UNIVERSITY OF SANTO TOMAS

AMV College of Accountancy

ACC 7 – Management Consultancy
Quizzer – Working Capital Management

Basic Concepts:

1. SM Company has current assets of P300,000 and current liabilities of P200,000. SM could increase its working capital
by the
a. Prepayment of P50,000 of next year's rent.
b. Refinancing of P50,000 of short-term debt with long-term debt.
c. Purchase of P50,000 of temporary investments for cash.
d. Collection of P50,000 of accounts receivable.

2. Other things held constant, which of the following will cause an increase in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.

3. Which of the following statements is most correct?

a. The current ratio is calculated as net working capital divided by current liabilities.
b. Gross working capital represents current assets used in operations.
c. Net working capital is defined as current assets minus current liabilities.
d. Statements b and c are correct.

4. It is the policy of RH Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are P400,000 and
the present current 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 b. P300,000 c. P266,667 d. P800,000

5. Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend
to have a
a. Greater percentage of short-term financing.
b. Higher ratio of current assets to fixed assets.
c. Greater risk of needing to sell current assets to repay debt.
d. Higher total asset turnover.

6. A firm following an aggressive working capital strategy would

a. Hold substantial amount of fixed assets.
b. Minimize the amount of short-term borrowing
c. Finance fluctuating assets with long-term financing.
d. Minimize the amount of funds held in very liquid assets.

7. A service enterprise's working capital at the beginning of January was P70,000. The following transactions
occurred during January:
Performed services on account P 30,000
Purchased supplies on account 5,000
Consumed supplies 4,000
Purchased office equipment for cash 2,000
Paid short-term bank loan 6,500
Paid salaries 10,000
Accrued salaries 3,500

What is the amount of working capital at the end of January?

a. P80,500 b. P78,500 c. P50,500 d. P47,500

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8. Colt Corporation has 100,000 shares of stock outstanding. Below is part of MFC’s Statement of Financial Position
for the last fiscal year.
Colt Corporation
Statement of Financial Position – Selected Items
December 31, 2017

Cash P455,000
Accounts receivable 900,000
Inventory 650,000
Prepaid assets 45,000

Accrued liabilities 285,000

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

What is the maximum amount Colt can pay in cash dividends per share and maintain a minimum current ratio of
2 to 1? Assume that all accounts other than cash remain unchanged.
a. P2.05 b. P2.50 c. P3.35 d. P3.80

9. MP Corporation's management is considering a plant expansion that will increase its sales and have commensurate
impact on its net working capital position. The following information presents management's estimate of the impact
the proposal will have on MP.
Current Proposal
Cash P 100,000 P 110,000
Accounts payable 400,000 470,000
Accounts receivable 560,000 690,000
Inventory 350,000 380,000
Marketable securities 200,000 200,000
Fixed assets 2,500,000 3,500,000
Net income 500,000 650,000

The impact of the plant expansion on MP's working capital would be

a. A decrease of P100,000. c. An increase of P100,000
b. A decrease of P950,000. d. An increase of P950,000

Operating Cycle Turnovers and Conversion Periods:

1. The current ratio is 2.5 to 1; the acid-test ratio is 0.9 to 1; cash and receivables are P270,000. The current assets are
composed of cash, receivables and inventory. Compute:
A) Current liabilities P300,000 B) Inventory P480,000

2. Accounts receivable equal 45 days’ credit sales. Annual sales of P900,000 are spread evenly throughout the year.
Inventory turnover is 4 times. Compute:
A) Average accounts receivable P112,500 B) Operating cycle 135 days

3. Net sales total P100,000. Net profit margin is 12%. Interest charges are earned 6 times. How much is the operating
income before interest and taxes assuming that tax rate is 40%? P24,000

4. Using the same data in No. 3 and suppose that the age of inventory is 30 days and the average amount of
inventory for the year is P5,000, how much is the company’s operating expenses? P16,000

5. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 million in average
inventory, and a cash conversion cycle of 75 days?
a. 6.56 days b. 18.75 days c. 52.60 days d. 67.50 days

6. Kuja Company sells on terms 3/10, n/30. Total sales for the year are P900,000. Forty percent of the customers pay
on the 10th day and take discounts; the other 60% pay, on average, 45 days after their purchases. What is the
average amount of receivables?
a. P70,000 b. P77,500 c. P77,200 d. P67,500

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 7. 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. 81 days and P120,000 c. 73 days and P108,000
b. 73 days and P120,000 d. 81 days and P200,000

8. Bully Corporation purchases raw materials on July 1. It converts the raw materials into inventory by September 30.
However, Bully pays for the materials on July 20. On October 31, it sells the finished goods inventory. Then, the
firm collects cash from the sale 1 month later on November 30. If this sequence accurately represents the average
working capital cycle, what is the firm's cash conversion cycle in days?
a. 92 days b. 133 days. c. 123 days d. 153 days

9. Helena Co. wants to sharply reduce its cash conversion cycle. Which of the following steps would reduce its cash
conversion cycle?
a. The company increases its average inventory without increasing its sales.
b. The company reduces its DSO.
c. The company starts paying its bills sooner, which reduces its average accounts payable without reducing its sales.
d. Statements a and b are correct.

