INTRODUCTION TO WORKING CAPITAL MANAGEMENT (THEORY)

• Which of the following decisions are addressed by working capital

management?
• Optimal level of investment in current assets
• Appropriate mix of debt and equity financing used to support investment

• I only
• II only
• Both I and II
• Neither I nor II

• Which of the following is true with regard to working capital management?

• Net working capital pertains to the firm’s investment in current

assets
• Working capital classified according to components pertains to
temporary and permanent working capital.
• Temporary working capital pertains to the investment in current
assets that varies with seasonal requirements
• Permanent working capital is constant over time.

• Implementing a financing policy based on maturity matching is considered

as
• Conservative
• Moderate
• Aggressive
• Either a or b

• Which of the following describe a company with a conservative investment

level policy?
• High liquidity
• High profitability
• High risk
• Both a and b

• When a portion of a company’s temporary working capital is financed by

long-term financing,
• The company is adopting a conservative financing policy
• The company may pay for interest on excess debt during seasonal
troughs when the particular funds are not needed
• The company faces less risks with respect to both liquidity and re-
financing
• All of the above are correct.

CASH AND SECURITIES MANAGEMENT (THEORY)

• Which of the following statements is not true in relation to the motives for
holding cash?
• Holding cash to meet payments, such as purchases, wages, taxes, and
dividends, arising in the ordinary course of business pertains to the
speculative motive.
• Holding cash to take advantage of temporary opportunities pertains to the
precautionary motive.
• I only
• II only
• Both I and II
• Neither I nor II

• A company has total funding requirements for the year of Php6,000,000.

Which of the following transaction frequencies would result in the lowest
interest opportunity cost for the company?
• 25 transactions
• 30 transactions
• 35 transactions
• 40 transactions

• Which of the following is true with regard to the Baumol model of

determining the optimum cash balance?
• The Baumol model allows for uncertainties in the pattern of future cash
flows
• There is an inverse relationship between transaction costs and opportunity
costs from foregone interest.
• The cash balance derived from the Baumol model minimizes total costs
related to cash.
• I and II only
• I and III only
• II and III only
• All of the above are correct

• Which of the following types of float does a lockbox system eliminate?

• Mail float
• Processing float
• Availability float
• Collection float

• Which of the following securities will most likely have the lowest yield
given the same maturity?
• Treasury bill
• Commercial paper
• Negotiable certificate of deposit
• Banker’s acceptance
CASH AND SECURITIES MANAGEMENT (PROBLEM SOLVING)

Use the following information to solve for items 11-13.

A company with a total funding requirements for the year of Php58,320,000

keeps a cash balance of Php2,430,000. The company is charged Php270 per
transaction, and it can invest funds at a rate of 2.70% per annum. Any
adjustment to the company’s cash holdings is reflected by a corresponding
adjustment to short-term securities.

• How much will the company’s cash balance increase or decrease if it

follows the optimal cash balance using the Baumol model?
• Increase by Php1,080,000
• Decrease by Php1,080,000
• Increase by Php1,350,000
• Decrease by Php1,350,000

• How much will the company save if it targets its cash balance at the
optimal level?
• Php9,396.00
• Php10,125.00
• Php12,586.15
• Php15,910.71

• If the company’s current ratio is at 1.350x, what will be the new current
ratio if the company shifts to the optimal cash balance? The company’s
current liabilities are at Php60,000,000, with 75% of the balance in
accounts payable and the rest in accrued expenses.
• 1.342x
• 1.350x
• 1.358x
• 1.367x

• A company bought a 90-day treasury bill with a face value of

Php15,000,000 for Php14,940,000. What is the quoted rate for the
security if it was sold on a discount-to-par basis? Assume a 360-day year.
• 0.400%
• 0.402%
• 1.600%
• 1.606%

• A company has total funding requirements for the year of Php14,112,000.

