MAS-06 WORKING CAPITAL (CASH & MS MGMT / AR MGMT / INVENTORY MGMT / SHORT TERM CREDIT FINANCING

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CASH & MS MANAGEMENT

X Corporation is expecting to have total payments of P 1,800,000 for one year, cost per transaction amounted to P 25, and the interest rate of marketable securities is 10%.

1. What is the company’s optimal initial cash balance that minimizes total costs?
2. What is the total number of transactions or cash conversions that will be required per year?
3. What will be the average cash balances for the period?
4. How much is the total cost of maintaining cash balances?

Y Corporation cost of goods sold per year is P 3,600,000. Annual operating expenses are estimated at P 1,000,000 inclusive of depreciation and other non-cash expenses of
P 100,000.

5. How much must the corporation’s minimum cash balance be if it is to be equal to 12 days requirement? (use 360 day year)

Z Corp. purchases merchandise on 20 day term. Goods are sold, on the average, 15 days after they are received. The average age of accounts receivable is 45 days. Z pays
its payable on due date.

6. How long in days is the normal operating cycle?

7. How long in days is the cash conversion cycle?
8. What is the number of cash conversion cycles in one year (360 days)?

It usually takes B Corp 8 calendar days to receive and deposit customer remittances. B is considering to adopt a lockbox system that will reduce the float time to 5 days.
Average daily cash receipts are P 220,000. The rate of return is 10 percent.

9. How much is the reduction of float in cash balances associated with implementing the system?
10. What is the amount of return associated with the earlier receipt of funds?
11. If the lockbox costs P 7,500 per month to implement, should the system be implemented? Why?

G Corp has P 20,000 excess cash that it might invest in marketable securities. It considers investing the money for a holding period of 3 months. The transaction fee arising
from this is P 300.

12. What is the break even yield (annual basis) for three month holding period?
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AR MANAGEMENT

F Corp sells on terms of 2/10 , n/30. 70% of customers normally avail of the discounts. Annual sales are P 900,000, 80% of which is made on credit. Cost is approximately
75% of sales.

13. Average balance of accounts receivables?

14. Average investment in accounts receivables?

H Corp. makes credit sales of P 2,160,000 per annum. The average age of accounts receivable is 30 days. Management considers shortening credit terms by 10 days. Cost of
money is 18%.

15. How much will the company save from financing charges? (Assume 60-day year).

T Corp. presents the following information:

- Annual credit sales: P 25,200,000

- Collection period: 3 months
- Trade credit term: n/30
- Rate of return 18%

T Corp considers to offer a credit term of 4/10 , n/30. It expects 30% of its customers will take advantage of the discount while sales would remain constant. As a result, the
collection period is expected to decrease to 2 months.

16. What is the net advantage (disadvantage) of implementing the proposed discount policy?

K Corp. reports the following information:

- Selling Price per unit P 10

- Variable cost per unit P8
- Total Fixed Costs P 120,000
- Annual Credit Sales 240,000 units
- Collection period 3 months
- Rate of return 25%

K considers to relax its credit standards by granting extension of credit terms. The following are expected to result: (1) sales will increase by 25% ; (2) collection costs will
increase by P 40,000 ; (3) bad debt losses are expected to be 5% on the incremental sales ; and (4) collection period will increase to 4 months.
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17. Should the proposed relaxation in credit standards be implemented? Why?

INVENTORY MANAGEMENT

R Inc. sells cellphone cases which it buys from a local manufacturer. R sells 24,000 cases evenly throughout the year. The cost of carrying one unit in inventory for one year
is P 11.52 and the cost per order is P 38.40.

18. The EOQ?

19. If R would buy in EOQ, the total order costs is?
20. If R would buy in EOQ, the total inventory carrying costs per year is?

The following information is available for Beth Corporation’s Material X:

Annual usage 12,600 units ; Working days per year 360 days ; Normal lead time 20days

The units of Material X are required evenly throughout the year.

21. What is the reorder point?

22. Assuming that occasionally, the company experiences delay in the delivery of Material X, such that the lead time reaches a maximum of 30 days, how many units of
safety stock should the company maintain?
23. Assuming that occasionally, the company experiences delay in the delivery of Material X, such that the lead time reaches a maximum of 30 days, what is the reorder
point?

Using the EOQ model, J Corp computed the EOQ for one of the products it sells to be 4,000 units. J Corp maintains safety stock of 300 units. The quarterly demand for the
product is 10,000 units. The order cost is P 200 per order. The purchase price of the product is P 2.40. The company sells at a 100% markup. The annual inventory carrying
cost is equal to 25% of the average inventory level.

24. The annual inventory carrying costs?

25. The total inventory ordering cost per year is?

The following information pertains to L Corporation’s Material Y. (items 26-27)

Annual usage 25,200 units ; Working days per year 360 days ; Normal lead time in working days 30days ; Safety stock 1,050 units

26. The maximum lead time in working days?

27. What is the reorder point?
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28. The basis EOQ model equals the square root of the (1) product of twice the demand times the cost per order, (2) divided by the periodic carrying cost per unit. If the
annual demand increases by 44%, the EOQ will increase (decrease) by what percentage?

SHORT-TERM CREDIT FINANCING

Nick Trading Co. purchases merchandise for P 200,000, 2/10, n/30.

29. The annual cost of trade credit?

30. The annual cost of trade credit if term is changed to 1/15 , n/20?

Khai Trading Co. was granted a P 200,000 bank loan with 12% stated interest.

