65. Central Terminal makes two products, X and Y. Their contribution margins are P50 and P90, respectively.

Each product goes through three processes: cutting, finishing, and painting. The number of hours required
by each process for each product and capacities available are given below:

Hours Required in Each Process

Product Cutting Painting Finishing
X 2 4 3
Y 1 6 2
Capacities in hours 300 500 250

Which of the following shall not be used in a Linear Programming model for Central Terminal?
a. Z = 50 X + 90 Y
b. X, Y > 0
c. 300 < 2 X + 1 Y
d. 250 > 3X + 2 Y

66. Kaplan and Norton’s Balanced Scorecard model requires that management performance be measured based
on the perspective of
a. Suppliers
b. Creditors
c. Government
d. Shareholders

67. Betty Go-Belmonte Company reports the following balance sheet data:

Current Liabilities P280,000

Bonds Payable, 16% 120,000
Preferred stock, 14%, P100 par value 200,000
Common stock, P25 par value, 16,800 shares 420,000
Premium on common stock 240,000
Retained earnings 180,000

Income before 40%-tax is P160,000 while the common stockholders’ equity in the previous year was
P800,000.
Assume a market price per common share of P35, what is the return on common equity?
a. 8.10%
b. 8.29%
c. 11.43%
d. 11.71%

68. Given the following standard cost data of Katipunan Company:

Actual direct labor cost P100,000

Actual factory overhead cost 250,000
Applied factory overhead costs 275,000

Labor spending variance P25,000 favorable

Overhead spending cost P15,000 unfavorable
Labor efficiency variance P12,500 unfavorable
Overhead efficiency variance P20,000 favorable
Materials purchase price variance P7,500 favorable

What is the overhead controllable variance?

a. P5,000 favorable
b. P5,000 unfavorable
c. P25,000 favorable
d. 25,000 unfavorable
69. Taft Corporation carries no debt in its capital structure. Its beta is 0.8. The risk-free rate is 9 percent and the
expected return on the market is 15 percent. The company has an opportunity to invest in a project that earns
12%

Using Capital Assets Pricing Model (CAPM), what is Taft’s cost of capital?
a. 4.8%
b. 9%
c. 12%
d. 13.8%

70. At the start of the year, Cubao Company initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program,
the following data were collected for the current year:

Sales P100,000
Scrap 20,000
Rework 25,000
Quality training 10,000
Product warranty 30,000
Product inspection 40,000
Materials inspection 20,000

In a quality cost report prepared by Cubao Company,what total amount should be shown as non-conformance
costs?
a. P45,000
b. P70,000
c. P75,000
d. P115,000
 FINANCIAL MANAGEMENT
Sources: CMA/CIA/RPCPA/AICPA/various test banks

WORKING CAPITAL MANAGEMENT

1. Net working capital is the difference between

a. Total assets and total liabilities c. Fixed assets and current liabilities
b. Current assets and current liabilities d. Shareholders’ investment and cash

2. If current assets go up by P120,000 Current liabilities go down by P50,00 then net working capital
a. Did not change c. Increased by P170,000
b. Increased by P70,000 d. Decreased by P170,000

3. Which of the following is strictly not a use of working capital?

a. Repurchase of common stock c. Purchase of equipment
b. Purchase of inventory on account d. Repayment of long-term debt

4. The net working capital of Philippines Company at December 31, 2013 was 10,000,000. Selected information
for the year 2014 for Philippines Company is as follows:
Working Capital provided from operations P1,700,000
Capital expenditures 3,000,000
Proceeds from short-term borrowings 1,000,000
Proceeds from long-term borrowings 2,000,000
Payments on short-term borrowings 500,000
Payments on long-term borrowings 600,000
Proceeds from issuance of common stock 1,400,000
Dividends paid on common stock 800,000
What is the net working capital at December 31, 2014?
a. P10,700,000 c. P11,500,000
b. P11,200,000 d. P12,000,000

