UM TAGUM COLLEGE Page 1 of 8

Department of Accounting Education

Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

Working Capital Management

• WORKING CAPITAL MANAGEMENT (WCM) involves managing the firm’s current assets and current
liabilities in order to achieve a balance between risks (liquidity) and returns (profitability).
• The term ‘working capital’ generally refers to current assets only. For purposes of WCM, ‘working capital’
refers to the difference between current assets and current liabilities (i.e., net working capital):
o The minimum working capital requirement regardless of the seasonal variations in business
operations is called PERMANENT (fixed) working capital.
o When additional working capital is needed during the more active business season, such working
capital is called SEASONAL (variable or incremental) working capital.
• WORKING CAPITAL FINANCING refers to optimal level, mix and use of current assets and current liabilities.
Consider the following working capital financing policies:
1. CONSERVATIVE financing strategy a.k.a. relaxed policy: a company seeks to minimize liquidity
risk by maintaining a relatively high level of working capital. This policy reduces liquidity risk but is
considered less profitable due to more reliance on long-term financing, which incurs relatively higher
financing costs.
2. AGGRESSIVE financing strategy a.k.a. restricted policy: operations are conducted with a minimum
amount of working capital. This policy enhances profitability by relying more on short-term debts
rather than long-term debts but is considered risky due to higher chances of short-term insolvency.
3. MODERATE financing strategy a.k.a. balanced or semi-aggressive or semi-conservative
policy: working capital maintained is relatively not too high (conservative) nor too low (aggressive).
4. MATCHING financing strategy a.k.a. self-liquidating or hedging policy: this policy is achieved by
matching the maturity of financing source with an asset’s useful life -- short-term assets are financed
with short-term liabilities; long-term assets are funded by long-term financing sources.
• WCM considers the level, liquidity, activity and structural component of working capital. A sound practice of
WCM would normally involve the following:
✓ Managing cash and its temporary investment efficiently. (Cash & Marketable Securities Management)
✓ Drafting and implementing effective credit and collection policies. (Receivable Management)
✓ Seeking favorable terms from suppliers and other short-term creditors. (Short-Term Credit Financing)
✓ Ensuring efficient manufacturing operations and sound material procurement. (Inventory
Management)

CASH & MARKETABLE SECURITIES MANAGEMENT

• Four (4) reasons for holding cash: “Why would a firm hold cash when, being idle, it is a non-earning
asset?”
1. TRANSACTION motive (Liquidity motive): cash is held to facilitate normal transactions of the
business.
2. PRECAUTIONARY motive (Contingent motive): cash is held beyond the normal operating
requirement to provide for buffer against contingencies, such as slow-down in collection and
possibilities of strikes.
3. SPECULATIVE motive: cash is held to avail of profit-making opportunities (e.g., sudden price drop).
4. CONTRACTUAL motive: cash is held as required by contracts or covenants (e.g., compensating
balance).
• OPTIMAL CASH BALANCE (OCB), a.k.a. Economic Cash Quantity or Economic Conversion Size, is based on
the following formula under the BAUMOL model (named after the American economist William Baumol):

➢ “OCB” is the optimal amount of cash to be raised by selling marketable securities or by borrowing.
➢ “D” is total amount of new cash needed for transactions during the year.
➢ “T” refers to the fixed costs of trading securities or cost of borrowing.
➢ “O” refers to the rate of return foregone on marketable securities or the cost of borrowing.
• The Baumol model, like its pattern EOQ, assumes that the demand for cash is spread evenly throughout
the year. When there is an irregularity of cash payment, OCB is computed using another formula based on
the MILLER-ORR model where OCB or ‘cash return point’ is achieved when the level of cash reaches an
upper limit/maximum amount or a lower limit/minimum amount.