31. What is the Effective Annual Rate (EAR) if Khai receives the entire amount of P 200,000?
32. What is the Effective Annual Rate (EAR) if Khai is granted a discounted loan?
33. What is the Effective Annual Rate (EAR) if Khai is required to maintain a compensating balance of P 10,000 under the non-discounted loan?
34. What is the Effective Annual Rate (EAR) if Khai is required to maintain a compensating balance of 10% under a discounted loan?

X plans to sell a 180-day commercial paper amounting to P 100,000,000 which it expects to pay a discounted interest of 12% per annum. X expects to incur P 100,000 in
dealer placement fees and paper issue costs.

35. What is % of effective cost of X’s credit?

Z Co. has P 200,000 in receivable that carries 30-day credit term, 2% factor’s fee, 6% holdback reserve, and an interest of 12% per annum on advances.

36. How much is the cash proceeds from factoring receivable?

37. What is the EAR of financing thru factoring the receivable?

38. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.

39. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage
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40. Gap Company follows an aggressive financing policy in its working capital management while Ging Corporation follows a conservative financing policy. Which one of the
following statements is correct?
A. Gap has low ratio of short-term debt to total debt while Ging has a high ratio of short-term debt to total debt.
B. Gap has a low current ratio while Ging has a high current ratio.
C. Gap has less liquidity risk while Ging has more liquidity risk.
D. Gap finances short-term assets with long-term debt while Ging finances short-term assets with short-term debt.

41. Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

42. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.

43. Short-term financing plans with high liquidity have:

A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

44. Temporary working capital supports

A. the cash needs of the company. C. acquisition of capital equipment.
B. payment of long term debt. D. seasonal peaks.

45. The transaction motive for holding cash is for:

A. a safety cushion C. compensating balance requirements
B. daily operating requirements D. none of the above
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46. The difference between the cash balance on the firm's books and the balance shown on the bank statement is called:
A, the compensating balance C. a safety cushion
B. float D. none of the above

47. The length of time between payment for inventory and the collection of cash is referred to as:
A. payables deferral period C. operating cycle
B. receivables conversion period D. cash conversion cycle

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

A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period
D. incurs more shortage costs

49. The longer the firm's accounts payable period, the:

A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.

50. The average length of time a peso is tied up in current asset is called the:
A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period.

51. All of these factors are used in credit policy administration except:
A. credit standards C. peso amount of receivables
B. terms of trade D. collection policy

52. Which of the following statements is most correct? If a company lowers its DSO (Days Sales Outsdtanding), but no changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
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D. the company's total asset turnover ratio would probably decline.

53. All but which of the following is considered in determining credit policy?
A. Credit standards C. Accounts payable deferral period
B. Credit limits D. Collection efforts

54. The use of safety stock by a firm will:

A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above

55. When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item
A. decreases by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock.

56. Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50% higher than total carrying costs?
A. Current order size is greater than optimal
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used

57. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.

58. 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 percent 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 days year?
A. P281,250 C. P 20,250
B. P168,750 D. P 56,250
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59. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty percent of the customers pay on the tenth day and take discounts; the other
60 percent pay, on average, 45 days after their purchases.
What is the average amount of receivables?
A. P70,000 C. P77,200
B. P77,500 D. P67,500

60. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. Palm estimates that a proposed
relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 4 0 days. Based on a 360-day year, the
proposed relaxation of credit to standards will result in an expected increase in the average accounts receivable balance of
A. P 540,000 C. P2,700,000
B. P 900,000 D. P1,620,000

61. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection period is 45 days, and bad debts are 3 percent of sales. The credit and collection
manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 1.5 percent of total s ales, and the average collection period
would fall to 30 days. However, sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of sales and the cost of carrying receivables is
10 percent. Assume a tax rate of 40 percent and 360 days per year.
What would be the decrease in investment in receivables if the change were made?
A. P 9,688 C. P 96,875
B. P 12,988 D. P129,975

(62-64) Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collect ions. At present, 40 percent of Sonata
Company‘s customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of
the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit
standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to
increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is 75 percent, the interest ra te on funds invested in accounts receivable is 9
percent, and the firm’s income tax rate is 40 percent.

62. What are the days sales outstanding (DSO) before and after the change of credit policy?
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively

63. The incremental carrying cost on receivable is

A. P 843.75 C. P 643.75
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B. P8,889.00 D. P6,667.00

64. The incremental after tax profit from the change in credit terms is
A. P68,493 C. P60,615
B. P65,640 D. P57,615

65. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the discount is:
A. 2.0%. C. 36.7%
B. 30.0%. D. 10.0%.

66. The cost of discounts missed on credit terms of 2/10, n/60 is

A. 2.0 percent C. 12.4 percent
B. 14.9 percent D. 21.2 percent

67. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10 percent nominal, or stated, rate on a one-year loan. What is the effective interest
rate if the loan is a discount loan?
A. 10.00% C. 12.45%
B. 11.11% D. 14.56%
68. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating balance? Assume 360 days pe r year.
A. 20.0% C. 17.4%
B. 15.0% D. 22.2%

69. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain
a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Pr emiere would otherwise maintain only
P100,000 in its checking account for transactional purposes. Premiere’s effective interest costs of the loan is
A. 12.00% C. 16.30%
B. 14.25% D. 15.86%

70. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12% stated rate in an add-on arrangement, payable in 12 equal monthly
installments.
A. 22.15% C. 25.05%
B. 24.00% D. 12.70%

The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way. – R.Kiyosaki