10. Ignoring cost and other effects on the firm, which of the following measures would tend to reduce the cash conversion
cycle?
a. Maintain the level of receivables as sales decrease c. Take discounts when offered.
b. Buy more raw materials to take advantage of price breaks d. Forgo discounts that are currently being taken.

11. On average, a firm sells P2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on
hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?
a. 365.0 days b. 182.5 days c. 30.3 days d. 15.2 days

12. Biondi Manufacturing Company (BMC) has an average accounts receivable balance of P1,250,000, an average inventory
balance of P1,750,000, and an average accounts payable balance of P800,000. Its annual sales are P12,000,000 and its cost
of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year. What is BMC’s cash conversion
cycle?
a. 84.15 days b. 53.23 days c. 72.28 days d. 60.83 days
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13. Porta Stadium Inc. has annual sales of P80,000,000 and keeps average inventory of P20,000,000. On average, the firm has
accounts receivable of P16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and
it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be
maintained at existing levels but inventory can be lowered by P4,000,000 and accounts receivable lowered by P2,000,000,
what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.
a. +105 days b. -105 days c. +27 days d. -27 days

14. Jordan Air Inc. has average inventory of P1,000,000. Its estimated annual sales are P10 million and the firm estimates its
receivables conversion period to be twice as long as its inventory conversion period. The firm pays its trade credit on
time; its terms are net 30 days. The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can
reduce its average inventory to P863,000. Assume a 365-day year and that sales will not change. By how much must the
firm also reduce its accounts receivable to meet its goal of a 10-day reduction in its cash conversion cycle?
a. P 101,900 b. P1,000,000 c. P 136,986 d. P 333,520
15. Gaston Piston Corp. has annual sales of P50,735,000 and maintains an average inventory level of P15,012,000. The
average accounts receivable balance outstanding is P10,008,000. The company makes all purchases on credit and has
always paid on the 30th day. The company is now going to take full advantage of trade credit and pay its suppliers on
the 40th day. If sales can be maintained at existing levels but inventory can be lowered by P1,946,000 and accounts
receivable lowered by P1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days
in the year.)
a. -14.0 days b. -18.8 days c. -28.0 days d. -38.0 days

Optimal Transaction Size

1. Smile, Inc. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Smile 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. What is the optimal cash conversion size?
a. P60,000 b. P55,000 c. P45,000 d. P72,500
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2. Suppose that the interest rate on Treasury bills is 6%, and every sale of bills costs P60. You pay out cash at a rate
of P800,000 a year. According to Baumol's model of cash balances, how many times a year should you sell bills?
a. 20 b. 35 c. 50 d. 15

3. Suppose that the interest rate on Treasury bills is 6%, and every sale of bills costs P20. You pay out cash at a rate
of P400,000 a month. According to Baumol's model of cash balances, how many times a month should you sell
bills?
a. 30 b. 20 c. 7 d. 4

4. Which of the following statements is most correct?

a. The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. The
total desired cash balance can be determined by calculating the amount needed for each purpose and then summing
them together.
b. The easier a firm’s access to borrowed funds the higher its precautionary balances will be, in order to protect against
sudden increases in interest rates.
c. For some firms, holding highly liquid marketable securities is a substitute for holding cash because the marketable
securities accomplish the same objective as cash.
d. Firms today are more likely to rely on cash than on reserve borrowing power or marketable securities for speculative
purposes because of the need to move quickly.

5. Which of the following statements is most correct?

a. Compensating balance requirements apply only to businesses, not to individuals.
b. Compensating balances are essentially costless to most firms, because those firms would normally have such funds
on hand to meet transactions needs anyway.
c. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the
effective cost of any loan requiring such a balance is increased.
d. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating

6. Mott Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Mott 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.

What is the optimum average cash balance?

a. P60,000 b. P55,000 c. P45,000 d. P27,500

Cash Management Strategies:

1. Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts.
Newman receives an average of 700 checks per day averaging P1,800 each, and its cost of short-term funds is 7%
per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which
one of the following proposals is optimal for Newman?
a. A P0.50 fee per check c. A flat fee of P125,000 per year
b. A fee of 0.03% of the amount collected d. A compensating balance of P1,750,000

2. What are the expected annual savings from a lockbox system that collects 200 checks per day averaging P500 each,
and reduces mailing and processing times by 2.0 and 0.5 days, respectively, if the annual interest rate is 6%?
a. P250,000 b. P12,000 c. P6,000 d. P15,000