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 2 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

• CASH CONVERSION CYCLE (CCC) a.k.a. cash flow cycle is the average time from the point cash is used to
pay for raw materials until cash is collected on the accounts receivable associated with the goods produced
with those raw materials. CCC must be distinguished from the NORMAL OPERATING CYCLE (NOC), which is the
length of time within which the firm purchases or produces inventory, sells it and receives cash.
NOC = Average Age of Inventory + Average Age of Receivable
CCC = Average Age of Inventory + Average Age of Receivable – Average Age of Payable
Alternative: CCC = NOC – Average Age of Payable
Where: Formula Other name(s)
Average Age of Inventory Inventory ÷ CGS* per day Inventory Conversion Period, Days Sales in
Inventory
Average Age of Receivable Receivables ÷ Sales per day Receivable Collection Period, Days Sales
Outstanding
Average Age of Payable Payables ÷ Purchases per day Payable Deferral Period, Days Payables
Outstanding
* “Sales per day” may be used in lieu of CGS per day -- the intention is to use an amount in proportion to
unit sales. ‘Average age’ ratios may also be computed using TURNOVER ratios under FS Analysis Topic.
• CASH MANAGEMENT STRATEGIES that help shorten the CCC:
• Accelerating collections (e.g., prompt billing, cash discounts, online collection, lockbox)
➢ LOCKBOX SYSTEM requires customers to mail payments to a post office box in a specific location, a
local bank then collects the checks from the box and deposit them promptly in the client’s account.
• Reducing precautionary idle cash (e.g., readily available line of credit, well-thought cash budgets)
➢ LINE of CREDIT is a predetermined borrowing limit that an entity can use at any time -- the borrower
can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed
again in the case of an open line of credit.
• Slowing disbursements (e.g., payment thru drafts, zero-balance accounts, playing the float)
➢ ZERO-BALANCE ACCOUNT (ZBA) requires checks to be written from special disbursement accounts
having zero-peso balance with no minimum maintaining balance required. Funds are automatically
transferred from a master account when a check drawn from a ZBA is presented.
• FLOAT is the difference between cash balance per BANK and cash balance per BOOK as of a certain
period, primarily due to outstanding checks and other similar reasons. Two types of floats are:
✓ POSITIVE or DISBURSEMENT Float: bank balance > book balance
Possible cause: outstanding checks issued by the firm that have not cleared yet.
✓ NEGATIVE or COLLECTION Float: book balance > bank balance.
1. MAIL Float – amount of customers’ payments that have been mailed by customers but not yet
received by the seller-company.
2. PROCESSING Float – amount of customers’ payments that have been received by the seller
but not yet deposited.
3. CLEARING Float – amount of customers’ checks that have been deposited but have not cleared
yet.

Good cash management suggests that positive float should be maximized while negative
float be minimized or, if possible, eliminated.

• MARKETABLE SECURITIES are short-term money market instruments that can easily be converted to
cash. Some of the common examples where an entity may invest its temporary idle funds:
✓ CERTIFICATES of DEPOSITS (CD) – savings deposits at financial institutions (e.g., time deposit)
✓ MONEY MARKET FUNDS – shares in a fund that purchases higher-yielding bank CDs, commercial
paper, and other large-denomination, higher-yielding securities.
✓ GOVERNMENTSECURITIES
➢ Treasury bills – debt instruments representing obligations of the National Government issued
by the central bank and usually sold at a discount through competitive bidding
➢ CB Bills or Certificates of Indebtedness (CBCIs) – represent indebtedness by the Central Bank.
✓ COMMERCIAL PAPERS – short-term, unsecured, material promissory notes issued by private
corporations with relatively high credit standing.
✓ REPURCHASE AGREEMENTS (Repos) – investment in loans with a commitment to resell the
security at the original contract price plus an agreed interest income for the holding period.
✓ BANKERS’ ACCEPTANCES – a draft drawn on a specific bank by a firm that has an account with
the bank, which if accepted by the bank becomes a negotiable instrument and is available for
investments.

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 3 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

• Factors considered in choosing marketable securities include:

✓ RISKS
➢ Default risk – chances that issuer may not be able to pay interest or principal on time.
➢ Inflation risk – danger that inflation will reduce the investment’s real value.
➢ Interest rate risk – fluctuations in prices caused by changes in market interest rates.
✓ MARKETABILITY – refers to how quickly a security can be sold before maturity date without a
significant price concession.
✓ RETURNS – an entity is willing to assume more risks given a higher expected return on
investment.
✓ TERM or MATURITY – maturity dates should coincide, whenever possible, with the date at which
the firm needs cash, or when the firm will no longer have cash to invest.
✓ TAXES – some marketable securities do not require payment of taxes, such as municipal bonds.

