Fin 081 Financial Management Past Paper 1S2223 PDF

PHINMA EDUCATION COLLEGE OF MANAGEMENT AND ACCOUNTANCY COMMON FINAL EXAMINATION 1S2223 FIN 081 – FINANCIAL MANAGEMENT ; Duration - 3 hours 1. Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay...

PHINMA EDUCATION COLLEGE OF MANAGEMENT AND ACCOUNTANCY COMMON FINAL EXAMINATION 1S2223 FIN 081 – FINANCIAL MANAGEMENT ; Duration - 3 hours 1. Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? a. I and IV only b. II and III only c. I, II, and III only d. II, III, and IV only 2. Which one of the following best states the primary goal of financial management? a. maximize current dividends per share b. maximize the current value per share c. increase cash flow and avoid financial distress d. minimize operational costs while maximizing firm efficiency 3. Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? a. decrease in the per unit production costs b. increase in the number of shares outstanding c. decrease in the net working capital d. increase in the market value per share 4. With which of the following statements would most people in business agree? a. A corporation’s short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. b. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. c. Although people’s moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. d. It is not useful for a large corporation to develop a formal set of rules defining ethical and unethical behavior. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis. 5. Which of the following statements is CORRECT? a. The proper goal of the financial manager should be to attempt to maximize the firm’s expected cash flows, because this will add the most to the wealth of the individual shareholders. b. The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. c. The riskiness inherent in a firm’s earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm’s assets. However, EPS is not affected by the manner in which those assets are financed. d. Potential agency problems can arise between stockholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. The following information pertains to ABC Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term P 40,000 investments Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets P295,00 0 Liabilities and Stockholders’ Equity Current liabilities 85,000  Long-term liabilities 85,000 Stockholders’ equity-common 150,000 Total Liabilities and stockholders’ equity P295,00 0 Income Statement Sales P 85,000 Cost of goods sold 45,000 Gross margin 40,000 Operating 20,000 expenses Net P income 20,000 Number of shares of common 6,000 stock Market price of common stock P20 Dividends per share.90 Cash provided by operations P30,000 6. What is the inventory turnover for this company? Round your answer to one decimal point. a..44 times b. 2.25 times c. 2 times d. 1 times 7. What is the return on assets for this company? Round your answer to one decimal point. a. 11.5% b. 10.5% c. 26.7% d. 6.8% 8. What is the profit margin for this company? Round your answer to one decimal point. a. 23.5% b. 18.75% c. 42.86% d. 15.0% 9. What is the return on common stockholders’ equity for this company? Round your answer to one decimal point. a. 5.0% b. 13.3% c. 53.3% d. 23.3% 10. Horizontal analysis of comparative financial statements includes the a. development of common size statements b. calculation of liquidity ratios. c. calculation of dollar amount changes and percentage changes from the previous to the current year. d. evaluation of financial statement data 11. What type of analysis is indicated by the following? Increase (Decrease*) 2007 2006 Amount Percent Current P 380,000 P 500,000 P120,000* 24%* assets Fixed assets 1,680,000 1,500,000 180,000 12% a. vertical analysis b. horizontal analysis c. liquidity analysis d. common-size analysis 12. One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to a. judge the relative potential of two companies of similar size in different industries. b. determine which companies in a single industry are of the same value. c. determine which companies in a single industry are of the same size. d. make a better comparison of two companies of different sizes in the same industry. 13. Under which of the following cases may a percentage change be computed? a. There is no amount in the base year. b. There is a negative amount in the base year and a negative amount in the subsequent year. c. The trend of the amounts is decreasing but all amounts are positive. d. There is a negative amount in the base year and a positive amount in the subsequent year. 14. Which of the following statements is CORRECT? a. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. b. A firm’s use of debt will have no effect on its profit margin on sales. c. If two firms differ only in their use of debt—i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales. d. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. 15. Which of the following statements is CORRECT? a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same. b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio. d. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate. 16. Which of the following statements is most correct? a. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with net income. b. The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast. c. Pro forma financial statements as discussed in the text are used primarily to assess a firm’s historical performance. d. The capital intensity ratio reflects how rapidly a firm turns over its assets and is the reciprocal of the fixed assets turnover ratio. 