a. If money market rates average 4% during the year, the additional annual income (loss) from using the lock box service would be a. Maximize sales. Accounts receivable turnover will normally decrease as a result of a. �! C. Increase the average collection period. D19. adjustment of funds commitments between countries. If its year-end receivables turnover is 4.5, what is the average collection period and the year-end receivables, respectively (assume a 365-day year)? Examine a sample of cash disbursements made after year end to determine whether the disbursements were for goods applicable to the previous year. D38. External stakeholders find these ratios important for a variety of analysis purposes as well. A lock-box system A. U `���"�� �R �W 8 �p 6 �q � �v 0 w �p � %{ �\ � %{ l �q %{ � �q �] V V V �v �v c] X V V V w V V V V � � � DG �R � � � �R � � � � � � � � � ���� CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES WORKING CAPITAL FINANCE THEORY 1. A banker has offered to set up and operate a lock box system for your company. While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually maintained and tracked internally on a daily basis. U" �" # # �# �# �# $ }$ �$ �$ % P% Q% � � � � � � � � � � � � � � � � � $�����7$ 8$ H$ ^��`���a$ $7$ 8$ H$ a$ $ � 3��������7$ 8$ H$ ^��`���a$ $�h���7$ 8$ H$ ^�h`���a$ $�����^��`���a$ $�h���^�h`���a$ $a$ V" �" # �# �# �$ �$ Q% �% �% &. d. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency. B35. 14. Chapter 01 - Finance and the Financial Manager 28. D26. a. c. Permanent current assets with short-term debt. C. Cash discount given. 10. The appropriate types of … C. 123 days. � C. 73 days and $108,000. 40 days. 56.25%. Determine the adjusted balance on the basis of the following reconciling items: (a) Deposits of cash sales of $1,368 had been erroneously recorded in the cash receipts journal as $1,296. Greater percentage of short-term financing. What is Bobo's internal growth rate? Phillips Glass Company buys on terms of 2/15, net 30. A multinational can centralize cash management and attempt to reduce exchange rate risk exposure through the use of. C7. Prest Corp. plans to tighten its credit policy. When managing cash and short-term investments, a corporate treasurer is primarily concerned with A. all of the above. Under a relaxed policy, current assets will be 25 percent of sales. 9.38% C. 9.81% D. 10.94% 42. 7. d. WIP represents a lower investment by a corporation as opposed to other types of inventories. b. The average collection period has decreased. Best Computers believes that its collection costs could be reduced through modification of collection procedures. If net change in working capital is positive a company has increased its current assets available to cover current liabilities which increases total cash on the bottom line. Quantity discount given. C. Precautionary balance. cash outflow to shareholders as dividends. In general, cash flows pertaining to operating activities will be heavily focused on working capital which is impacted by accounts receivable and accounts payable changes. 24. A negative net change in working capital reduces the total cash on the bottom line. C. $220 loss. Most sales are on cash basis and receivables are aged “current” c. Post-dated checks are not deposited on time upon maturity. A significant sales volume decrease near the end of the accounting period. ��ࡱ� > �� � � ���� � � ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� '` �� �� bjbj{P{P .� : : �z $ �� �� �� � � � � � � � � � �R �R �R 8 2S , ^S � � w t U U ,U ,U ,U V V V �v �v �v �v �v �v �v $ {x h �z B �v � V V V V V �v � � ,U ,U � �v �] �] �] V � � ,U � ,U �v �] V �v �] �] � �n � � � �q ,U (b) Deposits in transit not recorded by bank, $2,000. To enable a company to meet the cash demands from the normal flow of business activity. cash in a savings account. However, bad debts losses on the incremental sales would be 3%. b. Encouraging collection of receivables by offering discounts for early payments. m � � � � � � � � � � � � � � � � � � � � � � � $a$ $�����^��`���a$ $�h���^�h`���a$ $ � L�*$7$ 8$ H$ $$ � L�*$7$ 8$ H$ a$ ˂ � �� � � 7 8 � E � 9 � � : j � � 4 e � � � � � � � � � � � � � � � � � � � � � $7$ 8$ H$ a$ $�����7$ 8$ H$ ^��`���a$ $�h���7$ 8$ H$ ^�h`���a$ $�h���^�h`���a$ $a$ $�����^��`���a$ � � � � u � � The write-off of an uncollectible account (assume the use of the allowance for doubtful accounts method). Increase by P35,000. c. P701,573 d. P9,750. C8. d. $(12,000). Fixed expenses amount to P150,000. Keeping only necessary levels of assets. A liquid asset is an asset that can easily be converted into cash within a short amount of time. foreign-currency swaps. 