RECEIVABLES MANAGEMENT

• Receivable management refers to the set of policies, procedures, and practices employed by a
company with respect to managing sales on account or credit sales.
• Receivable management encompasses the evaluation of customer’s credit worthiness and risk,
establishing sales terms and credit policies, and designing an appropriate receivable collection
process.
✓ CREDIT STANDARD: consider the “5 C’s” in determining which customer shall be granted
credit and how much will the credit limit be. To wit:
➢ Character – customers’ willingness to pay
➢ Capacity – customers’ ability to generate cash flows
➢ Capital – customers’ financial sources (i.e., net worth)
➢ Conditions – current economic or business conditions
➢ Collateral – customer pledges to secure debt.
✓ CREDIT TERM refers to the (1) credit period extended to customer to encourage sales and (2)
cash discount offered to encourage prompt payment. Costs associated with credit terms that are
considered include cash discounts, credit analysis and collections costs, bad debt losses and
financing costs.
✓ COLLECTION PROGRAM: shortening the average collection period means less investment in
receivable (low opportunity costs) and less chances of delinquency and defaults, but may result
to loss of customers due to less favorable terms.
[Meaningful ratios useful in receivable management include receivable turnover, receivable
collection period or days sales outstanding. These ratios are covered on FS Analysis.]

INVENTORY MANAGEMENT

• The central issue in inventory management is to maintain an optimum investment in

inventories that considers a risk-reward relationship based on the following tradeoff:
overinvesting in inventory avoids shortages but incurs costs vs. underinvesting in inventory saves
on costs but increases the risk of stock-out or shortages.
• Two general approaches to inventory management:
✓ MATERIALS REQUIREMENT PLANNING (MRP) is used to determine the quantity and order
timing of raw materials based on sales forecast and scheduled production of finished goods.
✓ “JUST-IN-TIME” (JIT) is a demand-pull system that focuses on real usage, rather than sales
forecast (as opposed to MRP) in order to maximize space, minimize insurance costs, eliminate
waste (non-value-added activities), lower inventory carrying costs, and free-up capital.

MRP is a computer-based system that focuses on meeting requirements of the ‘projected’ usage or
demand while JIT is focused on the current, ‘real’ usage or demand while the system runs.

• MRP must be distinguished from MANUFACTURING RESOURCE PLANNING (MRP-II). MRP II evolved
from early MRP systems by including the integration of additional data, such as employee and
financial needs. MRP-II is a closed-loop system that integrates various functional areas of a
manufacturing company (e.g., inventories, production, sales and cash flows).
• MRP and MRP-II must be distinguished from ENTERPRISE RESOURCE PLANNING (ERP), which
integrates the information systems of the whole enterprise where organizational operations are inter-
connected while the organization itself is connected with its customers and suppliers.

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 4 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

• Activity-Based Costing [covered in AFAR] must be distinguished from inventory management’s ABC
Classification system. ABC Classification system is an inventory categorization method based on the
Pareto Principle in economics -- “In any group, there are significant few and insignificant many.”
✓ A items – high-value items (relatively few in number) requiring highest possible control.
✓ B items – medium-value items requiring normal or moderate control.
✓ C items – low-value items (relatively many in number) requiring the simplest possible control
• INVENTORY MODEL addresses inventory management issues based on these questions:
1. “How many units should be ordered?”
ECONOMIC ORDER QUANTITY (EOQ) refers to the order size (number of units) that minimizes
the sum of ordering costs and carrying costs.
➢ CARRYING COSTS – as order size increases, total carrying costs would also increase.
Examples: Storage, insurance, spoilage, obsolescence, security, record keeping, interest
foregone.
➢ ORDERING COSTS – as order size increases, total ordering costs would also decrease.
Examples: Delivery, inspection, handling, purchasing, processing, receiving, quantity discount
lost.

