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THEORY 5. The working capital financing policy that subjects the firm to the greatest risk of being unable
Working capital to meet the firm’s maturing obligations is the policy that finances
1. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Starrs A. Fluctuating current assets with long-term debt.
could increase its working capital by the B. Fluctuating current assets with short-term debt.
A. Prepayment of $50,000 of next year's rent. C. Permanent current assets with long-term debt.
B. Collection of $50,000 of accounts receivable. D. Permanent current assets with short-term debt.
C. Purchase of $50,000 of temporary investments for cash.
D. Refinancing of $50,000 of short-term debt with long-term debt. Cash conversion cycle
6. Ignoring cost and other effects on the firm, which of the following measures would tend to
Working capital policy reduce the cash conversion cycle?
2. Determining the appropriate level of working capital for a firm requires A. Take discounts when offered.
A. Changing the capital structure and dividend policy for the firm. B. Forgo discounts that are currently being taken.
B. Maintaining a high proportion of liquid assets to total assets in order to maximize the C. Maintain the level of receivables as sales decrease.
return on total investments. D. Buy more raw materials to take advantage of price breaks.
C. Offsetting the profitability of current assets and current liabilities against the probability of
technical insolvency. 7. An increase in sales resulting from an increased cash discount for prompt payment would be
D. Maintaining short-term debt at the lowest possible level because it is ordinarily more expected to cause
expensive than long term debt. A. An increase in the operating cycle.
E. Evaluating the risks associated with various levels of fixed assets and the types of debt B. A decrease in purchase discounts taken.
used to finance these assets. C. A decrease in the cash conversion cycle.
D. An increase in the average collection period.
3. Compared to other firms in the industry, a company that maintains a conservative working
capital policy will tend to have a Cash management system
A. Higher total asset turnover. 8. A precautionary motive for holding excess cash is
B. Greater percentage of short-term financing. A. To enable a company to have cash to meet emergencies that may arise periodically.
C. Higher ratio of current assets to fixed assets. B. To enable a company to meet the cash demands from the normal flow of business
D. Greater risk of needing to sell current assets to repay debt. activity.
C. To enable a company to avail itself of a special inventory purchase before prices rise to
4. A firm following an aggressive working capital strategy would higher levels.
A. Hold substantial amount of fixed assets.
D. To avoid having to use the various types of lending arrangements available to cover
B. Minimize the amount of short-term borrowing.
projected cash deficits.
C. Finance fluctuating assets with long-term financing.
D. Minimize the amount of funds held in very liquid assets.
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9. The amount of cash that a firm keeps on hand in order to take advantage of any bargain B. Satisfy compensating balance requirements.
purchases that may arise is referred to as its C. Earn maximum returns on investment assets.
A. Compensating balance. C. Speculative balance. D. Maintain adequate cash needed for transactions.
B. Precautionary balance. D. Transactions balance.
15. When managing cash and short-term investments, a corporate treasurer is primarily
10. Which of the following is not a major function in cash management? concerned with
A. Cash flow control C. Maximizing sales A. Minimizing taxes.
B. Cash surplus investment D. Obtaining financing services B. Liquidity and safety.
C. Maximizing rate of return.
11. Which of the following actions would not be consistent with good management? D. Investing in Treasury bonds since they have no default risk.
A. Minimize the use of float.
B. Increased synchronization of cash flows. 16. Which of the following investments is not likely to be a proper investment for temporary idle
C. Use of checks and drafts in disbursing funds. cash?
D. Maintaining an average cash balance equal to that required as a compensating balance A. Treasury bills.
or that which minimizes total cost. B. Commercial paper.
C. Treasury bonds due within one year.
12. The following are desirable in cash management except: D. Initial public offering of an established profitable conglomerate.
A. Cash is collected at the earliest time possible.
B. Post-dated checks are not deposited on time upon maturity. 17. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine
C. All sales are properly receipted and promptly deposited intact. the optimal mix between cash and marketable securities. The EOQ model assumes all of the
D. Most sales are on cash basis and receivables are aged “current” following except
A. Cash flow requirements are random.
13. A lock-box system B. The total demand for cash is known with certainty.
A. Accelerates the inflow of funds. C. An opportunity cost is associated with holding cash, beginning with the first dollar.
