Scribd
Upload
358 views52 pages

Working CapitalAnswerkey

Uploaded by

Rhea Jane Parcon
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
358 views52 pages

Working CapitalAnswerkey

Uploaded by

Rhea Jane Parcon
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
45. 46. 47. 48. C. 16.30% D. 15.86% The Peninsula Commercial following loan proposal: Bank and Mand Corporation aged w the 2 a ae ia tate of 10% ona one-year discounted loan; and i 5m . tbe ote loan 38 Compensating balance on zero-interest current acco * maincained by Island Corporation with Peninsula Comunercial be see a Proceeds of P15 million. What is the principal € Of Joan applied tor 4 “inCE ees pp 1 as pari of the loan agreement? B. 2,000,000 © C. P 1,764,706 D. P1,125,000 The Clay Company hus a revalving line of credit of P300,000 with a one-year mnatutiey. The terms cll fora 6% interest rte and 3 %4 percent commitment fee on the unused portion of the credi liue. ‘The average loan balance during “the year was P100,000, The annual cost ef this financing arrangement is ‘A. P6000 B. P6500 ©. P7,000 D. P7,500 Corporation received « P390,000 line of credic at a2 SQ Bank and drew down the entice amount on % i ic agreement requires that an amount equal to 15% ET Oi rsrapenstiag balance account. What is che oF che oon Pe coo credit fr this loan arrangement? effective ann A. 11.00% On January 1, Ricablanca interest rate of 12% from. ,000 from a bank on a one-year 8% term loan, with na boro ed are Whar is the effective annual interest on the interest 01 foan? 8% 585 4. C. 9.12% D, 10.41% The fciendly Bank offers AB United a 200,000 line of credic with an int rate of 2.25 percent per quarter. The credit line also requires that 2 pero the unused portion of the credit line be deposited n'a non-interes keri account as a compensating balance. AB United's short-term investments ue paving 1.5 percent per quarter. Assume any funds borrowed or invested Ee compound interest. Whar is the effective ennval interest rate on this arrangement if the line of credir goes unused ail year? A. 5.92% B. 6.00% CL 6.08% D,. 6.14% kk offers a P. 0 line of credit with an interest rate of 15 an agreement also requires that 5 pe New Town Be percent per quarter. The lo: ae F che credi uous as percent per quarter interest. What is the effective annual interest rate on the line of credit if a customer borrows the entire 25,000 for one year? A. 6.56% B. 8.98% C.. 9.87% D. 10.38% Juno Industrial Supply has a P250;000 line of credi¢ at a 9 percent itt i. The loan agreement requires a 3 percent compensating balance, which s based on the total amount borrowed, and which will be held in an inverest account. Whar is the effective interest rate if che firm borrows £160,000 en line of credit for one year? A. 8.67% > B. 8.78% C. 9.03% D. 9.28% Mabey Company es a cotal annual cash fequirement of P6,0/5,000 which e nto 5 i are to be paid uniformly, Mahogany has the opporcunity ro ine he P y, i money a *§ percent pet annum. The compa: 3 Pea en conversion to cash and vice jee pape on fi erg 195 fr ever aes What is the optimal conversion size for cash? < A. P58,457 B. P60,000 Cc. P82,670 D. P4i,335 If the firm bofrows P185,000 at § percent on a one-year discounted loan, whar is the effective interest rate? A. 8.00 percent B. 8.70 percent C. 9.07 percent D. 7.4} percent What is che estimated annual effective rate if Shofom Company borrows from Money Finance Company 200,000 at a term of 5 percent add-on unterest payable monthly for one year? A. 4.76% B. 5.26% Cc. 9.23% ~D. 12.50% ; if ny borrows P200,000 on a 6 percent i se et composi 3 ot i A. 7.14 percent . B. 6.00 percent C. 6.78 percent D. 6.44 percent THEORIES whooverong smog Swen nan sewn ne PROBLEMS 1B 2A 3.D 40 SA 6B 7D 8B 9.0 10.D be me Se = SPNAWA ASS SRP RoORA Qa &b te IC 12.A -13.B 14A ISA 16.4 17.C 184A 19.A 20.6 ~ SS WORKING CaPrr, 5 MANAG, Abed dniwen Say EMT aD LC D 52. 23.8 3D 24C HA 25.8 5A 26D 56D 27.8 IB 2% D 388 29.8 39.C 30. D 40.D 48 2LD = D 228 - ap BA 23D oP. HE UB ey 458 258 ec 16C 36K Re aD 27C BB a 28.6 aA ab 29.B 400 # 30A IA 28 WA HD GC GB TA CO 93 50.8 SID 2c 8 HAO SEC SOLUTIONS: ea Answer: B Cash Conversion Cycle = Ave, collection period +f Accounts Payable payment days * Inventory cycle day, _ ke Invensory ele in days Average collestion period £0 doy Operasing cycle pu Deduct Accounts payable payment days ny eo Cash conversion cycic oe, Ss Rt EE Answer: A Annual sales 360 days x 180,000 360m Inventory turnover 36MISO4 72 Inventory conversion porind 36017. 2 Answer: D Invenzory conversion period (See #4) 30.9 cay. ‘Average collection period (2)/[Link]) 20.0 dep Operatnig cycle 70.0 days Less: Ave, Accounts Payable payment Days (1.5 /0.5M) 30.0 days $0.0 des Cash conversion period Answer: The inventory conversion period can be celenlated by either aividing the ne inventory by the average daily sales or by dividing the days’ year by the inven turnover. Average daily sales. (30M/365) 82,191.78 Inventory conversion period. 5MI82,191.78 60.83 days 590 10, Answer: A 20x P10,000 x 4 days » so tin Answer: 2 ” Opsimal Cash Conversion Size = 3 I er Answer: D Pf hg The costs for other Proposals are higher than P122 500 gp follows: Choice A: 360 days x 700 checks x PO.50 PI Choice B: 9.9003 700 checks x P1800 x 369 sae hoice Ce Fil 136,080 Choice C: Flat fee 125,000 Answer: B OTs: 42,560 Opportunity cost: P42,500 » 2x 0.09 2 Answer: C Average AR 3,375,000/360 x 30 days 281,250 Average investment: 281,250 x 0.60 : 168,750 Carrying cost: 168,750 x 0.12 20.259 Answer: D Anventory turnover: x 5.336 Cost of goods saldtAve. Inventory (8M/1.5M) Ad Irventory conversion period (360 daysl5.33) 2.5 days a. 13. 14. 15. Answer: C 1 Reduction in cash float (2.5 + 1.5) Addivional free cash (4 days x 150 x P500) ‘Annual savings (P300,900 x 0.07) Answer: A Daily working capital required: 200 x 250 "Total working capital needed: 28 days x 50,000 CCC = 18 + 30-20 Answer: B DSO = (4x10) + (60 x 45) Average AR: 900,000(360x31 days Answer: A Days’ sales outstanding Old policy: (4x 15) + (3230) +43 x 19) New policy (5% 10) + (.25 x 30) + (.25 x 40) Answer: A Average receivable ss New policy: 2.6MI360 x 22.5 Old policy: 2.0M/360 x 27. Incremental Accounts Receivable Incremental carrying cost on receivable 42,500 x G.75 x 0.09 4.0 days P300,000 50,000 Jth.000 28 days 31 days 222,300 27.0 days _ 22.5 days 162,500 150,000 12,500 843.23 Answer; A Incremental sales Variable cost (75 x 600, is 000) 500,000 d Additional bad debts % (600,000 x 2 (450,000) Additional carrying coi eee ha) ( 12,000) Additional discouny, (844) (2,600,000 x5 x93) (3 : 3) ~(2,000,00 Before tax increase in income eats et (23,0099) Less tax 114,156 Incremental income “ L663 66,493 Answer: C Charige in average accounts receivables: Planned: 2,200,000/360x30 193,333 Present: 2,500,000/350~45 - 312,500 Decrease in AR balance 129.667. Variable cost ratic 75% Decrease in investment in AR 26,875 Answer: A Approximate annual cost: 2/98 x 360/20 36.73% Answer: A Approximase annual cost: 2198 x 360/10 73446 Answer: © computing the weighted sverige The average collection period can be calculated through ke don of the collection pattern. All custorners who avail the discount pay on the 10” day, # last day of the discount period. ) 3.33 days Payment within the discount period (113 10) Ia Payment without any discount (213-* 20) s A Average collection period 23,6. 