Transaction costs are at Php144 per transaction and the company can
invest funds at a rate of 2.50% per annum. Which of the following
transaction frequencies would result in the lowest cost for the company?
• 32 transactions
 • 36 transactions
• 40 transactions
• 44 transactions

• A company that invested Php9,820,209.45 in a discount security is

expected to receive the Php10,000,000.00 face value in 243 days. What is
the equivalent annual yield of this security? Assume a 365-day year.
• 2.71%
• 2.72%
• 2.75%
• 2.76%

RECEIVABLES MANAGEMENT (THEORY)

• Credit terms which encourage the buyer of certain products to take

delivery before the peak sales period and to defer payment until after the
peak sales period
• Receivable concentration
• Seasonal dating
• Revenue normalization
• Peak sale leveling

• Which of the following 5Cs of credit should a financial manager focus on

with regard to accounts receivable?
• Character
• Capacity
• Conditions

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

• When a proposed policy to lengthen credit period affects both old and
new customers, which of the following is an inaccurate representation of
the benefits and costs resulting from the proposal?
• The company benefits by the amount of the contribution margin
derived from additional sales as a result of the increased credit
period.
• The company incurs opportunity costs on the necessary investment
in receivables (i.e., the variable cost component of the sales)
required to generate the additional sales.
• The company incurs opportunity costs on the investment in
receivables (i.e., the variable cost component of the sales) from the
original sales as a result of the decreased receivable turnover.
• All of the above are accurate.
 • Which of the following statements is true regarding collection procedures
undertaken by a company?
• A company’s bad debt losses and collection expenditures are inversely
related.
• A company can eliminate bad debt losses by spending more on collection
procedures.

• I only
• II only
• Both I and II
• Neither I nor II

• Which of the following is not a source of information in assessing potential

credit applicants?
• Financial statements
• Credit ratings and reports
• Bank checking
• All of the above are sources of information

• Which of the following is incorrect with regard to lines of credit?

• It is a limit to the amount of credit extended to a particular account.
• It represents the minimum risk exposure that a firm is willing to
undergo for an account.
• It must be re-evaluated on a regular basis to be up-to-date with any
developments on the account.
• All of the above are correct statements.

RECEIVABLES MANAGEMENT (PROBLEM SOLVING)

• A corporation which currently generates Php30 million in credit sales has

an average collection period of one month and experiences default losses
of 2%. The firm is currently considering three credit policies, the results of
which are compiled below. Cumulative benefits pertain to the total benefits
of the policy in review and previous policies (i.e. the cumulative benefits in
Policy C represent the benefits of Policies A, B, and C)

Policy A Policy B Policy C

Incremental Sales 5,000,000 3,000,000 2,000,000
Cumulative
125,000 105,000 165,000
Benefit
Which policies should the company implement?
• Policies A and B only
• Policies A and C only
• Policies B and C only
• All three policies

Use the following information to solve for items 24-26.

A corporation which currently generates Php30 million in credit sales gives credit
terms of “net 30 days”. To stimulate demand, the firm is considering to change its
credit terms to “net 45 days”. This is expected to increase sales by 10% and
increase average collection period from 30 days to 45 days. The corporation’s
contribution margin is 10% and its required return on receivables is at 20%.

• What is the opportunity cost on the investment related to the incremental

sales? Assume a 360-day year.
• Php45,000
• Php50,000
• Php67,500
• Php75,000

• What is the opportunity cost on the original Php30 million sales as a result
of the increased credit period? Assume a 360-day year.
• Php100,000
• Php125,000
• Php225,000
• Php250,000

• Should the company implement the credit policy?

• Yes, because the policy results to a net benefit of Php150,000
• Yes, because the policy results to a net benefit of Php130,000
• Indifferent, because the policy results to a net benefit of Php0
• No, because the policy results to a net cost of Php17,500

• A company with Php24 million in annual revenues recognizes bad debt

losses equivalent to 2% of sales. To reduce its losses, the company is
considering to ramp up its collection efforts. Based on estimates, the
company must spend an additional Php37,500 monthly to be able to
reduce its bad debts losses by 90%. What is the annual net benefit or cost
to the company of implementing the policy?