3. 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. P6,000 b. P(6,000) c. P12,000 d. P(12,000)

4. 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. P126,000 b. P 75,000 c. P 32,000 d. P 24,000

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5. What is the opportunity cost of keeping a cash balance of P2 million, if the daily interest rate is 0.02% and the
average transaction cost of investing money overnight is P50?
a. P50 b. P350 c. P400 d. P40,000

6. On an average day, a company writes checks totalling P1,500. These checks take 7 days to clear. The company
receives checks totalling P1,800. These checks take 4 days to clear. The cost of debt is 9%. What is the firm's
disbursement float?
a. P10,500 b. P1,500 c. P1,800 d. None of the above

7. On an average day, a company writes checks totalling P1,500. These checks take 7 days to clear. The company
receives checks totalling P1,800. These checks take 4 days to clear. The cost of debt is 9%. What is the firm's net
float?
a. P300 b. P3,300 c. P2,100 d. P1,200

8. Which of the following statements is most correct?

a. A cash management system that minimizes collections float and maximizes disbursement float is better than one with
higher collections float and lower disbursement float.
b. A cash management system that maximizes collections float and minimizes disbursement float is better than one with
lower collections float and higher disbursement float.
c. The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than theft losses saved,
then the lockbox should be installed.
d. Other things held constant, a firm will need a smaller line of credit if it can arrange to pay its bills by the 5th of each
month than if its bills come due uniformly during the month.

9. Which of the following statements about current asset management is most correct?
a. A positive net float means that a company has more cash available for its use than the amount shown in the company’s
books.
b. Use of a lockbox reduces the possibility that petty cash will be lost.
c. Depreciation has an impact on the cash budget.
d. Statements a and c are correct.

10. Which of the following statements is most correct?

a. A good cash management system would minimize disbursement float and maximize collections float.
b. If a firm begins to use a well-designed lockbox system, this will reduce its customers’ net float.
c. In the early 1980s, the prime interest rate hit a high of 21 percent. In 2000 the prime rate was considerably lower. That
sharp interest rate decline has increased firms’ concerns about the efficiency of their cash management programs.
d. A firm that has such an efficient cash management system that it has positive net float can have a negative checkbook
balance at most times and still not have its checks bounce.

11. A lockbox plan is

a. A method for safe-keeping of marketable securities.
b. Used to identify inventory safety stocks.
c. A system for slowing down the collection of checks written by a firm.
d. A system for speeding up a firm’s collections of checks received.

12. A lockbox plan is most beneficial to firms that

a. Send payables over a wide geographic area. c. Have a large marketable securities account to protect.
b. Have widely disbursed manufacturing facilities. d. Make collections over a wide geographic area

13. Which of the following statements is most correct?

a. Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing
disbursement float and decreasing collections float.
b. The size of a firm’s net float is primarily a function of its natural cash flow synchronization and how it clears its checks.
c. Lockbox systems are used mainly for security purposes as well as to decrease the firm’s net float.
d. If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float.

14. Assume that the average number of daily payments to a lock-box is 200, the average size of the payment is P1,000,
the rate of interest per day is 0.02% (i.e., 0.0002), the savings in mail time is 2 days, and the savings in processing
time is 1 day. What is the daily return from operating the lock-box?
a. P80 b. P100 c. P120 d. P130

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15. Foster Inc. is considering implementing a lock box collection system at a cost of P80,000 per year. Annual sales
are P90 million, and the lockbox system will reduce collection time by 3 days. If Foster can invest funds at 8%,
should it use the lockbox system? Assume a 360-day year.
a. Yes, producing savings of P140,000 per year c. No, producing a loss of P20,000 per year.
b. Yes, producing savings of P60,000 per year d. No, producing a loss of P60,000 per year.

16. Kemple is a newly established janitorial firm, and the owner is deciding what type of checking account to open.
Kemple is planning to keep a P500 minimum balance in the account for emergencies and plans to write roughly 80
checks per month. The bank charges P10 per month plus a P0.10 per check charge for a standard business checking
account with no minimum balance. Kemple also has the option of a premium business checking account that
requires a P2,500 minimum balance but has no monthly fees or per check charges. If Kemple’s cost of funds is 10%,
which account should Kemple choose?
a. Standard account, because the savings is P34 per year c. Standard account, because the savings is P16 per year.
b. Premium account, because the savings is P34 per year d. Premium account, because the savings is P16 per year.