If safety stock is maintained, then average inventory = (EOQ ÷ 2) + safety stock

Assumptions & limitations of EOQ model:
1. Demand occurs evenly at a constant rate throughout the year.
2. For each order, units are received in a single delivery and lead time does not vary
(constant).
3. The unit cost of the inventory is constant; hence, there can be no quantity discounts.
4. There is no limit as to the order size or the number of units that may be ordered.
2. “When should the units be reordered?”
REORDER POINT refers to the number of units at which goods should be re-ordered to
minimize on the sum of carrying costs and stock-out costs.
➢ STOCK-OUT COSTS are opportunity costs and other costs incurred when inventory units
run out-of-stock (e.g., lost contribution margin on sales)

LEAD TIME is period from the time an order is placed until such time the same order is
received.
➢ Normal/Average lead time - this refers to the usual delay in the receipt of ordered goods
➢ Maximum lead time - this adds to normal lead time a reasonable allowance for further delay.
SAFETY STOCK (a.k.a. buffer stock) refers to the extra number of units maintained to
protect against stock-out costs during periods of uncertain lead time and demand.
Alternatively, safety stock may be computed using the demand-based formula:
(Maximum Usage – Normal Usage) x Normal Lead Time

• Applications of EOQ:
✓ When used for production, EOQ becomes the ECONOMIC LOT SIZE (ELS):

• When used for cash management, EOQ becomes the OPTIMAL CASH BALANCE or “Baumol
Model”.

SHORT-TERM CREDIT FINANCING

• Common sources of short-term funds include:

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 5 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

✓ UNSECURED CREDITS (e.g., accruals, trade credit and commercial papers)

✓ SECURED LOANS (e.g., receivable financing – pledging and factoring)
(e.g., inventory financing – blanket lien, trust receipts, warehouse receipts)
✓ BANKING CREDITS (e.g., term loan, line of credit, revolving credit agreement).
• Factors considered in selecting sources of short-term funds:
✓ COST – the effective costs of various credit sources.
✓ AVAILABILITY – the readiness of credit as to when needed and how much is needed.
✓ INFLUENCE – the influence of use of one credit source and availability of other sources of
financing.
✓ REQUIREMENT – additional covenants unique to various sources of financing (e.g., loans).
• Cost of short-term funds (Assume a 360-day year):
✓ Cost of TRADE CREDIT with supplier*:

* This type of financing cost is caused by foregoing cash discounts (opportunity cost).
✓ Cost of BANK LOANS (Effective Annual Rate):

➢ If loan does not require a compensating balance:

▪ Non-discounted: net proceeds = face value
▪ Discounted: net proceeds = face value less interest
➢ If loan requires a compensating balance (CB):
▪ Non-discounted: net proceeds = face value less CB
▪ Discounted: net proceeds = face value less interest less CB
✓ Cost of INSTALLMENT LOAN
Cost of installment loans = 2 x No. of Installments x Interest
(1+No. of installments) x Principal

✓ Cost of COMMERCIAL PAPERS

✓ Cost of FACTORING RECEIVABLES

PROBLEM 1 – WORKING CAPITAL AND LIQUIDITY RATIOS

Given the partial balance sheet information of ABC Company:
Cash P16,000 Accounts Payable P10,000
Accounts Receivable 14,000 Accrued payroll 7,000
Inventory 20,000 Current tax liability 3,000
Fixed Assets 50,000 Bonds payable 25,000
Bonds will mature in 10 years.
REQUIRED:
1. Determine the: (a) net working capital (b) current ratio (3) quick or acid-test ratio
2. If the entire accounts payable are paid in cash, what is the new current ratio?
3. If a short-term loan of P10,000 is obtained from a bank, what is the new current ratio?

PROBLEM 2 – WORKING CAPITAL POLICY: CONSERVATIVE VS AGGRESSIVE

EFG Company expects the following policy data with regard to its working capital operations in 2023:
Working Capital Policy
Conservative Aggressive
Net Sales P 10,000,000 P10,000,000
Current assets as a % of sales 25% 10%
Fixed Assets P 1,500,000 P1,500,000
Debt-equity rate 50:50 50:50
Interest rate 10% 10%
Tax rate 30% 30%
Profit before interest and tax P800,000 P800,000

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 6 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

REQUIRED: Compute the return on equity (ROE) in each of the working capital policies.