B. Provides security for late night deposits. D. The cost of a transaction is independent of the dollar amount of the transaction and
C. Reduces the need for compensating balances. interest rates are constant over the short run.
D. Reduces the risk of having checks lost in the mail.
ReceivableManagement
Marketable securities Management 18. The one item listed below that would warrant the least amount of consideration in credit and
14. All of the following are valid reasons for a business to hold cash and marketable securities collection policy decisions is the
except to A. Cash discount given.
A. Meet future needs. B. Quantity discount given.

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C. Quality of accounts accepted. C. The minimum risk group to which credit should be extended.
D. Level of collection expenditures. D. The extent (in terms of money) to which a firm will go to collect an account.

19. The goal of credit policy is to 23. The credit and collection policy of Amargo Co. provides for the imposition of credit block when
A. Maximize sales. the credit line is exceeded and/or the account is past due. During the month, because of the
B. Minimize bad debt losses. campaign to achieve volume targets, the general manager has waived the credit block policy
C. Minimize collection expenses. in a number of instances involving big volume accounts. The likely effect of this move is
D. Extend credit to the point where marginal profits equal marginal costs. A. Increase in the level of receivables only.
B. Deterioration of aging of receivables only.
20. When a company analyzes credit applicants and increases the quality of the accounts C. Deterioration of aging and increase in the level of receivables.
rejected, the company is attempting to D. Decrease in collections during the month the move was done.
A. Maximize sales.
B. Maximize profits. 24. A high turnover of accounts receivable, which implies a very short days-sales outstanding,
C. Increase bad-debt losses. could indicate that the firm
D. Increase the average collection period. A. Offers small discounts.
B. Has a relaxed (lenient) credit policy.
21. A strict credit and collection policy is in
place in Star Co. As Finance Director youare asked to C. Has an inefficient credit and collection department.
advise on the propriety of relaxing the credit standards in view of stiff competition in the D. Uses a lockbox system, synchronizes cash flows, and has short credit terms.
market. Your advise will be favorable if
A. The competitor will do the same thing to prevent lost sales. 25. Accounts receivable turnover will normally decrease as a result of
B. The projected margin from increased sales will exceed the cost of carrying the A. An increase in cash sales in proportion to credit sales.
incremental receivables. B. A change in credit policy to lengthen the period for cash discounts.
C. The account receivable level is improving, so the company can afford the carrying cost of C. A significant sales volume decrease near the end of the accounting period.
receivables. D. The write-off of an uncollectible account (assume the use of the allowance for doubtful
D. there is a decrease in the distribution level of your product, and a more aggressive stance accounts method).
in necessary to retain market share.
26. The level of accounts receivable will most likely increase as
A. Cash sales increase and number of says sales.
22. It is held that the level of accounts receivable that the firm has or holds reflects both the
B. Credit limits are expanded, credit sales increase, and credit terms remain the same.
volume of a firm’s sales on account and a firm’s credit policies. Which one of the following
C. Credit limits are expanded, cash sales increase, and aging of the receivables is
items is not considered as part of the firm’s credit policies?
improving.
A. The size of the discount that will be offered.
D. Cash sales increase, current receivables ratio to past due increases, credit limits remain
B. The length of time for which credit is extended.
the same.
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27. A change in credit policy has caused an increase in sales, an increase in discounts taken, a 32. Which of the following inventory items would be the most frequently reviewed in an ABC
reduction of the investment in accounts receivable, and a reduction in the number of doubtful inventory control system?
accounts. Based on this information, we know that: A. Expensive, frequently used, high stock-out cost items with long lead time.
A. Net profit has increased. B. Expensive, frequently used, low stock-out cost items with long lead times.
B. Gross profit has declined. C. Inexpensive, frequently used, high stock-out cost items with long lead time.
C. The average collectionperiod hasdecreased. D. Expensive, frequently used, high stock-out cost items with short lead times.