24, ° The annual net costs consist Answer: D Credit sale = 40,500,600 x 80% = 32,400,000 Iucreased credit sales: 32,400, 000 x 1.2 = 38, 880, 000 New Average AR 38,880,000/360 x 40 = 4,320,000 Old Average AR 32,400,009/360 x 30 = 2,700,000 Increase in Average AR _ 1.820.900 Answer: BR Annual credit sales + Days’ year x DSO Average collection period under each credit policy Present: 0.7 x PSUM + 360-75 : Proposed: 0.6.x 9.95 360 x 50 P7267 a 3 Decrease in Accounss receivable balance 23,333,334 Anwer: D The annual effective cost of shit financing scheme can be caiculated by releting t annual net cost so the net proceeds. The annual interest is baced on the average be balance of P80,000. The service fee 's 296 and on the aveiage, there are 12 sansa: in one year. Interest (100,000 x 0.80 x 0.16 Annual service fee 100,060 x 0.02 x i2 months Total interest and service fee Less savings on collection expenses Net annual cost Annual effective rate 14,000 + 80,000 Answer: B / iy oth The discount shat the entity foregoes is u cost of trade financing (opportunity 98° the company paid she accouns on the 15" day, is should have poid only 97 peer: F* invoice price. The 3 percent discount that che company forfeis is the cost 30. 31. 33. 100: (100 x 32* x 0.25) + (200 x 32x 0.35) + G00 x 32 x 0.20)-+ (100 x 9) 200: (100 x 320.35) + (200 x 32 x 0.20) + (200 x 9) : i 4,200 300: (00x31 x 0.20) + (300 x 9) 400: (400x 9) srockous per unit x 8 orders per year. Answer: A edering casts 4x E2GO ; Carrying costs (50,000 + 2x 0.75 13,750 Total 19.550 Answer, © a Baepensestasditional Investment in Ingentory ars Interest Rate a0 1 (1,860,000 ~ 4,000,000) SL Answer: © 3GL% ke (2 +98) x (360 +20) ames that the conipany, forego es the discouns vig O68 during the ye" The solution asst Answer: B ae pay on the 10th Wish credit terms of 2H, ni30 one 1) minus the cash discount) at the rate 2 ns fer of foregoin’ he discowt net payment (inveice price paying the Jgan on the 60th day. The annuitized rate Of Lae percent. 2 Oe 2198 x 365150 x. Be 37. 38. Answer: B The cust of discounts missed is 12, 3% which is charges The company should borrow hich is more than the 8 merce a ee arth 1p an ) u Cost of foregoing discount: {1 + 99) x (360 + 30) Answer: A Purchase discount — 10,000 x 0. , 02 x 2 ina on borrowed money 9,800 | oue arches 4,800 ravings L176 44 Number of purchases: 360 days/15-day interval 200 “Answer: C Discount 5M x 0.02 100.000 Interest (5M x 0.98 x 0.12) x 151360 : 24,500 Savings + : ¢ Bi Answer: C re é =~ Number of units to be purchased in advance: 90,000 — 7,500 5m Average investments in working capital: 82,500 x 0.5* x P25 dee Opportunity cost 1,031,250%0 R 123030 half (82,500 + 0) * 2 *The average investment is one- Answer: B i ; LLL & =10+ (100-10) Chapter 24 logs Short-term Financing Management MULTIPLE CHOICE QUESTIONS Spontaneous and Bink non-spontaneous source of trea rarest ; ata B. Mortgage bonds D. Debentures Ge from owners. or credi itors, for 1A 2 Aspontaneous source of financing @ Financing refers to process of money leo Lon eeieris or investing and operate? actives taneous in nature is secon term nature. An example of financing which is spor oH eters tO counts, in jt, It arises willingness oa ods Provide ready pills creat line with the ‘end-in-view of selling g to their customers, an shes more the use © hort-term trade credit. It normally accounts for the gre, hig oe inancing because of its ease in use. atest *p" and “d” are incot because mortgage bonds are debent, eous and do not arise automatically out of a trading tran: ures, because accounts receivable is not a source of net ing but is an investment account. 2. Which one of the following statements about trade credit is correct? Trade credit A. Notan important source of financing for small firms. is term financing to the seller. B. Asource of long~ ~ Subject to risk of buyer default. D. Usually an inexpensive source of external financing. (cma) Q Trade credit, or purchase transactions, is subj i buyer's default. It is an open account and is not collateralized. ee, 7 nk of important source of financing for small firms who have limited amount of an x en g activities. Trade credit is usually short-term in an mally added by the seller to the price of ne finance its normal operatin and its cost of financing, which is non inexpensive depending on trade practices. mechan? sold, may be expensive or i ‘oice-letters “a”, “b”, and “d” are incorrect because they are false statements 2C 2 Atrue statement about trade credit. liability arising from about trade credits. 3. - Which one of the followir f wing responses is not { not an i - ee ee market for short-term fee? binds rovides more fund: a Aa The make rovi nds at lower rates than i ve r other met ids the expense of maintaining a phate ae c qourercal bank. i lere are no ictic restrictions as to the type of corporation that can enter into D market. . The market provide les a broad distributi ion for borrowing i (cma) Short-t hort-term Financing Management 20 on? ; ort-te! 4 fe sponse that is Not an advantage in using commercial paper market (OF sh inatio' mercial { franeind. rcial papers are UNSECUTed not sually in targe 9 9 oad by large corporation, which have e * Paya good Credit rating. oe aintain a ne care normally issued at a lower cost of funds it does Ot TE gh the on pensating balance and avoids the regular costs of issuing securities thro Sebt. market brokerages. It also provides a broad and nt distribution © of maviettes "2", "b', and "d" are incorrect because mney 2° advantad commercial papers as a source of short-term financing. commercial paper Ay maturity data greater than 1 year. B's usually sol only through investment banking dealers: L ordinarily does not have an active secondary market. (cma) D. Has an interest rate lower than Treasury bills. a6 iption wi e description with regard to commercial . 1 Gone paper is a form of aoc pole that is so'd BY only Wig nk creditworthy companies. As such, commercial papers have no secondary ™? urchased by the dealers or organizations that issued them ity of not Choice-letter *a" is incorrect because commercial papers have @ maturity © ‘id rong 270 days. Choice-etler "b’ is incorrect berate they could Oe directly by the organization issuing the commercial papers. Choice-letter a” Is Pecause commercial papers have interest that ig normally higher than the | to attract investors. 5, The following terms of short-term borrowings are available to a firm: + Floating lien: + Bankers’ acceptances + Factoring + Lines ofcredit. =~ + Revolving credit + Commercial paper + Chattel mortgages The forms of short-term borrowing that are unsecured credit are: A. Floating lien, revolving credit, chattel mortgage, and commercial paper. 8. Factoring, chattel mortgage, bankers’ acceptances, and line of credit. C. Floating lien, chattel mortgage, bankers’ acceptances, and line of credit. 