ACCTG.

44: MANAGEMENT ADVISORY SERVICSE

MIDTERM EXAMINATON

1. Working capital management is concerned with

a. Management of current d. Management of seasonal
assets assets
b. Management of fixed assets e. Both a and c are
correct Commented [VS1]: Ans. E
c. Financing current assets

2. An aggressive firm will utilize more ____________ and

maintain ____________ liquidity than a conservative firm
a. Short-term debt; higher d. Short-term debt; lower Commented [VS2]: Ans. D
b. Long-term debt; lower e. None of the above are
correct
c. Long-term debt; lower

3. The concept of “permanent” assets refers to

a. Plant and equipment d. Accounts receivable
plus cash
b. Inventory e. Total assets
c. The minimum level of
current assets Commented [VS3]: Ans. C

4. A yield curve which depicts long-term interest rates to be

higher than short-term interest rates is said to be
a. Inverted d. Normal Commented [VS4]: Ans. D
b. Complex e. Skewed
c. Humped

5. Net working capital is the difference between

a. Current asset and Current liabilities Commented [VS5]: A
b. Fixed assets and current liabilities
c. Total assets and Total liabilities
d. Shareholders’ investment and cash

6. As s company becomes more conservatives in working capital

policy, it would tend to have a(an)
a. Decrease in its 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. Commented [VS6]: C
d. Increase in funds invested in common stock and a decrease
in funds invested in marketable securities.

7. All of the following statements in regard to working capital

are correct except

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a. Current liabilities are an important source of financing

for many small firms.
b. Profitability varies inversely with liquidity.
c. The hedging approach to financing involves matching
maturities of debt with specific financing needs.
d. Financing permanent inventory build-up with long-term debt
is an example of an aggressive working capital policy. Commented [VS7]: D

8. 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. Greater risk of needing to sell current assets to repay
debt.
c. Higher ratio of current assets to fixed assets. Commented [VS8]: C
d. Higher total asset turnover.

10. A firm has a daily cash receipt of P 100,000 and

collection time of 2 days. A pack has offered to reduce the
collection time on the firm’s deposits 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. P3,000 b. P12,000 c. P0 d. P6,000 Commented [VS9]: D

11. A company uses the following formula in determining the

optimal level of cash
C = √2bt/I
If: b= fixed cost per transaction
l= interest rate on marketable securities
t = total demand for cash over a period of time

This formula is a modification of the economic order

quantity (EOQ) formula used for inventory management. Assume
that the fixed cost of selling marketable securities is P10
per transaction and the interest rate on marketable
securities is 6% per year. The company estimates that it will
make cash payments of P12, 000 over the one month period.
What is the average cash balance (rounded to the nearest
peso)?
a. P1,000 b. P2,000 c. P3,464 d. P6,928 Commented [VS10]: C

12. A firm has daily cash receipts of P300,000. A bank has

offered to provide alockbox service that will reduce the
collection time by 3 days. The bank requires a monthly fee of
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MIDTERM EXAMINATON

P2,000 for providing this service. If monthly market are

expected to average 6%during the year, the additional annual
income (loss) of using the lockbox system is
a. P(24,000) b. P12,000 c. P30,000 d. P54,000 Commented [VS11]: C

13. Luke Company has an inventory conversion period of 60

days, a receivables conversion period of 45 days, and a
payments cycle of 30 days. What is the length of the firm’s
cash conversion cycle?
a. 90 days b. 75 days c. 54 days d. 105 days Commented [V12]: B

14. The Spades Company has an inventory conversion period of

75 days, a receivables conversion period of 38 days, and a
payable payment period of 30 days. What is the length of the
firm’s cash conversion cycle?
a. 83 days b. 113 days c. 67 days d. 45 days Commented [V13]: A

15. Casie Company turns out 200 calculators a day at a cost

of P250 per calculator for materials and variable conversion
cost. It takes the firm 18 days to convert raw materials
into calculator. Casie’s usual credit terms extended to its
customers is 30 days, and the firm generally pays its
suppliers in 20 days.

If the foregoing cycles are constant, what amount of working

capital must Casie Company finance?
a P1,400,000 b P2,400,00 c P900,00 d P1,800,00 Commented [V14]: A
. . 0 . 0 . 0

16. It is the policy of a compony that the current ratio

cannot fall below 1.5 to 1.0. it 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

17. A firm’s current ratio is currently 1.70 to 1.0.

Management knows it cannot violate a working capital
restriction contained in it its bond indenture. If the firm’s
current ratio falls below 1.40 to 1, technically it will have
defaulted/ it current liabilities are 200 million, the
maximum new commercial paper that can be issued to finance
inventory expansion is

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a. P80 b. P370 c. P150 d. P280

million million million million

18. America is considering implementing a lockbox system at

a cost of 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 per year)
a. Yes, savings of P140,000 c. No, loss of P60,000 per
per year year
b. Yes, savings of P60,000 d. No, loss of P20,000 per
per year year

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

20. If current assets go up by P120,000, current liabilities

go down by P50,000, then net working capital
a. Did not change c. Increased by P170,000
b. Increased by P70,000 d. Decreased by P170,000

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