Finman Working Capital

MANAGEMENT ADVISORY SERVICES Working Capital Management
WORKING CAPITAL MANAGEMENT D. Short-term notes payables are retired with cash. CMA 0697
Theories: 7. Tiger, Inc. has current ratio of 0.95 is to 1.00. Which of the following would raise the
company’s current ratio?
Working Capital Policy A. Declaration of cash dividend.
1. Net working capital is the difference between B. Payment of accounts payable.
A. Current assets and current liabilities C. Shareholders investment and cash C. Collection of accounts receivable
B. Fixed asset and current liabilities D. Total assets and total liabilities CMA 0692 D. Purchase merchandise in a 2/10, net 30 open account. Bobadilla
2. Working capital is important for all the following reasons except that it: 8. Which one of the following transactions would increase the current ratio and decrease net
A. affects a firm’s liquidity and profitability. profit?
B. consists of a large portion of a firm’s total assets. A. A stock dividend is declared.
C. consists of those assets that are most manageable. B. Vacant land is sold for less than the net book value.
D. consumes a small portion of the financial manager’s time. Cabrera C. An income tax payment due from the previous year is paid. CMA 0697
D. Uncollectible accounts receivable are written off against the allowance account.
3. Which of the following statements is correct?
A. Working capital is a measure of long-term solvency 9. If a firm increases its cash balance by issuing additional shares of common stock, working
B. The stockholder’s equity is a major component of working capital Roque 2013 capital
C. Net working capital is the difference between quick assets and current liabilities. A. increases and the current ratio increases.
D. Net working capital is the difference between current assets and current liabilities. B. increases and the current ratio decreases.
C. increases and the current ratio remain unchanged.
4. The longer the firm’s accounts payable period, the: D. remains unchanged and the current ratio remains unchanged. CMA*
A. Shorter the firm’s inventory period.
B. Longer the firm’s cash conversion period. 10. Working capital management involves investment and financing decisions related to:
C. Less the firm must invest in working capital A. sales and credit.
D. More the delay in the accounts receivable period. Bobadilla B. current assets and capital structure.
C. current assets and current liabilities.
5. Starrs has current assets of 300,000 and current liabilities of 200,000. Starrs could increase D. plant and equipment and current liabilities. Bobadilla
it's working capital by the
A. Prepayment of 50,000 of next year's rent 11. The primary objective of working capital management is to:
B. Refinancing of 50,000 of short-term debt with long -term debt A. achieve a balance between risk and return.
C. Purchase of 50,000 of financial assets held for trading for cash B. maximize the company’s total current assets.
D. Acquisition of land valued at 50,000 through the issuance of common shares CMA 1293 C. minimize the company’s total current liabilities.
D. balance the amount of current assets and current liabilities. Roque 2013
6. Which one of the following transactions does not change the current ratio and does not
change the total current assets? 12. Which of the following assumptions does not underlie risk-return tradeoffs in managing
A. A cash dividend is declared. working capital?
B. A fully depreciated asset is sold for cash. A. Fixed assets remain constant.
C. A cash advance is made to a divisional office. B. The yield curve is downward sloping.
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C. Current assets are less profitable than fixed assets. B. minimize the amount of short-term financing.
D. Short-term financing is less expensive than long-term financing. Cabrera C. finance fluctuating assets with long-term financing.
D. minimize the amount of funds held in liquid assets. Cabrera
13. Which of the following is incorrect
A. Profitability varies directly with liquidity. 19. Conservative working capital management strategies involve:
B. The greater the risk, the greater is the potential for larger return. A. high risk, high return. C. low risk, low return.
C. More current assets lead to greater liquidity, but yield lower returns. B. low risk, high return. D. moderate risk, moderate return. Cabrera
D. Long-term financing has less liquidity risk than short-term financing, but has a higher
explicit cost, hence lower return. Roque 2011 20. Compared to other firms in the industry, a company that maintains a conservative working
capital policy will tend to have a
14. Which of the following statements is false? A. Higher total asset turnover
A. Liquidity is the ability to convert an asset into cash without significant loss. B. Greater percentage of short-term financing
B. Lengthening the cash cycle increases a firm’s required level of working capital. C. Higher ratio of current assets to fixed assets
C. Working capital management uses only a small portion of the financial manager’s time. D. Greater risk of needing to sell current assets to repay debt RPCPA 0595
D. The goal of working capital management is to maintain the optimal level of net working
capital. Cabrera 21. As a company becomes more conservative in working capital policy, it would tend to have
a(an)
15. Which of the following statement is false? A. Decrease in its acid-test ratio.
A. Net working capital equals working capital less current liabilities. B. Increase in the ratio of current assets to units of output.
B. A firm with a current ratio greater than one has positive net working capital. C. Increase in the ratio of current liabilities to non-current liabilities.
C. Working capital management concerns decisions about all of a firm’s assets. Cabrera D. Increase in funds invested in common stock and a decrease in funds invested in
D. Net working capital is that portion of a firm’s current assets financed with long-term marketable securities. CMA 1296
funds.
22. Temporary working capital supports
16. The optimal level of working capital depends on all of the following factors except the: A. acquisition of capital equipment. C. seasonal peaks. Bobadilla
A. Kind of firm. C. Stability of dividends. B. payment of long term debt. D. the cash needs of the company.
B. Length of the cash cycle. D. Variablity of cash flows.
23. According to the hedging approach, working capital should be financed with:
17. Determining the appropriate level of working capital of the firm requires A. long-term financing. C. short-term and long-term financing.
A. Changing the capital structure and dividend policy of the firm. B. short-term financing. D. spontaneously generated funds. Cabrera
B. Offsetting the profitability of current assets and current liabilities against the probability of
technical insolvency. 24. The hedging approach to financing involves
C. Evaluating the risk associated with various levels of fixed assets and the types of debt A. The use of long-term debt to finance current assets.
used to finance those assets. B. Matching maturities of debt with specific financing needs.
D. Maintaining a high proportion of liquid assets to the total assets in order to maximize the C. The use of short-term debt to finance non-current assets.
return on total investment. RPCPA 0596 D. Issuance of common stocks to raise funds for working capital requirements. Roque 2011
18. A firm following an aggressive working capital strategy would: 25. The financing of the basic level of current assets by issuing commercial paper is inconsistent
A. hold substantial amounts of liquid assets. with
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A. the maximization of shareowners' wealth the former will maximize the return on total assets. Roque 2011
B. the goal of minimizing the cost of debt financing
C. the objective of matching the maturities of assets and liabilities 31. Short-term financing plans with high liquidity have:
D. the expectation that long-term interest rates will decrease the coming year Cabrera A. high return and high risk C. moderate return and moderate risk
B. low profit and low risk D. none of the given choices Bobadilla
26. An advantage of the use of long-term debt as opposed to short-term debt to finance current
assets is 32. Which of the following would increase risk?
A. It is easy to repay A. Raise the level of working capital.
B. It decreases the risk of the firm B. Increase the amount of equity financing.
C. It generally is less costly than short-term debt C. Increase the amount of short-term borrowing.
D. It generally places fewer restrictions on the firm Wiley 2012 D. Decrease the amount of inventory by formulating an effective inventory policy. Bobadilla
27. Financing inventory build-up with long-term debt is an example of 33. When a firm finances long-term assets with short-term sources of funding, it
A. Matching policy. A. Improves the leverage ratio
B. Hedging policy. B. Will have higher interest expense
C. An aggressive working capital policy C. Reduces the risk of cash shortage
D. A conservative working capital policy. Roque 2011 D. Is ignoring the principle of matched maturities Bobadilla
28. In a conservative or relaxed working capital financing policy, 34. The probability of technical insolvency is reduced by:
A. Operations are operated with too much working capital. A. maintaining a high level of liquid assets.
B. Operations are conducted on a minimum amount of working capital. B. financing fluctuating assets with long-term debt.
C. The company is exposed to risk of illiquidity because of low working capital position. C. financing permanent assets with short-term debt.
D. Short term liabilities are used to finance not only temporary current assets, but also part D. both A and B. Cabrera
or all of the permanent current asset requirements. Roque 2011
35. If the firm was to shift P2,000 of current liabilities to long term fund, the firm's net working
29. As a company becomes more conservative with respect to working capital policy, it would capital would____ , the annual cost of financing would _____, and the risk of technical
tend to have a(n) insolvency would____, respectively
A. Increase in the operating cycle. A. decrease, decrease, increase C. increase, decrease, decrease
B. Decrease in the operating cycle. B. decrease, increase, decrease D. increase, increase, decrease
C. Increase in the ratio of current assets to current liabilities.
D. Increase in the ratio of current liabilities to noncurrent liabilities. Bobadilla 36. Zap Company follows an aggressive financing policy in its working capital management while
Zing Corporation follows a conservative financing policy. Which one of the following
30. Which of the following statements is true? statements is correct?
A. Short-term debt is usually more expensive than long-term debt. A. Zap has less liquidity risk while Zing has more liquidity risk.
B. A conservative working capital policy is characterized by higher current ratio and acid- B. Zap has a low current ratio while Zing has a high current ratio.
test ratio. C. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term
C. Determining the appropriate level of working capital for a firm requires changing the debt to total debt.
firm’s capital structure and dividend policy. D. Zap finances short-term assets with long-term debt while Zing finances short-term assets
D. Liquid assets do not ordinarily earn higher returns relative to long-term assets, so holding with short-term debt. Bobadilla
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A. Accounts payable deferral period C. Inventory conversion period