5. China Corporation had income before taxes of P60,000 for the year. Included in this amount was depreciation
of P5,000 a charge of P6,000 for the amortization of bond discounts, and P4,000 for interest expense. The
estimated cash flow for the period is
a. P49,000 c. P66,000
b. P60,000 d. P71,000

6. USA Co. has an acid test ratio of 1.5 to 1.0. Which of the following will cause this ratio to deteriorate?
a. Payment of cash dividends previously declared
b. Borrowing short-term loan from a bank
c. Sale of inventory on account
d. Sale of equipment at a loss

7. It is the policy of a company that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are
P400,000 and the present value ratio is 2 to 1. How much is the maximum level of new short-term loans it
can secure without violating the policy?
a. P400,000 c. P266,667
b. P300,000 d. 800,000

8. A firm’s current ratio is currently 2.2 to 1. Management knows it cannot violate a working capital restriction
contained in its bond indenture. If the firm’s current ratio falls below 2 to 1, technically it will have defaulted.
If current liabilities are P200,000,000, what is the maximum new commercial paper that can be issued to
finance inventory expansion?
a. P20 million c. 180 million
b. P40 million d. 240 million

9. Which one of the following transactions would increase the current ratio and decrease net profit?
a. An income tax payment due from the previous year is paid
b. A stock dividend is declare
c. Uncollectible accounts receivable are written off against the allowance account
d. Vacant land is sold for less than the net book value
10. Which one of the following transactions does not change the current ratio and does not change the total
current assets?
a. A cash advance is made to a divisional office
b. A cash dividend is declared
c. Short-term notes payable are retired with cash
d. A fully depreciated asset is sold for cash

11. Australia Corporation has 100,000 shares of stock outstanding. Below is part of Australia’s Statement of
Financial Position for the last fiscal year
AUSTRALIA Corporation
Statement of Financial Position – Selected items
December 31
Cash P455,000
Accounts receivable 900,000
Inventory 650,000
Prepared assets 45,000

Accrued liabilities 285,000

Accounts payable 550,000
Current portion, long-term notes payable 65,000

a. P2.05 c. P3.35
b. P2.50 d. P3.80

12. As a company become more conservative in working capital policy, it would tend to have a (an)
a. Decrease in acid test ratio
b. Increase in the ratio of current liabilities to non-current liabilities
c. Increase in the ratio of current assets to units of output
d. Increase in funds invested in common stock and a decrease in funds invested in securities

13. The firm’s financing requirement can be separated into

a. Seasonal and permanent c. Current liabilities and long-term funds
b. Current assets and fixed assets d. Current liabilities and long-term debts

14. 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 (where CA= current assets)
a. Temporary CA with long-term debts c. Permanent CA with long-term debts
b. Fluctuating CA with short-term debts d. Permanent CA with short-term debts

15. Which of the following actions would not be consistent with good working capital management?
a. Increased synchronization of cash flows
b. Minimize the use of float
c. Maintaining an average cash balance equal to that which minimizes total cost
d. Use of checks and drafts in disbursing funds

16. Determining the appropriate level of working capital for a firm requires
a. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance
these assets
b. Changing the capital structure and dividend policy of the firm
c. Maintaining short-term debt at the lowest possible level because it is generally more expensive than
long-term debt
d. Offsetting the benefit of current assets and current liabilities against the probability of technical
insolvency

17. A compensating balance

a. Compensates a financial institution for services rendered by providing it with deposits of funds
b. Is used to compensate for possible losses on a marketable securities portfolio
c. Is a level of inventory held to compensate for variations in usage rate and lead time
d. Is the amount of prepaid interest on a loan

18. The most direct way to prepare a cash budget for a manufacturing firm is to include
a. Projected sales, credit terms, and net income
b. Projected net income, depreciation and goodwill amortization
c. Projected purchases, percentages of purchase paid, and net income
d. Projected sales and purchases, percentages of collections, and terms of payments
19. Shown below is a forecast of sales for Europe Inc. for the first 4 months of the year (all amounts are in
thousands of pesos)
January February March April
Cash sales P15 P24 P18 P14
Sales on credit 100 120 90 70