PROBLEM 3 – OPTIMAL CASH BALANCE – BAUMOL MODEL

HIJ Company expects to make even monthly cash payments of P160,000 during the year. The average return on money
market placement is 8% p.a and it expects to pay P250 per cash transfer. Using the Baumol model, determine the following:
1. Optimum cash size per transaction.
2. Average cash balance
3. Number of cash transfer per year
4. Total relevant costs at the optimum cash size
5. Total relevant cash costs at the following cash transfers
a. P 50,000
b. P 400,000

PROBLEM 4 – CASH CONVERSION CYCLE

KLM Company is concerned about managing cash efficiently. On the average, inventories have an age of 90
days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days
after they arise. KLM spends at a constant rate P 24 million on operating-cycle investments each year.
REQUIRED:
1. How long in days is the normal operating cycle?
2. How long in days is the cash conversion cycle?
3. What is the number of cash conversion cycles in one year (360 days)?
4. How much amount of resources is needed to support the cash conversion cycle?

PROBLEM 5 – FLOAT AND LOCKBOX SYSTEM

NOP Company has daily cash receipts of P 85,000. A recent analysis of its collection indicated that customer’s payments
were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are
deposited, it takes an average of three days for these receipts to clear the banking system.
Required:
1. How much collection float (in days) does the firm currently have?
2. If the firm’s opportunity cost is 11%, would it be economically advisable for the firm to pay at an annual fee of
P16,500 to reduce collection float by four days?

PROBLEM 6 – AVERAGE INVESTMENT OF ACCOUNTS RECEIVABLE

QRS Company sells on terms of 2/10, n/30. 70% of customers normally avail of the discounts. Annual sales are
P900,000, 80% of which is made on credit. Cost is approximately 75% of sales.
REQUIRED:
1. Average balance of accounts receivable
2. Average investment in accounts receivable

PROBLEM 7 – COLLECTION POLICY (CASH DISCOUNT)

TUV Company presents the following information:
• Annual credit sales: P25,200,000
• Collection period: 3 months
• Rate of return: 12%
ABC Company considers changing its credit term from n/30 to 3/10, 1/30. The following are expected to result:
(1) 30% of its customers will take advantage of the discount;
(2) Sales will remain constant;
(3) The collection period is expected to decrease to two months.
REQUIRED: What is the net advantage (disadvantage) of implementing the proposed discount policy?

PROBLEM 8 – CREDIT POLICY (RELAXATION OF CREDIT STANDARDS & EXTENSION OF CREDIT PERIOD)
WXY Company is considering to change the following:
• Its credit policy from “2/10, n/30” to “2/15, n/45”. This change would push the 2023 sales to reach P48 million, or
an increase of 20% from last year’s.
• 90% of total sales would be on credit. 80% of credit customers are expected to avail of the discount.
• Accounts receivable at the end of year is estimated at 15% of sales.
• Variable costs ratio shall be maintained at 75%. In relation to changing the credit terms, collection costs would
increase by 10% of the incremental sales.
• Doubtful accounts are expected to increase from 1% to 2.75% of credit sales. The effective rate of return on a
given investment is determined at 12%.
REQUIRED: Should WXY Company change its credit policy in 2023?

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 7 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

PROBLEM 9 – ECONOMIC ORDER QUANTITY, CARRYING COSTS & ORDERING COSTS

Z Company would like to reduce its inventory cost by determining the optimal number of units to obtain per order. The
following information were gathered in relation to its product:

Annual demand 40,000

Ordering Cost P 120 per order
Carrying Cost P 0.15 per unit
Working days per year 320 days
Lead time 5 days
Safety stocks 250 units
Compute the following:
1. Economic Order Quantity (EOQ)
2. Total Ordering cost (TOC) per year at EOQ
3. Total Carrying cost (TCC) per year at EOQ
4. Total Annual cost (TAC) at EOQ
5. The number of orders per year (N)
6. The number of days between orders (T)
7. The normal lead time usage (NLTU)
8. The reorder point

PROBLEM 10 – REORDER POINT & SAFETY STOCK

NOW-I-KNOW Company purchases 136,800 units of mini soap bars per year. The average purchase lead time is 5 days.
Maximum lead-time is 8 days. The company works 360 days per year.
REQUIRED:
1. Determine the units of safety stock that the Company should carry
2. The reorder-point for bleaching soap.
3. Assume that the lead time is always 5 days and no delay in delivery has been experienced by the company:
a. What is the reorder point?
b. How many units of safety stock must be kept by the company in this case?