37. Which of the following statements is false? B. Accounts receivable period D. Operating cycle Wiley 2012
A. Using short-term debt to finance permanent assets increases the risk of insolvency.
B. Financing fluctuating current assets with long-term financing is a conservative strategy. 44. As a firm's cash conversion cycle increases, the firm:
C. The term permanent assets refers only to fixed assets such as machinery, buildings, and A. becomes less profitable
equipment. B. incurs more shortage costs
D. Maintaining a high level of current assets in the form of marketable securities reduces C. reduces its accounts payable period
the probability of technical insolvency. Cabrera D. increases its investment in working capital Bobadilla
38. Which of the following statements is true? 45. Ignoring cost and other effects on the firm, which of the following measures would tend to
A. A higher level of working capital increases the firm’s profitability. reduce the cash conversion cycle?
B. Long-term financing is used to finance current assets under the hedging approach. A. Take discounts when offered
C. Technical solvency is the inability of a firm to pay its obligations as they come due. B. Forgo the discounts that are currently being taken
D. The hedging approach is an example of an aggressive working capital management C. Maintain the level of receivables as sales decrease
strategy. Cabrera D. Buy more raw materials to take advantage of price breaks Brigham
39. All of the following statements in regard to working capital are correct except 46. Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?
A. Profitability varies inversely with liquidity. A. Reducing the amount of time the firm takes to pay its supplier.
B. Current liabilities are an important source of financing for small firms. B. Increasing the average days sales outstanding on its accounts receivable. Wiley 2012
C. The hedging approach to financing involves matching maturities of debt with specific C. Adopting a new inventory system that reduces the inventory conversion period.
financing needs. D. Adopting a new inventory system that increases the inventory conversion period.
D. Financing permanent inventory build up with long-term debt is an example of an
aggressive working capital policy CMA 0696 47. If everything else remains constant and a firm increases its cash conversion cycle, its
profitability will likely
Cash & Marketable Securities Management A. Decrease C. Increase if earnings are positive
40. The length of time it takes for the initial cash outflows for goods and services to be realized as B. Increase D. Not be affected Wiley 2012
cash inflows from sales is called
A. Cash conversion cycle C. Product life cycle 48. An increase in sales resulting from an increased cash discount for prompt payment would be
B. Manufacturing cycle D. Vicious cycle Roque 2011 expected to cause a(n):
A. increase in the operating cycle.
41. The length of time between payment for inventory and the collection of cash is referred to as: B. decrease in the cash conversion cycle.
A. cash conversion cycle C. payables deferral period C. increase in the average collection period.
B. operating cycle D. receivables conversion period Bobadilla D. decrease in the purchase discount taken. Cabrera
42. The average length of time a peso is tied up in current asset is called the: 49. An objective of cash management is to
A. cash conversion cycle. C. net working capital. A. Maximize the cash balance to avoid the risk of illiquidity.
B. inventory conversion period. D. receivables conversion period. Bobadilla B. Minimize the cash balance to maximize the return from idle cash.
C. Reserve as much cash as possible for potential investment opportunities. Roque, 2011
43. The length of time between the acquisition of inventory and payment for it is called the D. Invest cash for a return while retaining sufficient liquidity to satisfy future needs.
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50. All of the following are valid reasons for a business to hold cash and marketable securities 56. Which of the following is true about a firm’s float?
except to A. A firm strives to minimize the float for both cash receipts and cash disbursements.
A. maintain a precautionary balance. B. A firm strives to maximize the float for both cash receipts and cash disbursements.
B. satisfy compensating balance requirements. C. A firm strives to maximize the float for cash disbursements and minimize the float for
C. earn maximum returns on investment assets. cash receipts.
D. maintain adequate cash needed for transactions. Cabrera D. A firm strives to maximize the float for cash receipts and minimize the float for cash
disbursements. Wiley 2012
51. The transaction motive for holding cash is the
A. A safety cushion C. Daily operating requirements 57. Which of the following actions would not be consistent with good management?
B. Compensating balance requirements D. None of the given choices Bobadilla A. Minimizes the use of float.
B. Increased synchronization of cash flows.
52. A typical objective sought in the effective management of a company’s cash could be C. Use of checks and drafts in distributing funds.
expressed as follows: D. Maintaining an average cash balance equal to that required as a compensating balance
A. To minimize the corporate investment in the accounts receivable. or that which minimizes total cost. RPCPA 0595
B. To attain that level of profit margin per sales pesos and receivables turnover that
maximizes sales. 58. The following practices will impact the cash flow of the company:
C. To provide the means of paying off accounts when due and thereby helping to maintain 1. Sales personnel are unequivocally responsible for collecting their credit sales
the firm’s credit rating. 2. Sales commissions are based on collected invoices
D. To coordinate the activities of the manufacturing and the marketing areas so that the 3. Statement of accounts receivable are reconciled with customers and regularly sent for
corporation can maximize its profits. Cabrera confirmation
4. Automatic transfer of funds is arranged with banks regarding deposits of branches.
53. A precautionary motive for holding excess cash is Of the above, which will result to a better cash flow?
A. To enable a company to have cash to meet emergencies that may arise periodically A. Statement 4 only C. Statements 1, 3 and 4 only
B. To enable a company to meet the cash demands from the normal flow of business B. Statements 3 and 4 only D. All Statements RPCPA 0594*
activity
C. To enable a company to avail itself of a special inventory purchase before process rise to 59. The collection of accounts receivable can be accelerated by the use of
higher levels. A. a lockbox system C. remittance advices
D. To avoid having to use the various types of lending arrangements available to cover B. bank drafts D. turnaround documents Cabrera
projected cash deficits. RPCPA 0595
60. Which of the following cash management techniques focuses on cash disbursements?
54. The risk in our economy which is typically associated with the holding of cash is referred to as A. Depository transfer checks C. Preauthorized checks
A. business risk. C. market rate risk. B. Lockbox system D. Zero-balance account Bobadilla
B. market risk. D. purchasing power risk. Cabrera
61. A working capital technique that increases the payable float and therefore delays the outflow
55. The difference between the cash balance on the firm's books and the balance shown on the of cash is
bank statement is called: A. A draft C. Concentration banking CMA 1296
A. a float C. the compensating balance B. A lockbox system D. Electronic Data Interchange (EDI)
B. a safety cushion D. none of the given choices Bobadilla
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62. A method of delaying the disbursement of cash by a corporation with a liquidity problem C. projected purchases, percentages of purchases paid, and net income.
would be to D. projected sales and purchases, percentages of collections, and terms of payments.
A. install a lock box program CMA*
B. utilize a concentration banking program
C. take as many cash discounts as possible 68. For a manufacturing firm, the most direct way of preparing a cash budget requires
D. pay its bills through the use of bank drafts Cabrera incorporation of the following, except
A. sales projections and credit terms.
63. An automated clearing house (ACH) electronic transfer is a(an) B. collection percentages and other cash receipts.
A. Computer-generated deposit ticket verifying deposit of funds C. projected net income and depreciation expenses.
B. Electronic payment to a company’s account at a concentration bank D. estimated purchases and payment terms and other cash disbursements. Roque, 2011
C. Check like instrument drawn against the payer and not against the bank.
D. Check that must be immediately cleared by the Banko Sentral ng Pilipinas CMA 0694 69. Franklin Inc., is a medium-size manufacturer of toys that makes 25% of it sales to Mel
Company, a major national discount retailing firm. Mel will be requiring Franklin and other
64. Which of the following is true about electronic funds transfer from a cash flow standpoint? suppliers to use Electronic Data Interchange (EDI) for inventory replenishment and trade
A. It is never beneficial from a cash flow standpoint payment transactions as opposed to the paper-based systems previously used. Franklin
B. It is always beneficial from a cash flow standpoint would consider all of the following to be advantages using EDI in its dealings with Mel except
C. It is beneficial from a cash receipts standpoint but not from a cash disbursements A. Reduction in payment float
standpoint B. Better status of deliveries and payment
D. It is beneficial from a cash disbursements standpoint but not from a cash receipts C. Access to Mel’s inventory balances of Franklin’s products.
standpoint Bobadilla D. Compatibility with Franklin’s other procedure and systems Agamata 2013
65. The primary reason financial analysts often focus on net cash inflows rather than profits when 70. When a company is evaluating whether the ratio of cash and marketable securities to total
evaluating company performance is that assets should be high or low, its decisions will be based upon Cabrera
A. net cash inflows are not subject to distortion. A. cost of capital considerations. C. operating leverage considerations.
B. net cash inflows indicate the company’s liquidity B. financial leverage considerations. D. risk-profitability trade-off considerations.
C. net cash inflows measure the present value of profits.
D. net cash inflows are subject to less distortion than profits Cabrera 71. When managing cash and short-term investments, a corporate treasurer is primarily
concerned with
66. The cash budget is one of the prime instruments used to aid in the cash management A. Liquidity & safety
process and B. Maximizing taxes.
A. Is basically a longer term forecasting mechanism. C. Maximizing the rate of return.
B. provides a quick method of projecting profits for manufacturing firms. D. Investing in Treasury bonds since they have no default mix. CMA 1295
C. Is rather inflexible and consequently, cannot be adjusted very well for risk.
D. Aids in determining when cash deficits and cash surpluses are expected to arise within 72. The most important considerations with respect to short-term investments are
the budget period. Cabrera A. Growth and value C. Return and value
B. Return and risk D. Risk and liquidity Wiley 2012
67. The most direct way to prepare a cash budget for a manufacturing firm is to include
A. projected sales, credit terms and net income. 73. Investment instruments used to invest temporarily idle cash balances should have the
B. projected net income, depreciation and goodwill amortization. following characteristics:
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A. low default risk, low marketability, and a short term to maturity. 80. Which one of the following is not a characteristic of a negotiable certificate of deposit?
B. high expected return, readily marketable, and no maturity date. Negotiable certificates of deposit
C. low default risk, readily marketable, and a short term to maturity. A. Have a secondary market for investors.
D. high expected return, low marketability, and a short term to maturity. Cabrera B. Are regulated by the Banko Sentral ng Pilipinas
C. Are usually sold in denominations of a minimum of P100,000 CMA 0691
74. The primary factor to consider when evaluating any investment alternative as a use for short- D. Have yields considerably greater than bankers’ acceptances and commercial paper
term excessive cash is the
a. yield-to-maturity c. maturity date 81. All of the following are alternative marketable securities suitable for investment except
b. tax payable on the return d. safety of principal Cabrera A. RP Treasury Bills C. Commercial paper
B. Eurodollars D. Convertible bonds CMA 0694*
75. In the process of investing of surplus cash, the term “riding the yield curve” refers to
A. purchasing only the longest maturities for given rates of return. 82. One of the responsibilities of a financial manager is to make efficient use of idle cash for short
B. adherence to the liquidity-preference theory of securities investments. periods of time. Which one of the following would not qualify as a satisfactory investment for
C. swapping different maturities for similar quality debt securities in order to obtain higher idle cash?
yields. A. Bangko Sentral Treasury Bills C. Negotiable certificates of deposit.
D. diversifying a securities portfolio so that the firm has an equal balance of long-term B. Common stocks of Manila Corporation D. Prime commercial paper Cabrera
versus short-term securities. Cabrera
83. Which of the following investments is not likely to be a proper investment for temporary idle
76. Which one of the following investment alternatives is commonly used to hold cash earmarked cash?
to meet a firm’s short term periodic variation in cash needs? A. Treasury bills
A. Treasury Bills B. Commercial paper
B. Treasury stock. C. Treasury bonds due within one year
C. High grade, corporate debentures. D. Initial public offering of an established profitable conglomerate RPCPA 0595
D. High grade, corporate mortgage bonds. Cabrera
84. The term short selling is the
77. In smaller business where the management of cash is but one of numerous functions A. Selling of a security that is not owned by the seller.
performed by the treasurer, various cost incentives and diversification arguments suggest B. Selling of a security that was purchased by borrowing money from a banker.
that surplus cash should be invested in C. Betting that stock will increase by a certain amount within a given period of time.
A. banker’s acceptances. C. corporate bonds. D. Selling of all the share you own in a company in an anticipation that the price will decline
B. commercial paper. D. money market mutual funds. Cabrera dramatically. CMA 1294
78. Which of the following investments generally pay the highest return? 85. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
A. Commercial paper C. Treasury bills the optimal mix between cash and marketable securities. The EOQ model assumes all of the
B. Money market accounts D. Treasury notes Wiley 2012 following except that
A. Cash flow requirements are random.
79. Short-term securities issued by the Federal Housing Administration are known as B. The total demand for cash is known with certainty.
A. Agency securities C. Commercial paper C. An opportunity cost is associated with holding cash, beginning with the first peso.
B. Banker’s acceptance D. Repurchase agreements CMA 0689 D. The cost of a transaction is independent of the peso amount of the transaction and
interest rates are constant over the short run. CMA 0689
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91. The average collection period for a firm measures the number of days after a typical credit
86. Which of the following is/are true in relation to the Baumol model of cash management? sale is made until the firm receives the payment. It should be related to the firm’s credit terms.
A. The optimal cash balance falls when intent rates rise. For example, a firm that allows 2/10, net 30 should have an average collection period of
B. The optimal cash balance rises when interest rates rise. A. ten days.
C. The optimal cash balance rises when brokerage fees rise. B. twenty days.
D. Both A and C are correct. AICPA* C. thirty days.
D. somewhere between ten days and thirty days. Roque, 2011
87. If a corporation held a marketable equity security for one year, the total return on investment
for this security would be 92. An increase in the firm’s collection period means
A. the sum of cash dividends for the year divided by the purchase price A. the firm’s current ratio is increasing.
B. the capital gain (loss) on the stock for the year divided by the purchase price. B. the firm’s collection expenses have fallen.
C. the earnings per share on the stock for the year divided by the purchase price. C. the firm’s receivables turnover ratio is increasing.
D. the sum of the cash dividends received plus any capital gain (loss) for the year divided D. the firm has become less efficient in the collection of its receivables. Cabrera
by the purchase price. Cabrera
93. Which of the following represents a firm’s average gross receivables balance?
Receivables Management I. Average age in days of receivables × average daily sales
88. The primary objective in the management of accounts receivable is II. Average daily sales × average collection period
A. to realized no bad debts because of the opportunity cost involved. III. Annual credit sales ÷ accounts receivable turnover
B. to provide the treasurer of the corporation with sufficient cash to pay the company’s bills A. I only C. I and II only
on time. B. II only D. I, II, and III Roque, 2011
C. to coordinate the activities of manufacturing, marketing, and financing so that the
corporation can maximize its profits. 94. Which of the following represents a firm’s average gross receivables balance?
D. to achieve that combination of sales volume, bad debt experience, and receivables I. Days sales in receivables x accounts receivable turnover.
turnover that maximizes the profits of the corporation. CMA* II. Average daily sales x average collection period.
III. Net sales / average gross receivables.
89. An objective accounts receivable management is to have both the optimal amounts of A. I only. C. I and II only.
receivables outstanding and bad debts. This balance requires the trade-off between the B. II only. D. II and III only. CMA 1296
benefit of more credit sales and
A. the cost of sales. 95. At any point in time, the level of accounts receivable on a corporate balance sheet is least
B. more bad debts. affected by which one of the following factors?
C. a high accounts receivable turnover. Roque, 2011 A. “Tight money.”
D. the cost of accounts receivables, such as collection, interest and cost of bad debts. B. Credit standards of the seller.
C. Collection practices of the seller.
90. The average collection period for a firm measures the number of days D. Length of the company’s production process. Cabrera
A. Beyond a typical account becomes delinquent
B. For a typical check to “clear” through the banking system. 96. The level of accounts receivable will most likely increase as:
C. After a typical credit sale is made until the firm receives the payment. CMA 1295 A. Cash sales increase and number of days sales
D. Beyond the end of the credit period before a typical customer payment is received. B. Credit limits are expanded, credit sales increase, and credit terms remain the same
C. Credit limits are expanded, cash sales increase, and aging of the receivables is improved
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D. Cash sales increase, current receivables ratio to past due increases, credit limits remain B. credit period. D. quantity discount given. Cabrera
the same. RPCPA 0594
103. All but which of the following is considered in determining credit policy?
97. Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30 will generally A. Accounts payable deferral period C. Credit limits
A. increase average collection period and increase sales. B. Collection efforts D. Credit standards Bobadilla
B. reduce the average collection period and reduce sales.
C. increase the average collection period and reduce sales. 104. Which of the following describes a firm’s credit criteria?
D. reduce the average collection period and increase sales. RPCPA* A. The diligence to collect slow-paying accounts.
B. The percentage of discount allowed for early payment.
98. In a set of comparative financial statements, you observed a gradual decline in the net to C. The length of time a buyer is given to pay for purchase.
gross ratio, (i.e., between net sales and gross sales). This indicates that: D. The required financial strength of acceptable customers. Wiley 2012
A. Sales volume is decreasing.
B. The discount period is being lengthened. 105. The procedures followed by the firm for ensuring payment of its accounts receivables are
C. There is stiffening in the grant of discounts to the customers. called its
D. There is adherence to the collection policies of the company. Agamata 2013 A. Collection policy C. Discount policy
B. Credit policy D. Payables policy Wiley 2012
99. An aging of accounts receivable measures the
A. ability of the firm to meet short-term obligations. 106. Which of the following statements is most correct? If a company lowers its DSO, but no
B. average length of time that receivables have been outstanding. changes occur in sales or operating costs, then the company
C. percentage of sales which have been collected after a given time period. A. might well end up with a lower debt ratio.
D. amount of receivables that have been outstanding for given lengths of time. Cabrera B. might well end up with a higher debt ratio.
C. would probably end up with a higher ROE.
100. The goal of credit policy is to D. total asset turnover ratio would probably decline. Bobadilla
A. Maximize sales.
B. Minimize bad debts losses. 107. Following are ways of accelerating collection of accounts receivables, except
C. Minimize collection expenses. A. shorten credit terms.
D. Extend credit to the point where marginal profits equal marginal costs. RPCPA 0597 B. minimize negative float.
C. age accounts receivables.
101. It is held that the level of accounts receivable that the firm has or holds reflects both the D. offer special discounts to those who pay promptly Roque, 2011
volume of a firm’s sales on account and a firm’s credit policies. Which one of the following
items is not considered as part of the firm’s credit policies? 108. A company’s president requested the credit and collection manager to submit proposals on
A. The length of time for which credit is extended. the company’s credit policy. The credit and collection manager submitted two proposals. In
B. The size of the quantity discount that will be offered. both proposals, sales, profits, and collection period will change although by different periods.
C. The minimum risk group to which credit should be extended. Bad debts experience will remain the same despite the proposed changes. In making a
D. The extent (in terms of money) to which a firm will go to collect an account. RPCPA 1095 decision on which proposal should be implemented, the president should consider the
following factors, except
102. The one item listed below that would warrant the least amount of consideration in credit and A. the cost of short-term credit.
collection policy decisions is the B. the company’s current bad debts experience.
A. cash discount given. C. quality of accounts accepted. C. the impact of the proposed changes on the current customers of the company.
Page 9 of 37
D. the change in credit terms to be imposed by banks which provide short-term financing to
the company. Roque, 2011 113. A change in credit policy has 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
109. A change in credit policy accelerated the collection of accounts receivable. As a result, the accounts. Based on this information we know that
company experienced the following, except A. The net profit has increased.
A. a decrease in bad debts. B. The bad debt percentage has increased.
B. a decrease in the receivables balance. C. The average collection period has decreased.
C. an increase in the average collection period. D. The size of the discount offered has decreased. CMA 1289
D. an increase in discounts taken by customers. Roque, 2011
114. The credit and collection policy of Levy Company provides for the imposition of credit block
110. A change in a seller’s credit policy has caused the following: when the credit line is exceeded and/or the account is past due. During the month, because
 Sales decreased of the campaign to achieve volume targets, the general manager has waived the credit block
 Discounts taken decreased policy in a number of instances involving big volume accounts. The likely effect of this move
 Investment in accounts receivable increased is
 The number of doubtful accounts increased A. Increase in the level or receivables only.
Based on this information, we can say that B. Deterioration of aging of receivables only.
A. Net profit has decreased C. Decrease in collections during the month the move was done.
B. Gross profit has increased D. Deterioration of aging of receivables and increase in the level of receivables. RPCPA
C. The average collection period has increased 1094
D. The company increased the rate of discount offered Roque, 2011
115. If a firm had been extending trade credit on a 2/10, net/30 basis, what changes would be
111. A strict credit and collection policy is in place in Star Company. As Finance Director you are expected on the balance sheet of its customer if the firm went to a net cash 30 policy?
asked to advise on the property of relaxing the credit standards in view of stiff competition in A. Decreased in cash.
the market. Your advise will be favorable if: B. Increased receivables.
A. The competitor will do the same thing to prevent lost sales. C. Decreased receivables.
B. The projected margin from increased sales will exceed the cost of the incremental D. Increased payables and increased bank loan. RPCPA 0596
receivables.
C. The account receivable level is improving so the company can afford the carrying cost of 116. Which one of the following statements is most correct if a seller extends credit to a purchaser
receivables. for a period of time longer than the purchaser’s operating cycle? The seller
D. There is a decrease in the distribution level of your product and a more aggressive A. Has no need for a stated discount rate or credit period.
stance is necessary to retain market share. RPCPA 0594 B. Is, in effect financing more than just the purchaser’s inventory needs.
C. Can be certain that the purchaser will be able to convert the inventory into cash before
112. A change in credit policy has caused an increase in discounts taken, a decrease in the payment is due.
amount of bad debts, and a decrease in the investment in accounts receivable. Based upon D. Will have a lower of accounts receivable than those companies whose credit period is
this information, the company’s shorter than the purchaser’s operating cycle. CMA 1296
A. working capital has decreased.
B. average collection period has decreased. 117. The sales manager of Ryan Company feels confident that, if the credit policy at Ryan’s were
C. percentage discount offered has decreased. changed, sales would increase and, consequently, the company would utilize excess
D. accounts receivable turnover has decreased. CMA 1296 capacity. The two credit proposals being considered are as follows:
Page 10 of 37
Proposal A Proposal B D. a greater need for inspection of goods as the goods arrive. Cabrera
Increase in sales ₱500,000 ₱600, 000
Contribution margin 20% 20% 122. The goal of managing working capital, such as inventory, should be to minimize the
Bad debts percentage 5% 5% A. opportunity cost of capital
Increase in operating profits ₱ 75, 000 ₱ 90, 000 B. costs of carrying inventory
Desired return on sales 15% 15% C. amount of spoilage or pilferage
Currently, payment terms are net 30. The proposed payment terms for Proposal A and D. aggregate of carrying and shortage costs Bobadilla
Proposal B are net 45 and net 90, respectively. An analysis to compare these two proposals
for the change in credit policy would include all of the following factors except the 123. Which inventory costing system will result in a high inventory turnover ratio in a period of
A. Cost of funds for Ryan. rising prices?
B. Current bad debt experience. A. FIFO C. Periodic
C. Bank loan covenants on days’ sales outstanding CMA 0697 B. LIFO D. Perpetual Roque, 2013
D. Impact on the current customer base of extending terms to only certain customers.
124. A company would be willing to have a low inventory turnover ratio if the:
118. Which one of the following represents methods for converting accounts receivable to cash? A. carrying cost of inventory is high C. inventory order costs is low
A. Factoring, pledging, and electronic funds transfers B. cost of stock out is high D. lead time is short Roque, 2013
B. Trade discounts, collection agencies, and credit approval
C. Cash discounts, electronic funds transfers, and credit approval 125. Which of the following will not affect the budgeting of order getting costs?
D. Cash discounts, collection agencies, and electronic funds transfers Cabrera A. Location of distribution warehouses C. Policies and action of competitors
B. Market research and test D. Sales promotion policies CMA 1279
Inventory Management
119. Inventory management is the formulation and administration of plans and policies to 126. Order-filling costs, as opposed to order-getting costs, include all but which of the following
efficiently and satisfactorily meet production and merchandising requirements and minimize items?
costs relative to inventories. One of its objectives is to A. Credit check of new customs
A. maximize sales. B. Packing and shipping of sales order
B. minimize production costs. C. Mailing catalogs to current customer
C. maximize the units in inventory. D. Collection of payments for sales order CMA 1279
D. maintain inventory at a level that best balances the estimates of actual savings, the cost
of carrying additional inventory and the efficiency of inventory control. Roque, 2013 127. The control of order filling costs
A. Can be accomplished through the use of flexible budget standards
120. Economic order quantity model and two-bin system are commonly used controls for a B. Is related to pricing decisions, sales promotions, and customer reaction
company's material function. Those controls primarily relate to what part of the cycle? C. Is not crucial because the costs are typically fixed and not subject to frequent changes
A. Material requirements C. Production distribution D. Is not crucial because the costs order-filling routine is entrenched and external influences
B. Physical storage D. Raw materials acceptance CIA 0588 are minimal. CMA 1279
121. Companies that adopt just-in-time purchasing systems often experience 128. Inventory costs, in addition to the costs of the purchased items, have been traditionally
A. an increase in carrying costs. classified as follows, except
B. fewer deliveries from suppliers. A. carrying costs. C. order-filling costs.
C. a reduction in the number of suppliers. B. order costs. D. stockout costs. Roque, 2013
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A. Cost of capital invested in the inventory C. Insurance Cost