• Php432,000 net benefit

• Php126,000 net benefit
• Php18,000 net cost
• Php48,000 net cost

• A company with Php36 million in sales provides a 2/10, net 45 discount

 period to its customers. To reduce its days receivables from 36 days to 20
days, the company plans to change its credit terms to 5/10, net 30. The
change in credit terms will increase the percentage of customers availing
the discount from 20% to 25%. If the company’s contribution margin is
25% and its required return on receivables is 20%, what is the company’s
net benefit or cost as a result of changing the discount terms? Assume a
360-day year.
• Php104,000 net benefit
• Php24,000 net benefit
• Php14,000 net benefit
• Php66,000 net cost

INVENTORIES MANAGEMENT (THEORY)

• Which of the following is not a requirement in making a just-in-time

system work?
• Strong management commitment
• Small lot sizes
• Geographic concentration
• All of the above are necessary conditions

• Which of the following is true regarding a just-in-time inventory system?

• The just-in-time system can be described as “pushing” inventories as
produced instead of the traditional “pulling” of inventories as needed.
• For a just-in-time system to work, a company should have a very
extensive supplier network to reduce dependence on any one supplier.

• I only
• II only
• Both I and II
• Neither I nor II

• Which of the following is incorrect with regard to safety stock?

• Safety stock is held in reserve as a cushion against uncertain
demand and replenishment lead time.
• A company will be better off by implementing a level of safety stock
that keeps stock-out costs at a minimum.
• The more accurate a company is able to forecast demand and the
more effort a company puts to reduce supplier delays, the less
safety stock is needed.
• All of the above are correct.

• Which of the following variables are directly proportional to the economic

order quantity?
• Ordering costs
• Carrying costs
 • Total inventory usage for the period
• I and II only
• I and III only
• II and III only
• I, II, and III

• Which of the following is incorrect with regard to the order point?

• The order point is the quantity to which inventory must fall in order to
signal that an order must be placed to replenish an item.
• The order point takes into account average lead time and average daily
usage of inventory.
• Because of the precautionary nature of safety stock, a company that
provides for safety stock can have a lower order point compared to one
with no provision.
• All of the above are correct.

INVENTORIES MANAGEMENT (PROBLEM SOLVING)

• A company that incurs Php6,400 per order and Php90 annual storage
cost per unit has determined its economic order quantity to be at 32,000
units. What is the company’s total inventory requirement for the year?
• 3,600,000 units
• 7,200,000 units
• 10,368,000 units
• 14,400,000 units

• A company has an average lead time of 7 days and an average daily

inventory usage of 60,000 units. If 10,000 units are kept as safety stock,
what is the company’s order point?
• 350,000 units
• 410,000 units
• 430,000 units
• 490,000 units

Use the following information to solve for items 36-37.

A company is currently looking into the optimal safety stock level it should
implement. In an analysis of the situation, the company has estimated the cost of
being out of stock associated with various levels of safety stock. Carrying costs
are Php0.80 per liter per year.

Annual Cost of
Safety Stock (in L)
Stockouts
A. Current Policy 5,000 Php12,500
B. Policy 1 10,000 7,000
C. Policy 2 15,000 2,500
D. Policy 3 20,000 0
 Annual Cost of
Safety Stock (in L)
Stockouts
A. Current Policy 5,000 Php12,500
B. Policy 1 10,000 7,000
C. Policy 2 15,000 2,500
D. Policy 3 20,000 0

• How much safety stock must the company hold to minimize total costs?
• 5,000 units
• 10,000 units
• 15,000 units
• 20,000 units

• If carrying costs increase to Php1.20 per liter per year, which policy must
the company implement to minimize total costs?
• Current policy
• Policy 1
• Policy 2
• Policy 3

Use the following information to solve for items 38-39.

A company with an annual inventory requirement of 87,480 units has an

inventory balance of Php364,500. The company is charged Php135 per order,
and annual carrying costs are at Php2.25 per unit. Any adjustment to the
inventory is reflected by a corresponding adjustment to accounts payable.