2 Revolving credit, bankers’ acceptances, line of credit, and commercial paper. (cma) ho 4 Refers of short-term borrowing that are unsecured credit. : ! yr credit is not supported by @ collateral but is approved ba: | Signature (ie., credit standing) of the borrower. The credit is eendéd wal Sena institution on the strength of credit investigation results that provide information “” incorrect be Treasury bil 7 \MULTIPLE CHOICE| a 1067 Short-term Financing Management Chae, WJ 3 borro igati Iving credit, bankers’ | * Wer and hi ili obligations. Revolving ers’ ay line of 6, dit and oman mneats a examples of unsecured credit lances inv ating lien is secured by a property that normally changes in amoun en (i . » Su Ory. Factoring is a source of financing where accounts receivable are sold % factor Who charges interests and commissions for collection and "eceiva, maintenangg ® bles. Chattel mortgage is secured by property such as automotiies an MaCchineries. ' x Cost of financing , : SSuming a 360-day year, the current price of a P100 Treasury bill due in 180 days i n'a 6% discount basis is | A. - P97.00 C. P100.00 B. P94.00 D: P93.00 (cma) | A | The current price of a P100 Treasury bill due in 180 days at a 6% discount. The 6% discount is good for 1 year, and for 180 days it should be 3% (i 2., 6% x %), | he curre! int price of the P100 Treasury bill is P97 (i.e., P100 x 97%) : d ComnManvy antare inta aw ~------ : WORKIN " IG CAPTTAL MANAGEMEN “ pORIES: Hes j ¥ elared to: : hvestment and plane and equipment and curren} current assets and capital structur current assets and current {i sales and credit. t liabilities, ire, liabilities, 20 F> 2 2 ce Sai, 1, The length of time between the acquisition of inventory and Payment for alled the \T ce A. Operating cycle Trighe be. “de perayn ¥ B. Inventory conversion period : C. Accounts receivable Period D. Accounts payable deferral period ~ Ignoring cost and other effects on the firm, which of the following measures would tend to reduce the cash conversion cycle? &), Forgo the 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 \ Which, of the following actions is likely to reduce the length of a firm's cash Conversion cycle? ‘ : : A. Adopting~a new inventory system thac reduces the inventory conversion period, : xo lt Adopting a new inventory system that increases the inventory conversion Period. : 2 5 : i qj Incteasing the average days sales outstanding on its accounts receivable. Ds Reducing the amount of time the firm. takes co pay-its supplier. B. int TOD If everything else remains constant and a firm increases its cash conve ‘ele, its profitability will likely Increase “ + Inctease if earnings are positive @ Decrease D. Not be affected 6. As a company becomes more conservative with policy, it would tend to have a(n) *SPECE 0 wor 'A__ Increase in the ratio of current liabilities to gagcurrent | B cing B. Increase in the operating cycle. abilities G. Decrease in the operating oydle. (. Increase in the ratio of current assets to Current liabilities, bde . tion motive for holding cash is the cushion B) Daily operating requirements v C. Compensating balance requirements D. None of the given choices 8. The longer the firm’s accounts payzble period, the: A. Longer the firm’s cash conversion period. B. Shorter the firm’s inventory period. C. More the delay in the accounts receivable period. DY Less the firm musi invest in working. capital 9, Allof the following statements about working capital are correct excepr: A. Current liabilities are an impoxtint source of financing for, many smal firms. B. Profitability varies inversely with liquidity! C. The hedging approach to financing involved matching maturities of debe with specific financing needs. Financing permanent inventory buildup-with long-term debt is an example ofan ix [Link] policy. rage. radon 90 10, Short-term financing plans with igh liguidicy have: A. high return an Tisk B. moderate return and moderate risk ~~ ww C._ low profit and low risk D. none of the given choices LL. When a firm finances long-term assets with short-term sources of funding * ‘A. Reduoes the tisk of cash shortage B. Will have higher interest expense C. Improves the leverage ratio a 566 j j 13. p. Isignoring the principle of Matched maturities vu ‘The procedures’ followed by the §; receivables are called is im Fo ensuing payment of je sae A. Discount policy B. Collection policy \/ C. Credit policy D. Payables policy f long. 4 finance current assers ig "SE debt 28 opposed to shore-term A. Te decreases the risk of the firm B.. Ie generally is less costly than short-term debt C. Ie generally places fewer Festrictions on the firm D. tis easy to Tepay debe to Which of the following fi source of short-term credit A. Installment toans // B. Commercial paper. C. Trade credic D. Mortgage bonds nancial inser uments generally provides the lane for small firms ee ee The prime rate isthe— FAN A. Size of the commitment fee on a commercial bank loan B. Effective cost of a commercial bank loss C. "Rate charged cd on business loans to borrowers with high credit cat D. Rate at which a bank borrows from the Bangko Sentral ng A compensating balance A. Compensates a financial institution for services rendered by providing ir with deposits of funds B. Is used to compensate for possible losses on a marketable securities portfolio C. Is a level of inventory held to compensate for variations in usage rate and* lead time D. Isan amount paid by financial institution to compensate large depositors ‘Which of the following is true about a firm's fioat? A A firm strives to minimize the float for both cash receipts and cash disbursements. 18. du. B. A firm strives f° maximize the float for both cash receipts disbursements. ei ; and cay, C. A firm strives 1 maximize the float for cash receipts and minimize i: : float fi h disbursements. D. Sih ves to maximize the float for cash disbursements and * the float for cash receipts. ne A working capital technique that increases che payable floar wd ia the ourflow of cash is : » coer Hao niv anSwr 5 . ©. Electronic Data Interchange (EDI) 1D. A lockbox system A minimum checking account balance that a firm must maintain wid commercial bank . A. Transaction balance © Compensating balance ~/ Precautionary balance D. Speculative balance Which of the following is true abour clecrronic funds ugnster from 2 cash iow a srue about clectroNs ea ae eficial from a casi How standpoine ¥ A. Iris always be B. tis never beneficial from a cash flow standpoint Yo C. It is beneficial from a cash receipt standpoine bur not from a cash disbursements standpoi Seo at v Do IP beneficial from a cash disbursements standpoint but not from 2 ash receipts standpoint Temporary working capital supports A. the cash needs of the company. B. payment of long term debr. C._ acquisition of capital equipment. © seasonal peaks. x D. F : ctetmining the appropriate level of working capit: a firm requires | o types of de “4 ciated with various levels ‘of fueect assets and types of debt us finance these assets. a B. changi i ‘nging the capital structure and dividend policy of the fire: : jntaining short-term debr maintaining ’ a the lowes, " enerally more expensive than ong-te POSSIbNe Level b 2s 3 Seeing fit of cuceeny* tm debe. it ig . probability of technical insolvency, Current liabilities Aepinee the Company follows an i hile 7s —~—aTCINE bolicy i. anagement whl ing Co na ain 6 working Gpieal qyhich ane of the foliowing Statements jg cortesp HARING policy Zap has low ratio of shorierin debe tg, toral hil [Link] short-term debe £0 total deby, Neb wie Zing has 4 higmm ? Zap has a low current ratio while Zin, i < Zap has less liquidicy risk while Ziny we hie caren rati,~* D. Zap finances short-term assets with long-tecm “ai ak shore-term assets with short-tey,qi debe, yO ile Zing finances Which of the following would increase risk? A, Raise the level of working capital e th Fi B. ag © amount: of inventory by formulating an effective laventory C. Increase the amount of. short-term borrowing, : D. Inctease the amount of, equity financing. The difference between the cash balance on the fiem's books and the balance shown on the bank statement iscalled- the compensating balance a float a safety cushion none of the given choices The length of time n payment for i and the collection of cash is referred to as: A. payables deferral pericd : Teceivables conversion period ~ Operating cycle D. cash conversion cycle GOpP> asa firm'[Link] conversion cycle increases, the firm: becomes less profitable Poe increases its investment in working capi Teduces its accounts payable period incurs more shortage costs” ” goes 28. 