17. Which of the following statements is most correct? a. Since accounts payable and accrued liabilities must eventually be paid, as these accounts increase, AFN also increases. b. Suppose a firm is operating its fixed assets below 100 percent capacity but is at 100 percent with respect to current assets. If sales grow, the firm can offset the needed increase in current assets with its idle fixed assets capacity. c. If a firm retains all of its earnings, then it will not need any additional funds to support sales growth. d. Additional funds needed are typically raised from some combination of notes payable, long-term bonds, and common stock. These accounts are nonspontaneous in that they require an explicit financing decision to increase them. 18. ABC Furnishings has P150,000 in sales. The company expects that its sales will increase 30 percent this year. ABC’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in thousands of dollars) is Inventories = P7.50 + 0.1875(Sales). Given the estimated sales forecast and the estimated relationship between inventories and sales, what is your forecast of the company’s year-end inventory turnover ratio?  a. 2.25 b. 3.35 c. 3.66 d. 4.43 19. ABC recently reported sales of P100 million, and net income equal to P5 million. The company has P70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by P2 million. If the company’s sales increase, its profit margin will remain at its current level. The company’s dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales? a. P 2,000,000 b. P 6,000,000 c. P 8,400,000 d. P 9,600,000 20. Over the past four years, a well-managed company has had the following link between its inventories and its sales: Year Sales Inventories 2019 P200 million P35 million 2020 250 million 38 million 2021 400 million 55 million 2022 500 million 70 million The company is in the process of generating its forecasted financial statements for 2023. The company first generates a forecast for sales and then, given its sales forecast, uses a regression model (using data given above) to forecast its inventories for 2023. Assuming that the forecasted sales for 2023 are P650 million, what are its forecasted inventories for 2023? a. P54,399,885 a. P75,801,342 b. P86,175,824 c. P93,000,000 21. Which of the following conditions does not make the assumption that each spontaneous asset and liability item increases at the same rate as sales? a. Economies of scale. b. Lumpy assets. c. Excess assets due to forecasting errors. d. All of the statements above are correct. 22. Which of the following is likely to increase the additional funds needed (AFN) in a given year? a. The company reduces its dividend payout ratio. b. The company’s profit margin increases. c. The company decides to reduce its reliance on accounts payable as a form of financing. d. The company is operating well below full capacity. 23. All else equal, which of the following is likely to increase a company’s additional funds needed (AFN)? a. An increase in its dividend payout ratio. b. The company has a lot of excess capacity. c. Accounts payable increase faster than sales. d. All of the statements above are correct. 24. On the basis of historical relationships between its balance sheet items and its sales, profit margin, and dividend policy, ABC Corporation’s analysts have graphed the relationship of additional funds needed (on the Y-axis) to possible growth rates in sales (on the X-axis). If ABC decides to increase the percentage of earnings paid out as dividends, which of the following changes would occur in the graph? a. The line would shift to the right. b. The line would pass through the origin. c. The line would shift to the left. d. The slope coefficient would fall. 25. Considering each action independently and holding other things constant, which of the following actions would reduce a firm’s need for additional capital? a. An increase in the dividend payout ratio. b. A decrease in the profit margin. c. A decrease in the days sales outstanding. d. An increase in expected sales growth. 26. Other things held constant, which of the following will cause an increase in net 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. 27. Firms generally choose to finance temporary current operating assets with short-term debt because a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital. b. short-term interest rates have traditionally been more stable than long-term interest rates. c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. d. the yield curve is normally downward sloping. 28. ABC Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? a. Increase average inventory without increasing sales. b. Take steps to reduce the DSO. c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. d. Sell common stock to retire long-term bonds. 29. Other things held constant, which of the following would tend to reduce the cash conversion cycle? a. Carry a constant amount of receivables as sales decline. b. Place larger orders for raw materials to take advantage of price breaks. c. Take all discounts that are offered. d. Continue to take all discounts that are offered and pay on the net date. 30. Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. b. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30. d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. 31. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payments lags. b. Depreciation. c. Cumulative cash. d. Repurchases of common stock. 32. Which of the following items should a company report directly in its monthly cash budget? a. Its monthly depreciation expense. b. Cash proceeds from selling one of its divisions. c. Accrued interest on zero coupon bonds that it issued. d. New shares issued in a stock split. 33. Which of the following statements is CORRECT? a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control. b. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other. c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. d. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts. 34. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? a. The firm must make a known future payment, such as paying for a new plant that is under construction. b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. 35. Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should a. consist mainly of long-term securities because they pay higher rates. b. consist mainly of short-term securities because they pay higher rates. c. consist mainly of U.S. Treasury securities to minimize interest rate risk. d. consist mainly of short-term securities to minimize interest rate risk. 36. ABC Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 38 days Average collection period = 19 days Payables deferral period = 20 days a. 33 days b. 37 days c. 41 days d. 45 days 37. ABC Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm’s annual sales are P400,000; its fixed assets are P100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is P35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? a. 4.25% b. 4.73% c. 5.25% d. 5.78% 38. Your consulting firm was recently hired to improve the performance of ABC Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle? Average inventory = P75,000 Annual sales = P600,000 Annual cost of goods sold = P360,000 Average accounts receivable = P160,000 Average accounts payable = P25,000 a. 120.6 days b. 126.9 days c. 133.6 days d. 148.0 days 39. ABC Inc. had the following data for 2020 (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by P4,000, (2) that improvements in the credit department could reduce receivables by P2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by P2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered? Original Revised Annual sales: unchanged P110,000 P110,000 Cost of goods sold: unchanged P80,000 P80,000 Average inventory: lowered by P4,000 P20,000 P16,000 Average receivables: lowered by P2,000 P16,000 P14,000 Average payables: increased by P2,000 P10,000 P12,000 Days in year 365 365 a. 34.0 b. 37.4 c. 41.2 d. 45.3 40. ABC Inc. has annual sales of P36,500,000, or P100,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has P9,000,000 in inventory and P8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day. a. -26 days b. -22 days c. -18 days d. -14 days 41. What is the primary purpose of credit analysis? a. determine the optimal credit period b. establish the effectiveness of granting a cash discount c. determine the optimal discount period, if any d. evaluate whether or not a customer will pay 42. Which one of the following time periods is included in the accounts receivable period but not in the cash collection period? a. the period of time between the receipt of a check and the availability of those funds b. time it takes a firm to process incoming receipts c. period of time a check is in the mail d. period of time it takes an invoice to reach a customer by mail 43. You are doing some comparison shopping. Five stores offer the product you want at basically the same price. Which one of the following stores offers the best credit terms if you plan on taking the discount? Store Credit Terms A 1/10, net 20 B 2/10, net 10 C 2/5, net 30 D 2/15, net 30 a. store A b. store B c. store C d. store D 44. Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer? I. seller's operating cycle II. customer's operating cycle III. seller's inventory period IV. customer's inventory period a. I and II b. II and III c. III and IV d. II and IV 45. Which one of the following statements is correct in regards to credit periods? a. Perishable items tend to have longer credit periods. b. Items with low markups tend to have longer credit periods. c. Smaller accounts tend to have longer credit periods. d. Different customers may be offered different credit periods by the same firm. 46. Which of the following statements correctly reflect the effects of granting credit to customers? I. Total revenues may increase if both the quantity sold and the price per unit increase when credit is granted. II. A firm's cash cycle generally increases if credit is granted, all else equal. III. Both the cost of default and the cost of discounts must be considered before granting credit. IV. A firm may have to increase its long-term borrowing if it decides to grant credit to its customers. a. I, II, and III only b. II, III, and IV only c. I, III, and IV only d. I, II, III, and IV 47. When credit policy is at the optimal point, the: a. total costs of granting credit will be maximized. b. carrying costs of credit will be equal to zero. c. opportunity cost of credit will be equal to zero. d. carrying costs will equal the opportunity costs. 48. Which one of the following statements is correct? a. If the majority of a firm's new customers become repeat customers then there is a strong argument against extending credit even if the default rate is low. b. A customer's past payment history reveals little information in relation to his or her future tendency to pay. c. A suggested policy for offering credit to new customers is to limit the amount of their initial credit purchase. d. The risk of issuing credit is the same for a new customer as it is for an existing customer. 49. Which one of the following statements is correct? a. An aging schedule helps identify those customers who are the most delinquent. b. The percentage of total receivables that falls within a certain time period on an aging schedule will remain constant over time even if the firm has seasonal sales. c. Normally firms call their delinquent customers prior to sending them a past due letter. d. A constant average collection period over a period of time is cause for concern. 