On average, 50% of credit sales are paid for in the month of sale. 30% in the month following the sale and
the remainder is paid 2 months after the month of sale. Assuming there are no bad debts, what is the expected
cash inflow for Europe in March?
a. P 138,000 c. P 119,000
b. P 122,000 d. P 108,000

20. Asia Inc. has a pool of cash that it uses to pay bills. When the cash is exhausted, it replenishes its pool by
setting T-bills. The firm disburses P600,000 in cash every year, and every sale of T-bills costs P60. The
current risk-free rate is 8%. What is the optimal cash balance for Asia?
a. P 27,932 c. P 30,000
b. P 48,530 d. P 37,546

21. A firm needs a total of P30,000,000 in new cash for transaction purposes. The annual interest rate on
marketable securities is 10% and the brokerage fee cost per transaction of selling securities to replenish cash
is P1,000. Which of the following is closest to the firm’s optimal average cash balance?
a. P 353,432 c. P 774,597
b. P 387,298 d. P 790,213

22. Africa, Inc. has P2 million invested in T-bills yielding 8% per annum. This investment will satisfy the firm’s
need for funds during the coming year. It costs P50 to sell these bills. If Africa needs P166,667 a month, how
frequently should the company sell off T-bills?
a. About every 3 days c. About every 15 days
b. About every 9 days d. About every 18 days

23. A firm has an average age in inventory of 60 days, an average collection period of 45 days, and an average
payment period of 30 days. What is the number of days in the cash flow cycle?
a. 135 days c. 90 days
b. 105 days d. 75 days

24. The company’s cash flow cycle extends up to 50 days. Receivables age is for 20 days. Average age in
inventory is twice as long as days’ receivable. For how long is the company’s payable deferral period?
a. 10 days c. 5 days
b. 20 days d. 15 days

25. A working capital technique that increases the payable float therefore delays the outflow of cash is
a. Concentration banking c. Electronic Data Interchange (EDI)
b. A draft d. A lockbox system

26. Assume that each day a company writes and receives checks totaling P10,000. If it takes 5 days for the checks
to clear and be deducted from the company’s account, and only 4 days for the deposits to clear, what is the
float?
a. (P 10,000) c. P 10,000
b. P 0 d. P 50,000

27. Arctic is a retail mail order firm that currently uses a central collection system that requires all checks to be
sent to its Manila headquarters. An average of 6 days is required for mailed checks to be received, 3 days for
Arctic to process them, and 2 days for the checks to clear through its bank. A proposed lockbox system would
reduce the mailing and processing time to 2 days and the check-clearing time to 1 day. Arctic has an average
daily collection of P150,000. If Arctic adopts the lockbox system, its average cash balance will increase by
a. P 1,200,000 c. P 600,000
b. P 750,000 d. P 450,000

28. America Company is considering implementing a lockbox system at a cost P20,000 per quarter. Annual sales
are P90,000,000, and the lockbox system will reduce collection time by 3 days. If America can invest funds
at 8% should it implement lockbox system? (Assume a 360-day year)
a. Yes, savings of P140,000 per year c. No, loss of P20,000 per year
b. Yes, savings of P60,000 per year d. No loss of P60,000 per year
29. A firm has daily cash receipts of P100,000 and collection time of 2 days. A bank has offered to reduce the
collection time on the firm’s deposit by 2 days for a monthly fee of P500. If money market rates are expected
to average 6% during the year, the net annual benefit (loss) from having this service is
a. P 0 c. P 6,000
b. P 3,000 d. P 12,000

30. Peru Company is a newly established janitorial firm, and the owner is deciding what type of checking account
to open. Peru is planning to keep a P 500 minimum balance in the account for emergencies and plans to write
roughly 80 checks per month. The bank charges P 10 per month plus a P 0.10 per check charge for a standard
business checking account with no minimum balance. Peru also has the option of a premium business
checking account that requires a P 2,500 minimum balance but has no monthly fees or per check charges. If
Peru’s cost of funds is 10%, which account should Peru choose?

