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MANAGEMENT SERVICES

OCTOBER 2007 BATCH SECOND PREBOARD EXAMS

I try to avoid looking forward or backward, and try to keep looking upward.
-Charlotte Bronte

GENERAL INSTRUCTIONS: Select the BEST answer for each of the following questions by writing a vertical line (I) on the
letter of your choice on the answer sheet provided. Mark only one answer. NO ERASURES ARE ALLOWED. Use pencil no. 2
only.

. IM, Company has failed to reach its planned activity level during its first two years operation.
i

The following table shows the relationship between units produced, sales, and normal activity for
these years and the projected relationship for Year 3. All prices and costs have remained the same
for the last two years and are expected to do so in Year 3. Income has been positive in both Year
1 and Year 2.
Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000

Because IM Company uses an absorption costing system, one would predict gross margin for Year 3 to be
a. Greater titan Year 1. c. Equal to Year 1.
b. Greater than Year 2. d. Equal to Year 2.
ii
. A company had income of P50,000 using direct cost for a given period. Beginning and ending inventories for that
period were 13,000 units and 18,000 units, respectively. Ignoring income taxes, if the fixed overhead application rate
were P2.00 per unit, what would the income have been using absorption costing?
a. P40,000. c. P60,000.
b. P50,000. d. Cannot be determined from the information given

Questions 3 and 4 are based on Kapritso Co ., a manufacturer operating at 95% of capacity. Kapritso has been
offered a new order at P7.25 per unit requiring, 15% of capacity. No other use of the 50% current idle capacity can be
found. However, if the order were accepted, the subcontracting for the required 10% additional capacity would cost
P7.50 per unit. The variable cost of production for Kapritso on a per-unit basis follows:
Materials P3.50
Labor 1.50
Variable overhead 1.50
P6.50

iii
. In applying the contribution margin approach to evaluating whether to accept the new order, assuming
subcontracting, what value would be computed for average variable cost per unit?
a. P6.83 b. P7.17 c. P7,25 d. P7.50
iv
. The expected contribution margin per unit on the new order would be
a. P0.08. b. P0.25 . c. P0.33. d. P0.42.

v
. A company has the following cost data:
Fixed manufacturing costs P2,000
Fixed selling, general, and administrative costs 1,000
Variable selling costs per unit sold 1
Variable manufacturing costs per unit 2

Beginning inventory 0 unit


Production 100 units
Sales 90 units at P40 per unit

Variable and absorption-cost net incomes are


a. P320 variable, P520 absorption c. P520 variable, P320 absorption.
b. P330 variable, P530 absorption. d. P530 variable, P330 absorption.
vi
. Direct costing has an advantage over absorption costing for which of the following purposes?
a. Analysis of profitability of products, territories, and other segments of a business.
b. Determining the CVP relationship among the major factors of selling price, sales mix, and sales volume.
c. e. Minimizing the effects of inventory changes on net income.
d. Minimizing the effects of the arbitrary allocation of fixed costs.
e. All of the above.
vii
. Alicia Co. is replacing a grinder purchased 5 years ago for P15,000 with a new, one costing P25,000 cash. The
original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value; Alicia will sell this
old equipment to a third party for P6,000 cash. The new equipment will be depreciated on a straight-line basis over
10 years to a zero salvage value. Assuming a 40% marginal tax rate, Alicias net cash investment at the time of
purchase if the old grinder is sold and the new one purchased is
a. P19,000.
b. P15,000.
c. P17,400.
d. P25,000.
e. P21,000.
viii
. A weakness of the internal rate of return (IRR) approach for determining the acceptability of Investments is that it
a. Does not consider the time value of money.
b. Is not a straightforward decision criterion.
c. Implicitly assumes that the firm is able to reinvest project cash flows at the firm's cost of capital.
d. Implicitly assumes that the firm is able to reinvest project cash flows at the project's internal rate of return.
e. Does not consider the annual timing of the projected cash flows.
ix
. The profitability index approach to investment analysis
a. Fails to consider the timing of project cash flows.
b. Considers only the project's contribution to net income and does not consider cash flow effects.
c. Always yields the same accept/reject decisions for independent projects as the net present value method.
d. Always yields the same accept/reject decisions for mutually exclusive projects as the net present value method.
e. Always yields the same accept/reject decisions for dependent projects as the net present value method.
x
. Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated
that costs P450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper is
subject to a 40% Income tax rate. To meet the company's payback goal, the sorter must generate reductions in
annual cash operating costs of
a. P60,000.
b. P100,000.
c. P150,000.
d. P190,000.
e. P285,000.

Questions 11 and 12 are based on the following information.


