reduces salaries by P80, 000,
what revenues must be the organization to have earned the same net income as last year?
a. P1, 042,000 c. P1, 150,000
b. P1, 350,000 d. P1, 630,000

29. The sales Director of Can Can Co. suggest that certain terms be modified. He estimates the
following effects:
 Sales will increase by at least 20%
 Accounts receivable turnover 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. Yes, because income will increase by P64,800.

b. Yes, because losses will be reduced by P13,000.
c. No, because income will be reduced by P134,000
d. No, because losses will be increased by P28,000.

30. NumeroUno 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 standards would increase credit sales by 30% and increase the
average collection period from 30 days to 45 days. Based on on a 360-day year, the proposed
relaxation of credit standards would result to an increase in accounts receivable balance of
a. P6,880,000
b. P1,920,000
c. P2,880,000
d. P6,080,000

31. Selected information from the accounting records of GOOD Company is as follows:

Net sales for 2019 P1,800,000

Gross profit rate on cost 20%
Current liabilities P 500,000
Current ratio 3 to 1
Quick assets ratio 2.5 to 1

GUTZY’s inventory turnover for 2019 is

a. 6.00
b. 5.76
c. 8.64
d. 12.00

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 32. During 2019, FERDZ Company purchased P960, 000 of inventory and the ending inventory at
December 31, 2019 was P180, 000. FERDZ Company’s net sales for 2019 was P1,200,000, and
the analysis shows that profit for the year was 15% of sales and 20% of cost of sales. What was
the inventory turnover for 2019?
A. 6.4
B. 6.0
C. 5.3
D. 5.0.
(FTG)

33. GUTZY CORP. had net income for 2019 of P7,000,000. Additional information is as follows:

Provision for doubtful accounts:

Current receivables P 110,000

Long-term nontrade receivables 40,000
Long-term debt:

Bond premium amortization P 90,000

Interest paid 1,200,000
Amortization of patents P 60,000
Depreciation on plant assets 2,200,000
What should be the net cash provided by operating activities in the statement of cash flows for
the year ended December 31, 2019, based solely on the above information?

A. P9,500,000.
B. P9,430,000.
C. P9,320,000.
D. P9,460,000.

34. The balance in retained earnings at December 31, 2018 was P810,000 and at December 31,
2019 was P654,000. Net income for 2019 was P563,000. A stock dividend was declared and
distributed which increased common stock P225,000 and paid-in capital P125,000. A cash
dividend was declared and paid.

The amount of the cash dividend was

a. P279,000.
b. P369,000.
c. P494,000.
d. P719,000.

35. You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual interest rate
is closest to:
a. 1.5 percent.
b. 12 percent.
c. 18 percent.
d. 24 percent.

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36. A bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon maturity.
Assuming 10 percent to be the appropriate discount rate, the present value of the bond is:

a. $877.11
b. $1,000.00
c. $416.39
d. $1,785.67
37. If you have $20,000 in an account earning 8 percent annually, what constant amount could you
withdraw each year and have nothing remaining at the end of 5 years?
a. $5,009
b. $4,755
c. $3,409
d. $2,466
38-39

The management FERDZ INC. provided the following data for your analysis:

Budgeted sales for 2020 P162,520

Total variable costs in 2019 is 7.5 times higher than in the company’s profit for the same year
Total fixed costs in 2019 P40,000
Profit on the budgeted income statement for 2020 P15,000.
Profit on 2019 operation was 8% of Sales.

38. What is the degree of operating leverage for 2019? __________ 5

39. What is the projected percentage increase in 2020 sales? ______________ 30%

40. GUTZY CO. is planning to invest in the new product that will increase its profit by 10%.
The VP-Finance said that retained earnings will be used which is more favorable in analysing the
capital structure of the company. At present the company has an investment in T-Bills with a risk
free rate of 3%. The CAPM showed 7.5%. The beta used was .9
What was the market rate used by the company in determining its CAPM? ___________ 8%

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41. A firm has the balance sheet accounts, common stock, and paid-in capital in excess of par, with
values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If
the firm had a par value of $1, the stock originally sold for
(a) $11.50/share.
(b) $12.50/share.
(c) $13.50/share.
(d) $15.50/share.
Answer: C

42. A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The
required return on the preferred stock has been estimated to be 16 percent. The value of the
preferred stock is _________.
(a) $64
(b) $16
(c) $25
(d) $50
Answer: C

43. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon
interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are
currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is
_________.
(a) $791.00
(b) $1,000
(c) $1,052.24
(d) $1,113.00
Answer: D

44. What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that
matures in 6 years and pays 12 percent interest annually?
(a) 8.5 percent
(b) 9.4 percent
(c) 12.0 percent
(d) 13.2 percent
Answer: B

45. A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm’s
sales price per unit is $35 and its variable cost per unit is $22.50. The firm’s cash operating
breakeven point in units is
(a) 23,330.
(b) 32,000.
(c) 42,000.
(d) 52,000.
Answer: B

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46. Cary’s Carry-all Company bonds have a 12% coupon rate. Interest is paid semi-annually. The
bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of
Terminator Bonds if investors' required rate of return is 8%.

a. $1,114.70

b. $1,233.05

c. $894.06

d. $941.27

47. You are planning to sell a corporate bond with three years remaining to maturity. The bond will pay
the holder $1,000 at maturity, and also makes $40 interest payments semi-annually. If the discount
rate is 8% compounded semi-annually, what is the selling price for this bond?

A. $1,000.

B. $1,080

C. $1,120

D. $ 900

48. If you deposit $25,700 today into a bank account, how much will you have in 6.5 years if the
account pays 4.5 percent interest compounded quarterly?

A. $34,375.97

B. $36,596.83

C. $33,468.09

D. Answer not given

49. Assume that liquid funds can be invested to yield 12 percent. If annual remittance checks total $2
billion, what is it worth for the firm to reduce float by 1 day?

a. $24,000,000

b. $1,000,000

c. $658,000

d. $54,833

50. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of 35
days, and a payment cycle to 26 days. If its sales for the period just ended amounted to P972,000,. What
is investment in accounts receivable?(assume 360 days in year).

e. P85,200

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 f. P72,450

g. P94,500

h. P79,600

END OF EXAMINATION

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