129. The ordering costs associated with inventory management include B. Cost of obsolescence D. Shipping Costs CMA 0697
A. Shipping costs, obsolescence, setup costs, and capital invested
B. Insurance costs, purchasing costs, shipping costs, and spoilage. 136. If one optimizes the inventory turnover ratio, which cost will not increase?
C. Obsolescence, setup costs, quantity discounts lost, and storage costs. A. carrying cost C. total reorder costs
D. Purchasing costs, shipping costs, setup costs, and quantity discounts lost CMA 0687 B. stockout cost D. unit reorder cost RPCPA 1090
130. Inventory management requires the firm to balance the on hand for operations with the 137. In inventory management, a decrease in frequency of ordering will normally:
investment in inventory. Two cost categories in inventory management are order costs and A. have no effect on total carrying cost C. increase total carrying cost
carrying costs. B. have no effect on total ordering cost D. increase total ordering cost Roque, 2013
A. the order costs include insurance costs, shipping costs and obsolescence
B. the carrying costs include handling costs, interest on capital invested, and obsolesce. 138. You computed the economic order quantity of the main raw material of Moonlight Company at
C. the carrying costs include purchasing costs, shipping costs, quantity discounts lost and 10,000 units. However, the chief purchasing officer decided to order in quantities of 12,000
setup cost. units. What is the probable effect of the decision on the company's annual purchase order
D. the order costs include quantity discounts lost, handling costs and setup costs for a cost compared with the amounts had the order been made at the economic order quantity.
production run. Roque, 2013 A. Higher purchase order cost and higher carrying cost.
B. Higher purchase order cost and lower carrying cost
131. The carrying cost associated with inventory management includes C. Lower purchase order cost and higher carrying cost
A. Insurance cost, shipping costs, storage costs, and obsolescence D. Lower purchase order cost and lower carrying cost AICPA*
B. Purchasing cost, shipping costs, set up costs, and quantity discount lost
C. Storage costs, handling costs, interest on capital invested and obsolescence CMA 0687 139. In inventory management the problem of avoiding excessive investment in inventories and at
D. Obsolescence, set up costs, interest on capital invested, and purchasing order costs the same time avoiding inventory shortages can be solved by applying a quantitative
technique known as:
132. The carrying cost pertaining to inventory includes A. High-low point method C. Payback analysis
A. Insurance costs, incoming freight cost and setup cost B. Economic order quantity model D. Probability Analysis RPCPA 0589
B. Insurance costs, incoming freight cost and storage cost
C. Setup and opportunity cost of capital invested in inventory 140. Which of the following is used in determining the economic order quantity (EOQ)
D. Storage cost and opportunity cost of capital invested in inventory RPCPA 0595 A. Regression analysis C. Markov process
B. Calculus D. Queuing Theory CIA 0593
133. An example of a carrying cost is
A. Disruption of production schedules C. Obsolescence 141. The purpose of the economic order quantity model is to
B. Handling costs D. Quantity discounts lost CMA 1294 A. Minimize the safety stock.
B. Minimize the inventory quantities.
134. An example of carrying cost is C. Minimize the sum of the order costs and the holding costs.
A. Disruption of production schedules C. Quantity Discount lost D. Minimize the sum of the demand costs and the backlog costs. CIA 0594
B. Handling cost D. Spoilage CMA 1294
142. The order size determined by the economic order quantity formula minimizes the annual
135. Which one of the following would not be considered a carrying cost associated with inventory cost which is comprised of ordering cost and
inventory? A. Carrying Cost C. Stock out cost
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B. Safety stock cost D. No answer RPCPA 0588 C. purchasing staff's salaries.