29. 30. 32., 33. GS The average len; of time a peso is tied up in current asset is called tne A. necworking capital r : B, inventory conversion period. 68 C._ receivables conversion ped CG cd oo él wersion cycle: D. cash conversion YES i == which of the following, statements is most correct? If a company lowen DSO, but no changes occur in sales or operating costs, then the its A. company might well end up with a higher debe ratio. B. company mighs vad ich a lower 4 bt ratio. C. company would probably end up with @ higher OF. & 1. company's total esset rutnover ratio woutd probably decline. jnvestments generally pay the highest recurn? re Treasury bills Commercial paper,“ The most impo: tant considerations with respect <0 short-term invesemencs are Rerurn and value Recura and risk seh and-Hrquidiry . Growth and vale All but which of the following is ‘considered in determining credit policy AL Credit standards are Toe B. Credit limits “ C.. Accounts payable deferral period” - D. Collection efforts Ae Which of the following describes a firm's credit crite ig? * A. The length of time a buyer is giv f purchase? [Link] percentage of discount allowed for early payment. 7 C.° The diligence to collect slow-payi paying accounts. D. The required financial strength of acceptable customers. P ‘The economic order quantisy formula assumes that 7 ae J > periodic demand for the good is known. j cor Costs per unit vary with quantity ordered. 0 placing an order vary with quantity ordered. UO > a7 e costs per unit differ g p. purchas Ue to Quanery ding: ar maintain very low or ng iny pms Me Satie tobe tory levee hare " Tpigher CAMryiDg costs higher ocering and caring con / lower ordering and carrying costs example of a peering cost is ke Disruption of production sch B Quantity discounts lose c, Handling cests D. Obsolescence edules ¢ s The amount of inventory tha . tend t increase as the A. sales level falls to a Permanently lower level B. cost of carrying inventory decteases C. variability of sales decreases D. cost of running out of stack decreases » v The use of safery stock by a firm will A. reduce inventory costs increase inventory costs C. have‘no effect on inventory costs D. none of the given choices The goal of managi minimize the A. costs of carrying inventory 7 pportunity cost of capital c 4gBregate of carrying and shortage costs — D. amount of spoilage or pilferage ing. working capital, such as inventory, should be . fa pveiuy, 2 When a specified level of safety stock is caried for an item in inven wWerage inventory level for that irem fr decreases by the amount of the safe scock. > ¢ iSone-half the level ofthe safery stocks & Increases by one-half the amount ofthe sf soe Increases by the number of units of the safety is correct for a firm that currently ha, S Coral following statements owing Og inventory thac are SOW higher than to Se 2 tal carrying 41, Which of the costs of carrying st caren @ Current order size 1, aa i ize i than optim: B. Current order size istess C. Perumiccarrying costs ‘are to nigh “t> The optimal order size is currently being used x conducive to switching from a tradir traditional costs are mos -in-time ordering system? Which changes 42. - javentory ordering system t0 just Cost per Purchase Order + Inventory Unit Carrying Cost A. Increasing i B. Decreasing wv C. ~ Decreasing Decreasing D. Increasing Decreasing 43, To determine the reorder point calculations norinally include the ! i v Bordering cost < i C. economic order quantity . D. carrying cost MC sy of purchase transactions, management decides to | for asample of che company’s producs. 14. To evaluate the efficiency management would need data fora calculate the economic orde: quantity Yo calculate the economic order quantity; of the following, except the’ A. volume of product sales ws [Link] prices of the products \- } CG. the fixed cost of ordering products. VV ©). volume of producis in inventory _// 5. Pepper Company changed from a traditional manufacturing philosophy © # just-in-time technology. What are the expected effects of this change OF 5 Yercentage oF toval: ase® Pepper's _inventory—turhove ii pper s_ir = er_and inventory as feported on Pepper's balance sheet? ES i Inventory Turnover Inventory Percentage iz pewe Decrease c : ease Increase D. Tage = i, BSR Pease Increase 572 é dit cerms of 3/8, 0/30, what j ne wich ore eT ee etlagit Wil ans ree days alter the invoice is recej mers NS A ye Beh dlay isthe customer's deco Payment decision date? B. Anytime during the period, 8th to the oa A The 30th day is the primary decision date, mon SOUTCES of short-term financing ; serecching payables meng ince it. ois jesuing bonds 49. B. mrss - reducing inventory al all of che given choices Which of the following cash management techniques ( focuses on cash disbursements? A. Lockbox system B. Preauthorized checks | Zero-balance account g Depository transfer checks Roar Company has current assets of 74,000,000 and currene liabilities of 3,006,000. Which of the following transactions would increase its working » capital? A. Prepayment of 50,009 of next year's rent. B. | Refinancing P500,000 of short cerm debe with long-term debe. C. Acquisition of land valued at Pi inllion by isuing new common stock. D. Purchase of P50,000 marketable secures for Tiger, inc. has current ratio of 0.95 js 0 1.00. Which of the following would taise the company’s current sae cS, ie 25 fone ree mnt ©. Collection of aocounes recite D. Declaration of cash divi PROBLEMS i. i 1 . . od of 60 a any nas an inventory conversion peri siti: Laake Company ia 45 days, and a payments cycle of 30 days. waste coor the firm's cash conversion cycle? Whee en A. 90 days B. 75 days C. 54 days D. 105 days = varitan Supplies, Inc. lus PS million in inventory and P2 m Sait ctvables Its average daily sales are P 100,000, The company ha million in accounts payable. Its average daily’ pur s are P50,000, Whar the length of the company’s inventory conversion periods A. 50days 7 B. 90 days . C. 120 days D. 46 days ve lase question, what is the length of che compsm's Using the information in cash conversion period? 50 days 20 days 30 days Bi 40 days Oop Julia Company bas PS million of average inventory and sales of P30 million, Using a 365-day year, calculate the fizm’s inventory conversion period. A. 30.25 days, B, 45.00 days £. 60.83 days D. 72.44 days ae the expected annual savings from a lock-box system thac colle 20 ‘nae pe day averaging P10,000 each and reduces mailing and processing © Pe LS days, respectively, if che annual interest is 5 percent? - P20,000 BE Co P4id.44 D. P2,000 574 | ppc. has @ eer cash Tequirement OF 9 ge gil foemly. Simile has « SPPOREUNty a jy 25000 Which ate 4, PP Toe COMPANY SPEDE, On the sreaye pap money at 24g ig che optimal cash conversion sing? teen what! 00 . 