a. Standard account, because the savings is P34 per year

b. Premium account, because the savings is P34 per year
c. Standard account, because the savings is P16 per year
d. Premium account, because the savings is P16 per year

31. China Inc. has a majority of its customers located in Metro Manila Tibetan, a major retail bank, has agreed
to provide a lockbox system to China at a fixed fee of P 50,000 per year and a variable fee of P0.50 for each
payment processed by the bank. On average, China receives 50 payments per day, each averaging P20,000.
With the lockbox system, the company’s collection float will decrease by 2 days. The annual interest rate on
money market securities is 6%. If China makes use of the lockbox system, what would be the net benefit to
the company? (Use 365 days per year).
a. P50,000 c. P60, 875
b. P59,125 d. P120,000

32. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
a. Maximizing rate of return
b. Minimizing taxes
c. Investing in treasury bonds since they have no default risk
d. Liquidity and safety

33. The average collection period for a firm measures the number of days
a. After typical credit sale is made until the firm receives the payment
b. For a typical check to clear through the banking system
c. Beyond the end of the credit period before a typical customer payment is received
d. Before a typical account becomes delinquent

34. Russia Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000, and the collections
department estimates that 30% of the customers pay on the tenth day and take discounts, 40% pay on the
thirtieth day and the remaining 30% pay, on average, 40 days after the purchase. Assuming 360 days per
year, what is the average collection period?
a. 40 days c. 20 days
b. 27 days d. 15 days

35. England Company has an inventory conversion period of 60 days, a receivables conversion period of 35 days,
and a permanent cycle of 26 days. If its sales for the period just ended amounted to P972,000, what is
investment in accounts receivable? (Assume 360 days in a year)
a. P72,450 c. P85,200
b. P79,600 d. P94,500

36. Italy Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average 150 units at a
price of P300 each. All sales are on credit and 60% of its customers take the discount and pay on day 10
while the rest of the customers pay on day 30. The amount of Italy’s accounts receivable is
a. P1,350,000 c. P900,000
b. P990,000 d. P810,000

37. A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the
investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this
information, one can conclude that
a. Net profit c. Size of the discount offered has decreased
b. Bad debt percentage has increased d. Average collection period has decreased
38. Mexico Company 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 they pursue this opportunity,
what will be the after-tax profit?
a. Increase by P35,000 c. Increase by P65,000
b. Increase by P97,500 d. Remain the same

39. A company’s budgeted sales for the coming year are P96 million, of which 80% are expected to be credit
sales at terms of n/30. The company estimates that a proposed relaxation of credit standards would increase
credit sales by 30% and increase the average collection period form 30 days to 45 days. Based on a 360-day
year, the proposed relaxation of credit standards would result to an increase in AR balance by
a. P6,880,000 c. P2,880,000
b. P6,080,000 d. P1,920,000

40. Singapore Corporation plans to tighten its credit policy. Below is the summary of changes:

Old policy New policy

Average number of days collection 75 50
Ratio of credit sales to total sales 70% 60%
Projected sales for the coming year is P100 million and it is estimated that the new policy will result in a 5%
loss if the new policy is implemented. Assuming a 360-day year, what is the effect of the new policy on
accounts receivable?
a. 3,333,333 decrease c. 6,500,000 decrease
b. 3,817,445 decrease d. 18,749,778 increase

41. Iran Computers believes that its collection costs could be reduced through modification of collection
procedures. This action is expected to result in a lengthening of the average collection period from 28 days
to 34 days; however, there will be no change in uncollectible accounts. The company’s budgeted credit sales
for the coming year are P27,000,000, and short-term interest rates are expected to average 8%. To make the
changes in collection procedures cost beneficial, what would be the minimum savings in collection costs
(using a 360-day year) for the coming year?
a. P30,000 c. P180,000
b. P36,000 d. P360,000