D. The shipping cost to deliver the products to customers RPCPA 0597
143. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are:
A. Constant demand, constant ordering cost, constant carrying cost, and unlimited inventory 149. In the EOQ model, the return on capital that is foregone when it is invested in inventory is a
capacity. (an)
B. Limited production capacity, declining demand, constant ordering cost, constant carrying A. carrying cost C. irrelevant cost
cost and unlimited inventory capacity. B. exclusion in the EOQ computation D. order cost Roque, 2011
C. Increasing demand, limited production capacity, increasing ordering cost, increasing
carrying cost, and limited inventory capacity. 150. To evaluate the efficiency of purchase transactions, management decides to calculate the
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing economic order quantity for a sample of the company’s products. To calculate the economic
carrying cost, and unlimited inventory capacity. RPCPA 0594 order quantity, management would need data for all of the following, except the
A. purchase prices of the products C. volume of products in inventory
144. The economic order quantity (EOQ) formula assumes that B. the fixed cost of ordering products D. volume of product sales Bobadilla
A. Periodic demand for the good is known
B. Costs of placing an order vary with quantity order 151. Which of the following is not an element in the EOQ formula?
C. Erratic usage rates are cushioned by safety stocks A. periodic carrying cost per unit C. variable cost per order
D. Purchase costs per unit differ because of quantity discounts AICPA 0591 B. safety stock D. yearly demand Roque, 2013
145. The Economic Order Quantity (EOQ) formula does not assume that 152. Which one of the following items is not directly reflected in the basic economic order quantity
A. usage is uniform (EOQ) model?
B. demand is known A. Interest in invested capital
C. the cost of inventory itself is constant B. Public warehouse rental charges
D. the cost of placing an order is constant Roque, 2011 C. Setup costs of manufacturing runs
D. Quantity discounts lost on inventory purchases CMA 1294
146. A characteristics of the basic economic order quantity (EOQ) model is that is
A. is relatively insensitive to error 153. The result of the economic order quantity formula indicates the
B. is used when product demand, lead-time, and order costs are uncertain A. Annual quantity of inventory to be carried
C. should not be used when carrying cost are large in relation to procurement cost B. Annual usage of materials during the year
D. Should not be used in conjunction with computerized perpetual inventory system CMA C. Quantity of each individual order during the year
1294 D. Safety stock plus estimated inventory for the year CMA 0691
147. One of the elements included in the economic order quantity (EOQ) formula is 154. Which of the following statements is correct for a firm that currently has total costs of carrying
A. Safety stock C. Selling price of item and ordering inventory that are 50% higher than total carrying costs?
B. Yearly demand D. Lead time for delivery CIA 0595 A. Per unit carrying costs are too high
B. Current order size is less than optimal
148. In computing the economic order quantity (EOQ) which of the following cost should be C. Current order size is greater than optimal
included? D. The optimal order size is currently being used Bobadilla
A. Capital cost
B. expected Value analysis 155. Firms that maintain very low or no inventory levels have
Page 13 of 37
A. higher carrying costs C. higher ordering and carrying costs A. 64% decrease C. 20% increase
B. higher ordering costs D. lower ordering and carrying costs B. 80% decrease D. No effect Wiley 2012
Bobadilla
163. The selling price of the product is relatively high and the purchase cost of the product is
156. With regards to inventory management, an increase in the frequency of ordering will relatively low. In this situation
normally? A. The EOQ model will
A. Have no impact on ordering costs C. Reduce total carrying costs B. The EOQ of the product is affected by the selling price
B. Have no impact on total carrying costs D. Reduce the total cost CIA 0590 C. The selling price has nothing to do with the EOQ of the product. RPCPA 0594
D. Management must increase the price to cover the cost of carrying higher inventory.
157. A decrease in inventory order costs will
A. Increase the reorder point 164. The use of EOQ analysis in inventory management can be modified to improve the
B. Decrease the economic order quantity management of inventory by
C. Decrease the carrying cost percentage A. purchasing inventory only once a year in order to save on ordering costs.
D. Have no effect on the economic order quantity RPCPA 0596 B. purchasing inventory on a monthly basis in order to save on carrying costs.
C. eliminating semi-variable costs from any consideration in the EOQ analysis due to the
158. The economic order quantity (EOQ) will rise following difficulty of estimating those costs.
A. An increase in carrying costs D. employing a minimum safety stock level because delivery times and inventory usage
B decrease in annual unit sales levels do not conveniently match quantitative formulas. CMA*
C. An increase in the per-unit purchased price of inventory
D. An increase in the variable costs of placing and receiving an order CIA 1189 165. Ardmore Industries is in the process of reviewing its inventory and production policies. The
company often has an excess supply needed for the planned shortages of other products
159. The Stewart Company uses the EOQ model for inventory management. A decrease in which needed for planned productions runs. The method that Ardmore should use to establish its
one of the following variable would increase the EOQ? inventory policies regarding these products is
A. Annual sales C. Cost per order A. Contribution margin analysis C. Linear programming
B. Carrying costs D. Safety stock level CMA 1295 B. Economic production quantity analysis D. Regression analysis CMA 0688
160. A decrease in inventory order cost will 166. The Economic Order Quantity (EOQ) model can be used to establish inventory policy. In the
A. Decrease the EOQ C. Have no effect on the EOQ case of a manufacturer, the EOQ is called the Economic Lot Size (ELS) or Economic
B. Decrease the holding cost percentage D. Increase the reorder point RPCPA 0596 Production Quantity (EPQ). Which of the following statements about the ELS is incorrect?
A. In the ELS model, the production rate is deemed to be instantaneous.
161. An increase in inventory carrying cost will B. In the ELS model, the demand is assumed to occur at a constant rate over some period
A. Increase the safety stock required of time.
B. Decrease the economic order quantity C. The ELS model is used to maximize contribution margin or minimize costs given
C. Have no effect on the economic order quantity resource constraints.
D. Decrease the number of orders issued per year CMA 0691 D. The objective of the ELS model is to minimize the sum of inventory carrying costs and
the costs of production runs or setup costs. Roque, 2013
162. As a consequence of finding a more dependable supplier, Dee Company reduced its safety
stock of raw materials by 80%. What is the effect of this safety stock reduction on Dee’s 167. The simple economic production lot size model will only apply to situation in which the
Economic order quantity? production
Page 14 of 37
A. Rate equals the demand rate Statement 1 True True False False
B. Rate is less than the demand rate Statement 2 True False True False
C. Rate is greater than the demand rate
D. For the period covered equal the projected sales for the period CMA 0688 172. The optimal level of inventory would be affected by all of the following except the
A. cost per unit of inventory
168. Which of the following statements is false? B. current level of inventory
A. A decrease in inventory order costs will decrease the EOQ. C. usage rate of inventory per time period.
B. An increase in inventory carrying costs will decrease the EOQ. D. cost of placing an order for merchandise Cabrera
C. An increase in the variable cost of placing and receiving an order will increase the EOQ.
D. The cost of inventory itself, as well as many quantity discount lost on inventory 173. The amount of inventory that a company would tend to hold in stock would increase as the
purchases, is directly reflected in the EOQ model. Roque, 2013 A. variability of sales decreases
B. cost of carrying inventory decreases
169. Traditionally, large manufacturers have believed that economies of scale gained through C. cost of running out of stock decreases
large production runs of like, or similar, products are the best way to keep production cost D. sales level falls to a permanently lower level Bobadilla
down and remain competitive. Select the most appropriate response whether this theory is
valid. 174. Which of the following would tend to increase the holdings of inventory quantity in the future?
A. No, economics of scale can no longer be gained from long production runs A. Increased computer control C. Limited variety of products
B. No, production flexibility and diversity of products are needed to remain competitive. B. Increased rate of sales growth D. Standardization of products Cabrera
C. Yes, larger economies of scale continues to accrue from ever larger production runs
D. Yes, lower-per-unit costs for standard products continue to guarantee a competitive 175. The size of safety stocks for inventory is important for most firms. Though several factors can
advantage Agamata 2013 be cited as contributing to the determination of the size of safety stock that a firm should
carry, the issue can often be reduced to a single factor. Which one of the following
170. State whether the statements are true or false. statements best summarizes the factor that affects the level of safety stock that a firm will
Statement 1: The two main types of inventory cost relevant to inventory decision-making are carry?
carrying costs and ordering costs A. The rapidity with which the inventory position will turn over.
Statement 2: The optimal ordering quantity in the EOQ model occurs at the point where the B. The level of production the firm’s bank is willing to finance.
sum of the carrying costs and ordering costs are minimized. C. The amount of idle cash management believes it has to invest in safety stock.
Agamata 2013 A. B. C. D. D. The level of uncertainty with respect to an out-of-stock condition that management is
Statement 1 True True False False willing to accept. RPCPA*
Statement 2 True False True False
176. Safety stocks are used to compensate for
171. Indicate whether the following statements are true or false/ A. inventory obsolescence and sales returns.
Statement 1: The cost of warehousing and storage, property taxes, insurance of inventory, B. variations in inventory prices and lead times.
losses from spoilage are examples of ordering costs. C. variations in inventory usage rates and prices.
Statement 2: One of the relevant costs in inventory management is “carrying cost” which D. variations in inventory usage rates and lead times Cabrera
refers to the total effect of the failure of a company to service customers or
conduct manufacturing operations smoothly because of goods, raw materials 177. The level of safety stock in inventory management depends on all of the following except
and/or suppliers are out of stock. A. cost to reorder stock
Agamata 2013 A. B. C. D. B. cost of running out of inventory
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C. level of uncertainty of the sales forecast. 184. When a specified level of stock is carried for an item in inventory, the average inventory level
D. level of customer satisfaction for back orders. Cabrera for that item
A. Is not affected by the safety stock
178. In inventory management, the safety stock will tend to increase if the B. Increase by the amount of the safety stock
A. Carrying cost increases C. Fixed order cost decreases CMA 1289 C. Decrease by the amount of the safety stock
B. Cost of running out of stock decreases D. Variability of the lead time increases D. Increase by the one-half the amount of the safety stock RPCPA 0596
179. The use of safety stock by a firm will 185. The elapsed time between placing an order for inventory and receiving the order is
A. have no effect on inventory costs C. reduce inventory costs A. Lead time C. Stocking time
B. increase inventory costs D. none of the given choices Bobadilla B. Reorder time D. Stockout time CMA 0688
180. When the level of safety stock is increased 186. To determine the reorder point, calculations normally include the
A. Lead time will increase A. average daily usage C. economic order quantity
B. Order costs will decrease B. carrying cost D. ordering cost Wiley 2012
C. Carrying costs will decrease
D. The frequency of stockouts will decrease CMA 0688 187. For inventory management, ignoring safety stocks, which of the following is a valid
computation of the reorder point?
181. A company stocks, maintains, and distributes inventory. The company decides to add to the A. The EOQ
safety stock and expedite delivery for several product lines on a trial basis. For the selected B. The EOQ times the anticipated demand during lead time
product lines, the company will experience C. The square root of the anticipated demand during the lead time
A. A change in the service level D. The anticipated demand per day during lead time times lead time in days AICPA 0576
B. A decrease in ordering, carrying, and delivery costs
C. An increase in ordering, carrying, and delivery costs 188. Which changes in costs are most conducive to switching from a traditional inventory ordering
D. An increase in some costs but no change in the service level CIA 1190 system to a just-in-time ordering system?
Bobadilla A. B. C. D.
182. The amount of inventory that a company would tend to hold in safety stock would increase as Cost per purchase order Increasing Increasing Decreasing Decreasing
the Inventory unit carrying cost Increasing Decreasing Increasing Decreasing
A. variability of sales decreases.
B. cost of carrying inventory decreases. 189. Pepper Company changed from a traditional manufacturing philosophy to a just-in-time
C. cost of running out of stock decreases. technology. What are the expected effects of this change on Pepper’s inventory turnover and
D. sales level falls to a permanently low level. Cabrera inventory as a percentage of total assets reported on Pepper’s balance sheet?
Bobadilla A. B. C. D.
183. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The Inventory turnover Increase Increase Decrease Decrease
usual lead time for the inventory item is six days; however at times the lead time has gone as Inventory percentage Increase Decrease Increase Decrease
high as eight days. Kulasa now desires to adjust its safety stock policy. The likely effect on
stockout costs and carrying costs, respectively, would be. 190. The cost of stock-out do not include
A. Decrease and decrease C. Increase and decrease A. Depreciation and obsolescence. C. Loss of customer goodwill
B. Decrease and increase. D. Increase and increase RPCPA 0597 B. Disruption of production schedules D. Loss of sales RPCPA 1095
Page 16 of 37
191. What are the three factors a manager should consider in controlling stockouts? A. Advances by owners C. Factoring
A. Carrying costs, quality costs, and physical inventories B. Commercial bank loan D. Trade credit Cabrera
B. Economic order quantity, annual demand, and quality costs
C. Economic order quantity, production bottlenecks & safety stock 199. An organization would usually offer credit terms of 2/10, net 30 when
D. Time needed for delivery, rate of inventory usage, & safety stock CIA 1191 A. the cost of capital approaches the prime rate.
B. the organization can borrow funds at a rate less than the annual interest cost.
192. A company experiences both variable usage rates and variable lead times for its inventory C. the organization can borrow funds at a rate exceeding the annual interest cost.
items. The probability distributions for both usage and lead times are known. A technique the D. most competitors are offering the same terms, and the organization has a shortage of
company could use for determining the optimal safety stocks levels for an inventory items is: cash. CMA*
A. Decision tree analysis C. Monte Carlo simulation
B. Linear Programming D. Queuing theory CMA 1291 200. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
193. A manufacturing company dates invoices seasonally so that skis delivered in September will B. Anytime during the period, 8th to the 30th.
bear an invoice due date for the following February. As a result of using this method, the C. The 30th day is the primary decision date.
manufacturer’s inventory carrying costs are (lower; higher; constant) and the buyer is D. The 8th day is the customer’s decision date. Bobadilla
extended to a (shorter; longer) credit period than would otherwise be true
A. Higher; longer C. Lower; longer 201. Which one of the following statements about trade credit is correct?
B. Higher; shorter D. Lower; shorter CIA 1182 A. Subject to risk of buyer default
B. A source of long-term financing to the seller
Short-term Financing C. Not an important source of financing for small firms
194. Common sources of short-term financing include D. Usually an inexpensive source of external financing CMA 1296
A. issuing bonds C. stretching payables
B. reducing inventory D. all of the given choices Bobadilla 202. On cash discounts, all of the following statements do not apply except
A. The cost of not taking a cash discount is always higher than the cost of a bank loan.
195. Which of the following is not a source of short-term credit? B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net
A. accruals C. deferred income 30.
B. common stock D. purchases on account Roque, 2011 C. With trade terms of 2/15, net 60, if the discount is taken the buyer receives 45 days of
free credit.
196. Which of the following financial instruments generally provides the largest source of short- D. If a firm buys ₱10,000,00 of goods on terms of 1/10, net 30 and pays within the discount
term credit for small firms? period, the amount paid would be 9,000. RPCPA 0597
A. Commercial paper C. Mortgage bonds
B. Installment loans D. Trade credit CMA 1295 203. As a corporation grows from a small business into a larger, more profitable business, the
corporation tends to rely
197. Which one of the following provides a spontaneous source of financing for a firm? A. More on trade credit because of its unlimited availability.
A. Accounts payable C. Debentures B. More on cash purchases due to the cash flow generated through collection of accounts
B. Accounts receivable D. Mortgage bonds Becker 2009 receivable.
C. More on government secured loans which are available to the larger more profitable
198. Given that each of the following short-term resources in available, which source of financing firms in the economy.
is likely to have the highest cost for a small business? D. More on bank credit and similar resources rather than trade credit because trade credit is
Page 17 of 37
not adequate to meet the financing needs beyond certain levels of growth. Cabrera
210. A compensating balance
204. Short-term debt financing generally has the following three characteristics from the viewpoint A. can be held in the form of a banker’s acceptance.
of the borrower when compared with long-term debt financing: B. may be required in lieu of a fee for bank services.
A. Less flexibility, lower total cost, and lower risk C. earns interest at the same rate as a saving deposit.
B. Greater flexibility, higher total cost, and lower risk D. increases the effective rate of return on savings account. Cabrera
C. Greater flexibility, lower total cost, and greater risk
D. Greater flexibility, higher total cost, and greater risk Cabrera 211. A compensating balance
A. Is the amount of prepaid interest on a loan
205. The following forms of short-term borrowings are available to a firm: B. Is used to compensate for possible losses on a marketable securities portfolio
• Floating lien • Bankers’ acceptances C. Is a level of inventory held to compensate for variations in usage rate and lead time
• Factoring • Lines of credit D. Compensates a financial institution for services rendered by providing it with deposits of
• Revolving credit • Commercial paper funds. CMA 0688*
• Chattel mortgages
The forms of short term borrowing that are unsecured credit are: 212. The net effect of a compensating balance requirement on a loan from the viewpoint of the
A. Factoring, chattel mortgage, bankers’ acceptances, and line of credit borrower is
B. Floating lien, chattel mortgage, bankers’ acceptances, and line of credit A. the compensating balance has no effect on financing costs.
C. Floating lien, revolving credit, chattel mortgages, and commercial paper B. the compensating balance will seldom be used if the loan maturity is less than 5 years.
D. Revolving credit, bankers’ acceptances, line of credit, and commercial paper CMA 1286 C. the effective borrowing costs will be lower than if the compensating balance were not
required.
206. A small retail business would most likely finance its merchandise inventory with D. the effective borrowing costs will be higher than if the compensating balance were not
A. a chattel mortgage. C. a terminal warehouse receipt loan. required. Cabrera
B. a line-of-credit. D. commercial paper. Cabrera
213. The prime lending rate of commercial banks is an announced rate and is often understated
207. Short-term interest rates are from the viewpoint of even the most credit-worthy firms. Which one of the following
A. Usually lower than long-term rates requirements always results in a higher effective interest rate?
B. Usually higher than long-term rates A. A floating rate for the loan period.
C. Not significantly related to long-term rates B. The absence of a charge for any unused portion in the line of credit.
D. Lower than long-term rates during periods of high inflation only CMA 0691 C. A covenant that restricts the issuance of any new unsecured bonds during the existence
of the loan.
208. The prime rate is the D. The imposition of a compensating balance with an absolute minimum that cannot be met
A. Effective cost of a commercial bank loan by current transaction balances. CMA 1280
B. Size of the commitment fee on a commercial bank loan
C. Rate at which a bank borrows from the Bangko Sentral ng Pilipinas 214. Experience with compensating balances in corporate bank account reveals that
D. Rate charged on business loans to borrowers with high credit ratings CMA 0688* A. the use of compensating balances tends to lower the cost of borrowing.
B. the use of compensating balances has no effect on the cost of borrowing.
209. A minimum checking account balance that a firm must maintain with a commercial bank is a C. Banks tend to be very strict and require that compensating balances be maintained
A. Compensating balance C. Speculative balance exactly as agreed.
B. Precautionary balance D. Transaction balance CIA 1190 D. banks tend to be flexible in administering compensating balances and, based on the
Page 18 of 37
different business conditions, allow fluctuations from the required level. Cabrera 220. The credit instrument known as banker’s acceptance
A. Is a timed draft payable on a specified date and guaranteed by the bank
215. Commercial paper B. Is a method of sales financing in which the bank retains title to the goods until the buyer
A. Has a maturity date of greater than 1 year. has completed payment
B. Has an interest rate lower than Treasury bills. C. Calls for immediate payment upon delivery of the shipping documents to the bank’s
C. Ordinarily does not have an active secondary market. customer and acceptance of goods by the bank.
D. Is usually sold only through investment banking dealers. CMA 0691 D. Involves an invoice being signed by the banker upon receipt of goods, after which both
the banker and seller record the transaction on their respective goods. CIA 0596
216. The principal advantage of using commercial paper as a short-term financing instrument is
that it 221. Which of the following forms of short-term borrowing is a secured credit?
A. offers security, i.e., collateral, to the lender. A. Banker’s acceptance C. Commercial paper
B. is readily available to &most all companies. B. Chattel mortgage D. Line of credit Roque, 2011
C. can be purchased without commission costs.
D. is generally cheaper than a commercial bank loan. Cabrera 222. An example of secured short-term financing is:
A. A line of credit C. A warehouse receipt
217. Commercial paper tends to be quite popular with large, profitable corporation because B. A revolving credit line D. Commercial paper CIA 1191
A. the market distribution for commercial paper is very narrow
B. purchasers of the commercial paper typically use this type of investment on a long- 223. Inventory financing can take the form of a
term basis A. blanker lien. C. warehouse receipt.
C. even though interest costs are higher than the interest on ordinary bank loans, the B. trust receipt D. all of the above Cabrera
interest is tax deductible
D. interest costs are lower than the interest on ordinary bank loans and compensating 224. In assessing the loan value of an inventory, a banker will normally be concerned about the
balances are not required of borrowers Cabrera portion of inventory that is work-in-process because
A. WIP generally has the lowest marketability of the various types of inventories
218. Which one of the following responses is not an advantage to a corporation that uses the B. WIP inventory usually has the highest loan value of the different inventory types
commercial paper market for short – term financing? C. WIP represents lower investments by a corporation as opposed to other types of
A. This market provides a broad distribution for borrowing. inventories
B. This market provides more funds at lower rates than other methods provide. D. WIP inventory is relatively easy to sell because it does not represent a raw material or a
C. There are no restrictions as to the type of corporation that can enter into the market. finished product RPCPA 0596
D. The borrower avoids the expense of maintaining a compensating balance with a
commercial bank. CMA 0696 225. From the viewpoint of a borrower, a field warehouse arrangement is frequently considered
superior to a terminal (public) warehouse arrangement because
219. Which of the following statements concerning commercial paper is false? A. pledged inventory is not removed from the borrower’s property to another specific
A. Commercial paper can be issued by virtually all firms. location.
B. Commercial paper is generally written for terms less than 270 days. B. pledged inventory can be released to the borrower in cases of emergency without
C. Commercial paper generally carries an interest rate below the prime rate. authorization from the lender.
D. Commercial paper is sold to money market mutual funds, as well as to other financial C. a warehouse person is required for a public warehouse arrangement, but no supervision
institutions and non-financial corporations. Cabrera is required for a field warehouse.
D. insurance does not have to be carried on the inventory when a field warehousing
Page 19 of 37
arrangement is employed making the cost much less. Cabrera