The Keego Company is planning a P200,000 equipment investment which has an estimated 5-year life with no
estimated salvage value. The company has projected the following annual cash flows for the investment,
Year Projected Present
Cash inflows Value of P1
1 P120,000 .91
2 60,000 .76
3 40,000 .63
4 40,000 .53
5 40,000 .44
Totals P300,000 3.27
xi
. Assuming that the estimated cash inflows occur evenly during each year, the payback period for the Investment is
a. .75 years.
b. 1.67 years.
c. 4.91 years.
d. 2.50 years.
e. 1.96 years.
xii
. The net present value for the investment is
a. P18,800.
b. P218,800.
c. P196,200.
d. P(3,800).
e. P91,743.
xiii
. Altoona Company is considering replacing a machine with a book value of P200,000, a remaining useful life of 4
years, and annual straight-line depreciation of P50,000. The existing machine has a current market value of
P175,000. The replacement machine would cost P320,000, have a 4 year life, and save P100,000 per year in cash
operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is
40%, what would be the increase in annual income taxes if the company replaces the machine?
a. P28,000
b. P40,000
c. P42,000
d. P64,000
xiv
. Portage Press Company is considering replacing a machine with a book value of P200,000, a remaining useful life
of 5 years, and annual straight-line depreciation of P40,000. The existing machine has a current market value of
P200,000. The replacement machine would cost P300,000, have a 5-year life, and save P100,000 per year in cash
operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is
40%, what would be the increase in annual net cash flow if the company replaces the machine?
a. P60,000
b. P68,000
c. P76,000
d. P84,000
xv
. Winneconne Company is considering replacing a machine with a book value of P400,000, a remaining useful life
of 5 years, and annual straight-line depreciation of P80,000. The existing machine has a current market value of
P400,000. The replacement machine would cost P550,000, have a 5-year life, and save P75,000 per year in cash
operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is
40%, what would be the net investment required to replace the existing machine?
a. P90,000
b. P150,000
c. P330,000
d. P550,000
xvi
. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for P20, has a
variable cost of P11, and a fixed cost per unit of P5 Alcatraz has a capacity to produce 100,000 units per period.
Capone Division currently purchases 10,000 units of part X from Alcatraz for P20. Capone has been approached by
an outside supplier willing to supply the parts for P18. What is the effect on XYZ's overall profit if Alcatraz REFUSES
the outside price and Capone decides to buy outside?
a. no change
b. P70,000 decrease in XYZ profits
c. P40,000 decrease in XYZ profits
d. P20,000 increase in XYZ profits
xvii
. Alcatraz Division of XYZ Corp., sells 80,000 units of part X to the outside market. Part X sells for P20, has a
variable cost of P11, and a fixed cost per unit of P5. Alcatraz has a capacity to produce 100,000 units per period.
Capone Division currently purchases 10,000 units of part X from Alcatraz for P20. Capone has been approached by
an outside supplier willing to supply the parts for P18. What is the effect on XYZ's overall profit if Alcatraz ACCEPTS
the outside price and Capone decides to buy inside?
a. no change
b. P70,000 decrease in XYZ profits
c. P40,000 decrease in XYZ profits
d. P20,000 increase in XYZ profits
xviii
. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would
a. increase by 30%
b. decrease by 20%
c. decrease by 44%
d. none of the above
xix
.Spade Division has the following results for the year:
Revenues P940,000
Net income 260,000

Total divisional assets are P1,250,000. The company's minimum required rate of return is 12 percent. Residual
income for Spade is
a. P7,520.
b. P110,000.
c. P147,200.
d. cannot be determined without further information.
xx
. Compared to a jewelry store, a supermarket has
a. higher margin and higher turnover.
b. higher margin and lower turnover.
c. lower margin and higher turnover.
d. lower margin and lower turnover.
xxi
. Sams Company manufactures a single product. It keeps its inventory of finished goods at 75% the coming
month's budgeted sales, inventory of raw materials at 50% of the coming month's budgeted production needs. Each
unit of product requires two pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July,
1,300; August, 1,600. Raw material purchases in June would be
a. 1,525 pounds.
b. 2,550 pounds.
c. 2,800 pounds.
d. 3,050 pounds.
xxii
. Rundall Co. makes payments for purchases 30% during the month of purchase and the remainder the following
month. April purchases are projected to be P160,000; May purchases will be P240,000. Cash payments in May will
be
a. P 72,000.
b. P108,000.
c. P168,000.
d. P184,000.
xxiii
. Conde Inc. has projected sales to be: February, P20,000; March, P18,000; April, P16,000; May, P20,000; and
June, P22,000. Conde has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month
following the sale and 60% collected the second month. Accounts receivable for May 31 would be
a. P 6,160.
b. P13,300.
c. P14,000.
d. P20,720.
xxiv
. In a profit-volume graph, the cost/volume/profit relationships are represented. The vertical axis is the profit in
pesos and the horizontal axis is the volume in units. The diagonal line is the contribution margin line. The point at
which the contribution margin line intersects the zero profit line is the point:
a. At which the volume level is zero
b. At which the total cost equal the total sales
c. At which sales increases
d. At which total variable costs equal total sales
xxv
. For the doughnuts of McDonut Co. the Purchasing Manager decided to buy 65,000 bags of flour with a quality
rating two grades below that which the company normally purchased. This purchased covered about 90% of the flour
requirement for the period. As to the material variances, what will be the likely effect?
a. Unfavorable price variance, favorable usage variance
b. Favorable price variance, unfavorable usage variance
c. No effect on price variance, unfavorable price variance
d. Favorable price variance, favorable usage variance
xxvi
. Which of these assertions refer to responsibility accounting?
1. Costs and revenues are identified with individuals for better control and performance appraisal.
2. Performance reports under this concept includes variances of actual amounts versus plan.
3. Third parties who are external users are the main recipients of information.
4. Only expenses which are directly under the control of managers should ideally be charged to them.
a. Assertions 1, 2 and 4 only
b. Assertions 1 and 4 only
c. Assertions 1 and 2 only
d. All four assertions
xxvii
. Hankies Unlimited has a signature scarf, for ladies, which has been quite popular. Certain production and
marketing data are indicated below:

Cost per yard of cloth P 36.00


Allowance for rejected scarf 5% of production
Yards of cloth needed per scarf 0.475 yards
Airfreight from supplier P 0.60/yard
Motor freight to customers P 0.90/scarf
Purchase discount from supplier 3%
Sales discount to customers 2%

The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf. Rejects have no market value.
Materials are used at the start of production. Calculate the standard cost of cloth per scarf that Hankies Unlimited
should use in its cost sheets
a. P 16.87
b. P 17.76
c. P 18.21
d. P 17.30
xxviii
. The Sales Director of Can-Can Co. suggests that certain credit terms be modified. He estimates the following
effects:
Sales will increase by at least 20%
Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times.
Bad debts, now at 1% of sales will increase to 1.5%. Sales before the proposed change are at P 900,000. Variable
cost ratio is 55% and desired rate of return is 20% Fixed expenses amount to P 150,000.