D. The size of the discount offered has decreased.
33. In an ABC inventory analysis, the items that are most likelyto be controlled with a red-line
28. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be system are the
expected on the balance sheet of its customer if the firm went to a net cash 30 policy? A. A items. C. C items.
A. Decrease in cash. B. B items. D. items on a perpetual inventory.
B. Increased receivables.
C. Decreased receivables. 34. The materials control method that is based on physical observation that an order point has
D. Increased payables and increased bank loan. been reached is the:
A. ABC plan C. min-max method
Inventory Management B. cycle review method D. two-bin method
29. Which condition justifies accepting a low inventory turnover ratio?
A. High carrying costs. C. Low inventory order costs. 35. The underlying philosophy of “just-in-time” inventory system is that
B. High stock-out costs. D. Short inventory order lead times. A. The quantities of most stock items are subject to definable limits.
B. It is a quest toward continuous improvement in the environmental conditions that
30. If one optimizes the inventory turnover ratio, which costs will not increase? necessitates inventories.
A. Carrying costs C. Total reorder costs C. It is impractical to give equal attention to all stock items, hence the need to classify and
B. Stock-out cost D. Unit reorder costs rank them according to their cost significance.
D. The status of quantities on hand must be periodically reviewed where high-value items or
31. Order-filling costs, as opposed to order-getting costs, include all but which of the following critical items are examined more frequently than low-cost or non-critical items.
items?
A. Credit check of new customers. 36. Companies that adopt just-in-time purchasing systems often experience
B. Packing ad shipping of sales orders. A. An increase in carrying costs.
C. Mailing catalogs to current customers. B. Fewer deliveries from suppliers.
D. Collection of payments for sales orders. C. A reduction in the number of suppliers.
D. A greater need for inspection of goods as the goods arrive.

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37. An inventory control system which employs mathematical models as an aid in making 42. The economic order quantity formula can be used to determine the optimum size of
inventory decision is known as A. B. C. D.
A. Mini-max system C. Statistical inventory control system. Production run Yes Yes No No
B. Order cycling system D. Two-bin system Purchase order Yes No Yes No

38. In inventory management, the problem of avoiding excessive investment in inventories and at 43. The simple economic production lot size model will only apply to situations in which the
the same time avoiding inventory shortages can be solved by applying a quantitative production
technique known as A. Rate equals the demand rate.
A. Payback analysis C. Probability analysis B. Rate is less than the demand rate.
B. Economic order quantity D. High-low point method C. Rate is greater than the demand rate.
D. For the period covered equals the projected sales for the period.
39. Which of the following is used in determining the economic order quantity (EOQ)?
A. Calculus. C. Queuing theory. 44. Which one of the following items is not directly reflected in the basic economic order quantity
B. Markov process. D. Regression analysis. (EOQ) model?
A. Inventory obsolescence.
40. A characteristic of the basic economic order quantity (EOQ) model is that it B. Interest on invested capital.
A. Is relatively insensitive to error. C. Public warehouse rental charges.
B. Is used when product demand, lead-time, and ordering costs are uncertain. D. Quantity discounts lost on inventory purchases.
C. Should not be used in conjunction with computerized perpetual inventory systems.
D. Should not be used when carrying costs are large in relation to procurement costs. 45. The ______________ would not affect the economic order quantity.
A. cost of a stockout
41. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are B. cost of insuring inventory
A. Constant demand, constant ordering cost, constant carrying cost, unlimited production C. cost of purchase requisition forms
and inventory capacity. D. company's weighted average cost of capital
B. Limited production capacity, declining demand, constant ordering cost, constant carrying
cost, and unlimited inventory capacity. 46. The economic order quantity isnot affected by the
C. Increasing demand, limited production capacity, increasing ordering cost, increasing A. safety stock level
carrying cost, and l imited inventory capacity. B. cost of purchase-order forms.
D. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing C. cost of insuring a unit of inventory for a year.
carrying cost, and unlimited inventory capacity. D. estimate of the annual material consumption.

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47. The ordering costs associated with inventory management include 52. Clear View Co. manufactures various glass products including a car window. The setup cost to
A. Insurance costs, purchasing costs, shipping costs, and obsolescence. produce the car window is $1,200. The cost to carry a window in inventory is $3 per year.