Receivables Management:

1. 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 Camp’s variable cost ratio is 60% and annual fixed costs of
P600,000. The current cost of capital for Camp is 12%. If Camp’s annual sales are P3,375,000 and all sales are on
credit, what is the firm’s carrying cost on accounts receivable, using 360-day year?
a. P281,250 b. P168,750 c. P20,250 d. P56,250

2. Mr. S. Mart assumed the presidency of Riches Corp. He instituted new policies and with respect to credit policy,
below is a summary of relevant information:
Old Credit Policy New Credit Policy
Sales P1,800,000 P1,980,000
Average collection period 30 days 36 days

The company requires a rate of return of 10% and a variable cost ratio of 60%. Using a 360-day year, the pre-tax
cost of carrying the additional investment in receivables under the new policy would be
a. P4,800 b. P2,880 c. P3,000 d. P4,080

3. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
Old New
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. Decrease of P13 million c. Decrease of P5 million.
b. No change d. Decrease of P 6.67 million.

4. 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. P85,200 b. P72,450 c. P94,500 d. P79,600

5. Hakuna 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 10th day and take discounts; 40% pay on the 30th day;
and the remaining 30% pay, on the average, 40 days after the purchase. Assuming 360 days per year, what is the
average collection period.
a. 40 days b. 15 days c. 20 days d. 27 days

6. An organization offers its customers credit terms of 5/10, net 20. One-third of the customers take the cash discount
and the remaining customers pay on day 20. On average, 20 units are sold per day, priced at P 10,000 each. The
rate of sales is uniform throughout the year. Using a 360-day year, the organization has days’ sales outstanding in
accounts receivable, to the nearest full day, of
a. 13 days b. 15 days c. 17 days d. 20 days

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 7. Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables.
However, they can provide erroneous signals to credit managers when
a. Customers’ payments patterns are changing. c. Some customers take the discount and others do not.
b. Sales fluctuate seasonally. d. Sales are relatively constant, either seasonally or cyclically.

Inventory Management:

1. 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 b. 4,000 bags c. 8,000 bags d. 16,000 bags

2. Zeus Co. sells 200 units of discs per week. Purchase order lead time is 3 weeks and the economic order quantity is
450 units. What is the reorder point?
a. 425 units b. 1,750 units c. 600 units d. 2,250 units

3. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000 units. The cost per unit
of inventory is P5, and the carrying cost is 10% of the average value of inventory. The annual inventory carrying
cost for the organization is
a. P 3,000 b. P 3,500 c. P 5,000 d. P 6,000

For questions 4 and 5:

Laguna Company purchases 7,500 units of bleaching soap per annum. The average purchase lead time is 7
working days. Maximum lead time is 10 working days. The company works 300 days per year.

4. How many units should Laguna maintain as safety (buffer) stock? 75

5. What is Laguna’s reorder point for bleaching soap? 250

For questions 6 to 9:

Ward Company requires 40,000 units of materials for its P100-signature product. The materials, which are
purchased from outside suppliers, will be used evenly throughout the year. The cost to place one order is P20,
while the cost to carry the units of materials in inventory for one year is P0.40.

Required: Compute for the following:

6. The optimal order quantity. 2,000

7. The number of times the company should place orders within a year. 20
8. The average inventory. 1,000
9. Total ordering and carrying costs. P400 each

10. Zedlar Corporation's EOQ for Material A is 500 units. This EOQ is based on:
Annual demand 5,000 units
Ordering costs P12.50

What is the annual carrying cost per unit for Material A?

a. P0.50 b. P2.00 c. P2.50 d. P5.00

Review Questions

1. Working capital management is concerned about the trade-off between

a. Default risk and conservatism c. Profitability and risk of technical short-term insolvency
b. Return and financial risk d. Current ratio and return on equity

2. A precautionary motive for holding excess cash is

a. To enable a company to meet the cash demands from the normal flow of business activity
b. To enable a company to avail of inventory purchase before prices rise to higher levels
c. To enable a company to have cash to meet emergencies that may arise periodically
d. To avoid using various lending arrangements available to cover projected cash deficits

3. A working capital technique that increases the payable float and therefore delays the outflow of cash is
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 a. Concentration banking c. Electronic data interchange
b. A draft d. A lockbox system

4. A firm has an average age in inventory of 90 days, an average collection period of 40 days, and an average
payment period of 30 days. What is the firm’s cash conversion cycle?
a. 80 days b. 100 days c. 130 days d. 160 days

5. A lock-box system
a. Reduces the need for compensating balances. c. Reduces the risk of having checks lost in the mail.
b. Provides security for late night deposits. d. Accelerates the inflow of funds.

6. 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
a. Transaction balance c. Precautionary balance
b. Compensating balance d. Speculative balance

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

10. Which of the following current assets is the most productive?

a. cash on hand b. cash in bank c. receivables d. inventory

11. A decrease in the price of a raw material could result in a(n)

a. increase in the lead time c. decrease in the order point
b. increase in the EOQ d. increase in the setup costs

12. The number of orders that will be submitted each year for raw material is given by which formula?
a. Economic order quantity x order point
b. Total annual material needs/economic order quantity
c. Order point/economic order quantity
d. Total annual material needs/safety stock