50. On average, your firm sells P38,700 of items on credit each day. The firm's average operating cycle is 49 days and it acquires and sells inventory, on average, every 17 days. What is the average accounts receivable balance? a. P657,900 b. P848,000 c. P1,238,400 d. P1,315,500 51. ABC Products currently sells 650 units a month at a price of P59 a unit. The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is P38. What is the incremental cash inflow from the proposed credit policy switch? a. P774 b. P2,625 c. P4,750 d. P5,690 52. You are trying to attract new customers that you feel could become repeat customers. The average selling price of your products is P69 each with a P41 per unit variable cost. The monthly interest rate is 1.2 percent. Your experience tells you that 8 percent of these customers will never pay their bill. What is the value of a new customer who does not default on his or her bill? a. P1,986 b. P2,333 c. P2,617 d. P4,817 53. You are trying to attract new customers that you feel could become repeat customers. The average price of your product is P619 per unit with a P435 variable cost per unit. The monthly interest rate is 1.8 percent. Your experience tells you that 9 percent of these customers will never pay their bill. Should you offer credit terms of net 30 to attract these potential customers? Why or why not? a. yes; because the NPV of extending credit is P8,867 b. yes; because the NPV of extending credit is P9,787 c. yes; because the NPV of extending credit is P128 d. no; because the NPV of extending credit is -P459 54. ABC currently has a cash sales only policy. Under this policy, the firm sells 410 units a month at a price of P219 a unit. The variable cost per unit is P148 and the carrying cost per unit is P3.30. The monthly interest rate is 1.3 percent. The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy. What is the net present value of the switch using the one-shot approach? a. P228,400 b. P255,590 c. P261,470 d. P282,233 55. Under your current cash sales only policy you sell 132 units a month for a total sales value of P9,240. Your variable cost per unit is P44 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 22 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach? a. P45,976 b. P46,992 c. P49,081 d. P50,224 56. The ABC sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,600 forecasts every month at a price of P1,100 each. What is the firm's average balance sheet amount in accounts receivable? a. P940,274 b. P1,408,272 c. P1,786,521 d. P1,811,012 57. The ABC Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 330 bicycles. The average cost to the shop of a bicycle is P300. The owner knows that only 93 percent of the customers will be able to make their payments. To identify the remaining 7 percent, she is considering subscribing to a credit agency. The initial charge for this service is P540, with an additional charge of P6 per individual report. What is the amount of the net savings from subscribing to the credit agency? a. P3,790 b. P3,920 c. P4,080 d. P4,410 58. Which of the following statements is most correct? a. A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually. If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate. b. In managing a firm’s accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. c. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm’s receivables management needs to be reviewed and improved. d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio. 59. Which of the following statements is most correct? a. If credit sales as a percentage of a firm’s total sales increases, and the volume of credit sales also increases, then the firm’s accounts receivable will automatically increase. b. It is possible for a firm to overstate profits by offering very lenient credit terms that encourage additional sales to financially “weak” firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts. c. A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity. d. Firms use seasonal dating primarily to decrease their DSO. 60. Which of the following statements is most correct? a. If a firm’s volume of credit sales declines then its DSO will also decline. b. If a firm changes its credit terms from 1/20, net 40 days, to 2/10, net 60 days, the impact on sales can’t be determined because the increase in the discount is offset by the longer net terms, which tends to reduce sales. c. The DSO of a firm with seasonal sales can vary. While the sales per day figure is usually based on the total annual sales, the accounts receivable balance will be high or low depending on the season. d. An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit. 61. 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. b. Sales fluctuate seasonally. c. Some customers take the discount and others do not. d. Sales are relatively constant, either seasonally or cyclically. 62. If easing a firm’s credit policy lengthens the collection period and results in a worsening of the aging schedule, then why do firms take such actions? a. It normally stimulates sales. b. To meet competitive pressures. c. To increase the firm’s deferral period for payables. d. Statements a and b are correct. 63. ABC Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's: a. customer service policy. b. credit policy. c. collection policy. d. payables policy. 64. The terms of sale generally include which of the following? I. type of credit instrument II. cash discount III. credit period IV. discount period a. I and III only b. II and IV only c. III and IV only d. I, II, III, and IV 65. Which one of the following statements is correct if you purchase an item with credit terms of 1/5, net 15? a. If you pay within 1 day, you will receive a 5 percent discount. b. If you pay within 5 days, you will receive a 1 percent discount. c. If you do not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate. d. If you pay within 15 days, you will receive a 1/5th percent discount. 