• If inventory unit costs are at Php150 per unit, how much is the inventory
balance expected to increase or decrease?
• Php121,500 increase
• Php20,900 increase
• Php20,900 decrease
• Php121,500 decrease

• If the company’s quick ratio is at 1.200x, what will be the new quick ratio if
the company shifts to the optimal inventory? The company’s current
liabilities are at Php2,500,000, with 75% of the balance in accounts
payable and the rest in accrued expenses.
• 1.144x
• 1.200x
• 1.210x
• 1.261x

SHORT-TERM FINANCING (THEORY)

• Keeping other variables constant, which of the following will result to a

lower annual cost of a forgone discount?
• Higher percentage discount
• Longer credit period/payment terms
• Longer discount period
• Both b and c
 • This is the short-term interest rate charged by banks to large, creditworthy
customers.
• Prime rate
• Fixing rate
• Composite rate
• Preferred rate

• Which of the following is not a type of spontaneous financing?

• Note payable
• Trade acceptance
• Commercial paper
• Accrued expense

• Which is of the following is incorrect with regard to compensating

balances?
• A compensating balance is a demand deposit maintained by a firm to
compensate a bank for services provided, credit lines, or loans.
• A compensating balance may be computed on both the total line granted
and the actual usage of the line.
• A compensating balance reduces the effective annual interest rate of a
company.
• Both b and c are incorrect.

• This pertains to a security for the deposit of goods in a public warehouse

that a lender holds as collateral for a loan.
• Floating lien
• Trust receipt
• Terminal warehouse receipt
• Field warehouse receipt

SHORT-TERM FINANCING (PROBLEM SOLVING)

• Which of the following credit terms would be the least costly for a
company to forego the discount?
• 3/10, net 30
• 3/15, net 60
• 5/10, net 30
• 5/15, net 45

• A company currently has credit terms of 2/15, net 45 with its suppliers.
During the month, it was presented with two alternative investments.
Security A provides a guaranteed return of 2% for 30 days, while Security
B provides a guaranteed return of 2.025% for 30 days. Which of the
following statements is correct?
 • The company is better off foregoing the discount to invest in either
Security A or Security B.
• The company is indifferent between taking the discount and
foregoing the discount to invest in Security A, while the company is
better off foregoing the discount to invest in Security B.
• The company is worse off foregoing the discount to invest in
Security A, while the company is indifferent between taking the
discount and foregoing the discount to invest in Security B.
• The company is worse off foregoing the discount to invest in either
Security A or Security B.

Use the following information to solve for items 47-49.

A firm currently has a revolving credit line with a bank. It can borrow up to
Php3,000,000 at 6% but is required to maintain a 15% compensating balance on
any funds borrowed under the agreement. In addition, it must pay a 0.75%
commitment fee on the unused portion of the formal credit line. For the year, it
borrowed Php1,800,000.

• How much are the company’s total financing costs for the year?
• Php108,000
• Php117,000
• Php121,500
• Php130,500

• What is the company’s effective annual interest rate on its borrowing?

• 6.50%
• 6.75%
• 7.65%
•
• 7.95%

• By how many basis points is the company’s effective annual interest rate
higher compared to if it fully utilized the credit line?
• 50 basis points
• 60 basis points
• 75 basis points
• 90 basis points

• A company habitually engaged in factoring sold Php25 million worth of

receivables. The receivables have an average collection period of one
month, but the company left the funds in its account for another month.
The proceeds received by the company amounted to Php24,437,500. If
the factor charges and pays 0.75% monthly interest, how much is the
factor’s fee?
• 1.500%
• 1.511%
 • 2.978%
• 3.000%

51. It uses a significant value in the financial statement as the base value, and
all other financial items in the financial statement are composed with it.
a. horizontal analysis c. financial ratios
b. vertical ratios d. financial planning

