WORKING CAPITAL MANAGEMENT

1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs could increase its
working capital by the
A. Prepayment of $50,000 of next year's rent.
B. Collection of $50,000 of accounts receivable.
C. Purchase of $50,000 of temporary investments for cash.
D. Refinancing of $50,000 of short-term debt with long-term debt.

2. Compared to other firms in the industry, a company that maintains a conservative working capital policy will
tend to have a
A. Higher total asset turnover.
B. Greater percentage of short-term financing.
C. Higher ratio of current assets to fixed assets.
D. Greater risk of needing to sell current assets to repay

3. The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s
maturing obligations is the policy that finances
A. Fluctuating current assets with long-term debt.
B. Fluctuating current assets with short-term debt.
C. Permanent current assets with long-term debt.
D. Permanent current assets with short-term debt.

4. An increase in sales resulting from an increased cash discount for prompt payment would be expected to cause
A. An increase in the operating cycle.
B. A decrease in purchase discounts taken.
C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.

5. The amount of cash that a firm keeps on hand in order to take advantage of any bargain purchases that may
arise is referred to as its
A. Compensating balance.
B. Precautionary balance.
C. Speculative balance.
D. Transactions balance.

6. Which of the following actions would not be consistent with good management?
A. Minimize the use of float.
B. Increased synchronization of cash flows.
C. Use of checks and drafts in disbursing funds.
D. Maintaining an average cash balance equal to that required as a compensating balance or that which
minimizes total cost.

7. A lock-box system
A. Accelerates the inflow of funds.
B. Provides security for late night deposits.
C. Reduces the need for compensating balances.
D. Reduces the risk of having checks lost in

8. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
A. Minimizing taxes.
B. Liquidity and safety.
C. Maximizing rate of return.
D. Investing in Treasury bonds since they have no default risk.

9. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal mix
between cash and marketable securities. The EOQ model assumes all of the following except
A. Cash flow requirements are random.
B. The total demand for cash is known with certainty.
C. An opportunity is cost associated with holding cash, beginning with the first dollar.
D. The cost of a transaction is independent of the dollar amount of the transaction and interest rates are
constant over the short run.

10. The goal of credit policy is to

A. Maximize sales.
B. Minimize bad debt losses.
C. Minimize collection expenses.
 D. Extend credit to the point where marginal profits equal marginal costs.
11. A strict credit and collection policy is in place in Star Co. As Finance Director you are asked to advise on the
propriety of relaxing the credit standards in view of stiff competition in the market. Your advice will be
favorable if
A. The competitor will do the same thing to prevent lost sales.
B. The projected margin from increased sales will exceed the cost of carrying the incremental receivables.
C. The account receivable level is improving, so the company can afford the carrying cost of receivables.
D. there is a decrease in the distribution level of your product, and a more aggressive stance in necessary to
retain market share.

12. The credit and collection policy of Amargo Co. provides for the imposition of credit block when the credit line
is exceeded and/or the account is past due. During the month, because of the campaign to achieve volume
targets, the general manager has waived the credit block policy in a number of instances involving big volume
accounts. The likely effect of this move is
A. Increase in the level of receivables only.
B. Deterioration of aging of receivables only.
C. Deterioration of aging and increase in the level of receivables.
D. Decrease in collections during the month the move was

13. Accounts receivable turnover will normally decrease as a result of

A. An increase in cash sales in proportion to credit sales.
B. A change in credit policy to lengthen the period for cash discounts.
C. A significant sales volume decrease near the end of the accounting period.
D. The write-off of an uncollectible account (assume the use of the allowance for doubtful accounts method).

14. A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction of the
investment in accounts receivable, and a reduction in the number of doubtful accounts. Based on this
information, we know that
A. Net profit has increased.
B. Gross profit has declined.
C. The average collection period has decreased.
D. The size of the discount offered has decreased.

15. Which condition justifies accepting a low inventory turnover ratio?

A. High carrying costs.
B. High stock-out costs.
C. Low inventory order costs.
D. Short inventory order lead times.

16. Order-filling costs, as opposed to order-getting costs, include all but which of the following items?
A. Credit check of new customers.
B. Packing and shipping of sales orders.
C. Mailing catalogs to current customers.
D. Collection of payments for sales orders.