Should the company allow the revision of its credit terms?


a. Yes, because income will increase by P 64,800.
b. Yes, because losses will be reduced by P 78,800.
c. No, because income will be reduced by P 13,000.
d. No, because losses will be increased by P 28,000,
xxix
. Bing and Lynn's Store is on the cash basis of preparing it funds statement. These data are available:
Decrease in working capital P 50,000
Depreciation 13,000
Increase in cash 25,000
Repairs and maintenance 19,500
Total uses of cash 454,000

Calculate the total sources of cash of Bing and Lynn's Store.


a. P 472,500
b. P 492,000
c. P 479,000
d. P 467,000
xxx
. The following data pertain to Sunlight Corp., whose management is planning to purchase an automated tanning
equipment:
1) Economic life of equipment: 8 years
2) Disposal value after 8 years: nil
3) Estimated net annual cash inflows for each of the 8 years: P 81,000 4. Time-adjusted internal rate of
return: 14%
4) Cost of capital of Sunlight Corp: 16%
5) The table of present values of P 1 received annually for 8 years has these factors; at
6) 14% = 4.639, at 16%=4.344
7) Depreciation is approximately P 46,970 annually.

Find the required increase in annual cash inflows in order to have the time adjusted rate of return approximately
equal the cost of capital.
a. P 5,501
b. P 6,501
c. P 4,344
d. P 5,871
xxxi
. Given these data:
Net after tax inflows are: P 24,000 for year 1, P30,000 for year 2, P36,000 for year 3, and P30,000 for year 4
Initial investment outlay is P60,000
Cost of capital is 18%
Determine the payback period for this investment:
a. 2.5 years
b. 2.17 years
c. 3.00 years
d. 3.17 years
xxxii
. It is the start of the year and St. Tropez Co. plans to replace its old sing-along equipment, this information is
available:
Old New
Equipment cost P 70,000 P 120,000
Current salvage value 10,000 n/a
Salvage value, end of useful life 2,000 16,000
Annual operating costs 56,000 38,000
Accumulated depreciation 55,300
Estimated useful life 10 years 10 years

The company's income tax rate is 35% and its cost of capital is 12%. What is the present value of all the relevant
cash flows at time zero?
a. (P 54,000)
b. (P110,000)
c. (P120,000)
d. (P124,700)
xxxiii
. Mr. Val Yu is an entrepreneur who is contemplating to buy a machine to increase the capacity of his
manufacturing operations, He consults you for advise on the alternatives of leasing or buying the equipment. If
purchased, the straight line depreciation expense will be P 18,700 annually over its life of 5 years. The annual lease
payments will amount to P 29,000 payable at the end of each of the 5 years. Cost of money is 18%. Tax rate is 35%.
There is no salvage value. Present value of P 1 received annually for 5 years at 18% is 3,127. Present value of P1
due in 5 years at 18% is .437.

What will you recommend and why?


a. Lease the machine because leasing saves P 2,817
b. Lease the machine because leasing saves P 27, 138.
c. Buy the machine because depreciation saves P 10,300 each year.
d. Lease the machine because outlay is less by P 51,500
xxxiv
. Reliable Electric is a regulated public utility, and it is expected to provide steady growth of dividends of 5% per
year for the indefinite future. Its last years dividend was P5 per share; the stock sold for P60 per share just after the
dividend was paid. What is the companys cost of equity?
a. 8.33
b. 13.75
c. 7.69
d. 8.08
xxxv
. Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of P20M, a
maturity of 10 years, and a yield to maturity of 10%. The coupons are paid annually. The other bond issue has a
maturity of 15 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issue is
P25M, and the issue sells for 92.8% of the par value. The firms tax rate is 35%. What is the before-tax cost of debt
for Olympic? (Rounded off to two decimal places)
a. 10.43%
b. 10.77%
c. 9.55%
d. 5.22%
xxxvi
. Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of P20M, a
maturity of 10 years, and a yield to maturity of 10%. The coupons are paid annually. The other bond issue has a
maturity of 15 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issue is
P25M, and the issue sells for 92.8% of the par value. The firms tax rate is 35%. What is the after-tax cost of debt for
Olympic?
a. 3.39%
b. 6.21%
c. 7.00%
d. 6.78%
xxxvii
. Passive footwear has a WACC of 12%. Its debt sells at a yield to maturity of 9%, and its tax rate is 40%. Its cost
of equity is 15%. What is the fraction of the firms resources financed with debt?
a. 1.687%
b. 0.687
c. 5.40
d. 31.25%
xxxviii
. The total book value of the firms equity is P10M; book value per share is P20. The stock sells for a price of P30
per share, and the cost of equity is 15%. The firms bonds have a par value of P5M and sell at a price of 110 percent
of par. The yield to maturity on the books is 9%, and the firms tax rate is 40%. What is the companys WACC?
a. 12.5%
b. 0.0873
c. 0.126
d. 12.75%

Questions 39 and 40 are based on the following information Little Leo Corporation had the following activity
relating to its fixed and variable overhead for the month of July.

Actual costs
Fixed overhead P120,000
Variable overhead 80,000
Flexible budget
(Standard input allowed for actual output achieved x the budgeted rate)
Variable overhead 90,000
Applied
(Standard input allowed for factual output achieved x the budgeted rate)
Fixed overhead 125,000
Variable overhead spending variance 2,000F
Production volume variance 5,000U
xxxix
. If the budgeted rate for applying variable manufacturing overhead was P20 per direct labor hour, how efficient or
inefficient was Little Leo Corporation in terms of using direct labor hours as an activity base.
a. 100 direct labor hours inefficient
b. 100 direct labor hours efficient
c. 400 direct labor hours inefficient
d. 400 direct labor hours efficient
e. 500 direct labor hours efficient
xl
. The fixed overhead efficiency variance is
a. P3,000 favorable.
b. P3,000 unfavorable.
c. P5,000 favorable.
d. P10,000 unfavorable.
e. Never a meaningful variance.
xli
. Which one of the following variances is of least significance from a behavioral control perspective?
a. Unfavorable material quantity variance amounting to 20% of the quantity allowed for the output attained.
b. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained.
c. Favorable labor rate variance resulting from an inability to hire experienced workers to replace retiring workers.
d. Favorable material price variance obtained by purchasing raw material from a new vendor.
e. Fixed overhead volume variance resulting from management's decision midway through the fiscal year to reduce
its budgeted output by 20%.