PROBLEM 11 – STOCK-OUT COSTS

MY-ABC Company uses an inventory where it places 12 orders per year, the cost of the stockout is P200 per occurrence,
the carrying cost per unit is P2.00 per year, and the probabilities of stockouts have been estimated for various levels of
safety stock as follows:
Safety stock (in units) Probability of stockout
0 60%
100 50%
200 40%
400 20%
600 10%
REQUIRED: Determine the optimal safety stock level.
PROBLEM 12 – ECONOMIC LOT SIZE
NEXT-WON’T-YOU Bookstore publishes a book about RFBT. NEXT-WON’T-YOU prints 20,000 copies of the book evenly
throughout the year. The set-up cost is P 300 while the optimal production run (economic lot size) is 2,000.
REQUIRED: How much is the unit carrying cost of the book per year?

PROBLEM 13 – SHORT-TERM CREDIT FINANCING: TRADE CREDIT

SING-WITH-ME Trading purchases merchandise for P 200,000, 2/10, n/30.
REQUIRED:
1. The annual cost of trade credit.
2. The annual cost of trade credit if term is changed to 1/15, n/20.

PROBLEM 14 - SHORT-TERM CREDIT FINANCING: BANK LOANS

The following data has been extracted from 123 BANK CORPORATION:
Principal P100,000
Nominal rate 12%
Period 120 days
Compensating balance 8%
REQUIRED: Compute for the effective interest assuming:
1. Discounted and with compensating balance requirement
2. Discounted but no compensating balance requirement
3. Simple interest with compensating balance requirement
4. Simple interest with no compensating balance requirement

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024
 UM TAGUM COLLEGE Page 8 of 8
Department of Accounting Education
Competency Appraisal Course – 1ST Semester – S.Y. 2023-2024
MS – Working Capital Management

PROBLEM 15 – SHORT-TERM CREDIT FINANCING: INSTALLMENT LOAN

The following data has been extracted from 456 BANK CORPORATION:
Principal P100,000
Nominal rate 12%
Term Installment Loan
REQUIRED: Compute for the effective interest assuming the following installment payments
1. Monthly
2. Quarterly
3. Semiannual
4. Annual
5. Re-compute monthly payments assume a 2-year loan
6. Re-compute the effective interest assuming the loan requires compensating balance of 8% of Principal.

PROBLEM 16 – SHORT-TERM CREDIT FINANCING: COMMERCIAL PAPER

The following data has been extracted from 789 BANK CORPORATION:
Face value P1,000
Issue price P920
Term 120 days
REQUIRED:
1. Compute for the effective interest.
2. Recompute the effective interest assuming:
a. Flotation cost of P10 is required.
b. Paper carries 6% nominal rate.
c. Flotation cost of P10 is required and contains 6% nominal rate.

PROBLEM 17 – SHORT-TERM CREDIT FINANCING: RECEIVABLE FACTORING

ABC COMPANY assigned P700,000 of accounts receivable to First Bank under a non-notification arrangement. First bank
advances 80% less a 2% service charge. ABC COMPANY signed a 120-day promissory note that provides for interest of
12% on the unpaid loan balance.
REQUIRED:
1. Compute for the amount of loan.
2. Compute for the effective rate.

PROBLEM 18 – SHORT-TERM CREDIT FINANCING: INVENTORY FINANCING

The ABC Company is considering obtaining a loan from a sales finance company secured by inventories under a field
warehousing arrangement. ABC Company would be permitted to borrow up to P500,000 under such an arrangement at an
annual interest rate of 10%. The additional cost of maintaining a field warehouse is P15,000 per year. ABC Company
borrowed P400,000 during the year.
REQUIRED:
1. Compute for the financing cost of the loan.
2. Compute for the effective rate.

- END OF HANDOUT –

Our greatest weakness lies in giving up. The most certain way to succeed is always to try
just one more time.
- Thomas Edison

Prepared by: JOHN GLENN REOJA, CPA

CAC 1st Semester SY: 2023-2024