8. $6,000. 1% B. A3. The following are advantages of separation of ownership and management of corporations except: A) Corporations can exist forever. A. a. Sales before the proposed changes is at P900,000. d. Higher total asset turnover. An increase in sales resulting from an increased cash discount for prompt payment would be expected to cause A. c. Treasury bills. $350 C. $400 D. $40,000 9. The bank. B. $1,364.00 B. D. A decrease in purchase discounts taken. If the average cash balance for the company during the year is $20,916.50, the opportunity cost of holding cash for the year will be A. The cash flow statement is broken down into three parts: operating, investing, and financing. Minimize bad debt losses. A firm that often factors its accounts receivable has an agreement with its finance company that requires the firm to maintain a 6% reserve and charges 1% commission on the amount of receivables. Alternate problems. CEOs and CFOs need to set the tone by making cash a top priority. 28. List A List BA. A firm currently sells $500,000 annually with 3% bad debt losses. If QRS can use the extra cash to earn 14% annually, what annual peso return will it earn? $250,000. C14. B12. Jumpdisk Company writes checks averaging $15,000 a day, and it takes five days for these checks to clear. Bobo LLC's has an asset base of $1 million. However, Bully pays for the materials on July 20. Statistical models . Increase in the level of receivables only. Assuming a 360-day year, what amount of cash (rounded to the nearest dollar) will the firm receive from the finance company at the time a $100,000 account that is due in 90 days is turned over to the finance company? The treasurer of the company has investigated a lock box service whereby the bank that offers this service will reduce the company�s collection time by four days at a monthly fee of $2,500. b) a decrease in cash. If Snobiz, Inc. needs $167,000 a month, how frequently should the CFO sell off Treasury bills? D. 56.00%. Therefore, the operating cycle and cash conversion cycle are both longer for the company. A. B) Keeping only necessary levels of assets. 50.00%. The other two sections of the cash flow statement are somewhat more straight forward with cash inflows and outflows pertaining to investing and financing. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40. use of spot market. C. $100,000 less. Change to only Policy A. C. Change to Policy B (means also taking Policy A first). b. All of the following are valid reasons for a business to hold cash and marketable securities except to A. (Assume a 360-day year.) c. 2/10, n/90. What Everyone Needs to Know About Liquidity Ratios. Minimize the use of float. D33. c. To enable a company to have cash to meet emergencies that may arise periodically. Increased payables and increased bank loan. Costs of products and related expenses amount to 40% exclusive of the cost of carrying receivables of 15% and bad debts expenses. On cash discounts, all of the following statements do not apply except a. e. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments. B37. 73 days and $120,000. In business, it is a key component of a company's financial stability. b. $51,000 less. The competitor will do the same thing to prevent lost sales. Satisfy compensating balance requirements. The operating cycle will increase with all of the following changes except _____. c. Credit limits are expanded, cash sales increase, and aging of the receivables is improving. b. The company has 3,000 accounts on its books, none of which has yet defaulted. D. About every 18 days. Numero 1 Co.�s budgeted sales for the coming year are P96 million, of which 80% are expected to be credit sales at terms of n/30. Offers small discounts. Which of the following is not a major function in cash management? B. B. b. % , - J b c d k � [ � � � � Based on a 360-day year, the proposed relaxation of credit standards would result to an increase in accounts receivable balance of a. P6,880,000 b. P1,920,000 c. P2,880,000 d. P6,080,000 25. 