Questions 42 through 44 are based on the following information . Hap Chan uses a standard costing system in
the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for P105,000,
and two units of raw material are required to produce one unit of final product. In November, the company produced
12,000 units of product. The standard allowed for material was P60,000, and there was an unfavorable quantity
variance of P2,500.
xlii
Hap Chan's standard price for one unit material is
a. P2.00.
b. P2.50.
c. P3.00.
d. P5.00.
e. P6.00.
xliii
. The units of material used to produce November output totaled
a. 12,000 units.
b. 12,500 units.
c. 23,000 units.
d. 24,000 units.
e. 25,000 units.
xliv
. The materials price variance for the units used in November was
a. P2,500 unfavorable.
b. P11,000 unfavorable.
c. P12,500 unfavorable.
d. P3,500 unfavorable.
e. P2,500 favorable.

Questions 45 through 49 are based on Matapang Company , which manufactures a line of products distributed
nationally through wholesalers. Presented below are planned manufacturing data for 2007 and actual data for
November 2007. The company applies overhead based on planned machine hours using a predetermined annual
rate.
2007 Planning Data
Annual November
------------------------------------------------
Fixed manufacturing overhead P1,200,000 P100,000
Variable manufacturing overhead 2,400,000 220,000
Direct labor hours 48,000 4,000
Machine hours 240,000 22,000

Data for November 2007


Direct labor hours (actual) 4,200
Direct labor hours (plan based on output) 4,000
Machine hours (actual) 21,600
Machine hours (plan based on output) 21,000
Fixed manufacturing overhead P101,200
Variable manufacturing overhead P214,000
xlv
. The predetermined overhead application rate for Matapang Company for 2007 is
a. P 5.00.
b. P25.00.
c. P10.00.
d. P50.00.
e. P15.00.
xlvi
. The total amount of overhead applied to production for November 2007 was
a. P316,200.
b. P315,000.
c. P320,000.
d. P300,000.
e. P324,000.
xlvii
. The amount of over- or under-applied variable manufacturing overhead for November was
a P6,000 overapplied.
b. P4,000 underapplied.
c. P20,000 overapplied.
d. P2,000 overapplied.
e. P6,000 underapplied.
xlviii
. The variable overhead spending variance for November 2007 was
a P2,000 favorable.
b. P6,000 favorable.
c. P14,000 unfavorable.
d. P6,000 unfavorable.
e. P2,000 unfavorable.
xlix
. The fixed overhead volume variance for November 2007 was
a P1,200 unfavorable.
b. P5,000 unfavorable.
c. P10,000 favorable.
d. P5,000 favorable.
e. P1,200 favorable.
l
. Fatima Fashions sells a line of women's dresses. Folsom's performance report for November 2001 follows:
Actual Budget
Dresses sold 5,000 6,000
Sales P235,000 P300,000
Variable costs 145,000 180,000
Contribution margin P 90,000 P120,000
Fixed costs 84,000 80,000
Operating income P 6,000 P 40,000

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the
various factors affecting the difference between budgeted and actual operating income.
The following additional information would be needed by Fatima Fashions to calculate the peso impact of a change in
market share on operating income for November 2001.
a. Fatima's budgeted market share and the budgeted total market size.
b. Fatima's budgeted market share, the budgeted total market size, and the average market selling price.
c. Fatima's budgeted and actual market shares and the actual total market size.
d. Fatima's actual market share and the actual total market size.
e. There is no information that would make such a calculation possible.
li
. A firm has daily cash receipts of P200,000. A commercial bank has offered to reduce the collection time by 3 days,
The bank requires a monthly fee of P4,000 for providing this service, if money market rates will average 12% during
the year, the additional annual income (loss) of having the service is
a. P(24,000).
b. P24,000.
c. P66,240.
d. P68,000.
e. Some amount other than those given above.
lii
. Melody, Inc. has a temporary need for funds. Management is trying to decide between not taking discounts from
one of their three biggest suppliers, or a 14.75% per annum renewable discount loan from its bank for 3 months. The
suppliers' terms are as follows:
Chester Co. 1/10, net 30
Tim Co. 2/15, net 60
Marcel Co. 3/15, net 90

Using a 360-day year, the cheapest source of short-term financing in this situation is
a. The bank.
b. Chester Co.
c. Tim Co.
d. Marcel Co.
liii
. If the average age of inventory is 90 days, the average age of accounts payable is 60 days, and the average age
of accounts receivable is 65 days, the number of days in the cash flow cycle is
a. 215 days.
b. 150 days.
c. 95 days.
d. 85 days.

Questions 54 and 55 are based on the following information . Catherine Company needs to pay, a supplier's
invoice of P50 000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at
12% per annum plus a 10% compensating balance.
liv
. The amount Catherine Company must borrow to pay the supplier within the discount period and cover the
compensating balance is
a. P50,000.
b. P55,000.
c. P55,056.
d. P55,556.
e. P54,444.
lv
. Assuming Catherine Company borrows the money on the last day of the discount period and repays it 30 days
later, the effective interest rate on the loan is
a. 12.00%.
b. 13.61%.
c. 13.33%.
d. 13.20%.
e. 13.48%.
lvi
. The following information regarding a change in credit policy was assembled by the Winston Company. The
company has a required rate of return of 10% and a variable cost ratio of 60%.
Old Credit New Credit
Policy Policy
Sales P3,600,000 P3,960,000
Average collection period 30 days 36 days