60,01 55,000 & 45,100 p, P72;500 wman Products has received Proposals from wot system to speed up receipts, Newman yore per day averaging PL B00 cach, and j 2 iS Cost of short. x year. Assuming, thar all proposals will Ploduce equivalene rane ~ and wing 2 360-day year, which one of the following pre is eae Newman? = ~~~ °PORS i opel A. AP0.50 tee per check yy 3, A fee of 0.03% of the amount collected Bh ore C. Aflat fee of P125,000 per year (sy D. A compensating balance of P1,75¢,000 2 go2 — Hyperbole Corporation estimates its total annual cash dis ens of 93,251,250 which are to be Paid uniformly. Hyperbole has the opporanie et annum. The company spends, on che average, conversion to marketable securities and vice versa. to invest the money at 9% p P25 for every cash What is the opportunity cost of keeping cash inthe bank accoune? A. P3,825.00 ary ® P1,912.50 © P4,190.00 DP tees E wsion period of 60 deys. 2 The Camp Company has an inventor os pave payment period of $5 Gaable conversion period of 30 days and 2 pam rn ey cons of YS. The Camp's variable cost ratio is 60 per ; camp is 12%. 800,000. The current cos of capital for Cam ae all sales are credie, "PComp's annual sales are 3,375,000, races 360 days year? an tims carrying cost on agcounts 00 : Wee \. P2gi.a50 cad 27590 y/A2¢-x ee B. PI68,750 cer 20,250 D. P 56,259 What is the inventory period for a fiem wich an annual cost of ys What ee pres million in average inventory, and + cah convention 75 days? = A. 6.56 days B. 18.75 days C. 52.60 days ) 57.50 days jock-box system thar coliec: ricet mailing 200 calculacors a day at 2 com ol m cost. Ir takes the firm i& cus 5 into calculavor. Casi usual credit ter 4 can generally pays its supplier Casie Company turns cal calculstor for materials and variable convel ro convert saw mater to! ith Customers is 30 days, and the days. If che foregoing cycles are constant, what amount of working rapial sus Casie Cofapany finance? @ P1,400,000 B. 2,406,000 €. P. 900,000 D. P1,800,000 Caja Company sells on terms 3/10, net 30. Total sales for the yet sstomers pay on the renth ft ree 2900,000. Forty, percent of the ci discounts; the other 60 percent pay, on average, What is the average amount of receivables? A. P70,000 ‘ ® 77,500 \oF C. 77,200 D. P67.5¢0 45 days after che’ 576 Question Nos, 14 trough "6 are 5 ‘d ase, : on Sonazt Company is con, ee the Polling dary 30 in order 10 speed Collection, aging is Credit term, ake the 2 percene aiscoun, Uy ler th, 7esent, 49 Perceny vot GB net 59 LO ny - 10 50 percent. Rega a MW term, dig es 4 cwtome, discount are expected to a Set 2 5, lof be nannes ane pete es change does not involye 4 relg st expecied £0 rise aboye 5», 5 : year accounts receivable i 9 pentae end aoe te the interest rate PET ye 0 id. . What are th © days sales 5 credit Paley? SS standing (050 befoce and after the change of A. 27.0 days and 22.5 iy -5 days, respective B. 22.5 days and 270d, ; respectively C. 22.5 days and 21.5 days, respectively B. 21.5 days and 295 days respectively 15. The incremental Cattying cost on receivable is A. P 843.75 B. P8,889.00 C. P 643.75 D. 6,667.00 16. The incremental after tax profit from the change in credit terms is 8 68,493 B. 65,640 C. P60,615 D. P57,615< al sales of P2,500,000. Its average Company has annul 0.00. Is cage TS pits le feta, esa Sod clon arg eocing ah cent of total sles and the whey ad wo ned 19 ofl ls ere a = peed vould Be Vsihibbose ae 15 pereent of is | average collection ld li Spt | Bend P00 ohne he cost of ar pete at 360 days per year. ys 577 18. 21, What would be the decrease in inves ii iced ies Whee ase in investment in recivables if che chang: wag A. P 9,688 B. P 12,988 C. P 96,875 D. P129,975 Escape Company regularly pays its accounts payable cn the tench de enjoys the 2 percent cash discount, term: 2/16, net 30. Because of an eat 24 ‘one supplier's invoice is not paid within th une period, Whitt annual cost of that incidenc of paying an invoice on G23" day, insieay oe tenth day? Use 360 days a year. py O20 OF the 36.73% Ul Qs x 390/70 - 34.35 PD. 2.04% Escope Company regularly pays its accounts payable on the tenth day a 1 of paying an invoice on 0 2 yeat 1) x 30102 FDA 20. Onethind of she mers pay om day 29. The rate of Mercade offers iss customers credit cerms of 5/19, customers take the cash discount and the remaining On average, 20 units are sold per day, priced at P10,000 each. sales is uniform throughout che year. Using a 360-day year, the company has days’ sales outstanding in accounts receivable, to the nearest full day, of = are 104.33. 33 ¥ UOlH4). B soar Poe py SS en caneab budgeted sales for the coming year are P40,500,0! which 80% are expected to be credit sales at terms of 0/30. Palit 20% yy 00 of * that a proposed relaxation of credit standards will increase credit sales b ‘ a3 and increase the average collection period from 30 days to 40 days. i 578 i. a 360-day year, the Proposed relaxation of credie to expected increase in the ave; Standards wilt ARC accounts rece Will resule j A. P 540,600 SE ACCONNS receivable balance ay =a B. P 900,000 C. P2,700,600 339 O. P1,620,000 ) Projected sales would be 5 if the proposed new it implemented. The firm’s short-term interes ie is 10%, re akin ne coming year are P5Q) million, = Assuming a 360-day year, calculate the peso impact On accounts receivable this proposed change in credit Policy. g i a = P3,819,445, decrease B P3333, 334 decrease c P6,500,000 decrease D. P18,749,778 increase A company enters into an agreeme eat with a firm who will factor the weitbany’s accounts receivable.” ‘The face agrees to buy the company's s which average P100,000per month and have an Petiod of 30 days. ‘The factor will vat |. mpany estimates Hie would Save P18,000 in collection expenses over the year. Fees and interest are not deducted ini advance Assuming a 360-day year, what is the annual cost oF financing? A. 10.0% wekoe B. 14.0% wee oon: UK CS, 16.0% 83k DB 17.5% a ae ¥ 3 ion is ide credit terms of 3/[Link] 45. The firm doormat So - Using a 365-day year, what is the nominal annual cost of not taking difSune? A. 18.2% 02 BR 21.71% 579 Y 60-day year» the proposed relaxation of credi a3 7 to standards wil] ; i ¢ in the average ace i MUU result in a ected increase in ge accounts receivable bal n op p 540,000 : fanice of " p 900,000 ee 2,700,000 239 @. P1.620,000 Acompany plans to tighten its credie policy. * average number of days in collection from 75 edit sales to total revenue from 70%, projected sales would be 5% less if implemented. The firm’s short- the coming year are P50 million. The new policy will decrease the to 50 days and reduce the ratio of £9 60%. The company estimates chat the proposed new credit policy were term interest cost is 10%. Projected sales for Assuming a 360-day year, calculate the peso impact on accounts receivable of this proposed change in credit policy. A. P3,819,445 decrease B. P3,333,334 decrease €. P6,500,000 decrease D. P18,749,778 increase ent with 2 firm who will factor the A company enters into an agreement with 2 Ss oe co company’s accounts receivable. The factor ase vo bar. be caret receivables, which average P100, 000 per ae dave sn . : “il divas < Patil oF 30. days a Ove and charge a fe of 20 on all receivables receivables at an annual rate of 10% and tee 3 0 oe ay kd - purchased. The contioller of che company estimares Gir HE OMPANY NO save P18,000 in collection expenses over the year. me deducted iri advance. ee. at is the annual cost of financing? - Assuming a 360-day year, what is wt A. 10.0% ee ate B. 14.0% Se C, 16.0% . Se Bi 17.5% fe * 3/USvnec 45. The P. + Corporation is offered trade eed me of; a ne deg aramount Se ac end'l p afc 7d does nor take advantage ef a ea * Mannual cost of not taking digo Using a 365-day year 42 A. 18.2% BR 21.71% 25. 