17. In an ABC inventory analysis, the items that are most likely to be controlled with a red-line system are the
A. A items.
B. B items.
C. C items.
D. items on a perpetual inventory.

18. The underlying philosophy of “just-in-time” inventory system is that

A. The quantities of most stock items are subject to definable limits.
B. It is a quest toward continuous improvement in the environmental conditions that necessitates inventories.
C. It is impractical to give equal attention to all stock items, hence the need to classify and rank them
according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or critical items are
examined more frequently than low-cost or non-critical items.

19. An inventory control system which employs mathematical models as an aid in making inventory decision is
known as
A. Mini-max system
B. Order cycling system
C. Statistical inventory control system.
D. Two-bin system

20. Which of the following is used in determining the economic order quantity (EOQ)?
A. Calculus.
 B. Markov process.
C. Queuing theory.
D. Regression analysis

21. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are
A. Constant demand, constant ordering cost, constant carrying cost, unlimited production and inventory
capacity.
B. Limited production capacity, declining demand, constant ordering cost, constant carrying cost, and
unlimited inventory capacity.
C. Increasing demand, limited production capacity, increasing ordering cost, increasing carrying cost, and
limited inventory capacity.
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing carrying cost, and
unlimited inventory capacity.

22. The simple economic production lot size model will only apply to situations in which the production
A. Rate equals the demand rate.
B. Rate is less than the demand rate.
C. Rate is greater than the demand rate.
D. For the period covered equals the projected sales for the period

23. The ______________ would not affect the economic order quantity.
A. cost of a stockout
B. cost of insuring inventory
C. cost of purchase requisition forms
D. company's weighted average cost of capital

24. The ordering costs associated with inventory management include

A. Insurance costs, purchasing costs, shipping costs, and obsolescence.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs.
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost.
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested

25. The optimal level of inventory is affected by all of the following except the
A. Cost per unit of inventory.
B. Current level of inventory.
C. Usage rate of inventory per time period.
D. Cost of placing an order for merchandise

26. The selling price of the product is relatively high and the purchase cost of the product is relatively low. In this
situation
A. The EOQ model will indicate frequent large orders.
B. The EOQ of the product is affected by the selling price.
C. The selling price has nothing to do with the EOQ of the product.
D. Management must increase the price to cover the cost of carrying higher inventory

27. A decrease in inventory order costs will

A. Increase the reorder point.
B. Decrease the economic order quantity.
C. Decrease the holding cost percentage.
D. Have no effect on the economic order quantity

28. The economic order quantity (EOQ) will rise following

A. An increase in carrying costs.
B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory.
D. An increase in the variable costs of placing and receiving an order

29. Missile Company has correctly computed its economic order quantity as 500 units. However, management feels
it would rather order quantities of 600 units. How should Missiles’ total annual purchase-order costs and total
annual carrying cost for an order quantity of 600 units compare to the respective amounts for an order quantity
of 500 units?
A. Lower purchase-order cost and lower carrying cost.
B. Lower purchase-order cost and higher carrying cost.
C. Higher purchase-order cost and lower carrying cost.
D. Higher purchase-order cost and higher carrying cost.
30. For inventory management, ignoring safety stocks, which of the following is a valid computation of the reorder
point?
A. The economic order quantity.
B. The square root of the anticipated demand during the lead time.
C. The anticipated demand per day during lead time times lead time in days.
D. The economic order quantity times the anticipated demand during the lead time.

31. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The usual lead-time for
the inventory item is six (6) days; however, at times, the lead-time has gone as high as eight (8) days. Kulasa
now desires to adjust its safety stock policy. The likely effect on stockout costs and carrying costs, respectively,
would be
A. Increase and increase.
B. Increase and decrease.
C. Decrease and increase.
D. Decrease and decrease.

32. A company obtaining short-term financing with trade credit will pay a higher percentage financing cost,
everything else being equal, when
A. The discount percentage is lower.
B. The items purchased have a lower price.
C. The items purchased have a higher price.
D. The supplier offers a longer discount period.