The pretax cost of carrying the additional Investment in receivables, using a 360-day year, would be
a. P5,760.
b. P9,600.
c. P8,160.
d. P960.
lvii
. The Alta Vista Corporation was recently quoted terms on a commercial bank loan of 7% discounted interest with a
20% compensating balance. The term of the loan is 1 year. The effective cost of borrowing is (rounded to the nearest
hundredth)
a. 6.54%.
b. 8,75%.
c. 9.41%.
d. 7.53%.
e. 9.59%.
lviii
. During 2000, Bunny Company's current assets increased by P120, current liabilities decreased by P50, and net
working capital
a. Increased by P70.
b. Did not change.
c. Decreased by P170.
d. Increased by P170,
e. Decreased by P70.
lix
. Cogie, Inc. can issue 3-month commercial paper with a face value of P1,000,000 for P980,000. Transaction costs
will be P1,200, The effective annualized percentage cost of the financing, based on a 360-day year, will be
a. 2.16%.
b. 8.48%.
c. 8.66%.
d. 8.00%.
e. 2.00%.
lx
. Lacson Company has the opportunity to increase annual sales P100,000 by selling to a new, riskier group of
customers. Based on sales, the uncollectible expense is expected to be 15%, and collection costs will be 5%, The
company's manufacturing and selling expenses are 70% of sales; and its effective tax rate is 40%. If Lacson accepts
this opportunity, the company's after-tax profit will increase by
a. P4,000.
b. P6,000.
c. P10,000.
d. P9,000.
e. P14,400.

/end
i
C
ii
C
iii
B
iv
A
v
B
vi
E
vii
The correct answer is (c). (CMA 1292 49)
REQUIRED: The net cash investment at the time of purchase of an old asset and the sale of a new one.
DISCUSSION: The old machine has a book value of P10,000 [P15,000 cost - 5(P15,000 cost / 15 years)
depreciation]. The loss on the sale is P4,000 (P10,000 - P6,000 cash received), and the tax savings from the
loss is P1,600 (40% x P4,000). Thus, total inflows are P7,600. The only outflow is the P25,000 purchase price of
the new machine. The net cash investment is therefore P17,400 (P25,000 - P7,600).
Answer (a) is incorrect because P19,000 overlooks the tax savings from the loss on the old machine. Answer (b)
is incorrect because P15,000 is obtained by deducting the old book value from the purchase price. Answer (d) is
incorrect because the net investment is less than P25,000 given sales proceeds from the old machine and the
tax savings. Answer (e) is incorrect because P21,000 is obtained by subtracting the loss on the old machine from
the purchase price.

viii
The correct answer is (d). (CMA 1292 413)
REQUIRED: The weakness of the internal rate of return approach.
DISCUSSION: The IRR is the rate at which the discounted future cash flows equal the net investment (NPV = 0).
One disadvantage of the method is that inflows from the early years are assumed to be reinvested at the IRR.
This assumption may not be sound. Investments in the future may not earn as high a rate as is currently
available.
Answer (a) is incorrect because the IRR method considers the time value of money. Answer (b) is incorrect
because the IRR provides a straightforward decision criterion. Any project with an IRR greater than the cost of
capital is acceptable. Answer (c) is incorrect because the IRR method implicitly assumes reinvestment at the
IRR; the NPV method implicitly assumes reinvestment at the cost of capital. Answer (e) is incorrect because the
IRR method considers the timing of cash flows.

ix
The correct answer is (c). (CMA 1292 4-14)
REQUIRED: The true statement about the profitability index.
DISCUSSION: The profitability index is the ratio of the present value of future net cash inflows to the initial net
cash investment. It is a variation of the net present value (NPV) method and facilitates the comparison of
different-sized investments. Because it is based on the NPV method, the profitability index will yield the same
decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of
different sizes.
Answer (a) is incorrect because the profitability index, like the NPV method, discounts cash flows based on the
cost of capital. Answer (b) is incorrect because the profitability index is cash based. Answers (d) and (e) are
incorrect because the NPV and the profitability index may yield different decisions if projects are mutually
exclusive and of different sizes.

x
The correct answer is (d). (CMA 693 4-30)
REQUIRED: The cash savings that must be generated to achieve a targeted payback period.
DISCUSSION: The payback period is calculated by dividing cost by the annual cash inflows, or cash savings. To
achieve a payback period of 3 years, the annual increment in net cash inflow generated by the investment must
be P150,000 (P450,000 /3-year targeted payback period). This amount equals the total reduction in cash
operating costs minus related taxes. Depreciation is P90,000 (P450,000 / 5 years). Because depreciation is a
noncash deductible expense, it shields P90,000 of the cash savings from taxation. Accordingly, P60,000
(P150,000 - P90,000) of the additional net cash inflow must come from after-tax net income. At a 40% tax rate,
P60,000 of after-tax income equals P100,000 (P60,000 / 60%) of pre-tax income from cost savings, and the
outflow for taxes is P40,000. Thus, the annual reduction in cash operating costs required is P190,000 (P150,000
additional net cash inflow required + P40,000 tax outflow).
Answer (a) is incorrect because P60,000 is after-tax net income from the cost savings. Answer (b) is incorrect
because P100,000 is the pre-tax income from the cost savings. Answer (c) is incorrect because P150,000
ignores the impact of depreciation and income taxes. Answer (e) is incorrect because P285,000 would produce a
payback period less than 3 years.

xi
The correct answer is (d). (CMA 1293 4-18)
REQUIRED: The payback period for the investment.
DISCUSSION: The payback period is the number of years required to complete the return of the original invest -
ment. The principal problems with the payback method are that it does not consider the time value of money and
the inflows after the payback period. The inflow for the first year is P120,000, the second year is P60,000, and
the third year is P40,000, a total of P220,000. Given an initial investment of P200,000, the payback period must
be between 2 and
3 years. If the cash inflows occur evenly throughout the year, P20,000 (P200,000 - P120,000 - P60,000) of cash
inflows are needed in year 3, which is 50% of that years total. Thus, the answer is 2.5 years.
Answer (a) is incorrect because only P90,000 will be paid back after .75 years. Answer (b) is incorrect because
1.67 years assumes that the inflows of the first year continue at the same rate in the second year. Answer (c) is
incorrect because P296,400 will be recovered after 4.91 years, Answer (e) is incorrect because less than
P180,000 will be paid back after 1.96 years.

