WORKING CAPITAL MANAGEMENT

THEORIES:
Working capital management
1. Working capital management involves investment and financing decisions related
to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.
17. The goal of managing working capital, such as inventory, should be to minimize
the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage
Working capital financing policy
Aggressive

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5. Zap Company follows an aggressive financing policy in its working capital

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management while

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Zing Corporation follows a conservative financing policy. Which one of the following

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statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of

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shortterm debt to total debt.
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B. Zap has a low current ratio while Zing has a high current ratio.
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C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances short-
term
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assets with short-term debt.

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6. Which of the following would increase risk?

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A. Raise the level of working capital.

B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.
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Conservative
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2. As a company becomes more conservative with respect to working capital policy,

it would
tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
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B. Increase in the operating cycle.

C. Decrease in the operating cycle.
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D. Increase in the ratio of current assets to current liabilities.

Moderate
3. Short-term financing plans with high liquidity have:
A. high return and high risk
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B. moderate return and moderate risk

C. low profit and low risk
D. none of the above
Temporary & Permanent working capital
4. Temporary working capital supports
A. the cash needs of the company. C. acquisition of capital equipment.

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 B. payment of long term debt. D. seasonal peaks.
Cash Management
Motives for holding cash
7. The transaction motive for holding cash is for:
A. a safety cushion C. compensating balance requirements
B. daily operating
D. none of the
requirements
above
Float
8. The difference between the cash balance on the firm's books and the balance
shown on the
bank statement is called:
A, the compensating balance
C. a safety cushion
D. none of the
B. float
above
Cash conversion cycle
9. The length of time between payment for inventory and the collection of cash is
referred to as:

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A. payables deferral period C. operating cycle

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B. receivables conversion period D. cash conversion cycle

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10. As a firm's cash conversion cycle increases, the firm:

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A. becomes less profitable

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B. increases its investment in working capital
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C. reduces its accounts payable period
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124
Financial Management
(B. Working Capital Management)
D. incurs more shortage costs
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11. The longer the firm's accounts payable period, the:

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A. longer the firm's cash conversion cycle is.

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B. shorter the firm's inventory period is.

C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.
12. The average length of time a peso is tied up in current asset is called the:
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A. net working capital. C. receivables conversion period.

B. inventory conversion
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D. cash conversion
period.
period.
Receivables management
13. All of these factors are used in credit policy administration except:
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A. credit standards C. peso amount of receivables

B. terms of trade D. collection policy
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14. Which of the following statements is most correct? If a company lowers its DSO,
but no
changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
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B. the company might well end up with a lower debt ratio.

C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.
15. All but which of the following is considered in determining credit policy?
A. Credit standards C. Accounts payable deferral period
B. Credit limits D. Collection efforts

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 Inventory
management
16. The use of safety stock by a firm will:
A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above
18. When a specified level of safety stock is carried for an item in inventory, the
average
inventory level for that item
A. decreases by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock.
19. Which of the following statements is correct for a firm that currently has total
costs of carrying
and ordering inventory that are 50% higher than total carrying costs?
A. Current order size is greater than optimal
B. Current order size is less than optimal

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C. Per unit carrying costs are too high

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D. The optimal order size is currently being used

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Trade credit

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20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?

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A. Three days after the invoice is received.

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B. The 8th day is the customer’s decision date.
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C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.
PROBLEMS
Working capital financing
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1
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. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for
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materials
and variable conversion cost. It takes the firm 18 days to convert raw materials into
calculator. Casie’s usual credit terms extended to its customers is 30 days, and the
firm
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generally pays its suppliers in 20 days.

If the foregoing cycles are constant, what amount of working capital must Casie
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Company
finance?
A. P1,400,000 C. P 900,000
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B. P2,400,000
D. P1,800,000
Cash conversion cycle
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2
. Luke Company has an inventory conversion period of 60 days, a receivables
conversion
period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s
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cash
conversion cycle?
A. 90 days C. 54 days
B. 75 days D. 105 days
3
. The Spades Company has an inventory conversion period of 75 days, a receivables
conversion period of 38 days, and a payable payment period of 30 days. What is the

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 length of
the firm’s cash conversion cycle?
A. 83 days C. 67 days
125
Financial Management
(B. Working Capital Management)
B. 113 days D. 45 days
4
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts
receivable. Its
average daily sales are P100,000. The company has P1.5 million in accounts
payable. Its
average daily purchases are P50,000. What is the length of the company’s cash
conversion
period?
A. 50 days C. 30 days
B. 20 days
D. 40 days
Days inventory

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5
. What is the inventory period for a firm with an annual cost of goods sold of P8

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million, P1.5

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million in average inventory, and a cash conversion cycle of 75 days?