33. In assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory
that is work-in-process because
A. WIP generally has the lowest marketability of the various types of inventories.
B. WIP inventory usually has the highest loan value of the different inventory types.
C. WIP represents a lower investment by a corporation as opposed to other types of inventories.
D. WIP inventory is relatively easy to sell because it does not represent a raw material or a finished product.

34. Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the company wishes to
maintain it. Debt 25% Preferred equity 5% Common equity 70% Enert's management is planning to build a P75
million facility that will be financed according to this desired capital structure. Currently, $15 million of cash is
available for capital expansion. The percentage of the P75 million that will come from a new issue of common
shares is
A. 50.00%.
B. 56.00%.
C. 56.25%.
D. 70.00%.

35. Bobo LLC's has an asset base of P1 million. After a dividend payment of P40,000, Bobo added P50,000 to
retained earnings. What is Bobo's internal growth rate?
A. 1%
B. 4%
C. 5%
D. 9%

36. Wildthing Amusement Company’s total assets fluctuate between P320,000 and P410,000, while its fixed assets
remain constant at P260,000. If the firm follows a maturity matching or moderate working capital financing
policy, what is the likely level of its long-term financing?
A. P 90,000
B. P260,000
C. P320,000
D. P410,000

37. Jumpdisk Company writes checks averaging P15,000 a day, and it takes five days for these checks to clear. The
firm also receives checks in the amount of P17,000 per day, but the firm loses three days while its receipts are
being deposited and cleared. What is the firm’s net float in dollars?
A. P 24,000
B. P 32,000
C. P 75,000
D. P126,000

38. CMR is a retail mail order firm that currently uses a central collection system that requires all checks to be sent
to its Boston headquarters. An average of 5 days is required for mailed checks to be received, 4 days for CMR
to process them and 1½ days for the checks to clear through its bank. A proposed lockbox system would reduce
the mail and process time to 3 days and the check clearing time to 1 day. CMR has an average daily collection
of P100,000. If CMR should adopt the lockbox system, its average cash balance would increase by
 A. P250,000.
B. P400,000.
C. P650,000.
D. P800,000.

39. A company has daily cash receipts of P150,000. The treasurer of the company has investigated a lock box
service whereby the bank that offers this service will reduce the company’s collection time by four days at a
monthly fee of P2,500. If money market rates average 4% during the year, the additional annual income (loss)
from using the lock box service would be
A. P(12,000).
B. P(6,000).
C. P6,000.
D. P12,000

40. QRS makes large cash payments averaging P17,000 daily. The company changed from using checks to sight
drafts which will permit it to hold unto its cash for one extra day. If QRS can use the extra cash to earn 14%
annually, what annual peso return will it earn?
A. P6.52
B. P652.10
C. P2,380
D. P6,521.00

41. Sixty percent of Baco's annual sales of P900,000 is on credit. If its year-end receivables turnover is 4.5, what is
the average collection period and the year-end receivables, respectively (assume a 365-day year)?
A. 73 days and P108,000.
B. 73 days and P120,000.
C. 81 days and P120,000.
D. 81 days and P200,000.

42. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a
payment cycle of 26 days. If its sales for the period just ended amounted to P972,000, what is the investment in
accounts receivable (Assume 360 days a year.)
A. P72,450
B. P79,600
C. P85,200
D. P94,500

43. Simba Corp., whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The collections manager
estimated that 30% of the customers pay on the 10th day and take discounts; 40% on the 30th day; and the
remaining 30% pay, on the average, 40 days after the purchase. If management would toughen on its collection
policy and require that all non- discount customers pay on the 30th day, how much would be the receivables
balance?
A. Zero
B. P60,000
C. P70,000
D. P80,000

44. Phillips Glass Company buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 30 days
after the invoice date. Net purchases amount to P720,000 per year. On average, how much “free” trade credit
does Phillips receive during the year? (Assume a 360-day year.)
A. P30,000
B. P40,000
C. P50,000
D. P60,000