52. It is the company’s ability to meet its long-term obligations as they become
due.
a. Liquidity ratio c. Leverage ratio
b. Profitability ratio d. Asset utilization ratio

53. It indicates the ability of a firm to pay current obligations from the more
liquid current assets.
a. Quick or Acid test ratio c. Current ratio
b. Debt-to-Equity ratio d. Debt ratio

54. If current asset exceed current liabilities, payments to creditors made on

the last day of the month will _________.
a. increase current ratio c. decrease current ratio
b. decrease working capital d. increase working capital

55. How are the following used in the calculation or receivable turnover?
Cash Sales Credit Sales
a. not used numerator
b. not used denominator
c. numerator numerator
d. denominator denominator

56. Short-term creditors are most interested in this ratio.

a. current ratio c. debt-to-equity ratio
b. quick ratio d. debt-to-total asset ratio

57. It is income statement showing the component percentages and uses in a

single year.
a. comparative statement c. common size statement
b. trend ratios d. financial ratios

58. It is classified as a leverage ratio.

a. current ratio c. quick ratio
b. debt ratio d. net working capital

59. It is not an objective of financial analysis.

a. profitability c. financial statement preparation
b. safety of investment d. liquidity.
60. It is indication in the books of the company if the current ratio is 3:1
accompanied by an acid test ratio of 2./75:1.
a. The greater portion of current assets is in cash, accounts
receivable, and marketable securities.
b. The greater portion of current assets is in inventory.
c. The quick assets are equal to the inventory and prepaid expenses.
d. none of the above.

61. It is the total debt if the debt-to equity ratio is 36% and the current liability
has a figure of P22,500 comprising of 15% of equity.
a. Php54,000 c. Php90,000
b. Php31,500 d. none of the above.

62. Selected pieces of information from the accounting records of Mari

Company are as follows:
Net accounts receivable on December 31, 2016 Php 900,000
Net accounts receivable on December 31, 2015 1,000,000
Accounts receivable turnover 5 to 1
Inventories on December 31, 2016 1,100,000
Inventories on December 31, 2015 1,200,000
Inventory turnover 4 to 1

What was Mari’s gross profit for 2016?

a. Php150,000 c. Php200,000
b. Php400,000 d. Php500,000

63. The retained earnings of Pau Company are Php150,000 and Php275,000
for 2016 and 2015, respectively. The net income for 2015 is Php250,000. T h e
preferred stockholder is to receive 10% of his or her equity.
How much will be given to the common stockholder if the equity of the
preferred stockholder is Php1,250,000.
a. Php125,000 c. Php0
b. Php62,500 d. none of the above

64. On January 1, 2016, Camil Company’s beginning inventory was

Php400,000. In . In 2016 , Camil Company purchased Php1,900,000 of
additional inventory. On December 31, 2016, the inventory was Php500,000.
What is the inventory turnover for 2016?
a. 4.6 c. 4.0
b. 3.8 d. 3.6
65. Asar Corporation had a current ratio of 2.0 at the end of 2016. Current
assets and current liabilities increased by equal amou8nts in 2015,. What a r e
the effects on the net working capital and on the current ratio respectively?
a. no effect; increase c. no effect; decrease
b. increase; increase d. decrease; decrease

66. He or she is the one responsible in making investment, financial, and

dividend policy-making decisions of a firm.
a. stockholder c. employees
b. finance manager d. creditor

67. It is the minimum acceptable return in an investment proposal.

a. cost of capital c. expected rate of return
b. cost of sales d. none of the above

68. It is a kind of security issued by the firm to raise funds with the expectation
of receiving dividends in the future.
a. capital stock c. bonds
b. stock dividends d. none of the above

69. This task is not a function of a controller

a. financial accounting c. tax reporting
b. cash management d. general accounting

70. One of the tasks of financial managers is to identify projects that when
undertaken ____________.
a. will have benefits that are at least equal to the projects’ costs.
b. will increase the book value of the firm’s common stock.
c. will decrease the book value of the firm’s outstanding debt.
d. none of the above.