Problems
226. Factoring is a credit arrangement Working Capital
A. which involves the outright sale of accounts receivable to a factor. 1 The working capital RED Company at December 31, 2012 was 10,000,000. Selected
B. which should be used only as a last resort when all other sources of financing fail. information for the year 2013 for RED Company is as follows:
C. in which the factor is free to request new receivables for those accounts it deems Working capital provided from operations P1,700,000
uncollectible Capital expenditure 3,000,000
D. in which the cash advances from the factor is essentially a loan secured by the eventual Proceeds from short-term borrowings 1,000,000
collection of the receivables factored. Cabrera Proceeds from long-term borrowings 2,000,000
Payments on short-term borrowings 500,000
227. A firm which finances through a factor Payments on long-term borrowings 600,000
A. maintains a compensating balance. Proceeds from issuance of common stocks 1,400,000
B. uses inventory as collateral for a loan. Dividends paid on common stock 800,000
C. sells approved accounts receivable without recourse. What is RED working capital at December 31, 2013?
D. uses another company to endorse or guarantee a loan. Cabrera A. P10,700,000 C. P11,500,000
B. P11,200,000 D. P12,000,000 Agamata 2013
228. The principal difference between factoring and pledging receivables rests in the fact that in
factoring 2. During 2013, Mason Company's current assets increased by P120, current liabilities
A. the accounts receivable are pledged on a non-notification basis. decreased by P50, and net working capital
B. the accounts receivable are sold outright to a financial institution. A. Decreased by P170 C. Increased by P70
C. the accounts receivable are merely pledged as security for a loan B Did not change D. Increased by P170 CMA 1290
D. the financial institution factoring the accounts reserves the right to substitute newer
receivables for those accounts that appear difficult to collect Cabrera Liquidity Ratios
3. A firms current ratio is currently 1.70 to 1. Management knows it cannot violate a working
229. The most appropriate tool for determining in what month a short-term bank loan can be capital restriction contained in its bond indenture. If the firm's current ratio falls below 1.40 to
repaid is 1, technically it will have defaulted. If current liabilities are P200 million, the maximum new
A. The monthly cash budget commercial paper that can be issued to finance inventory expansion is
B. The asset turnover for the month A. P80 million C. 280 million
C. The earning as a percent of sales for the month B. P150 million D. P370 million Gleim
D. The monthly Statement of Changes in Financial Position Cabrera
4. MFA Corporation has 100, 000 shares of stock outstanding. Below is part of MFC's
230. Which of the following is incorrect? Statement of Financial Position for the fiscal year.
A. Trade credit usually bears no interest, so it is costless. MFA Corporation
B. Pledging of receivables is an example of secured short-term credit Statement of Financial Position - Selected Items
C. When a firm purchases goods or services on credit from a supplier, it automatically December 31, 2013
obtains short-term financing. Roque, 2011
D. Accruals or accrued expenses is a form of spontaneous financing which represents Cash P455, 000
liabilities for services that have been provided to the company but have not been paid for Accounts receivable 900, 000
Inventory 650, 000
Page 20 of 37
Prepaid assets 45, 000