27. C. 23.48% D. 26.45% What is the economic order quantizy for the following j sells 32,000 bags of premium sugar per year. The cont on 2 Policy firm experiences a carrying cost of P0.80 per bag. Pet order is Pagp, Mfg A. 2,000 bags We the B. 4,000 bags C. 8,000 bags D. 16,060 bags Marsman Co. has determined the following for a piven year: Ecouomic order quantity (standard order size) 5,000 uni Total cost to place purchase orders for the yexr P4006 Cost to place one p > 160 Cost to carry one unit for one year PrP 4 What is Marsman’s estimated anual usage in units? A. 13,606,000 2,000,008 40k | 002 sv00 C.. 500,000 S188) YspdO= I DB. 1,560,000 3 BIBO Company is distributor of videotapes. Pirate Mart is 2 local x outlet which sells blank and recorded videos. Pirate Mast purchases from BEBO Company at P300.00 per rape; tapes are shipped in packages 26. BIBO Company pays all incoming freight, and Pirate Mart dees inspect the tapes due tc BIBO Company's reputation. for high qui Annual demand is 194,000 rapes at a rate of 4,000 tapes per week: Pi Mart earns 20% oa its cash investments. The purchase-order lead time is weeks. The following cost dara are available: Relevant ordering costs per purchase order Carrying costs per pachage per year Relevant insurance, materials handling. breakage, etc., per year 2 P80 3 2 What is the required annual return on investment pet package A. P6,000 B. P 250 . ° 28. 30. C. P1,200 D. P 600 For Raw Material L12, a compan . P y mail Its average inventory (taking into aber de . sey stock of 5,009 pounde What is the apparent order quantiry? SNS stock) is 12.508 pound AL 18,000 Ibs. B. 6,000 Ibs. C. 14,000 ibs, D. 24,000 Ibs. Paeng Company uses the EOQ model for invento an annual demand of 50,000 units for Part number 6702 znd has computed optimal lot size of 6,250 units, Per-unit carrying costs and stockour cons oe [Link] P4, respectively. The following data have heen gathered in an acer ry control. The company has to determine an appropriate sefety stock level: Units Shore Because of Excess Nusnber of Times Shor Demand during the Lead in the last 40 Reorder Time Period Gq i008 7 200 10 300 22 UI rn, 400 3, oe ‘What is the optimal safery stock ievel? A. 100 units ‘B. 300 units C. 200 units D. 406 units Durable Furninure Company uses about 200000 ran at 2 pare fb each year, The fabric costs P25 per yard. The current oniet Be oe arm baa i Sememental carting costs are about PO.75 per yard, much si opportunity cost of the funds tied up in inventory. ts ee ‘ch total annual costs are associated with the current inventory low much t = olicy? 2 “ee B 719,550 fo =O B) P18,750 ~ 30 C. P38,300 = FIA D. P62,500 \ } > >a ; 581 > “ae ee ee Se 31. 7 33. 34. “35. Nara Company is considering a awicch to level prod: Nari car undet level production and fee tax cst mould decline Ween tie inventory would increase from P1,000,000 to PI "00.000. Non 03000 have vo nance the extra inventory at a cost of 10.5 percent. re eon wire cg the maximum interest cate shat snakes level production feuibie A. 7.00 percent : ae B. 5.83 percent Fok [Mo> 675% C. 8.75 percent D. 10.00 percent tea firm is piven a trade credit cerms of 2/10, net 3), then the cos to she Frm failing to take the discount is: A. 2.0%. B. 30.0%. GD 36.7% D. 10.0%. ‘The cost of discounts missed on credit rerms of 2/40, 1/59 is A. 2.0 peecent 8. 3. 14.9 percent C. 32.4 percent D. 21.2 percent An inyoice of a P100,900 purchase has credic terms of H/LG, ni! for 8 percent can be arranged at any time, When should the customer py “he invoice? A. Pay on the 1*. @. Pay on the 10” C. Pay on the 40” 1D. Pay on the 60* Every 15 days a company receives P10,000 worth of raw m: suppliers. The credit reems for these purchases are 2/10, net 30, 4 is made on the 30th day after each delivery. Thus, the company a l-year bank loan for P9,250 (98% of the invoice amount). If the effectiv® annual interest rate on this loan is 12%, what will be the net peo savings over the year by borrowing and then taking the discount on the materials? 7 P3,624 7 . -PES t Si panoo v4 D. P1,224 arcuv -——" 582 36. 3a. A comy Sa 18 payable of p: : has within 15 days, ner 30 nape ang ofS million with tems of 29% discount at an annual rate of 1295, 7) ¢-/15 Met 30). 11 can borrow funds from a bank FEVENUES 10 cover the pron ot Wait until the 30th day when ie will reucive discount period in oie: HF it borcows funds on the law day of ue A. P 51,000 leg to obrain the discount, its toval cost will be 1 B. P100,000 les, C..P 75,500 less D. P 24,500 more accoun; Ret 30 Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high selli ing products for the coming year. {ts supplier quoted a price of P25 per zipper. Diesel plauned to purchase 7,500 units per month but its supplier could not guarantee this delivery schedule, In order to ensure availability of these zippers, Diesel is considering the purchase of all these ] 99,000 units on January 1. Assuming Diesel can invest cash at 12%, che company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is A. P127,500 B. P135,000 % ' C.° P123,759 D. P264,006 You plan to borrow P10,000 from your bank, which offers to iend you che money at a 10 percent nominal, or stated, rate on 2 one-year loan. What is che effective interest rate if the loan is a discount loan? A. 10.00% B. LL119%° C. 12.45% D. 14.56% oe bortowed frém a bank an amount of 1,000,000. The bank Reras Com. ated vate in an adc-on arrangement, payable in 12 equal cnr cle A. 22.15% B. 24.00% C. 25.05% D. 12.70% 40. 41. 42. 43. 44. effective ratc of a 15% discounted loan for 50 days, 200,006, What is the rnsacing balance? Assume 366 days per year. with 10% compe! A. 20.0% B. 15.0% Cc. 174% D. 22.2% needs to borrow P300,000 for the next 6 moachs. The compar redie with a bank that aliows the company to borrow funds wich 1096 interest rate subject to a 25% of loan compensating balance. Currendy, Cayler Inc. has no funds on deposit with the bank and will need the lon cover the compensating balance as well 2s their other financing needs Caylor Inc. nas a line of How inuch will Caylor Inc. need to borrow?’ A. ?330,000 B. P400,000 C. P225,000 D. P375,000 Using Caylor Hae. in #42, whar will be the annual percentage rate, of APR. 4 this financing? A. [Link]% B. 12.12% C. 10.67% S D. 13.33% jon in No. 41, whac is the annual percentage Ft for this Using the informat cazest ig discounted? finincing scheme assuming the in A. 14.29% B. 13.98% C 16.67% DB. 20.00% ‘The Premiere Gompany obtained a short-term bank loan for P1.000,000 4 an annual interest rate 12%. As a condition of che loan, Premiere is re4b! to maintain 2 compensating balance of P300,000 in its checking seni The checking account earns interest at an annual rate of 34. Premiere Wy otherwise maintain only P100,000 in its checking acccust for transaction Burpocess Premiere’s effective interest costs of the loan is . 12.00% ’ B. 14.25% 584 46. 47. 