xii
The correct answer is (a). (CMA 1293 4-19)
REQUIRED: The net present value (NPV) for the investment.
DISCUSSION: The NPV is defined as the excess of the present value of the net cash inflows over the net cost of
the investment. Discounting the future cash inflows by the present value factors results in an P18,800 NPV
(P218,800 - P200,000).
P120,000 x .91 = P109,200
60,000 x .76 = 45,600
40,000 x.63 = 25,200
40,000 x.53 = 21,200
40,000 x.44 = 17,600
P218,800

Answer (b) is incorrect because P218,800 is the present value of the future net cash inflows. Answer (c) is
incorrect because P100,000 is the excess of the undiscounted cash flows over the investment. Answer (d) is
incorrect because P200,000 is the investment. Answer (e) is incorrect because P91,743 is based on dividing the
P300,000 total inflows by the total of all present value factors, which produces a nonsense answer.
xiii
a P28,000
xiv
b P68,000
xv
b P150,000
xvi
B
xvii
A
xviii
C
xix
B
xx
C
xxi
C
xxii
D
xxiii
D
xxiv
B 20. The intersection point represents the breakeven point

xxv
B 21. Price variance will be favorable because being two degrees below the quality rating, it means
cheaper price. But being low quality will also mean uneconomical usage input which will result to unfavorable
usage variance.

xxvi
A 31. Statement no.3 is wrong. Responsibility accounting reports are basically intended
for internal users.

xxvii
B 45, Year of Material input .475 yards (needed)
(net of allowance of 5% for rejected scarf) ------------------------ = .50 yard 95%
Standard costs:
Material cost (P36 x .50) P 18
Discount (3% x P18) (.54)
Freight In (P.60 x 50 yard) .30
Standard cost per scarf P17.76

xxviii
A 48. a. Increase in Sales (P900,000 x 20%) P180,000
b, Increase in A/R and effect to ROI (P45,000 x 20%) (9,000)
c. Increase in doubtful accounts (P900,000 x 1%) (7,200)
Increase in Variable Costs (P180,000 x P55) (99,0000) -------------------- Increase in Net Income P
64,800)
b. Old A/R (P90,000/10x) P90,000
new A/R (P1,080,000/8) 135,000
Increase in A/R P45,000
c. Old doubtful accounts(P90,000 x 1%) P 9,000
New doubtful accounts (1,080,000 x 1.5%) 16,200
Increase in doubtful accounts P 7,200

xxix
C 53. Increase in cash P25,000
Total uses of cash 454,000
Total sources of cash P479,000

xxx
A 55. Present value of Cash inflows-TARR (14%)
(P81,000 x 4.639) P375,759 Present value of cash inflows-Cost of capital(16%)
( P81,000 x 4.344) 351,864
needed increase in 8 years 23,895
divided by Present value of an annuity 4,344
Required increase in cash inflows P5,501

xxxi
B 57. Payback period = 2,17
If the annual cash inflows are not equal, the payback period is determined by summing the annual net cash flows
until the cumulative sum equals the amount of the proposed investment.
Cumulative
Year Net cash flow net cash flow 1 P24,000 P24,000 2 30,000 54,000* 3 36,000 90,000
2 years + (6/36)1 = 2.17

xxxii
B 58, Equipment cost-new P120,000 (outflow)
Salvage value(old) (10,000) (inflow)
--------------------
Present value of cash flow(time zero)

xxxiii
A 60. Lease Buy
Purchase price(P18.700 x 5) P93,500 Lease expense (P29,000 x 3.127) P90,683 Tax Savings -Rent
Expense
(P29,000 x 35% x 3.127) (31,739) Tax Savings-Depreciation
(P18,700 x 35% x 3.127) (20,466)
Total P58,944 P73,034
Difference (P73,034 - P58,944) P14,090
Divided by 5 years
Annual Savings P2,818

B.
xxxiv

13.75%
Ke = [{5 + (.05* 5)}/60 ] + 0.05 =0.1375
xxxv
A 10.43%
Face value Fraction Average Cost WACC
20M 20/45 0.09/1-0.10 4.44
25M 25/45 0.10/0.928 5.99
10.43%

D 6.78%
xxxvi

Face value Fraction Average Cost WACC


20M 20/45 0.09/1-0.10 4.44
25M 25/45 0.10/0.928 5.99
10.43 x 0.65 = 6.78%

D
xxxvii

D/V = 0.3125 ; D/V = 0.6875

Solution:
Let D be the portion financed by Debt ; E by Equity

Let Kd = (D/D+E) [.09 x (1-0.40)]


= (D/D+E)0.054
= 0.054D
D+E

Ke = 0.15 E
D+E

Kd + Ke = 0.12

(D/D+E) [.09 x (1-0.40)] + (E/ D+E)0.15= 0.12

(D/D+E) [.054] + (E/ D+E)0.15= 0.12


0.054D + 0.15E = 0.12
D+E

0.054D + 0.15E = 0.12(D+E)


0.054D + 0.15E = 0.12D+0.12E
0.15E - 0.12E = 0.12D - 0.054D
0.03E = 0.066D
0.03E =D
0.066
0.4545 E =D

Let Kd = (.4545E/.4545E+E) [.09 x (1-0.40)]


= (.4545E /1.4545E)0.054
=(0.312479)( 0.054)
=0.01687 or 1.687%

If the proportion of debt is 0.312479 (as computed above), then the part of Assets financed by Equity will have to
be 0.687521 (i.e. 1-0.312479)