Accrued liabilities 285, 000 8. What is the length of the company’s cash conversion period?
Accounts payable 550, 000 A. 20 days C. 40 days
Current portion, long term notes payable 65, 000 B. 30 days D. 50 days
What is the amount MFA can pay in cash dividends per share and maintain a minimum
current ratio of 2 to 1. Assume that all accounts other than cash remains unchanged. 9. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials
A. P2.05 C. P3.55 and variable conversion cost. It takes the firm 18 days to convert raw materials into
B. P2.50 D. P3.80 CMA 0697 calculator. Casie’s usual credit terms extended to its customers is 30 days, and the firm
generally pays its suppliers in 20 days.
Cash & Marketable Securities Management If the foregoing cycles are constant, what amount of working capital must Casie Company
5 If the average age of inventory is 60 days, the average age of the accounts payable is 30 finance?
days, and the average age of accounts receivables is 45 days, the number of days in the A. P 900,000 C. P1,800,000
cash flow cycle is B. P1,400,000 D. P2,400,000 Bobadilla
A. 75 days C. 105 days
B. 90 days D. 135 days Gleim 10. Assume that each day a company writes and received checks totaling P10,000. If it takes 5
days for the checks to clear and be deducted from the company’s account, and only 4 days
6. The following data are taken from the records of Apple Corporation for the year ended for the deposits to clear, what is the float?
December 31, 200B: A. P(10,000) C. P10,000
Net credit sales 576,000 B. P0 D. P50,000 CMA 0694
Average materials inventory 8,000
Average finished goods inventory 12,000 11. Annabelle Corporation is engaged in a multi-level marketing business that presently requires
Average accounts receivable 80,000 all sales agents to mail checks to its Manila office. An average of three days is required for
Average accounts payable 5,000 mailed checks to be received, one day for Annabelle Corporation to process them and three
Net credit purchases 120,000 days to clear through its banks.
Raw materials used 96,000 The company's treasurer proposed a change in the system, where the checks will no longer
Gross profit rate 25% be mailed to Manila office. Instead, checks collected will be deposited on-line in any branch of
What is the average number of days in the company’s operating cash conversion cycle? (use the company's depositary bank, and the deposit slips, as well as the other pertinent
a 360-day year) documents will be sent by fax or e-mail to the Manila office on the same day. The original
A. 45 days C. 75 days deposit slips and other documents will be submitted by the sales agents to Manila when they
B. 50 days D. 105 days Roque, 2011 attend the Sales Agents' Monthly Meeting.
The new system will eliminate the mailing float and the processing time. Annabelle
Questions 7 & 8 are based on the following information. Bobadilla Corporation has an average daily collection of P50,000.
Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its If the new system is implemented, Annabelle Corporation's average cash balance will
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its average increase by
daily purchases are P50,000. A. P50,000. C. P200,000.
B. P150,000 D. P350,000. Roque, 2011
7. What is the length of the company’s inventory conversion period?
A. 40 days C. 90 days 12. A firm has a daily cash receipts of P100,00 and collection time of 2 days. A bank has offered
B. 50 days D. 120 days to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of P500. If
Page 21 of 37
money market rates are expected to average 6% during the year, the net annual benefit interest rate paid by the central bank is 7.2% (0.02% per day). At what amount of pesos
(loss) from having this service is transferred would it be economically feasible to use a wire transfer instead of the DTC?
A. P 0 C. P6,000 Assume a 350-day year.
B. P3,000 D. P12,000 CMA 0696 A. P 125,000 or above.
B. Any amount greater than P 173.
13. What are the expected annual savings from a lock-box system that collects 150 checks per C. Any amount greater than P 62,500.
day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days D. It would never be economically feasible. CMA 1294
respectively, if the annual interest rate is 7%?
A. P 5,250 C. P 21,000 18. Globe Products have received proposals from several banks to establish a lock box system to
B. P 13,125 D. P300,000 Bobadilla speed up receipts. Globe receives an average of 700 checks per days averaging P1,800
each, and its cost of short term funds is 7% per year. Assuming that all proposals will
14. Average daily cash outflows are P3 million for Evans, Inc, A new cash management system produce equivalent processing results and using a 360-day year, which one of the following
can add two days to the disbursement schedule. Assuming Evans earns 10 percent on proposals is optimal for Globe?
excess funds, how much should the firm be willing to pay per year for this cash management A. P0.50 per check
system? B. A flat fee of P125,000
A. P600,000. C. P 3,000,000 C. A fee of 0.03% of the amount collected
B. P1,500,000. D. P6,000,000 Cabrera D. A compensating balance of P1,750,000 CMA 0697
15. RMN is a retail mail order firm that currently uses a central collection system that requires all 19. Majority of Aning Company's customers are farmers from remote rural areas. Farmers bank
checks to be sent to its flotation headquarters. An average of 6 days is required for mailed has offered to provide Aning Company a lockbox system at a fixed fee of P300 per month
checks to be received, 3 days for RMN to process them, and 2 days for the checks to clear and a variable fee of P2 for each payment processed by the bank.
through its bank. A proposed lockbox system would reduce the mailing processing time to 2 Aning Company receives 30 payments per day, averaging P5,000 per payment. With the
days and the check clearing time for 1 day. RMN has an average daily collection of lockbox system, the company's collection float will decrease by 3 days. Money market
P150,000. If RMN adopts the lockbox system, its average cash balance will increase by securities earn 5% per annum.
A. P450,000 C. P750,000 Should Aning Company accept Farmer Bank's offer to provide a lockbox system? (Use 360
B. P600,000 D. P1,200,00 Gleim 2013 days in a year)
A. Yes, because it would earn additional income of P22,500 per year.
16. A firm has a daily cash receipts of P300,000. A bank has offered to provide a lockbox service B. Yes, because it would earn net benefit of P2,700 from the lockbox system.
that will reduce the collection time by 3 days. The bank requires a monthly fee of P2,000 for C. No, because the lockbox system would require the company to spend P25,000 per year.
providing this service. If monthly market rates are expected to average 6% during the year, D. No, because the cost of the lockbox system is P2,700 more than the expected return on
the additional income (loss) of using the lockbox system is money market placements. Roque, 2011
A. P(24,000) C. P30,000
B. P12,000 D. P54,000 Gleim 2013 20. Foster, Inc. is considering implementing a lockbox collection system at a cost of P80,000 per
year. Annual sales are P90,000, and the lock-box system will reduce collection by 3 days. If
17. Troy Toy is a retailer operating in several cities. The individual store managers deposit daily Foster can invest funds at 8 percent, should it use the lock-box system? Assume a 360-day
collections at a local bank in a non-interest bearing checking account. Twice per week, the year.
local bank issued a depository transfer check (DTC) to the central bank at headquarters. The A. No, producing a loss of P20,000 per year.
controller of the company is considering using a wire transfer instead. The additional cost of B. No, producing a loss of P60,000 per year.
each transfer would be P25; collections would be accelerated by 2 days, and the annual C. Yes, producing savings of P60,000 per year.
Page 22 of 37
D. Yes, producing savings of P140,000 per year. Cabrera inventory management. Assume that the fixed cost of selling marketable securities is P10 per
transaction and the interest rate on marketable securities is 6% per year. The company
21. Butit is a newly established janitorial firm, and the owner is deciding what type of checking estimates that it will make cash payments of P12,000 over the one month period. What is the
account to open. Butit is planning to keep a P500 minimum balance in the account for average cash balance (rounded to the nearest peso)?
emergencies and plans to write roughly 80 checks per month. The bank charges P10 per A. P 1,000 C. P 3,464
month plus P0.10 per check charge for a standard business checking account with no B. P 2,000 D. P 6,928 CMA 0696
minimum balance. Butit also has the option of a premium business balance that requires a
P2,500 minimum balance but has no monthly fees or per check charges. If Butit’s cost of Questions 26 and 27 are based on the following information: Roque 2011
funds is 10%, which account should Butit choose? Ben Corporation uses the Baumol Cash Management Model to determine its optimal cash balance.
A. Premium account, because the savings is P16 per year For the coming year, the expected cash disbursements total P432,000. The interest rate on
B. Premium account, because the savings is P34 per year marketable securities is 5% per annum. The fixed cost of selling marketable securities is P8 per
C. Standard account, because the savings is P16 per year transaction.
D. Standard account, because the savings is P34 per year CMA 0697
26. Using the Baumol Cash Management Model, the company's optimal cash balance is
22. Assuming a 360-day year, the current price of a P100 Treasury bill due in 180 days on a 6% A. P1,175.76. C. P11,757.55.
discount basis is B. P5,878.78. D. P142,000.00.
A. P93.00 C. P97.00
B. P94.00 D. P100.00 CMA 0694 27. Using the Baumol Cash Management Model, the average cash balance is
A. P1,175.76. C. P11,757.55.
23. Mahogany Company has a total annual cash requirement of P6,075,000 which are to be paid B. P5,878.78. D. P142,000.00.
uniformly. Mahogany has the opportunity to invest the money at 8 percent per annum. The
company spends, on the average, P45 for every cash conversion to cash and vice versa. Receivable Management
What is the optimal conversion size for cash? 28. Piston, Inc. has an inventory conversion period of 60 days, a receivable conversion period of
A. P41,335 C. P60,000 35 days, and a payment cycle to 26 days. If its sales for the period just ended amounted to
B. P58,457 D. P82,670 Bobadilla P972,000, what is investment in accounts receivables? (Assume 360 days in a year)
A. P72,450 C. P85,200
24. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which B. P79,600 D. P94,500 RPCPA 0595
are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per
annum. The company spends, on the average, P25 for every cash conversion to marketable 29. A firm averages P4,000 in sales per day and is paid, on average, within 30 days of the sale.
securities and vice versa. After they receive their invoice, 55% of the customers pay by check, while the remaining 45%
What is the opportunity cost of keeping cash in the bank account? pay by credit card. Approximately how much would be the company show in accounts
A. P 188.55 C. P3,825.00 receivable on its balance sheet on any given data?
B. P1,912.50 D. P4,190.00 Bobadilla A. P4,000 C. P54,000
B. P48,000 D. P120,000 CMA 1294
25. A company uses the following formula in determining the optimal level of cash
C= √2𝑏𝑡⁄𝐼 if: b = fixed cost per transaction 30. Jackson Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average
I = interest rate on marketable securities 150 units at a price of P300 each. Assuming that all sales are on credit and 60% of
t = total demand for cash over a period of time customers take the discount and pay on day 10, while the rest of the customers pay on day
This formula is a modification of the economic order quantity (EOQ) formula used for 30, the amount of Jackson’s accounts receivable is
Page 23 of 37
A. P810,000 C. P990,000 from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
B. P900,00 D. P1,350,000 CMA 1295 standards will result in an expected increase in the average accounts receivable balance of
A. P 540,000 C. P1,620,000
31. Mercado offers its customers credit terms of 5/10, net 20. One-third of the customers take B. P 900,000 D. P2,700,000 CMA 1292
the cash discount and the remaining customers pay on day 20. On average, 20 units are
sold per day, priced at P10,000 each. The rate of sales is uniform throughout the year. 36. Green Company’s budgeted sales for the coming year are P96 million, of which 80% are
Using a 360-day year, the company has days’ sales outstanding in accounts receivable, to expected to be credit sales at terms of n/30. The company estimates that a proposed
the nearest full day, of relaxation of credit standards would increase credit sales by 30% and increase the average
A. 13 days C. 17 days collection period from 30 days to 45 days. Based on a 360-day year, the proposed relaxation
B. 15 days D. 20 days CIA 1195 of credit standards would result to an increase in accounts receivable balance of
A. P1,920,000 C. P6,080,000
32. Clauson Inc. Grants credit terms of 1/15, net 30 and projects gross sales for next year of B. P2,880,000 D. P6,880,000 RPCPA 0595
P2,000,000. The credit manager estimates that 40% of their customers pay on the discount
date, 40% on the net due date, and 20% pay 15 days after the net due date. Assuming 37. Prest Corporation plans to tighten its credit policy. Below is the summary of changes
uniform sales and a 360-day year, what is the projected days’ sales outstanding (rounded to Old New
the nearest whole day)? Average number of days collection 75 50
A. 20 days. C. 27 days. Ratio of credit to total sales 70% 60%
B. 24 days. D. 30 days. CMA 0697 Projected sales for the coming year is P100 million and it was estimated that the new policy
will be a 5% less if the new policy is implemented. Assuming a 360-day year, what is the
33. Simba Corporation whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. effect of the new policy on accounts receivable?
The collections manager estimated that 30% of the customers pay on the tenth day and take A. No change. C. Decrease of P6,666,667.
discounts; 40% on the thirtieth days; and the remaining 30% pay, on average, 40 days after B. Decrease of P5 million. D. Decrease of P13 million. RPCPA 0596
the purchase. If management would toughen on its collection policy and require that all non-
discount customers pay on the thirtieth day, how much would be the receivables balance? 38. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection period
A. Zero C. P80,000 is 45 days, and bad debts are 3 percent of sales. The credit and collection manager is
B. P50,000 D. P70,000 RPCPA 0595 considering instituting a stricter collection policy, whereby bad debts would be reduced to 1.5
percent of total sales, and the average collection period would fall to 30 days. However,
34. The Liberal Sales Company’s budgeted sales for the coming year are P30 million of which sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of
80% are expected to be made on credit. The company wants to change its credit terms from sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent and
n/30 to 2/10, n/30. If the new credit terms are adopted, the company estimates that cash 360 days per year.
discounts would be taken on 40% of the credit sales and the uncollectible amount would be What would be the decrease in investment in receivables if the change were made?
unchanged. The adoption of the new credit terms would result in expected discount availed of A. P 9,688 C. P 96,875
in the coming year of B. P 12,988 D. P129,975 Bobadilla
A. P192,000 C. P480,000
B. P288,000 D. P600,000 RPCPA 0596 39. Mr. S Mart assumed the presidency of Riches Corp. He instituted new policies with respect
to credit policy. Below is a summary of relevant information:
35. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are Credit policy
expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of Sales P1,800,000 P1,980,000
credit standards will increase credit sales by 20% and increase the average collection period Average collection period 30 days 36 days
Page 24 of 37
The company requires a rate of return of 10% and a variable cost ratio of 60%. Using a 360- 43. Sisa Corporation has the following data:
day year, the pre-tax cost of carrying the additional investment in receivables under the new Selling price per unit ₱ 70
policy would be Variable cost per unit ₱ 45
A. P2,880 C. P4,080 Annual credit sales – units 50,400
B. P3,000 D. P4,800 RPCPA 1096 Collection period 30 days
Rate of return 20%
40. Best Computers believes that its collection costs could be reduced through modification of Sisa Corporation is considering easing its credit standards. If it does, sales will increase by
collection procedures. This action is expected to result in a lengthening of the average 25%; collection period will increase to 45 days; bad debts losses are anticipated to be 4% of
collection period from 28 days to 34 days; however, there will be no change in the the incremental sales; and collection costs will increase by ₱31,645.
uncollectible accounts. The company’s budgeIf a firm purchases ted credit sales for the If the proposed relaxation in credit standard is implemented, the net benefit (loss) for Sisa
coming year are ₱27,000,000, and short-term interest rates are expected to average 8%. To Corporation is
make the changes in collection procedures cost beneficial, the minimum savings in collection A. (₱ 100,000) C. ₱ 215,000
costs (using a 360-day year) for the year would have to be B. (₱ 33,075) D. ₱ 315,000 Roque, 2011
A. ₱30,000 C. ₱180,000.
B. ₱36,000 D. ₱360,000 CMA 1292 44. The Sales Director of Go Company suggests that certain credit terms be modified. He
estimates the following effects:
41. A company with P4.8 million in credit sales per year plans to relax credit standards, projecting  Sales will increase by at least 20%
that this will increase credit sales by P720,000. The company’s average collection period for  Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
new customers is expected to be 75 days, and the payment behavior of the existing times
customers is not expected to change. Variable cost are 80% of sales. The firm’s opportunity  Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed
cost is 20% before taxes. Assuming a 360-day year, what is the company’s benefit(loss) on changes is at P900,000. Variable cost ratio is 55% and desired rate of return is 20%.
the planned changed in credit terms? Fixed expenses amount to P150,000
A. P0 C. P120,000 Should the company allow the revision of its credit terms?
B. P28,800 D. P144,000 Agamata 2013 A. Yes, because income will increase by P64,000. P68,850
B. Yes, because losses will be reduced by P78,800.
42. May Corporation’s average annual sales is ₱6,400,000, 10% of which is cash sales. The C. No, because income will be reduced by P13,000.
variable cost ratio is 60%. Starting next year, May Corporation will relax its credit standards. D. No, because losses will be increased by P28,000. RPCPA 0594
The relaxation in credit standards is expected to cause the following changes:
 Total credit sales will increase by 20%. 45. Crest Company has the opportunity to increase annual sales by P1 million by selling to new
 The collection period for incremental sales is 60 days. (The payment behavior of the riskier customers. It has been estimated that uncollectible expenses would be 15% and
existing customers will not change.) collection costs, 5%. The manufacturing and selling costs are 70% of sales and corporate tax
 The variable cost ratio, even for the incremental sales, will be the same as in the past. is 35%. If they pursue this opportunity, the after-tax profit will:
The cost of borrowing is estimated at 25% per year. The company uses 360 days in a A. Increase by P35,000. C. Increase by P97,500.
year in all its computations. B. Increase by P65,000. D. Remain the same. RPCPA 0596
What is May Corporation’s expected benefit (loss) from the planned relaxation in the credit
policy? 46. Wasting Resource Company has annual credit sales of P4 million. Its average collection
A. (₱ 27,520) C. ₱ 460,800 period is 40 days, and bad debts are 5% of sales. The credit and collection manager is
B. ₱ 432,000 D. ₱ 1,152,000 Roque, 2011 considering instituting a stricter collection policy, whereby bad debts would be reduced to 2%
of total sales, and the average collection period would fall to 30 days. However, sales would
Page 25 of 37
also fall by an estimated P500,000 annually. Variable cost is 60% of sales and the cost of collection costs for the coming year should be
carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the A. ₱8,100. C. ₱90,000.
incremental change in the profitability of the company if stricter policy would be implemented B. ₱81,000. D. ₱900,000.
would be
A. A reduction in net income by P35,400. Questions 51 and 52 are based on the following information: RPCPA 1095
B. A reduction in net income by P38,350. Slippers Mart has sales of P3 million. Its credit period and average collection period are both 30
C. A reduction in net income by P70,000. days and 1% of its sales end up as bad debts. The general manager intends to extend the credit
D. Zero as the positive and negative effects offset each other. RPCPA 0597 period to 45 days which will increase sales by P300,000. However, bad debts losses on the
incremental sales would be 3%. Costs of products and related expenses amount to 40% exclusive
Questions 47 & 48 are based on the following information. Roque of the cost carrying receivables of 15% and bad debts expenses.
Che-Che Corporation is planning to change its credit policy. The proposed change is expected to:
 Shorten the collection period from 50 days to 30 days. 51. Assuming 360 days a year, the changes in policy would result to incremental investments in
 Increase the ratio of cash sales to total sales from 20% to 30% receivables of
 Decrease total sales by 10%. A. P9,750 C. P65,000
B. P24,704 D. P162,500
47. If projected sales for the coming year is ₱40M, what is the peso impact on the average
accounts receivable balance of the proposed change in the credit policy? (Use 360 days in a 52. The change in the credit policy would result to increase (decrease) in incremental profit of
year.) A. P106,000 C. P171,000
A. ₱ 18,889 decrease C. ₱ 2,344,444 decrease B. P161,250 D. P177,750
B. ₱ 2,100,000 decrease D. ₱ 6,800,000 decrease
Question Nos. 53 through 55 are based on the following data: Bobadilla
48. What is the impact of the proposed credit policy on the company’s accounts receivable Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order
turnover? to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 percent
A. Decrease by 7.2 C. Increase by 4.8 discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless
B. Decrease by 20 days D. Increase to 4.8 times of the credit terms, half of the customers who do not take the discount are expected to pay on time,
whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit
Questions 49 & 50 are based on the following information Roque 2011 standards; therefore bad debt losses are not expected to rise above their present 2 percent level.
Elaine Corporation is planning to introduce changes in its collection procedures. The new However, the more generous cash discount terms are expected to increase sales from P2 million to
procedures are expected to make its collection period longer by ten days, although there will be a P2.6 million per year. Sonata Company’s variable cost ratio is 75 percent, the interest rate on
change in bad debts. funds invested in accounts receivable is 9 percent, and the firm’s income tax rate is 40 percent.
For the coming year, Elaine Corporation’s budgeted sales is ₱32,400,000 or ₱90,000 per day.
Short-term interest can be expected to average at 9% per annum. 53. What are the days sales outstanding (DSO) before and after the change of credit policy?
A. 21.5 days and 22.5 days respectively C. 22.5 days and 27.0 days, respectively
49. As a result of the changes in collection procedures, Elaine Corporation’s average accounts B. 22.5 days and 21.5 days, respectively D. 27.0 days and 22.5 days, respectively
receivable balance will increase (decrease) by
A. (₱900,000) C. ₱900,000 54. The incremental carrying cost on receivable is
B. ₱90,000 D. ₱32,400,000 A. P 643.75 C. P6,667.00
B. P 843.75 D. P8,889.00
50. To make the changes in collection procedures cost beneficial, the minimum savings in
Page 26 of 37
55. The incremental after tax profit from the change in credit terms is 61. Jeff company sells 20,000 radios evenly throughout the year. The cost of carrying one unit of
A. P57,615 C. P65,640 inventory for one year is P8, and the purchase order cost per order is P32. What is the
B. P60,615 D. P68,493 economic order quantity?
A. 200 C. 400
Inventory Management B. 283 D. 625 RPCPA 0598
56. Julia Company has P5 million of average inventory and sales of P30 million. Using a 365-day
year, calculate the firm’s inventory conversion period. 62. The following data relate to inventories for a given year of Cloud Company:
A. 30.25 days C. 60.83 days EOQ 7,500 units
B. 45.00 days D. 72.44 days Bobadilla Cost to place one purchase order P75
Total cost to place purchase orders for the year P15,000
57. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 Cost to carry one unit for one year P6
million in average inventory, and a cash conversion cycle of 75 days? The estimated annual usage in units would be:
A. 6.56 days C. 52.60 days A. 1,250,000 C. 2,250,000
B. 18.75 days D. 67.50 days Bobadilla B. 2,000,000 D. 5,625,000 RPCPA 1088
58. Southern Company’s budgeted sales and budgeted cost of sales for the coming year are 63. The basic EOQ model equals the square root of the (1) product of twice the demand times
P144,000,000 and P90,000,000 respectively. Short-term interest rates are expected to the cost per order, (2) divided by the periodic carrying cost per unit. If the annual demand
average 10%. If Southern can increase inventory turnover from its present level of nine times increases by 44%, the EOQ will increase (decrease) by
per year to a level of 12 times per year, its cost savings in the coming year would be A. 6.63% C. 12%
expected to be B. 9.38% D. 20% CIA 1195*
A. P250,000 C. P450,000
B. P400,000 D. P600,000 AICPA* 64. Narra Company is considering a switch to level production. Cost efficiencies will occur under
level production and after tax cost would decline by P70,000 but inventory would increase
59. A & B Company’s financial plan for next year shows sales of P72 million and cost of sales of from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at a cost of
P45 million. It expects short term interest rates to average 10% for the coming year. It aims to 10.5 percent.
increase inventory turnover from the present level of 9 times to 12 times next year. If its plans What is the maximum interest rate that makes level production feasible?
and objectives would be carried out, how much is the cost savings for the coming year? A. 5.83 percent C. 8.75 percent
A. P125,000 C. P375,000 B. 7.00 percent D. 10.00 percent Bobadilla
B. P300,000 D. P500,000 RPCPA 1096
65. One of the products Nature Health Products sells is a magnetic back support. The ordering
60. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high cost related to this product is P12.50 per order. The cost of carrying one item of inventory for
selling products for the coming year. Its supplier quoted a price of P25 per zipper. Diesel one year is P16.00. The business sells 40,000 of this type of product evenly throughout the
planned to purchase 7,500 units per month but its supplier could not guarantee this delivery year. How much is the total ordering costs per year and total carrying cost per year at the
schedule. In order to ensure availability of these zippers, Diesel is considering the purchase EOQ?
of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the RPCPA 1092 A. B. C. D.
company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is Ordering cost P1,562.50 P1,562.50 P2,000 P4,000
A. P123,750 C. P135,000 Carrying cost P1,562.50 P2,560.50 P2,000 P4,000
B. P127,500 D. P264,000 Bobadilla
66. Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The
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fabric costs P25 per yard. The current policy is to order the fabric four times a year. make and costs the company P20 to carry in inventory for a year. The setup costs for each
Incremental ordering costs are about P200 per order, and incremental carrying costs are production run total P80. The company should
about P0.75 per yard, much of which represents the opportunity cost of the funds tied up in A. Adopt EOQ due to savings of P35,675
inventory. B. Adopt EOQ due to savings of P42,320
How much total annual costs are associated with the current inventory policy? C. Continue the existing system due to P38,950 advantage
A. P18,750 C. P38,300 D. Continue the existing system due to P41,820 advantage RPCPA 0595
B. P19,550 D. P62,500 Bobadilla
Questions 70 and 71 are based on the following information: CMA 0694
67. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells Melsie Computer Furniture Inc, (MCF) manufactures a line of office computer chairs. The annual
blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.00 per demand for the chairs is estimated to be 5,000 units. The annual cost to hold one unit in inventory
tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight, and is P10 per year, and the cost to initiate a production run is P1,000. There are no computer chairs
Pirate Mart does not inspect the tapes due to BIBO Company's reputation for high quality. on hand, and MCF has scheduled four equal production runs of computer chairs for the coming
Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart earns 20% on year, the first of which is to be run immediately. RCF has 250 business days per year, sales
its cash investments. The purchase-order lead time is two weeks. occurred uniformly throughout the year, and production start-up is within one day.
The following cost data are available:
Relevant ordering costs per purchase order P90.50 70. The number of production runs per year of computer chairs that would minimize the sum of
Carrying costs per package per year: carrying and setup costs for the coming year is
Relevant insurance, materials handling, breakage, etc., per year P 4.50 A. 1 C. 4
What is the required annual return on investment per package? B. 2 D. 5
A. P 250 C. P1,200
B. P 600 D. P6,000 Horngren* 71. If RCF does not maintain a safety stock, the estimated total carrying costs for the computer
chairs for the coming year based on their current schedule is
68. Rodenstock, Inc, currently places orders for a particular stock item at quarterly intervals. A. P 4,000 C. P 6,250
Information concerning these items is as follows: B. P 5,000 D. P 12,500
Cost of placing an order P10
Annual Demand 20,000 units Nos. 72 and 73 are based on the following information Roque, 2011
Purchasing Price per unit P1.00 Using the EOQ model, Apple Baby Corporation computed the economic order quantity for one of
Carrying cost rate 10% the products it sells to be 4,000 units. Apple Baby Corporation maintains safety stock of 300 units.
What annual cost saving would result if Rodenstock used the EOQ for order sizes instead of The quarterly demand for the product is 10,000 units. The order cost is ₱200 per order. The
their current policy? purchase price of the product is ₱2.40. The company sells at a 100% markup. The annual
A. P80 C. P150 inventory carrying cost is equal to 25% of the average inventory level.
B. P90 D. P240 RPCPA 0592
72. The total inventory order cost per year is
69. Marlita works for a local ceramic company. She just completed her accountancy degree and A. ₱2,000 C. ₱5,520
learned the EOQ model in one of her subjects. She suggested to her employer to adopt it. B. ₱2,300 D. ₱800,000
The company sells 20,000 pcs of specialty ceramic items each year. Traditionally they have
produced the items four times a year, making 5,000 pcs at a time. They carry no safety stock, 73. The annual inventory carrying costs is
as customers do not mind waiting for orders. The average piece of ceramic cost 400P400 to A. ₱1,380 C. ₱4,000
B. ₱2,300 D. ₱4,300
Page 28 of 37
Sundays. The company would like to keep safety stock or extra stock to guard against stock
Questions 74 to 77 are based on the following information: Roque, 2011 outs. How much is the safety stock?
The following information pertains to Emy Manufacturing Corporation’s Product X: A. 1,250 units C. 25,000 units
Annual demand 33,750 units B. 8,750 units D. 33,750 units RPCPA 1096
Annual cost to hold one unit of inventory ₱15
Setup cost (or the cost to initiate a production run) ₱500 80. Eklog Manufacturing Corporation uses the standard economic order quantity (EOQ) model. If
Beginning inventory of product X 0 the EOQ for Product A is 200 units and Eklog maintains a 50-unit safety stock for the item,
At present, the company produces 2,250 units of Product X per production run, for a total of 15 what is the average inventory of Product A?
production runs per year. The company is considering to use the EOQ model to determine the A. 100 units C. 150 units
economic lot size and the number of production runs that will minimize the total inventory carrying B. 125 units D. 250 units CMA 1295
cost and setup cost for Product X.
81. DF Tires unlimited is a business enterprise located in the City of Cagayan de Oro. The
74. If the EOQ model is used, the economic lot size is market price on a per unit basis is P 3,000. Since Cagayan de Oro is a very progressive rural
A. 1,500 units C. 1,500,000 place, the business sells an average of 36,000 tires annually. Based on a company study
B. 2,250 units D. 2,250,000 units covering the last five years of its operations, it was found out that annual carrying cost per
tire is P 5.00 and the ordering cost is P 100 on a per order basis. The store is open 7 days a
75. If the EOQ model is used, the number of production runs should be week ( which includes Sundays and holidays of obligation). The delivery time per order (tires
A. 15 runs C. 67.5 runs are ordered from Manila) is 5 days. Since it normally takes time before an order is placed,
B. 22.5 runs D. 1,500 units filled up and delivered, the manager has decided to keep a safety stock of 3,000 tires which
is equivalent to a month’s sales. The average inventory is
76. At present, the company’s total annual inventory costs is A. 3,493 tires C. 1,200 tires
A. 7,500 C. 22,500 B. 3,600 tires D. 3,000 tires RPCPA 1091
B. 16,875 D. 24,375
82. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its average
77. If the EOQ model is used, the total annual inventory costs, compared with that under present inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent order
system, will increase (decrease) by quantity?
A. (5,625) C. 3,750 A. 6,000 lbs. C. 18,000 lbs.
B. (1,875) D. 11,250 B. 14,000 lbs. D. 24,000 lbs. Bobadilla
78. Scholas Company uses 840,000 units of component R4 in manufacturing P444 over a 300- 83. Felix Company sells 200 discs per week. Purchase order lead time is 3 weeks and the
day work year. The usual lead time for the part is six days, however at times the lead time economic order quantity is 450 units. What is the reorder point?
has gone high as eight days. Scholas now desire to adjust its safety stock policy. The A. 425 units C. 1,750 units
increase in safety stock is: B. 600 units D. 2,250 units RPCPA 0595
A. 2,800 units C. 6,800 units
B. 5,600 units D. 7,200 units RPCPA 0596 84. Huron Corporation purchases 60,000 headbands per year. The average purchase lead time
is 20 working days, safety stock, equals 7 days normal usage and the corporation works 240
79. D & R Corporation consumes 300,000 units of spare part V per year. The average purchase days per year. Huron should reorder headbands when the quantity in inventory reaches
lead time is 20 working days while maximum is 27 working days. The company’s annual A. 1,750 units C. 5,250 units
operations cover 240 days allowing for shutdowns for plant maintenance, holidays and B. 5,000 units D. 6,750 units CMA 1293
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Roque A. B. C. D.
85. The China Tee Store sells 100,000 tea bags a year. Additional data are presented below: Maximum Lead Time 15 days 30 days 45 days 45 days
Selling price per bag 2.50 Reorder Point 1,050 2,100 2,100 3,150
Purchase cost per bag 1.50
Ordering cost 5.40 an order 89. Canseco Enterprises uses 84,000 units of Part 256 in manufacturing activities over a 300-day
Carrying cost 20% of unit cost work year. The usual lead-time for the part is 6 days; occasionally, however, the lead time
Number of days the company operates in a year; 250 has gone as high as 8 days. The company now desires to adjust its safety stock policy. The
Average lead time on purchases; 6 days increase in safety stock size and the likely effect on stockout costs and carrying costs,
What is the reorder point if the company will keep a 10-day safety stock of inventory? respectively, would be
A. 2,400 bags C. 6,400 bags CMA 1294 A. B. C. D.
B. 5,400 bags D. 8,800 bags RPCPA 0594 Increase in safety stock size 560 units 560 units 1,680 units 2,240 units
Effect on stockout costs Decrease Increase Decrease Increase
86. M & L Company has the following information on inventory: Effect on carrying costs Increase Decrease Increaase Decrease
Sales 20,000 units per year
Order Quantity 4,000 units Questions 90 and 91 are based on the following information: Roque, 2011
Safety Stock 2,600 units The following information is available for Edgar Corporation’s Material X.
Lead time 4 weeks Annual usage 12,600 units
What is the re-order point? (use 50 week year) Working days per year 360 days
A. 1,600 units C. 4,200 units Normal lead time 20 days
B. 2,600 units D. 5,600 units RPCPA 1096 The units of Material X are required evenly throughout the year.
87. Softdrinks Distributors, which buys in a pre-sell basis, is discussing with the route salesmen 90. What is the reorder point?
on the proper cases to be ordered and the frequency of call. From the route book and other A. 20th day C. 630 units
records, the following are available: prior year’s purchases, 50,000 cases; carrying cost per B. 35 units D. 700 units
case of inventory, P1.20; distributor’s discount, 1 case for every 10 cases bought; cost of
placing and order, P3.00; weekly demand is approx. 952 cases. Safety stock required is 140 91. Assuming that occasionally, the company experiences delay in the delivery of Material X,
cases. No change in demand is expected this year. (Use 365 –day, 52-week). Determine the such that the lead time reaches a maximum of 30 days, how many units of safety stock
EOQ, and the reorder point assuming a two-day lead time. should the company maintain and what is the reorder point?
RPCPA 1094 a. b. c. d. A. B. C. D.
EOQ 481 cases 500 cases 962 cases 250 cases Safety stock 0 350 350 1,050
Reorder point 500 cases 414 cases 275 cases 280 cases Reorder point 1,050 700 1,050 700
88. The following information pertains to Annie Corporation’s Material X: Questions 92 thru 94 are based on the following information. CMA*
Annual usage 25,200 units Cantor Creations, which has 250 business days per year, manufactures desks for desktop
Working days per year 360 days workstations. The annual demand for the desks is estimated to be 5,000 units. The annual cost of
Normal lead time in working days 30 days carrying one unit in inventory is P10, and the cost to initiate a production run is P1,000. Cantor has
Safety stock 1,050 units scheduled four equal production runs for the coming year, the first to begin immediately. Currently,
The maximum lead time in working days and the reorder point for material X are there are no desks on hand. Assume that sales occur uniformly throughout the year and that
production is instantaneous.
Page 30 of 37
Excess Demand during in the Last 40