45. The Liberal Sales Co. budgeted sales for the coming year are P30 million of which 80% are expected to be on
credit. The company wants to change its credit terms from n/30 to 2/10, n/30. If the new credit terms are
adopted, the company estimates that cash discounts would be taken on 40% of the credit sales and the new
uncollectible amount would be unchanged. The adoption of the new credit terms would result in expected
discount availed of in the coming year of
A. P192,000
B. P288,000
C. P480,000
D. P600,000
46. The Sales Director of Can Can Co. suggests that certain credit terms be modified. He estimates the following
effects:
Sales will increase by at least 20%.
Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times.
Bad debts, now at 1% of sales will increase to 1.5%.
Sales before the proposed changes is at P900,000.
Variable cost ratio is 55% and desired rate of return is 20%.
Fixed expenses amount to P150,000.

Should the company allow the revision of its credit terms?

A. No, because losses will increase by P28,000.
B. Yes, because income will increase by P68,850
C. No, because income will be reduced by P13,000.
D. Yes, because losses will be reduced byP78,800

47. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier customers. It has
been estimated that uncollectible expenses would be 15% and collection costs 5%. The manufacturing and
selling costs are 70% of sales and corporate tax is 35%. If it pursues this opportunity, the after tax profit will
A. Remain the same.
B. Increase by P35,000.
C. Increase by P65,000.
D. Increase by P97,500.

48. A firm that often factors its accounts receivable has an agreement with its finance company that requires the
firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. The net proceeds
would be further reduced by an annual interest charge of 10% on the monies advanced. Assuming a 360-day
year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the
time a P100,000 account that is due in 90 days is turned over to the finance company?
A. P83,700
B. P90,000
C. P90,675
D. P93,000

49. The following data refer to various annual costs relating to the inventory of a single-product company:
Unit transportation-in on purchases P0.20
Storage per unit 0.12
Insurance per unit 0.10
Annual interest foregone from alternate investment of funds P800
Annual number of units required 10,000
What is the annual carrying cost per unit?
A. P0.30
B. P0.32
C. P0.42
D. P0.50

50. Penguin Company manufactures winter jackets. Setup costs are P2.00. Penguin manufactures 4,000 jackets
evenly throughout the year. Using the economic order quantity approach, the optimal production run would be
200 when the cost of carrying one jacket in inventory for one year is:
A. P0.05
B. P0.10
C. P0.20
D. P0.40

51. The following information are given:

Optimal production run in units 2,000
Average inventory in units 1,000
Number of production runs 5
Cost per unit produced P75
Desired annual return on inventory investment 18%
Set-up costs per production run P5,000
If the units will be required evenly throughout the year, the total annual relevant costs using the economic-
order-quantity approach is
A. P5,000
B. P38,500
C. P75,000
D. P150,000
52. The economic order quantity is the size of the order that minimizes total inventory costs, including ordering and
carrying costs. If the annual demand decreases by 36%, the optimal order size will
A. Decrease by 6%.
B. Decrease by 20%.
C. Increase by 6%.
D. Increase by 20%

53. A&B Co.’s financial plan for next year shows sales of P72 million and cost of sales of P45 million. It expects
short term interest rates to average 10% for the coming year. It aims to increase inventory turnover from the
present level of 9 times to 12 times next year. If its plans and objectives would be carried out, how much is the
cost savings for the coming year?
A. P125,000
B. P300,000
C. P375,000
D. P500,000

54. RODENSTOCK, INC. currently places orders for a particular stock item at quarterly intervals. Information
concerning this item is as follows:
Cost of placing an order P10
Annual demand 20,000 units
Purchasing price per unit P0.50
The cost of holding the stock items amounts to 20% of the stock value per annum.
What annual cost saving would result if RODENSTOCK used the economic order quantity for order sizes
instead of their current policy?
A. P 80
B. P 90
C. P150
D. P240

55. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average inventory (taking into
account the safety stock) is 8,000 pounds. What is the apparent order quantity?
A. 6,000 lbs.
B. 10,000 lbs.
C. 16,000 lbs.
D. 21,000 lbs.

56. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work year. The usual
lead time for the part is six days. However, at times, the lead time has gone as high as eight days. Scholas now
desires to adjust its safety stock policy. The increase in safety stock size is
A. 2,800 units.
B. 5,600 units.
C. 7,200 units.
D. 16,800 units

57. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs.,
and its order point is 1,500 lbs., what would be the total annual carrying costs assuming the carrying cost per
unit is P0.20?
A. P100
B. P600
C. P1,000
D. P1,100

58. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs.,
and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50 lbs.?
A. 10 days
B. 20 days
C. 30 days
D. 100 days

59. M&L Co. has the following information on inventory:

Sales 20,000 units per year
Order quantity 4,000 units
Safety stock 2,600 units
Lead time 4 weeks
What is the re-order point? (For calculation purposes, use 50-week year)
A. 1,600 units.
B. 2,600 units.
 C. 4,200 units.
D. 5,600 units

60. JASMIN Products, Inc. gathered the following information related to one of its materials:
Order quantity 1,500 units
Normal use per day 500 units
Maximum use per day 600 units
Minimum use per day 100 units
If the lead time is five days, the order point is
A. 500 units
B. 1,500 units
C. 2,500 units
D. 3,000 units

61. A softdrinks distributor which buys in a pre-sell basis, is discussing with the route salesmen on the proper cases
to be ordered and the frequency of call. From the route book and other records, the following are available:
prior year’s purchases, 50,000 cases; carrying cost per case of inventory, P1.20; distributor’s discount, 1 case
for every 10 cases bought; cost of placing an order, P3.00; weekly demand is approximately 962 cases. Safety
stock required is 140 cases. No change in demand is expected this year. (Use a 365-day, 52-week year).
Determine the economic order quantity (EOQ), and the reorder point assuming a two-day lead-time.
A. B. C. D.
EOQ 250 cases 481 cases 500 cases 962 cases
Reorder point 280 cases 500 cases 414 cases 275 cases

62. Each stockout of Product AXsold by AxiomInc. costs P87,500 per occurrence. The carrying cost per unit of
inventory is P250 per year, and the company orders 1,500 units of product 24 times a year at a cost of P5,000
per order. The probability of stockout at various levels of safety stock is
Units of Safety Stock Probability of a stockout
0 0.50
100 0.30
200 0.14
300 0.05
400 0.01
The optimal safety stock level for the company is
A. 0 units.
B. 100 units.
C. 300 units.
D. 400 units

63. Arnold Enterprises uses the EOQ model for inventory control. The company has an annual demand of 50,000
units for part number 101 and has computed an optimal lot size of 6,250 units. Per-unit carrying costs and
stockout costs are P13 and P3, respectively. The following data have been gathered in an attempt to determine
an appropriate safety stock level:
Units Short Because of Excess Number of Times Short
Demand during the Lead Time Period in the last 40 Reorder Cycles
200 6
300 12
400 6
The annual cost of establishing a 200-unit safety stock is expected to be
A. P2,600
B. P4,260
C. P4,040
D. P5,200

64. 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.
B. The cost of not taking the discount is higher for terms of 2/10, net 60 than for 2/10, net 30.
C. With trade terms of 2/15, net 60, if the discount is taken the buyer receive 45 days of credit.
D. If a firm buys P10,000 of goods on terms of 1/10, net 30 and pays within the discount period, the amount
paid would be P9,000.

65. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45. If you calculate that this policy
effectively costs your firm P157,500 each year, what is the firm’s average accounts payable balance?
A. P157,500
B. P625,000
C. P750,000
D. P1,234,000
66. Corbin, Inc. can issue 3-month commercial paper with a face value of P1,000,000 for P980,000. Transaction
costs will be P1,200. The effective annualized percentage cost of the financing, based on a 360-day year, will be
A. 2.00%.
B. 8.00%.
C. 8.48%.
D. 8.66%.

67. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net 30 days (2/15 net
30). It can borrow funds from a bank at an annual rate of 12%, or it can wait 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
A. P24,500 more.
B. P51,000 less.
C. P75,500 less.
D. P100,000 less.