66. Which one of the following factors tends to favor longer credit periods? a. high consumer demand b. lower priced merchandise c. increased credit risk d. increased competition 67. A cash discount of 2/5, net 30: a. grants customers 30 days to pay after the discount period expires. b. offers customers a maximum of 30 days credit. c. grants free credit for a period of 30 days. d. charges a higher price to a cash customer than to a customer who pays in 2 days. 68. A 2/10, net 30 credit policy: a. is an expensive form of short-term credit if a buyer foregoes the discount. b. provides cheap financing to the buyer for 30 days. c. is an inexpensive means of reducing the seller's collection period if every customer takes the discount. d. tends to have little effect on the seller's collection period. 69. The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental: a. decrease in the cash cycle. b. benefit from decreasing the inventory level. c. cash flows from increased sales. d. increase in bad debts. 70. If you extend credit for a one-time sale to a new customer you risk an amount equal to: A. the sales price of the item sold. B. the variable cost of the item sold. C. the fixed cost of the item sold. D. the profit margin on the item sold. 71. A firm has P5,000,000 of inventory on average and annual sales of P30,000,000. Assume there are 365 days per year. What is the firm’s inventory conversion period? a. 30.25 days b. 60.83 days c. 45.00 days d. 72.44 days 72. At the economic order quantity: a. total annual inventory costs, holding costs, and ordering costs are all minimized. b. total annual inventory costs and holding costs are minimized. c. total annual inventory costs are minimized, and holding costs equal ordering costs. d. total annual inventory costs are minimized, and holding costs exceed ordering costs. 73. ABC uses an economic order quantity model and has determined an optimal order size of 600 units. Annual demand is 18,000 units, ordering costs are P15 per order, and holding costs are P1.50 per unit. ABC's annual ordering and holding costs total: a. P900. b. P1,350. c. P9,900. d. P27,450. ABC Graphics uses a special purpose paper in 80% of its jobs. The paper is purchased in 100-sheet packages at a cost of P100 per package. Management estimates that the cost of placing and receiving a typical order is P15, and the annual cost of carrying a package in inventory is P1.50. ABC uses 2,600 packages each year. Production is constant, and the lead time to receive an order is 1 week. 74. The economic order quantity is approximately: a. 203 packages. b. 225 packages. c. 228 packages. d. 565 packages. 75. The reorder point is: a. 25 packages. b. 50 packages. c. 100 packages. d. 203 packages. 76. When comparing EOQ and JIT inventory systems, which of the following statements is false? a. The EOQ approach takes the viewpoint that some inventory is necessary. b. The EOQ system assumes a constant order quantity. c. JIT argues that inventory investments should be minimized. d. JIT argues that safety stocks are necessary to reduce the probability of a stock shortage. 77. Which of the following is not an ordering cost?  a. cost of receiving inventory b. cost of preparing the order c. cost of the merchandise ordered d. cost of storing the inventory 78. Which of the following describes the effect on direct labor when management adopts the JIT philosophy? a. Each direct labor person performs a single task, thereby allowing that person to reach his or her theoretical potential. b. Because each person runs a single machine in a JIT environment, there are more employees classified as direct labor. c. The environment becomes more labor-intensive. d. Machine operators are expected to run several different types of machines, help set up for production runs, and identify and repair machinery needing maintenance. 79. ABC Jewels Corporation produces quality jewelry items for various retailers. For the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs for a year are P2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what is the cost per order? a. P40 b. P20 c. P5 d. P25 80. A firm estimates that its annual carrying cost for material X is P.30 per lb. If the firm requires 50,000 lbs. per year, and ordering costs are P100 per order, what is the EOQ (rounded to the nearest pound)? a. 5,774 lbs. b. 4,082 lbs. c. 1,732 lbs. d. 1,225 lbs. ABC Corporation manufactures various glass products including a car window. The setup cost to produce the car window is P1,200. The cost to carry a window in inventory is P3 per year. Annual demand for the car window is 12,000 units. 81. Refer to ABC Corporation. What is the most economical production run (rounded to the nearest unit)? a. 6,000 units b. 3,000 units c. 9,295 units d. 3,098 units 82. Refer to ABC Corporation. If the annual demand for the car window was to increase to 15,000 units, a. the number of setups would decrease. b. the total carrying costs would increase. c. the economic order quantity would decline. d. all of the above would occur. 83. The size of the safety stock is directly affected by all of the following, except the a. cost of a stockout. b. probability of a stockout. c. carrying cost of stock. d. economic order quantity. 84. The economic production run quantity directly affects the a. order point for raw material inventories. b. safety stock for finished goods inventory. c. level of finished goods inventory. d. lead time for producing finished goods inventory. 85. The optimal size of the safety stock is defined by the point where the a. costs of carrying the safety stock equal stockout costs. b. setup costs equal stockout costs. c. ordering costs equal stockout costs. d. reorder point equals safety stock. 86. The role of safety stock in an organization is to a. reduce the lead time for an order to be received. b. reduce the probability of a stockout. c. reduce the order point. d. decrease the economic order quantity. 87. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the ordering costs are P100. The company uses an order quantity of 500 units. If the company operates 200 days per year, and the lead time for ordering Part C is 5 days, what is the order point? a. 250 units b. 1,000 units c. 500 units d. 2,000 units 88. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the ordering costs are P100. The company uses an order quantity of 500 units. By how much could the company reduce its total costs if it purchased the economic order quantity instead of 500 units? a. P500 b. P2,000 c. P2,500 d. P0 89. ____________________ may involve relocation or plant modernization by a vendor. a. Focused factory arrangements b. Economic order quantity c. Multiprocess handling d. Activity-based management 90. If a company carries safety stock and its annual carrying costs per unit are P0.30, what formula yields the total annual carrying costs? a. P0.30 x [(EOQ/2) + Safety stock)] b. P0.30 x (EOQ + Safety stock) c. P0.30 x [(EOQ x 2) + Safety stock)] d. P0.30 x (EOQ - Safety stock) 91. A bank offers your firm a revolving credit arrangement for up to P115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year? a. 0 percent b. 5.0 percent c. 5.2 percent d. 5.3 percent 92. The ABC Works has a beginning cash balance for the quarter of P784. Susie, the firm's president, requires that a minimum cash balance of P800 be maintained and requires that borrowing be used to maintain that balance. If funds have been borrowed, then she requires that those loans be repaid as soon as excess funds are available. Currently, the firm has a loan outstanding of P1,260. How much will the firm borrow or repay this quarter if the quarterly receipts are P3,918 and the quarterly disbursements are P3,774? a. borrow P16 b. borrow P128 c. borrow P144 d. repay P128 93. ABC's Craft Shack has a beginning cash balance for the quarter of P1,126. The store has a policy of maintaining a minimum cash balance of P1,000 and is willing to borrow funds as needed to maintain that balance. Currently, the firm has a loan balance of P480. How much will the store borrow or repay if the net cash flow for the quarter is -P280? a. P0 b. P28 c. P126 d. P154 94. The ABC Store has a beginning cash balance of P440 on March 1. The firm has projected sales of P610 in February, P680 in March, and P740 in April. The cost of goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 10 days. The firm has monthly cash expenses of P160. What is the projected ending cash balance at the end of March? Assume every month has 30 days. a. P258 b. P461 c. P507 d. P567 95. ABC's Delight expects to sell P8,200 worth of toys in December, P3,700 worth in January, P4,400 in February, and P6,100 in March. The wholesale cost is 72 percent of the retail price. The firm has a receivables period of 30 days, a payables period of 60 days, and buys inventory one month prior to selling it. Which one of the following statements is correct? a. The February payments to suppliers are P2,992. b. The March collections are P3,700. c. The accounts receivable balance at the end of March is P4,400. d. The accounts payable balance at the end of January is P5,832. 96. Which of the following are benefits derived from short-term financial planning? I. having advance notice of when your firm will require external financing II. being able to determine the extent of time for which a loan is required III. having the ability to time capital expenditures in order to place the least financial burden possible on a firm IV. knowing for certain what your cash balance will be six months in advance a. I and III only b. I, II, and III only c. II, III, and IV only d. I, II, and IV only 97. Which one of the following statements is correct? a. The assignment of receivables involves selling the firm's accounts receivables at full price. b. Lines of credit frequently require a cleanup period. c. With maturity factoring, the borrower receives the loan amount immediately. d. Commercial paper is short-term financing offered to highly-rated corporations by major banks. 98. ABC Hotel has P165,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Cross Town Bank. Which one of the following statements correctly describes this transaction? a. ABC will immediately receive P165,000 and will have no further obligation related to these receivables. b. ABC will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables. c. Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays ABC a discounted value for its receivables. d. Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays ABC a discounted price for the accounts collected after the normal collection period has elapsed. 99. Jill is the CFO of ABC Adventures which is a seasonal firm specializing in products related to water sports. The firm purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Sales are highest during July and August. Currently, Jill is preparing the cash disbursements section of the firm's cash budget. Which one of the following statements is supported by this information? a. Inventory purchases will be highest during the months of July and August. b. Inventory purchases will be highest during the months of May and June. c. Payments to suppliers will be highest during the months of June and July. d. Payments to suppliers will be highest during the months of August and September. 100. Which one of the following statements is correct? a. Seasonal needs are financed externally when firms adhere to a flexible financing policy. b. A flexible financing policy tends to increase the risk of encountering financial distress. c. Long-term interest rates tend to be less volatile than short-term rates. d. Most firms tend to finance inventory with long-term debt.