48. gneP C. 16.30% D. 15.86% The Peninsula Commercial following loan proposal: Stated interest rate of 10% ON a one-year di e Le of the loan as compensating balance a aa anecties accoun to be maintained by Island Corporation with Peninsula Comunercial Fak Bank and Idand Corporation agreed wo the The loan requires a net proceeds of P15 million, What is the i : J 5S million. principal ou i] bt for as pari of the loan agreement? 2,000,000 P 1,764,706 |. P1,125,000 The Clay Company has a revolving line of credie of P300,000 with a one-year maturity. ‘The rerms call for a 6% interest rare and a ¥ percent commitment fee on the unused portion of the credit lie. ‘The average Joan balance during the year was P100,000. The annual cos: ofthis financing arrangement is A. P6000 B. P6500 Cc. P7,000 D. P7,500 1, Ricablanca Corporation received a 300,000 line of credit at an mn ESQ Bank and drew down the entire amount on Fabeanry 1. The line of credic agreement requires that an amount equal co 159% ‘of the loan be deposited into a compensaning balance account. Whar is the “effective annwal cost of credit for this loan arrangement? A. 11,00% B. 12.00% C. 12.94% D. 14.12% Feho borrowed P100,000 from a bank on a one-year 8% term loan, with ‘What is the effective annual interest on the On January interest rate of 12% fro: jneerest compounded quarterly. Joan? 8% 1%, 51. C. 942% D. 19.41% The Friendly Bank offers AB United a P200,000 line of credie with | se O2.25 percent per quarter. The credit line also requires that 2 pero ee erased portion of the credit line be deposited im a non-imeren bewtan account as a compensating balance. AB United's short-term inveran beating paying 1.5 percent per quarter. Assume any fands borrowed or inv ents are. compound interest. rested use Whar is the effective ennval interest rate on this arrangement if the fine of credit goes unused ail yeas? 2 ae tinea A. 5.92% B. 6.00% C. 6.08% D. 6.14% New Town Bank offers 2 25,000 line of credit. wich an interest rate of 2.5 ‘The loan agieement also requires that 5 percent of te posited in a non interest bee im investments are currently pz nds borrowed or invested use percent per quarter. on of the credit ling be de Short ssume any peicent per quarter. interest. What is the effeccive annua! interest rate on the line of credit if a customer borrows the entire P25,000 for one year? - A 6.56% B. 8.98% C.. 9.87% D. 10.38% Juno Industrial Supply has a P250;000 line of credit at a9 percent It The loan agreement requires a 3 percent compensating balance, on the total amount borrowed, and which will be held in @ account. Whar is the effective interest rate if the firm borrows Pil fine of credit for one year? A. 8.67% : B. 8.78% C._ 9.03% D. 9.28% 52. 55. Mahogany Company has ; are to be paid anise hs annual cash requirement of 6,675 “8 percent per anuum: ‘The enge has the opporcuniey co inva, 3.00 which . © Com conversion to cash and vice pase spends, on the ave What is the optimal conversion size for cash? A. 58,457 B. P60,000 C.. P82,670 D. P41,335 If the firm borrows P185,000 at 8 percent on a one-year discounted loan, whut is the effective interest rate? A. 8.00) percent 5, 8.70 percent C.. 9.07 percent _ D. 7.4} percent we rate if Shsiom Company borrows from is imnared anaual effect! 2 What is che. estim: term of 5 percent add-on snterest, Money Finance Company 200,000 at a payable monthly for one year? A. 476% B. 5.26% Cc. 9.23% eae borrows P200,000 on a 6 percent f 0) K n What is the effective te if the corn ang balance for 3 months? discounted toan with a 10 percent compe A. 7.14 percent B. 6.00 percent C. 6.78 percen® D. 6.44 percent 0 invest the mo; mney at Tage, PAS for every cach THEORIES SBoSoOsoaReog PROBLEMS 1B 2A 3D 40 SA 6B 7.D 8B 2C 10.D dl. 12. 13. 4, ib. i6, I7. 8. 19. 20: IC 12A 13.8 14A ISA 164 I7C 184 19.A 20.C ~ WORKING caPrryy ORR oR ee by MANAGENY, Suegeted Answers @ Slaton, a : 3 D BL C D 532. 2.8 3D 24€ dA 25. B 5A 26D 36.D 28 UB 28D 38 8B 2.8 He 50. D 40D BIC ag mae 8 23D BB AE 2B 3 a 458 a HC me 268 ye 7 27.0 or on lo yy BP 29.8 00 0? 30A WA 25 WA HD 6 C GB TA BO 928 508 SLD RE 3B SAC SEC SOLUTIONS: iE: Answer: B Cash Conversion Cycle = Ave. collection period + Inven Accounts Payable payment days tory ore days 4, Invensory sycle in days Si Average collection period i‘ ie Operasing cycle i ios Fl Deduct Accounts payoble payment days apy - Lada: Cash conversion cycle 2 Axswer: A Annual sales 360 days x tory turnover S6MISM Invent Inventory conversion poriad 3607.2 50.0 days B Answer: D Invenzory conversion } 30.5 day: “Average collection period (5110.10) 20.0 days Operating cycle 760 dey Les. Ave. Accounts: Payable payrnent we Days (1.564/0.5M) 30.0 days 46.8 top Cash conversion period 4 Answer: € either dividing the avenge be calculated by by the inventory The inventory conversion period can inventory by the average daily sales or by dividing the days’ year nuernover. Average daily sales (30M/365) 62,191.78 Inveniory conversion period: SMI82,191.78 60.83 dys Answer: A 20% 720,000 3 4 days » 595 : 140,009 Answer: B Optimal Cash Conversion Size = Ona Answer: D 0 The alternative of maintainin, i 1G 4 com; i dis opportunity cost is (P1.750,099 , ie vend FP 1,750,000 is the least co thy 120 Der annum, The costs for other proposals are higher than P122, 500 a: fllo Choice A: 360 days x 700 checks x PO.50 Choice B: 0.0003 x 700 checks x P1800 x 360 Ghoice C: Flat foe Answer: B OTS: V2.x P3,251,250x P25 «0.09 ~ Pé2,500 Opportunity cost: P42,500+2x0.09 1.91250 Answer: C Average AR 3,375,0001360 x 30 days Average investment: 281,250 x 0.60 Carrying cost: 168,750 x 0.12 Answer: D Inventory turnover: Coit of guods soldAve. Inventory (BM/.5M) Inventory conversion period (360 days/5.33) 591 ?126,000 136,080 125,000 281,250 168,750 20.250 S.33x O25 dep dl. 12. 13. 14. 15. Answer: © : Reduction in cash float (2.5 + 1.5) Addiviona! free cash (4 days x 150 x P500) ‘Annual savings (P300,900 x 0.07) Answer: A / ‘Daily working capital required: 200 x 250 “Total working capital needed: 28 days x 50,000 ECC = 184 30-20 Answer: B DSO = (4x10) » (60 x 45) Average AR: 960,000/360x31 days Answer: A Days’ sales outsranding Old policy: (4x15) + (32 BO) +3 x 10) New policy (5x 10) + (25x30) + (25x 40) Answer: A Average receivable ws New policy: 2,6MI/360 x 22.5 Old policy: 2.0M/360 x 27. Incremental Accounts Receivable Incremental carrying cost on receivable 42,500 x 0.75 x 0.09 4.0 days 300,000 Ltl.000 50,000 380.900 28 days 31 days £72,300 27.0 days | 22.5 dass 162,500 150,000 £2,300 8 Answer: A Incremental sales bites cost (75 x 600,000) 600,000 ditional bad debts 6 7 (450,000) Additional carrying cost (600.000 « 2%) ( 12,000) Addivional discount (844) (2,600,000 x.5 x 03) ~(2,000,0 ; Uefore tax increase in insane Ot t* 2) (23.009) Less tax U4,156 Incremental income % aa Answer: C Chanige in average accounts receivables: Lined 2. Planned: 2.200,900/360%30 183,333 Present: 2,500, 000/350x45 < 312,500 Decrease in AR balance 129.667. Variable cost ratio 75% Decrease in investment in AR 26,875 Answer: A Approximate annual cost: 2/98 x 360/20 36.73% Answer: A 73.44% Approximate annual cost: 2/98 x 360HG Answer: C caleulated through computing the weighted gorge Th i jod can be ‘he average collection period can Seen son the 0" de of the collection pattern. All customers who avail the last day of the discount period. Payment within the discount period (1/3 x 10) Payment without any discount (213% 20) Average collection period 2i. 23. 