B. Obsolescence, set up costs, quantity discounts lost, and storage costs. Annual demand for the car window is 12,000 units. If the annual demand for the car window
C. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost. was to increase to 15,000 units,
D. Quantity discounts lost, storage costs, handling costs, and interest on capital invested. A. the number of setups would decrease.
B. the total carrying costs would increase.
48. The carrying costs pertaining to inventory include C. the economic order quantity would decline.
A. Insurance costs, incoming freight costs and setup costs. D. all of the above would occur.
B. Insurance costs, incoming freight costs and storage costs.
C. Setup costs and opportunity cost of capital invested in inventory. 53. A decrease in inventory order costs will
D. Storage costs and opportunity cost of capital invested in inventory. A. Increase the reorder point.
B. Decrease the economic order quantity.
49. The optimal level of inventory is affected by all of the following except the C. Decrease the holding cost percentage.
A. Cost per unit of inventory. D. Have no effect on the economic order quantity.
B. Current level of inventory.
C. Usage rate of inventory per time period. 54. An increase in inventory holding costs will
D. Cost of placing an order for merchandise. A. Increase the economic order quantity.
B. Decrease the economic order quantity.
50. A change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, first- C. Have no effect on the economic order quantity.
out) method would D. Decrease thenumber of orders issuedper year.
A. Not affect the EOQ.
B. Increase the EOQ in times of rising prices. 55. The economic order quantity (EOQ) will rise following
C. Increase the EOQ in times of falling prices. A. An increase in carrying costs.
D. Decrease the EOQ in times of rising prices. B. A decrease in annual unit sales.
C. An increase in the per unit purchase price of inventory.
51. The selling price of the product is relatively high and the purchase cost of the product is D. An increase in the variable costs of placing and receiving an order.
relatively low. In this situation
A. The EOQ model will indicate frequent large orders. 56. For its economic order quantity model, a company has a $10 cost of placing an order and a $2
B. The EOQ of the product is affected by the selling price. annual cost of carrying one unit in stock. If the cost of placing an order increases by 20%, the
C. The selling price has nothing to do with the EOQ of the product. annual cost of carrying one unit in stock increases by 25%, and all other considerations remain
D. Management must increase the price to cover the cost of carrying higher inventory. constant, the economic order quantity will:

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A. decrease
B. increase 61. For a 300-day work year Kulasa Corp. consumes 420,000 units of an inventory item. The
C. remain unchanged usual lead-time for the inventory item is six (6) days; however, at times, the lead-time has
D. either increase or decrease, depending on the reorder point gone as high as eight (8) days. Kulasa now desires to adjust its safety stock policy. The likely
E. either increase or decrease, depending on the safety stock effect on stockout costs and carrying costs, respectively, would be
A. Increase and increase. C. Decrease and increase.
57. Missile Company has correctly computed its economic order quantity as 500 units. However, B. Increase and decrease. D. Decrease and decrease.
management feels it would rather order quantities of 600 units. How should Missile’s total
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units 62. The optimal safety stock level is the quantity of safety stock that minimizes the sum of the
compare to the respective amounts for an order quantity of 500 units? annual relevant
A. Lower purchase-order cost and lower carrying cost. A. ordering costs and carrying costs. C. ordering costs and stockout costs.
B. Lower purchase-order costand highercarrying cost. B. ordering costs and purchasing costs. D. stockout costs and carrying costs.
C. Higher purchase-order costand lower carryingcost.
D. Higher purchase-order cost and higher carrying cost. Trade Credit
63. A company obtaining short-term financing with trade credit will pay a higher percentage
58. When a specific level of safety stock is carried for an item in inventory, the average inventory financing cost, everything else being equal, when
level for that item A. The discount percentage is lower.