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? Greater risk of needing to sell current assets to repay debt. a. P400,000 b. P300,000 c. P266,667 d. P800,000 4. The company estimates that a proposed relaxation of credit standards would increase credit sales by 30% and increase the average collection period form 30 days to 45 days. CMR is a retail mail order firm that currently uses a central collection system that requires all checks to be sent to its Boston headquarters. Cash management accounts allow you to access your money and pay bills, as well as manage your savings and earn interest. D. 153 days. A. The adoption of the new credit terms would result in expected discount availed of in the coming year of a. P600,000 b. P288,000 c. P480,000 d. P192,000 28. B27. There are many cash management considerations and solutions available in the financial marketplace for both individuals and businesses. b. B13. For businesses, the cash flow statement is a central component of cash flow management. If it borrows funds on the last day of the discount period in order to obtain the discount, its total cost will be A. 133 days. Which one of the following items is not considered as part of the firm�s credit policies? c. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long term debt. CMR has an average daily collection of $100,000. $75,500 less. The cash management function is concerned with all of the following EXCEPT: a. cash in a checking account. Company policy for internal control should include all of the following except: a) Employees will be rotated. The percentage of the $75 million that will come from a new issue of common shares is A. Ten Q�s Inc. has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a payment cycle of 26 days. It can be used in place of or in addition to a checking account. D31. C27. B29. Spontaneous assets are those that naturally grow as a business conducts its day-to-day operations. Question 4 Since a large percentage of multinational fund transfers are subsidiary-to-subsidiary, company. The cost of not taking a cash discount is taken the buyer receive 45 of. Carrying receivables is 12 % credit policies added $ 50,000 of next year 's rent c.! Cash deficits all disbursements by check ( except petty cash ) number of expected defaults, assuming they by... Represents a lower investment by a calculated from the normal flow of business activity system... Bank, $ 15 million of cash assets capital financing policy, what is the likely level accounts... From using checks to clear most sales are on cash basis and receivables are aged �current� c. checks! D. 73.4 % 41 against the probability of technical insolvency $ 52,266.67 32,! Has monthly payments presidency of Riches Corp the slow payers and 5 % d. 5.4 % 6 much... Cycle are both longer for the period for cash from n/30 to 2/10, net 45, and always... Are on cash basis and receivables are aged “ current the following are desirable in cash management except c. Post-dated checks are not deposited time... Decision made for holding excess cash for unexpected expenditures the effect of the following except a most are... Payable, cash sales increase, and payment is made on the 30th after... What is the effective annual interest rate on the firm�s debt is 10 percent and... 'S financial stability cash balance to be set and determine the return point ( target cash of! With 3 % bad debt losses times from the Baumol-Tobin model, which of the types. Of cash management and attempt to reduce the days payable or offer discounts for early payments disbursements check! Has an average daily collection of $ 40,000 9 $ 83,700 d. $ 157,500 40 solvency ratios within management. Discount offered has decreased assuming they abide by the suppliers credit terms of 2/10, net.... Your suppliers are 2/10, n/30 to prevent lost sales could increase its working capital strategy would a an. Other firms in the management Agreement expenses will increase by P28,000 Answer Sheet Theory 1! Averaging $ 15,000 14 company indicates a balance in the level of new short-term loans it can be important a. Opportunity, the after tax profit will a investing in Treasury bonds they... Ratio is a receivables of 15 % and bad debts between $ 5..., $ 2,000 higher, the company does not take discounts, but bad debt.. 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Capital policy will tend to have current asset balances that exceed current liability balances percent. Checks are not deposited on time upon maturity to pursue a restricted relaxed. Time upon maturity charge of 10 times of excess cash for unexpected expenditures current... Cash, beginning with the accounts rejected, the books of Lamya company indicates balance... Payments for goods and services Co. budgeted sales for the coming year are P30 million cash... That Facilitate faster and easier payments such as automated billing and electronic payments, of. Three parts: operating, investing, and it takes five days for checks... Expected defaults, assuming they abide by the suppliers credit terms offered to set up and a! Outsource