92. If Cantor Creations does not maintain a safety stock, the estimated total carrying costs for the The Lead Time Period Reorder Cycles
desks for the coming year is 200 6
A. P4,000. C. P6,250. 300 12
B. P5,000. D. P10,250. 400 6
The annual cost of establishing a 200-unit safety stock is expected to be
93. If Cantor Creations were to schedule only two equal production runs of the desks for the A. P2,600 C. P4,260
coming year, the sum of carrying costs and set-up costs would increase (decrease) by B. P4,040 D. P5,200 CMA 1288
A. P(2,000). C. P4,250.
B. P(250). D. P6,250. 97. Each stockout of a product sold by A.W. Inn Company costs P1,750 per occurrence. The
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
94. A safety stock for a five-day supply of desks would increase the number of units in Cantor product 24 times a year at a cost of P100 per order. The probability of a stockout at various
Creations’ planned average inventory by levels of safety stocks is.
A. zero. C. 100. Units of safety stock Probability of stockout
B. 50. D. 250. 0 .50
100 .30
95. Handy operated a chain of hardware stores across Laguna. The controller wants to determine 200 .14
the optimum safety stock levels for an air purifier unit. The inventory manager compiled the 300 .05
following data. 400 .01
 The annual carrying cost of inventory approximates 20% of the investment in inventory. The optimal safety level for the company is
 The inventory investment per unit averages P50 A. 0 unit C. 300 units
 The stockout cost is estimated to be P5 per unit B. 100 units D. 400 units CMA 0692
 The company orders inventory on the average of 10 times per year
 Total cost = carrying cost + expected stockout cost 98. Each stockout of Product AX sold by Axiom Inc costs P8,750 per occurrence. The carrying
The probabilities of a stockout per order cycle with varying levels of safety stock are as cost per unit of inventory is P250 per year and the company orders 1,500 units of product 24
follows: times a year at a cost of P5,000 per order. The probability of stockout at various levels of
Safety stock Stockout (Units) Probability safety stock is
200 0 0% Units of safety stock Probability of stockout
100 100 15% 0 .50
0 200 12% 100 .30
The total cost of safety stock on an annual basis with a safety stock level of 100 units is 200 .14
A. 550 C. 1,950 300 .05
B. 1,750 D. 2,000 CMA 1294 400 .01
The optimal safety stock level for the company is
96. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual A. 0 unit C. 200 units
demand of 50,000 units for part number 191 and has computed an optimal lot size of 6,250 B. 100 units D. 300 units RPCPA 0596*
units. Per-unit carrying cost and stockout costs are P13 and P3, respectively. The following
costs data have been gathered in an attempt to determine an appropriate safety stock level: 99. Paeng Company uses the EOQ model for inventory control. The company has an annual
Units Short Because of Number of times Short demand of 50,000 units for part number 6702 and has computed an optimal lot size of 6,250
Page 31 of 37
units. Per-unit carrying costs and stockout costs are P9 and P4, respectively. The following percent cash discount, term: 2/10, net 30. Because of an oversight, one supplier’s invoice is
data have been gathered in an attempt to determine an appropriate safety stock level: not paid within the discount period but paid 10 days after. What is the annual cost of that
Units Short Because of Excess Number of Times Short incident of paying an invoice on the 20th day, instead of the tenth day? Use 360 days a year.
Demand during the Lead in the last 40 Reorder A. 2.04% C. 36.73%
Time Period Cycles B. 30.02% D. 73.44% Bobadilla
100 8
200 10 105. Software Center Inc’s new controller is reviewing the company’s cash management. Below
300 14 are relevant information regarding trade credits from the suppliers of the company:
400 8 Supplier Average Monthly Purchases Credit terms
What is the optimal safety stock level? Tech Co. ₱ 100,000 Net 30
A. 100 units C. 300 units Computech ₱ 300,000 2/10, n/30
B. 200 units D. 400 units Bobadilla Compuworks ₱1,000,000 5/10, net 120
So-wares ₱ 600,000 3/10, net 45
Short-term Financing The company uses a 360-day year. Assume that all supplier can supply any and all of the
100. Batchoy & Company buys on terms 2/10, net 30, but generally does not pay until 40 days requirements of software and can provide unlimited credit line to the company and the
after the invoice date. Its purchases total P2,160,000 per year. Assuming 360 days a year, company can only have one supplier. With a cost of bank borrowing of 18% per annum,
the amount of “non-free” trade credit used by the company on the average. which supplier would Software choose?
A. P60,000 C. P180,000 A. Tech Co. due to no discount policy.
B. P120,000 D. P240,000 RPCPA 0595 B. Computech due to the trade credit of 36.7%.
C. Compuworks due to the highest trade discount at 5%.
101. If a firm purchases raw materials from its suppliers on a 2/10, n/60 cash discount basis, the D. Compuworks due to the longest credit term of 120 days. RPCPA 1096
equivalent annual interest rate (using a 360-day year) of foregoing the cash discount and
making payment on the 60th day is Questions 106 and 107 are based on the following information. CMA 1296
A. 12.2% C. 36.7% CyberAge Outlet, a relatively new store, is a cafe that offers customers the opportunity to browse
B. 14.7% D. 73.5% RPCPA 0596 the internet or play computer games at their tables while they drink coffee. The customer pays a
fee based on the amount of time spent signed on to the computer. The store also sells books, tee
102. If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the
equivalent annual interest rate (using 360-day year) of foregoing the cash discount and payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge’s two
making payment on the 40th day is major vendors, including average monthly purchases and credit terms.
A. 2% C. 24.49% Vendor Ave. Monthly Purchases Credit Terms
B. 18.36% D. 36.72% Gleim 2013 Web Master P25,000 2/10, n/30
Softidee 50,000 5/10, n/90
103. Paramount Corporation is offered trade credit terms of 3/15,net 45. The firm does not take
advantage of the discount, and it pays the account after 67 days. Using a 365-day year, what 106. Assuming a 360-day and that CyberAge continues paying on the last day of the credit period,
is the nominal annual cost of not taking discount? the company’s weighted average annual interest rate for trade credit (ignoring the effects of
A. 18.2% C. 23.48% compounding) for these two vendors is
B. 21.71% D. 26.45% Wiley 2012 A. 25.2% C. 28.0%
B. 27.0% D. 30.2%
104. Escape Company regularly pays its accounts payable on the tenth day and enjoys the 2
Page 32 of 37
107. Should CyberAge use trade credit and continue paying at the end of the credit period? of characteristics?
A. Yes, if the cost of alternative short-term financing is less. A. A 10% compensating balance and regular interest
B. No, if the cost of alternative long-term financing is greater. B. A 20% compensating balance and regular interest
C. Yes, if the cost of alternative short-term financing is greater. C. A 10% compensating balance and discount interest
D. Yes, if the firm’s weighted average cost of capital is equal to the weighted average cost D. A 20% compensating balance and discount interest CIA 1196
of trade credit.
114. Cool and Sweet obtained a short-term bank loan for P1 Million at an annual interest of 12%.
108. A one year, P20,000 loan with a 10% nominal interest rate provides the user with the use of As a condition of the loan, the company is required to maintain a compensating balance of
<List A> if interest is charged on a <List B> basis. P200,000 in its savings account which earns at an annual rate of 6%. The company would
CIA 0595 A. B. C. D. otherwise maintain only P100,000 on the savings account for transactional purposes. The
List A P18,000 P20,000 P20,000 P22,000 effective cost of the loan is:
List B Simple Simple Discount Discount A. 12% C. 13.20%
B. 12.67% D. 13.5% RPCPA 1095
109. If the firm borrows P185,000 at 8 percent on a one-year discounted loan, what is the effective
interest rate? 115. Echo borrowed P100,000 from a bank on a one-year 8% term loan, with interest compounded
A. 7.41 percent C. 8.70 percent quarterly. What is the effective annual interest on the loan?
B. 8.00 percent D. 9.07 percent Bobadilla A. 8% C. 9.12%
B. 8.24% D. 10.41% Wiley 2012
110. Hager Company’s bank requires a compensating balance of 20% on a P100,000 loan. If the
stated interest on the loan is 7%, what is the effective cost of the loan? 116. On January 7, 2006, Dean Company discounted its own P100,000, 180-day note at United
A. 5.83% C. 7.00% National Bank at a discount rate of 20%. Dean repaid the note on the July 6, 2005, due date.
B. 6.40% D. 8.75% CMA 0697 Based on a 360-day year, the effective rate of interest on the borrowing was
A. 18.2% C. 22.2%
111. Butuan Company recently received a commercial bank loan of 16% discounted rate with a B. 20.0% D. 25.0% Agamata 2013
20% compensating balance. The term of the loan is one year. The effective cost of borrowing
is: 117. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10%
A. 19.05% C. 22.05% compensating balance? Assume 360 days per year.
B. 20.00% D. 25.00% RPCPA 0596 A. 15.0% C. 20.0%
B. 17.4% D. 22.2% Bobadilla
112. The Peninsula Commercial Bank and Island Corporation agreed to the following loan
proposal: Stated interest rate of 10% on a one-year discounted loan; and 15% of the loan as 118. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12%
compensating balance on zero-interest current account to be maintained by Island stated rate in an add-on arrangement, payable in 12 equal monthly installments. What is the
Corporation with Peninsula Commercial Bank. estimated annual effective rate?
The loan requires a net proceeds of P1.5 million. What is the principal amount of loan A. 12.70% C. 24.00%
applied for as part of the loan agreement? B. 22.15% D. 25.05% Bobadilla
A. P1,125,000 C. P1,764,706
B. P1,666,667 D. P2,000,000 Bobadilla 119. Nardo, Inc. can issue a three-month commercial paper with a face value of P1,000,000 fpr
P980,000. Transaction costs would be P1,200. The annualized percentage cost of the
113. A short-term bank loan will have a higher effective financing cost if it has which combination financing would be
Page 33 of 37
A. 2.17% C. 8.48% June 5 3