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A. 6.56 days C. 52.60 days
B. 18.75 days D. 67.50 days
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6
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts
receivable. Its
average daily sales are P100,000. The company has P1.5 million in accounts
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payable. Its
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average daily purchases are P50,000. What is the length of the company’s inventory
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conversion period?
A. 50 days C. 120 days
B. 90 days
D. 40 days
Cash management
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Economic conversion quantity (ECQ)

7
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. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid
uniformly. Simile has the opportunity to invest the money at 24% per annum. The
company
spends, on the average, P40 for every cash conversion to marketable securities.
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What is the optimal cash conversion size?

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A. P60,000 C. P45,000
B. P55,000
D. P72,500
Opportunity cost
8
. Hyperbole Corporation estimates its total annual cash disbursements of
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P3,251,250 which
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
securities and vice versa.

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 What is the opportunity cost of keeping cash in the bank account?
A. P3,825.00 C. P4,190.00
B. P1,912.50
D. P 188.55
Annual savings
9
. What are the expected annual savings from a lock-box system that collects 150
checks per
day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5
days
respectively, if the annual interest rate is 7%?
A. P 5,250 C. P 21,000
B. P 13,125
Receivables D. P300,000
management
Carrying cost
10
. The Camp Company has an inventory conversion period of 60 days, a receivable
conversion period of 30 days, and a payable payment period of 45 days. The

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Camp’s
variable cost ratio is 60 percent and annual fixed costs of P600,000. The current

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cost of
capital for Camp is 12%.

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If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s
carrying rs e
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cost on accounts receivable, using 360 days year?
A. P281,250 C. P 20,250
B. P168,750
D. P 56,250
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Average receivables
11
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. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000.
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Forty
percent of the customers pay on the tenth day and take discounts; the other 60
percent pay,
on average, 45 days after their purchases.
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What is the average amount of receivables?

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A. P70,000 C. P77,200
B. P77,500 D. P67,500
12
. Palm Company’s budgeted sales for the coming year are P40,500,000 of which
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80% are
expected to be credit sales at terms of n/30. Palm estimates that a proposed
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relaxation of
credit standards will increase credit sales by 20% and increase the average
collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit
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to
standards will result in an expected increase in the average accounts receivable
balance of
A. P 540,000 C. P2,700,000
B. P 900,000 D. P1,620,000
Investment in receivables
13

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 . Currently, La Carlota Company has annual sales of P2,500,000. Its average
collection
126
Financial Management
(B. Working Capital Management)
period is 45 days, and bad debts are 3 percent of sales. The credit and collection
manager
is 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,
sales would also fall by an estimated P300,000 annually. Variable costs are 75
percent of
sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40
percent
and 360 days per year.
What would be the decrease in investment in receivables if the change were made?

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A. P 9,688 C. P 96,875

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B. P 12,988
D. P129,975

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Comprehensive

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Question Nos. 14 through 16 are based on the following data:
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10,

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net 30 in
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order to speed collections. At present, 40 percent of Sonata Company‘s customers
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take the 2
percent discount. Under the new term, discount customers are expected to rise to
50 percent.
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Regardless of the credit terms, half of the customers who do not take the discount
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are expected
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to pay on time, whereas the remainder will pay 10 days late. The change does not
involve a
relaxation of credit standards; therefore bad debt losses are not expected to rise
above their
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present 2 percent level. However, the more generous cash discount terms are
expected to
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increase sales from P2 million to P2.6 million per year. Sonata Company’s variable
cost ratio is
75 percent, the interest rate on funds invested in accounts receivable is 9 percent,
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and the firm’s

income tax rate is 40 percent.
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14
. What are the days sales outstanding (DSO) before and after the change of credit
policy?
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively
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B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively
15
. The incremental carrying cost on receivable is
A. P 843.75 C. P 643.75
B. P8,889.00 D. P6,667.00
16

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 . The incremental after tax profit from the change in credit terms is
A. P68,493 C. P60,615
B. P65,640
Inventory D. P57,615
management
EOQ
17
. What is the economic order quantity for the following inventory policy: A firm sells
32,000 bags
of premium sugar per year. The cost per order is P200 and the firm experiences a
carrying
cost of P0.80 per bag.
A. 2,000 bags C. 8,000 bags
B. 4,000 bags D. 16,000 bags
Annual demand
18
. Marsman Co. has determined the following for a given year:
Economic order quantity (standard order size)

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Total cost to place purchase orders for the year 5,000 units
Cost to place one purchase order P40,000

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Cost to carry one unit for one year P 100
What is Marsman’s estimated annual usage in P4

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units?
A. 1,000,000 rs e C. 500,000
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D.
B. 2,000,000
1,500,000
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