A
xxxviii

WACC=12.48%
Capital Fraction Average Cost of Capital WACC
15M 15/20 0.15 11.25%
5M 5/20 0.09/1.10 * (1-.40) 1.23
12.48%

xxxix
The correct answer is (d). (CMA 693 3-19)
REQUIRED: The efficiency variance stated in terms of direct labor hours.
DISCUSSION: The variable overhead spending and efficiency variances are the components of the total variable
overhead variance. Given that actual variable overhead was P80,000 and the flexible budget amount was
P90,000, the total variance is P10,000 favorable. If the overhead spending variance is P2,000 favorable the
efficiency variance must be P8,000 favorable (P10,000 total - P2,000 spending). At a rate of P20 per hour, this
variance is equivalent to 400 direct labor hours (P8,000 / P20).
Answers (a) and (c) are incorrect because the variances are favorable. Answer (b) is incorrect because 100
direct labor hours are equivalent to the spending variance (P20 x 100 hours = P2,000). Answer (e) is incorrect
because 500 direct labor hours are equivalent to the total variance (P20 x 500 hours = P10,000).

xl
The correct answer is (e). (CMA 693 3-20)
REQUIRED: The fixed overhead efficiency variance.
DISCUSSION: Variable overhead variances can be subdivided into spending and efficiency components.
However, fixed overhead variances do not have an efficiency component because fixed costs, by definition, are
not related to changing levels of output. Consequently, there is no concept of efficiency with respect to the
incurrence of fixed costs. Fixed overhead variances are typically subdivided into a budget (or fixed overhead
spending) variance and a volume variance.
Answers (a), (b), (c), and (d) are incorrect because efficiency variances are applicable to variable costs.

xli
The correct answer is (e). (CMA 693 3-26)
REQUIRED: The variance of least significance from a behavioral control perspective.
DISCUSSION: Most variances are of significance to someone who is responsible for that variance. However, a
fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed
overhead volume variance equals the difference between budgeted fixed overhead and the amount applied
(standard rate x standard input allowed for the actual output). It can be caused by economic downturns, labor
strife, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top
management decision to reduce output has fewer behavioral implications than other variances.
Answer (a) is incorrect because an unfavorable materials quantity variance affects production management and
possibly the purchasing function. It may indicate an inefficient use of materials or the use of poor quality
materials. Answer (b) is incorrect because an unfavorable labor efficiency variance reflects upon production
workers who have used too many hours. Answer (c) is incorrect because a favorable labor rate variance related
to hiring is a concern of the personal function. The favorable rate variance might be more than offset by an
unfavorable labor efficiency variance or a materials quantity variance (if waste occurred). Answer (d) is incorrect
because the purchasing function is responsible for a favorable materials price variance.

xlii
The correct answer is (b). (CMA 1293 3-22)
REQUIRED: The standard price for one unit of raw materials.
DISCUSSION: Given that the company produced 12,000 units with a total standard cost for materials of
P60,000, the standard cost must be P5.00 (P60,000 / 12,000 units) per unit of finished product. Because each
unit of finished product requires two units of raw materials, the standard unit cost for raw materials must be
P2.50.
Answer (a) is incorrect because the unit standard cost is P2.50. Answer (c) is incorrect because P3 is the actual
cost per unit of raw materials. Answer (d) is incorrect because P5 is the total standard cost of raw materials for
each unit of finished product. Answer (e) is incorrect because P6 is the actual cost of raw materials per unit of
finished product.

xliii
The correct answer is (e). (CMA 1293 3-23)
REQUIRED: The number of units of materials used to produce November output.
DISCUSSION: The company produced 12,000 units of output, each of which required two units of raw materials.
Thus, the standard input allowed for raw materials was 24,000 units at a standard cost of P2.50 each (see
preceding question). An unfavorable quantity variance signifies that the actual quantity used was greater than
the standard input allowed. The materials quantity variance equals the difference between actual and standard
quantities, times the standard price per unit. Consequently, 1,000 (P2,5000 + P2.50) additional units were used,
the actual total quantity must have been 25,000 units (24,000 standard + 1,000).
Answer (a) Is incorrect because 12,000 units is the number of units of finished product. Answer (b) is incorrect
because 12,500 units assumes that each unit of finished product includes only one unit of raw materials. Answer
(c) is incorrect because 23,000 units assumes a favorable quantity variance. Answer (d) is incorrect because
24,000 units assumes no quantity variance.
xliv
The correct answer is (c). (CMA 1293 3-24)
REQUIRED: The materials price variance for the units used in November.
DISCUSSION: The price variance equals actual quantity times the difference between the actual and standard
prices. Actual usage and the standard price were calculated in the two preceding questions as 25,000 units and
P2.50, respectively. Actual price was P3.00 (P105,000 total cost 35,000 units purchased). Consequently, the
materials price variance is P12,500 unfavorable [(P3.00 - P2.50) x 25,000 units].
Answer (a) is incorrect because P2,500 unfavorable Is the materials quantity variance. Answers (b) and (d) are
incorrect because the price variance is P12,500, or P.50 per unit. Answer (e) is incorrect because the price
variance is unfavorable. The actual price was greater than the standard price.

xlv
The correct answer is (e). (CMA 1292 3-15)
REQUIRED: The predetermined overhead application rate.
DISCUSSION: The predetermined overhead application rate is P15 [(P1,200,000 FOH + P2,400,000 VOH) +
240,000 machine hours).
Answer (a) is incorrect because P5 is the fixed overhead application rate. Answer (b) is incorrect because P25 is
the fixed overhead per labor hour. Answer (c) is incorrect because P10 is the variable portion of the overhead
application rate. Answer (d) is incorrect because P50 is the variable overhead rate per labor hour.

xlvi
The correct answer is (b). (CMA 1292 3-16)
REQUIRED: The total amount of overhead applied to production for the month.
DISCUSSION: Overhead is applied on the basis of planned machine hours. The predetermined overhead
application rate is P15 [(P1,200,000 FOH + P2,400,000 VOH) / 240,000 machine hours]. Thus, total overhead
applied was P315,000 (P15 x 21,000 planned machine hours based on output).
Answers (a) and (c) are incorrect because the total overhead applied was P315,000 based on 21,000 hours at
P15 per hour. Answer (d) is incorrect because P300,000 is based on planned direct labor hours at P75 per hour.
Answer (e) is incorrect because P324,000 is based on 21,600 actual machine hours. Use of actual machine
hours instead of standard hours for good output would apply extra overhead because of production inefficiency.