A. Is not affected by the safety stock. B. The items purchased have a lower price.
B. Increases by the amount of the safety stock. C. The items purchased have a higher price.
C. Decreases by the amount of the safety stock. D. The supplier offers a longer discount period.
D. Increases by one-half the amount of the safety stock.
Short-term Loans
59. For inventory management, ignoring safety stocks, which of the following is a valid 64. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not
computation of the reorder point? taking discounts from one of their three biggest suppliers, or a 14.75% per annum renewable
A. The economic order quantity. discount loan from its bank for 3 months. The suppliers' terms are as follows:
B. The square root of the anticipated demand during the lead time. Fort Co. 1/10, net 30
C. The anticipated demand per day during lead time times lead time in days. Riley Manufacturing Co. 2/15, net 60
D. The economic order quantity times the anticipated demand during the lead time. Shad, Inc. 3/15, net 90
Using a 360-day year, the cheapest source of short-term financing in this situation is
60. The cost of stock-out do not include A. Fort Co. C. Shad, Inc.
A. Depreciation and obsolescence. C. Loss of customer goodwill. B. Riley Manufacturing Co. D. The bank.
B. Disruption of production schedules. D. Loss of sales.

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65. In assessing the loan value of inventory, a banker will normally be concerned about the portion Internal growth rate
of inventory that is work-in-process because 3. Bobo LLC's has an asset base of $1 million. After a dividend payment of $40,000, Bobo added
A. WIP generally has the lowest marketability of the various types of inventories. $50,000 to retained earnings. What is Bobo's internal growth rate?
B. WIP inventory usually has the highest loan value of the different inventory types. A. 1% C. 5%
C. WIP represents a lower investment by a corporation as opposed to other types of B. 4% D. 9%
inventories.
D. WIP inventory is relatively easy to sell because it does not represent a raw material or a Working capital policy
finished product. 4. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset
investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt
and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s
PROBLEMS debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets
Capital Structure will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales.
1. Enert, Inc.'s current capital structure is shown below. This structure is optimal, and the What is the difference in t he projected ROEs between the restricted and relaxed policies?
company wishes to maintain it. A. 1.6% C. 5.4%
Debt 25% B. 3.8% D. 6.2%
Preferred equity 5%
Common equity 70% 5. Wildthing Amusement Company’s total assets fluctuate between $320,000 and $410,000,
Enert's management is planning to build a $75 million facility that will be financed according to while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or
this desired capital structure. Currently, $15 million of cash is available for capital expansion. moderate working capital financing policy, what is the likely level of its long-term financing?
The percentage of the $75 million that will come f rom a new issue of common shares is A. $ 90,000 C. $320,000
A. 50.00%. C. 56.25%. B. $260,000 D. $410,000
B. 56.00%. D. 70.00%.
Cash conversion cycle
Financial statement analysis 6. Bully Corporation purchases raw materials on July 1. It converts the raw materials into
2. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current inventory by September 30. However, Bully pays for the materials on July 20. On October 31,
liabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximum level it sells the finished goods inventory. Then, the firm collects cash from the sale 1 month later on
of new short-term loans it can secure without violating the policy? November 30. If this sequence accurately represents the average working capital cycle, what
A. P266,667 C. P400,000 is the firm's cash conversion cycle in days?
B. P300,000 D. P800,000 A. 92 days. C. 133 days.
B. 123 days. D. 153 days.

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Cash Management 11. CMR is a retail mail order firm that currently uses a central collection system that requires all
7. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these checks to be sent to its Boston headquarters. An average of 5 days is required for mailed
checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm checks to be received, 4 days for CMR to process them and 1½ days for the checks to clear
loses three days while its receipts are being deposited and cleared. What is the firm’s netfloat through its bank. A proposed lockbox system would reduce the mail and process time to 3
in dollars? days and the check clearing time to 1 day. CMR has an average daily collection of $100,000. If
A. $ 24,000 C. $ 75,000 CMR should adopt the lockbox system, its average cash balance would increase by
B. $ 32,000 D. $126,000 A. $250,000. C. $650,000.
B. $400,000. D. $800,000.
8. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is
0.02% and the average transaction cost of investing money overnight is $50? 12. What are the expected annual savings from a lockbox system that collects 200 checks per day