B. 8.00% D. 8.67% Cabrera KG has a line of credit up to P4million on which it pays interest monthly at a rate of 1% of the
amount utilized. KG is expected to have a cash balance of P2million on January 1 and no
120. New Town Bank offers a P25,000 line of credit with an interest rate of 2.5 percent per quarter. amount utilized on its line of credit. Assuming all cash flows occur at the end of the month,
The loan agreement also requires that 5 percent of the unused portion of the credit line be approximately how much will KG pay in interest during the first half of the year?
deposited in a non-interest bearing account as a compensating balance. Short-term A. Zero C. P61,000
investments are currently paying 1.6 percent per quarter. Assume any funds borrowed or B. P 50,000 D. P 132,000 CMA 0697
invested use compound interest.
What is the effective annual interest rate on the line of credit if a customer borrows the entire Questions 124 thru 126 are based on the following information. Bobadilla
P25,000 for one year? Caylor Inc. needs to borrow P300,000 for the next 6 months. The company has a line of credit with
A. 6.56% C. 9.87% a bank that allows the company to borrow funds with a 10% interest rate subject to a 25% of loan
B. 8.98% D. 10.38% Bobadilla compensating balance. Currently, Caylor Inc. has no funds on deposit with the bank and will need
the loan to cover the compensating balance as well as their other financing needs.
121. The Friendly Bank offers AB United a P200,000 line of credit with an interest rate of 2.25
percent per quarter. The credit line also requires that 2 percent of the unused portion of the 124. How much will Caylor Inc. need to borrow?
credit line be deposited in a non-interest bearing account as a compensating balance. AB A. P225,000 C. P375,000
United's short-term investments are paying 1.5 percent per quarter. Assume any funds B. P330,000 D. P400,000
borrowed or invested use compound interest.
What is the effective annual interest rate on this arrangement if the line of credit goes unused 125. What will be the annual percentage rate, or APR, for this financing?
all year? A. 10.00% C. 12.12%
A. 5.92% C. 6.08% B. 10.67% D. 13.33%
B. 6.00% D. 6.14% Bobadilla
126. What is the annual percentage rate for this financing scheme assuming the interest is
122. The Clay Company has a revolving line of credit of P300,000 with a one-year maturity. The discounted?
terms call for a 6% interest rate and a ½ percent commitment fee on the unused portion of A. 13.98% C. 16.67%
the credit line. The average loan balance during the year was P100,000. The annual cost of B. 14.29% D. 20.00%
this financing arrangement is
A. P6,000 C. P7,000 127. A company enters into an agreement with a firm that will factor the company’s accounts
B. P6,500 D. P7,500 CMA Samp receivable. The factor agrees to buy the company’s receivables, which average P100,000 per
month and have an average collection period of 30 days. The factor will advance up to 80%
123. The treasury analyst for KG Manufacturing has estimated the cash flows for the first half of of the face value of receivables at an annual rate of 10% and a charge fee of 2% on all
the next year (ignoring any short term borrowings) as follows: receivables purchased. The controller of the company estimates that the company would
Cash (millions) save P18,000 in collection expenses over the year. Fees and interest are not deducted in
Inflows Outflows advance. Assuming a 360-day year, what is the annual cost of financing?
January P2 P1 A. 10.0% C. 14.0%
February 2 4 B. 12.0% D. 17.5% CMA 0696
March 2 5
April 2 3 128. A firm often factors its account receivable. Its finance company requires a 6% reserve and
May 4 2 charges a 1.4% commission on the amount of the receivables. The remaining amount to be
Page 34 of 37
advanced is further reduced by an annual interest charge of 15%. What proceeds (rounded to 134. The high cost of short-term financing has recently caused a company to re-evaluate the terms
the nearest peso) will the firm receive from the finance company at the time a P100,00 of credit it extends to its customers. The current policy is 1/10, net 60. If customers can
account due in 60 days is factored? borrow at prime rate, at what prime rate must the company change its terms of credit in order
A. P92,600 C. P90,285 to avoid an undesirable extension in its collection of receivables?
B. P96,135 D. P85,000 Gleim 2013 A. 2% C. 7%
B. 5% D. 8% Gleim 2013
Questions 129 to 132 are based on the following information: Roque 2013
Lei Company enters into an agreement with a firm that will buy Lei Company’s accounts receivable 135. Three suppliers of Mama Corporation offer different credit term. Core Co. offers term of 1
and assume the risk of collection. 1/2/15, net 30. Doug Corp offers terms of 1/10, net 30. Ernst Inc. offers of 2/10, net 60. Mama
Details about the agreement are as follows. Corporation would have to borrow at a bank at an annual rate of 12% in order to take any
Average amount of receivable to be factored each month: P500,000 cash discounts. Which one of the following would be the most attractive for Ma Corp.?
Average collection period: 60 days (Assume 360 days in a year)
Amount to be advanced by the factor : 80% of the face amount of the receivables A. Purchase from Doug Corp and pay in 30 days. RPCPA 0595
Interest rate, deductible in advance: 10% p.a. B. Purchase from Core Co., pay in 15 days and borrow any money needed from the bank.
Factor’s fee, deductible in advance: 2% C. Purchase from Core Co., pay in 30 days and borrow any money needed from the bank.
Annual savings of Lei Company in collection expenses: P60,000 D. Purchase from Ernst Inc., pay in 60 days and borrow any money needed from the bank.
129. How much is the monthly net proceeds from factoring the receivables? 136. Buddah Corporation intends to acquire a new equipment to increase its capacity. It is
A. P350,000 C. P400,000 estimated to cost P2.4 million. A bank loan can finance the acquisition at ten percent (10%)
B. P383,333 D. P500,000 discounted interest. Alternatively, the company may adjust delay payment to its suppliers.
Presently, the company buys under terms of 2/10, net 40. But management believes payment
130. What is the annual net cost of factoring? could be delayed 30 additional days, without penalty, that is, payment could be made in 70
A. (P10,000) C. P120,000 days.
B. P100,000 D. P160,000 Assuming 360 days a year, the company should...
A. Delay payments to suppliers since it does not cost anything.
131. What is the effective annual cost rate of financing? B. Borrow since it is cheaper by 2.5% than delaying payment to suppliers.
A. 20% C. 26.09% C. Borrow since it is cheaper by 1.13% than delaying payment to suppliers. RPCPA 0597
B. 25% D. 29.41% D. Delay payments to suppliers since it would cost 12% as against bank loan of 10%.
132. If the interest charge and factor’s fee is not deducted in advance, the effective annual cost 137. Meals Etc has been very successful. It is the newest fast food outlet at the Greenbelt of
rate is Makati featuring ordinary Filipino food packed with banana leaves. After six months of
A. 20% C. 26.09% operations, it needs to expand. The owner, Mr. K Eng, estimates that P2.4Million will be
B. 25% D. 29.41% required to put up another outlet in Ortigas area. Financing was offered by a friendly banker
at 10% discounted interest. Alternatively, Mr, Eng is thinking of just delaying payment to its
133. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent suppliers. All his sales are on cash basis. The company purchases under terms of 2/10,
can be arranged at any time. When should the customer pay the invoice? net.40 but Mr. Eng believes that he could delay payments by another 30 days without any
A. Pay on the 1st. C. Pay on the 40th problem. This means payment could be made in 70 delays. Assuming 360 days a year,
B. Pay on the 10th D. Pay on the 60th Bobadilla Meals Etc should opt for
A. Bank loan since it costs of 10% is cheaper than the cost of delaying payments of 12%.
Page 35 of 37
B. Delaying payments since it costs only 2% compared to 10% discounted bank interest. B. P 51,000 less D. P100,000 less Bobadilla
C. Delaying payments since it has no cost compared to the 10%discounted bank interest.
D. Bank loan since its cost of 11.11% is cheaper than the cost of delaying payments of 142. A company will receive cash from sales in 1 year that can be used to pay for materials. The
12.24%. RPCPA 0597 supplier will allow payment in 1 year. If the company pays the supplier immediately, it will
receive a 20% discount off the P100,000 purchase price, but it must borrow the full amount. A
138. A corporation is currently experiencing cash-flow problems and has determined that it is in bank has offered the company three alternatives:
need of short-term credit. It can either use its trade credit on P100,000 of accounts payable  A 1-year loan at 18% with no other fees
with terms of 1/10, net 30 or a 30-day note with a 20% annual simple interest rate. Which is  A 1-year loan at 15% with the provision that it maintains 20% of whatever amount it
the best alternative, and what is its effective rate of interest (rounded to a whole percentage borrows as noninterest-bearing compensating balances over the life of the loan, or
and using a 360-day year)?  A guaranteed line of credit of P100, 000 at 17% with the provision that the bank will
A. The note. Its effective rate is 17% collect a 1% fee on the average amount of unused funds. The company expects to
B. The note. Its effective rate is 20% borrow no other funds
C. The trade credit. Its effective rate is 10% The company would achieve the lowest cost of financing by:
D. The trade credit. Its effective rate is 20% CIA 1188 A. Accepting the 1 year loan at 18% with no other provisions.
B. Accepting the 1 year loan at 15% with compensating balance provisions.
139. Jun Traders, a merchandising firm, purchases merchandise from its suppliers on credit terms C. Allowing the supplier to finance the materials and making payment at the end of 1 year.
of 2/10, net 30. Jun Traders needs cash, so it is considering two alternatives: D. Accepting the guaranteed line of credit at 17% with the fee required on the average
Alternative 1 – Obtain a short-term loan from a bank at an effective interest rate of 12%. amount of unused funds CIA 1186
Alternative 2 – Forego the discount on its credit purchases and pay on the 30th day of the
term. Questions 143 to 146 are based on the following information: Roque 2013
Jun Traders should choose (Use a 360-day year.) Jem Traders, Inc. needs P100,000 to pay a supplier’s invoice for merchandise purchased with
A. Alternative 1 because its cost is cheaper by 1%. terms 2/10, net 30. Jem Traders want to pay on the 10th day of the credit term so it can avail of the
B. Alternative 2 because its cost is cheaper by 10%. 2% discount.
C. Alternative 1 because its cost is cheaper by 24.73%.
D. Alternative 2 because this is a costless credit financing. Roque, 2013 The funds needed can be raised by obtaining a short-term loan from a bank which agrees to grant
a 30-day loan at 12% discounted interest per annum. The bank requires that a compensating
140. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The balance of 10% be maintained in the borrower’s non-interest earning deposit account.
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 considering a 1-year bank loan for P9,800 (98% of the 143. The amount needed by Jem Traders to pay the invoice within the discount period is
invoice amount). If the effective annual interest rate on this loan is 12%, what will be the net A. P9,000 C. P100,000
peso savings over the year by borrowing and then taking the discount on the materials? B. P98,000 D. P102,000
A. P1,176 C. P3,624
B. P1,224 D. P4,800 Bobadilla 144. The principal amount of the loan that must be obtained from the bank to raise the needed
fund is
141. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net A. P108,780 C. P112,360
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait B. P110,112 D. P125,640
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 145. What is the effective interest rate of the loan?
A. P 24,500 more C. P 75,500 less A. 10% C. 13.48%
Page 36 of 37
B. 12% D. 22% on all receivables purchased. The controller estimates that the firm would save
P24,000 in collection expenses over the year. Assume the fee and interest are not
146. If Jem Traders fails to pay the discount and pays the account on the 30th day of the term, deductible in advance.
what is the annual cost of this non-free trade credit? Alternative (B): Borrow P110,000 from a bank at 12% interest. A 9% compensating balance would
A. 0 C. 24% be required.
B. 2% D. 36.73% Alternative (C): Issue P110,000 of 6-month commercial paper for P100,000 (New paper would be
issued every 6 months)
Questions 147 thru 149 are based on the following information: Roque 2013 Alternative (D): Borrow P125,000 from a bank on a discount at 20%. No compensating balance
The expected boom in business in the coming period led the Baby Apple Company to decide to would be required.
expand its operations. The expansion requires an increase of P500,000 in working capital, which Assume a 360-day year in all of your calculations.
the company is considering to finance through any of the following alternatives:
1. Pledge the accounts receivable. The company’s average accounts receivable is P625,000 per 150. The cost of alternative A is
month. A financer will lend 80% of the face value of the receivables at 10% interest per A. 10.0% C. 13.2%
annum, payable on the maturity loan. B. 12.0% D. 16.0%
2. Issue P515,000 of 3-month commercial paper to net P500,000. New paper will be issued every
3 months. 151. The cost of alternative B is
3. Borrow from a commercial bank an amount that will net P500,000 after deducting a A. 9.0% C. 13.2%
compensating balance of 15% and interest of 5%. B. 12.0% D. 21.0%
Use a 360-day year in all your calculations.
152. The cost of alternative C is
147. The cost of Alternative 1 is A. 9.1% C. 18.2%
A. 8% C. 12.5% B. 10.0% D. 20.0%
B. 10% D. 120%
153. The cost of alternative D is
148. The annual cost of Alternative 2 is A. 20.0% C. 40.0%
A. 0.97% C. 11.65% B. 25.0% D. 50.0%
B. 1% D. 12%
149. The annual cost of Alternative 3 is

A. 5% C. 20%
B. 6.25% D. 25%
Questions 150 to 153 are based on the following information. CMA 1296
The Frame Supply Company has just acquired a large account and needs to increase its working
capital by P100,000. The controller of the company has identified the four sources of funds given
below:
Alternative (A): Pay a factor to buy the company’s receivables, which average P125,000 per
month and have an average collection period of 30 days. The factor will advance
up to 80% of the face value of receivables at 10% interest and charge a fee of 2%
Page 37 of 37

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MANAGEMENT ADVISORY SERVICES Working Capital Management

A. Accounts payable deferral period C. Inventory conversion period

A. Cost of capital invested in the inventory C. Insurance Cost

B. Safety stock cost D. No answer RPCPA 0588 C. purchasing staff's salaries.

arrangement is employed making the cost much less. Cabrera

Prepaid assets 45, 000

Excess Demand during in the Last 40

A. 2.17% C. 8.48% June 5 3

149. The annual cost of Alternative 3 is

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