42. A company with P4.8 million in credit sales per year plans to relax its credit standards, projecting that this
will increase credit sales by P720,000. The company's average collection period for new customers is
expected to be 75 days, and the payment behavior of the existing customers is not expected to change.
Variable costs are 80% of sales. The firm's opportunity cost is 20% before taxes. Assuming a 365-day year,
what is the company's benefit (loss) on the planned change in credit terms?
a. P 0 c. P120,000
b. P 28,800 d. P144,000

43. A computerized inventory system that simulates needed materials requirements for the finished product, and
then compares production needs to available inventory balances to determine when orders should be placed
a. EOQ system c. Just-In-Time system
b. Electronic Data Interchange d. Material Requirements Planning System

44. The economic order quantity formula indicates that

a. Annual quantity of inventory to be carried
b. Annual usage of materials during the year
c. Safety stock plus estimated inventory for the year
d. Quantity of each individual order during the year

45. An example of carrying cost is

a. Disruption of production schedules c. Handling costs
b. Quantity discount lost d. Spoilage

46. The ordering costs associated with inventory management include

a. Include costs, purchasing costs, shipping costs, and spoilage
b. Obsolescence, setup costs, quantity discounts lost, and storage costs
c. Purchasing costs, shipping costs, setup costs, and quantity discount lost
d. Shipping costs, obsolescence, setup costs, and capital invested
 47. The amount of inventory that a company would lend to hold in stock would increase as the
a. Sales level fails to a permanently lower level
b. Cost of carrying inventory decreases
c. Variability of sales decreases
d. Cost of running out of stock decreases

48. In inventory management, the safety stock will tend to increase if the
a. Carrying cost increases c. Variability of the lead time increases
b. Cost of running out of stock decreases d. Variability of the usage rate decreases

49. The result of the economic order quantity formula indicates the
a. Annual quantity of inventory to be carried
b. Annual usage of materials during the year
c. Safety stock plus estimated inventory for the year
d. Quantity of each individual order during the year

50. India operates a chain of hardware stores across Manila. The controller wants to determine the optimum
safety stock levels for an air purifier unit. The inventory manager compiled the following data.
• The annual carrying cost of inventory approximates 20% of the investment in inventory.
• The inventory investment per unit averages P50.
• The stock-out cost is estimated to be P5 per unit.
• The company orders inventory on the average of 10 times per year.
• The probabilities of a stock-out per order cycle with varying levels of safety stock are as follows.
Safety Stock Stock-out Probability
200 units 0 0%
100 units 100 units 15%
0 100 units 15%
0 200 units 12%

a. P550 c. P1,950
b. P1,750 d. P2,000

SHORT-TERM CREDIT FINANCING & LONG-TERM SOURCES OF FINANCING

1. Which one of the following provides a spontaneous source of financing for a firm?
a. Accounts payable c. Accounts receivable
b. Mortgage bonds d. Debentures

2. Based on a 360-day year, the current price of P100 treasury bill in 180 days on 6% discount basis is
a. P100.00 c. 94.00
b. P97.00 d. 93.00

3. Commercial paper
a. Has a maturity date greater than 1 year
b. Is usually sold only through investment banking dealers
c. Ordinarily does not have an active secondary market
d. Has an interest rate lower than Treasury bills

4. The forms of short-term borrowing that are unsecured credit are

a. Floating lien, revolving credit, chattel mortgage, and commercial paper
b. Factoring, chattel mortgage, bankers’ acceptances and line of credit
c. Floating lien, chattel mortgage, bankers’ acceptances, and line of credit
d. Revolving credit, bankers’ acceptances, line of credit, and commercial paper

5. A firm often factors its accounts receivable. Its finance company requires at 6% reserve and charges a 1.4%
commission on the amount of the receivables. The remaining amount to be advanced is further reduced by
annual interest charge of 15%. What proceeds will the firm receive from the finance company at the time a
P100,000 account due in 60 days is factored?
a. P85,000 c. P92,600
b. P90,285 d. P96,135