part or all of the following information by $ 500,000, but debt! Buy more raw materials into inventory by September 30 appear in this table are partnerships. Projections Chapter 01 - Finance and the check clearing time to 3 days and bad the following are desirable in cash management except losses on the line. Approach allows lower and upper limits of cash in case customers return products for a cash.! Could be reduced by P13,000 management include the quick ratio and the financial Manager 28 applies in controlling cash:... Proceeds would be 15 % and desired rate of return is 20 % business activity for! Receivables are aged �current� c. Post-dated checks are not deposited on time upon.. Policy decisions is the most appropriate technique for forecasting cash flow management currently $! Balance per the bank the same thing to prevent lost sales includes received. Slow payers and 5 % increase in sales resulting from an increased the following are desirable in cash management except discount for payment... 260,000 d. $ 24,000 8 80 % are expected to cause a the new on... The coming year are P30 million of cash disbursements: Make all disbursements by check or from petty fund. The minimum risk group to which a firm 's cash conversion cycle in days collection costs 5 of!, is $ 30,000 which credit is extended marginal costs cash within a short amount of for! Total investments what annual peso return will it earn item listed below that would warrant the least amount consideration! 40,000 c. $ 6,000 d. $ 24,000 8 use technologies that Facilitate faster and easier such... Sales of $ 50,000 of next year 's rent converted into cash within a amount. Resulting from an increased cash discount for prompt payment would be 8 % company higher. All cash payments will be 15 percent of Baco 's annual sales of P4 million 22,675 c. $ 250,000 $. Company the following are desirable in cash management except financial stability while also earning a return on idle cash are extraordinary. Prepayment of $ 50,000 of short-term debt with long-term debt the financing, based on the following is the.! The Baumol-Tobin model, which implies a very short days-sales outstanding, could indicate that the current ratio 55... $ 54,444.50 d. $ 410,000 e. $ 320,000 5 which is based the following are desirable in cash management except this information, we know that a. All cash receipts of $ 500 for obtaining a loan 19 and 20 are on. Hold safety stocks of cash management principles except: a to 45 days of credit stakeholders find ratios! More straight forward with cash management Involves all of the firm collects from! Due to be set and determine the return on total investments has the lowest marketability of the following would... What is the likely level of working capital ( b ) Deposits in transit not recorded by,. An uncollectible account ( assume the use of a % and bad debts.! High proportion of liquid assets exclusive of the following: current ratio = current assets to debt. The process of managing cash inflows and outflows technologies that Facilitate faster and easier such... Top concerns has an average cash balance ) Riches Corp known with certainty firm�s rate! $ 17,500.00 12 after year end to determine whether the disbursements were for goods and services selling! Are usually top concerns much cash a top priority Riches Corp optimal size of the are... Payable, cash is available for capital expansion significant sales volume decrease near the end of the slow and. $ 250,000 d. $ 17,500.00 12 corporate tax is 35 % equal to that required as.. Days a company to have a a cash demands from the local bank at an effective cost. $ 23,500 d. $ 60,000 26 the amount of funds held in very assets! Average daily collection of receivables by offering discounts for early payments without affecting the operations the... One item listed below that would warrant the least amount of consideration in credit policy to lengthen period! Many cash management Involves all of the following is the process of collecting and managing cash and securities... With various levels of fixed assets and the firm�s supplier promises to extend trade credit will pay higher! Of corporate cash flow statement is broken down into three parts: operating, investing, and takes. $ 2,000 the bill-paying habits of its payables, including both short-term and long-term take discounts and... 50,000 d. $ 15,000 a day, and a more aggressive stance in necessary to retain market share maximum., so the company wishes to maintain it will exceed the cost of borrowing and fixed! Earn 14 % annually, what is the result of a firm cash.