24, Answer: D Credit sale = 40,500,600 x 80% = 32,400,000 Increased credit sales: 32,400,000 x 1.2 = 38,880,000 New Average AR 38,880,000/360 x 40 = 4,320,000 Old Average AR 32,400,009/360 x 30 = 2,700,000 Increase in Average AR _ 1L820,900 Answer: B Arinsal credit sales + Days’ year x DSO Average collection period under each credit policy Present: 0.7 x P30M + 360 x 75 P7.231,667 Proposed: 0.6.x 8.95 «P5OM + 360 x 50 it Decrease in Accinants receivable balance Answer: D The anvual effecvive cost of shis financing scheme can be calculated by relating the annual net cost 30 the net proceeds, The annual interese ts based on the average bow balance of P80,000. The seevice fee 's 2% and on the aveusge, there are 12 trancaciom in one year. ‘ The anriual net costs consist of. Interest (100,000 x 0.80 x 0.10 Annual service fee 100,060 x 0.02 x 12 months Total interest and service fee Less savings on collection expenses Net annual cost , Annual effective rare 14,000 + 80,000 Answer: B The discount that the entity foregces isa cost of trade financing (apporenily the company paid the accouns om the 154 day, it should have pes ey 97 eet invoice price. The 3 percent discount that the company forfeis is the cost of 2. 2%: ' 100-unit level as. safety #0 wp Jlier’s credit during the non-fre Sins period). The cost per ered op sat 01 thy a ; Couns Dt 197 op 3 yyy" eanding ey thy annual vost of foregoing the discount j, I bs 3.093 , 46559 3 Mo ie or 21,7) lence, the Answer: B 7! ponent FOQ= V2 x 32,000x 200.8 Answer: B 1000 bap Number of orders made 40,000/i00 : 400 Annual requirement 400 x 5,000 2.000.000 Answer: C Investment in I package (20 x P300} 76.000 Required annual return: P6,000 x 0.2 1.200 Answer: C Average inventory units 12,000 ~ Less safety waits aR Average inventory based on BOQ ALY GQ Order size 7,000 x 2 * uae Answer: B Jui ot j , sel har gives the we The optimal safety srock level repreen® - vas oe a mpuaton the oe costs and additional carrying (OE “joie level * combined costs is P3340, corresponding suring probabil demande semper DS Pi pased on GMP i js 200. inst compute the stockout Costs ifthe ceddisional demal Stockout of 100 units. 30. 31. 33. (190 x 32° x 0.25) + (200 x 32 x 0.35) 100: + (300 x 32x 0.20}-+ (100 x 9) 200: (100 x 32 x 0.35) + (200x 32x 0.20) + (200 x 9) 300: (100 .x 31 x 0.20) + (300 x 9) 400: (400 x 9) srockous per unit x 8 orders per year. Answer: A Ordering costs 4x F200 Carrying costs (50,000 ~ 2x Tai 0.75 Answer: © Answer: © b= (2 +98) x (360 +20) The solution assurnes thet she conip: Answer: B 160 one maust PUY the cash discount Wish credit terms of 2/10, net payment (anvoice price minus J she 60th day. The anni paying the loan on percent. = b= 2198 x 365150 any foregoes the discount only oi an she 1th day choosing 5 1) at the rate of 2 pereens Je tized vate of foregoing whe disco 800 12530 ale 362% during she Ye" punt i 4 1428 #6 BS. 36. 37. 38. Answer: B The cust of discounts missed ; charges. The company sha, Be 12.35 shi 4m 0 re tha Jor the next 30 days (pay off she Bakken tg 10:b, pay ie 8 percent that te bend thy, ice, and Cost of foregoing discount: 41 +99) x (36, finance a1 8% 4 © 74 X (360 + 39) Answer: A Purchase discount 10, ),000 Interest on borrawed money ae 4 _ ae wrchases Savings 4,800 LIE i 4824 Number of purchases: 360 days/15-day interval 200 ‘Answer: C Discount 5M x 0.02 Interest (SM x 0.98 x 0.12) x 15/360 vans Savings : x 500 2 250 Answer: C Number of units t0 be purchased in advance: 90,000 — 7,500 62,500 Average investments in working capital: 82,500 x 0.5" x P25 1,031,250 123.7: Opportunity cost 1,031,250x 0. 2 123050 "The average investment is one-half (82,500 + 0) +2 Answer: B y LLL & = 10+ (100-10) 39. 40. 41. 42. Answer: A Interest for L year IM x 17% 120,000 Average Principal: (1M + (1M/12)] * 2 541,667 120,000/541,667 ga Estimated effective rate “Alternative solution for approxiinate (2x No. of payments x Interest) + (2x 12 x P120,090) - (13 » PIM) Ansier> © ytovest: 200,000 x 0.25 x IOL36O Principal 3 Less Discount Compensating balance Net proceeds Effective rate: (7, 5001172, 50) x BENG Answer: B “The net proceeds of the loan, P3000, rep The interest is assumed to be payable, toge months, The company needs to apply P400,000, Answer: D ‘The annual interest ra 13.33 percent, calculated as follows: (400,000 » 0.1 x 0.5} + 300,000 x 2 periods. Note that if the interest is payable 1 i Fike loan is upon maturity, even if the serm of the iaan is» than 1 year, the calculation can be simplified by just dividing se 2 based on the amount of principal by the net proceeds, 598 affective rate: Wi 4 No. of payments) x Prencipal] resents 75 percent of the laa applied fore ther with the principal, at she se for thit loan, with the interest payable in zt mioniiss 22.15% 200,989 ( 7,590) (20,066; 122,508 Ww end of calculated as (300.000 ~ 9.75). shorter snued insert BOA (400,000 x 0.1 ~ 300,900 = 13.3390). 46. 7. Answer: 4 jaasmuch that the loan of P400,000 ig Aiscounted, thy ther by the amourit of interest for six months, (a0. 004 ee 401 new decreeed ‘rie annual affective interest should be calculated tn deraiy aad ) “7 F280 009 alternative solution in the breceding anestion, 10 similar to the Interest rate per 6 month; 20,000/280, 000 7.1429% Annualized rate: 2X 7.1429 x 2 periods 14.29% Answer: B Interest expense 1M x 0.12 120 {es interest income on additional CA balance _ (206.000 x 0.03) 6000 Net interest cost 4.000 Effective interest rate 114,000/(1,000,900 — 200,000) 14.25% Ariswer; B Net proceeds in pesos 1,500,000 Divided by net proceeds percentage 1.00-0.1-0.15 9.75 Principal amount 2.000.000 Answer: C The total cost of the loan borrowing should be the sum of annual interest on average loan balance, (P100,000 x 9.96), P6,000 and the commitment fee on unused portion of the tredit dine, (200,000 x 0. 605), Pi,606. — Answer: D is ‘cash P300,000 The effective cost of this financing scheme it based on ae a of gas 15 percent compensating balance. released to the Rica ore Consens Thee of interest so be paid by Ricablanca is P36,000 (0.12 x P300,000) “etive rare is 14, 12 percent (36,000 + 255,000). 48. G9. 50. Answer: B The compounded interest rate ts calculated using the following formula: A+ Where: i = nominal monthly or quarterly rate n = number of compounding periods The nominal quarterly rate ts 8% + 4 quarters or 2%, Annual effective rate: 1.02'~ 1 8.24% Answer: D The shorter calculation uses the formula in compounding the periodic fallowws: ominal rate gp +i"); therefore, the rate = 1.0154 ~ 1 5.14% 4 detailed computation can be made as follows: Principal, Beginning - Quarterly Interest a: N, ok Ou Qi aie rest at few Amount, Endoff i 200,600 3,000 2 203,000 3,045 3 206,045 3,091 4 209,136 3.137 Effective interest rate: (212,237 ~ 200,000) + 200,000 or 6.14% Answer: D The solution would not consider any opportunity cest because a depo:tt i bearing. account is only required in case there is unused portion of the liv line is fully used during the year. The 2.5 percent quarterly rate should be compounded annually as follows: (1 + 0.025) —1 10.38 percent 600 5. Answer: D Interest based on actual loan (160, 000 W000 x 0.09) Net proceeds (P160,000 x 0,97) 4.400 Effective rate: 14,400/155,200 155,206 Answer: C 244% Optimal Conversion Size = Square root of (2 x 6,075,000 x 45 - 03) Answer: B 6048 8/(100 - 8) s : 8.70% Answer: C Bfechive rate = 51{100 + (100112))2 : : 92% Answer: C Interest (discount) 0.06 x 200,000112 x 3 3,000 Nes proceeds: (200,000 x 0.90} - 3,000 17,000 Interest rate (effective) 3,9001177,000 1263 sam j Sr 4

You might also like