A. $50 C. $400 averaging $500 each, and reduces mailing and processing times by 2.0 and 0.5 days,
B. $350 D. $40,000 respectively, if the annual interest rate is 6%?
A. $6,000 C. $15,000
Questions 9 and 10 are based on the following information. B. $12,000 D. $250,000
A company has a 10% cost of borrowing and incurs fixed costs of $500 for obtaining a loan. It has
stable, predictable cash flows, and the estimated total amount of net new cash needed for 13. A company has daily cash receipts of $150,000. The treasurer of the company has
transactions for the year is $175,000. The company does not hold safety stocks of cash. 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 $2,500. If money market ates
r
9. When the average cashbalance of the company ishigher, the <List A> thecash balance is average 4% during the year, the additional annual income (loss) from using the lock box
<List B>. service would be
List A List B A. $(12,000). C. $6,000.
A. Opportunity cost of holding Higher B. $(6,000). D. $12,000.
B. Total transactions costs associated with obtaining Higher
C. Opportunity cost of holding Lower 14. A banker has offered to set upand operate a lock box system foryour company. Details are
D. Total costs of holding Lower given below.
Average number of daily payments 325
10. If the average cash balance for the company during the year is $20,916.50, the opportunity Average size of payments $1,250
cost of holding cash for the year will be Daily interest rate 0.021%
A. $2,091.65 C. $8,750.00 Saving in mailing time 1.3 days
B. $4,183.30 D. $17,500.00 Saving in processing time 0.9 days
Bank charges $0.30

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Estimate the annual savings. Assume 250 processing days per year. 19. Sixty percent of Baco's annual sales of $900,000 is on credit. If its year-end receivables
A. $3,273 C. $23,500 turnover is 4.5, what is the average collection period and the year-end receivables,
B. $22,675 D. $47,000 respectively (assume a 365-day year)?
A. 73 days and $108,000. C. 81 days and $120,000.
15. QRS makes large cash paymentsaveraging P17,000 daily. The company changedfrom using B. 73 days and $120,000. D. 81 days and $200,000.
checks to sight drafts which will permit it to hold unto its cash for one extra day. If QRS can
20. Best Computers believes that its collection costs could be reduced through modification of
use the extra cash to earn 14% annually, what annual peso return will it earn?
collection procedures. This action is expected to result in a lengthening of the average
A. P6.52 C. P2,380
collection period from 30 to 35 days; however, there will be no change in uncollectible
B. P652.10 D. P6,521.00
accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunity
cost of a longer collection period is assumed to be negligible, the company's budgeted credit
Marketable Securities Management
sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify
Questions 16 and 17 are based on the following information.
changes in collection procedures, the minimum annual reduction of costs (using a 360-day
Snobiz, Inc. has $2 million invested in Treasury bills yielding 8% per annum; this investment will
year and ignoring taxes) must be
satisfy the firm's need for funds during the coming year.
A. $22,500 C. $125,000
B. $37,500 D. $375,000
16. If it costs $50 to sell these bills, regardless of the amount, how much should be withdrawn at a
21. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of
time?
35 days, and a payment cycle of 26 days. If its sales for the period just ended amounted to
A. $50,000 C. $250,000
P972,000, what is the investment in accounts receivable?(Assume 360 daysa year.)
B. $100,000 D. $500,000
A. P72,450 C. P85,200
B. P79,600 D. P94,500
17. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills?
A. About every 3 days. C. About every 15 days.
22. Prest Corp. plans to tighten its credit policy. Below is the summary of changes:
B. About every 9 days. D. About every 18 days.
Old New
Receivables Management Average number of days collection 75 50
Ratio of credit sales to total sales 70% 60%
18. Hakuna Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and
Projected sales for the coming year is P100 million and it is estimated that the new policy will
the collections department estimates that 30% of the customers pay on the 10th day and take
result in a 5% loss if the new policy is implemented. Assuming a 360-day year, what is the
discounts; 40% pay on the 30th day; and the remaining 30% pay, on the average, 40 days
effect of the new policy on accounts receivable?
after the purchase. Assuming 360 days per year, what is the average collection period.
A. No change. C. Decrease of P 6.67 million.
A. 15 days. C. 27 days.
B. Decrease of P5 million. D. Decrease of P13 million.
B. 20 days. D. 40 days.

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