xlvii
The correct answer is (b). (CMA 1292 3-17)
REQUIRED: The amount of over- or under-applied variable overhead for the month.
DISCUSSION: Variable overhead applied in November was P210,000 [21,000 planned machine hours based on
output x (P2,400,000 planned annual VOH / 240,000 planned machine hours)]. Because the applied overhead
was less than actual (P214,000), under-applied variable overhead equaled P4,000.
Answers (a), (c), and (d) are incorrect because the overhead was under-applied. Answer (e) is incorrect because
P6,000 is based on the 22,000 machine hours planned for November rather than the planned hours for actual
output.

xlviii
The correct answer is (a). (CMA 1292 3-18)
REQUIRED: The variable overhead spending variance.
DISCUSSION: The variable overhead variance is the price variance for overhead. It equals actual hours times
the difference between standard and actual prices. At a variable overhead application rate (standard cost) of P10
per machine hour (P2,400,000 / 240,000 hours), the total standard cost for the 21,600 actual hours was
P216,000. Given actual costs of P214,000, the favorable variance is P2,000.
Answer (b) is incorrect because P6,000 is based on planned machine hours of 22,000. Answers (c), (d), and (e)
are incorrect because the variance is favorable.

xlix
The correct answer is (d). (CMA 1292 3-19)
REQUIRED: The fixed overhead volume variance. DISCUSSION: The fixed overhead volume (idle capacity)
variance is the difference between budgeted fixed costs and the product of the standard fixed overhead cost per
unit of input and the standard units of input allowed for the actual output. Budgeted fixed costs for the month
were P100,000. The standard cost of actual output was P105,000 [21,000 machine hours planned for actual
output x (P1,200,000 planned annual FOH / 240,000 planned annual machine hours) FOH application rate].
Hence, the fixed overhead volume variance was P5,000 favorable. It was favorable because the budget for fixed
overhead was less than the amount applied to jobs. An overa-application of fixed overhead suggests that output
exceeded expectations.
Answers (a) and (b) are incorrect because the variance was favorable. Answer (c) is incorrect because P10,000
is based on 22,000 planned machine hours. Answer (e) is incorrect because P1,200 is the absolute amount of
the fixed overhead budget variance.

l
The correct answer is (c). (CMA 12913-18)
REQUIRED: The additional information needed to calculate the dollar impact of a change in market share on
operating income.
DISCUSSION: A change in market share reflects a change in relative competitiveness. To isolate the effect on
operating income of an increase or decrease in market share, the company must know its budgeted and actual
market shares, the actual size of the market for November, and the budgeted weighted-average unit contribution
margin. Such computations may help Fatima to determine whether its decline in sales resulted from a loss of
competitiveness or a shrinkage of the market.
Answer (a) is incorrect because the budgeted market size is insufficient to determine the total impact. Answer (b)
is incorrect because the budgeted market size is unnecessary if budgeted market share is known. Also, the
average market selling price is not needed if Folsom's sales are available. Answer (d) is incorrect because the
budgeted market share is also needed. Answer (e) is incorrect because, based on the given data, the
calculations are possible if the budgeted market share and actual market size can be determined.

li
The correct answer is (b). (CMA 683 1-7)
REQUIRED: The amount a company will gain by hiring a bank lockbox service to process cash collections.
DISCUSSION: Since collections will be speeded up by three days, at the rate of P200,000 per day, the company
will have an additional P600,000 to invest, At 12%, the interest earned would be P72,000 per year. However, the
bank will charge P48,000 (12 months x P4,000 per month) for its services. Thus, the firm will increase its income
by P24,000 (P72,000 - P48,000).

lii
The correct answer is (d). (CMA 1283 1-25)
REQUIRED: The best source of short-term financing, given suppliers' discounts and the bank rate.
DISCUSSION: The first step is to determine the actual annual percentage interest rate for each of the four
options. Assuming a P100 invoice, the Bona Company discount represents interest of P1 on a loan of P99 for 20
days (30-day credit period - 10-day discount period). The annual interest rate is 18.1818% [(360 / 20) periods x
(P1 / P99)], The Alpine Company discount represents an interest charge of P2 on a loan of P98; i.e., by not
paying on the 15th day, the company will have the use of P98 for 45 days (60-day credit period - 15-day discount
period), The number of periods in a year would be 8 (360 / 45). The interest would be 16.326% (P2 / P98 x 8
periods). The Alaska loan would be for P97 at a cost of P3. The loan would be for 75 days (90 - 15). Given 4.8
interest periods in a year (360 / 75), the annual interest rate would be 14.845% (P3 / P97 x 4.8). The bank loan
was quoted at 14.75% on a discount basis. On a P100 note, the borrower would only receive P85.25, giving an
interest rate of 17,302% (P14.75 / P85.25). Thus, not paying Alaska Company's invoices on time would be the
lowest cost source of capital, at a cost of 14.845%.

liii
The correct answer is (c), (CMA 1284 1-20)
REQUIRED: The length of the cashfIow cycle.
DISCUSSION: The cash flow cycle begins when the firm pays for merchandise it has purchased and ends when
it receives cash from the sale of the merchandise. Inventory is held for an average of 90 days prior to sale, but
the average age of accounts payable is 60 days. Therefore, the average time between outlay and sale is 30
days. Receivables are collected an average of 65 days after sale. Thus, the length of the cashflow cycle is 95
days (30 + 65).

liv
The correct answer is (e). (CMA 687 1-29)
REQUIRED: The amount to borrow to pay the supplier within the discount period and cover the compensating
balance requirement.
DISCUSSION: The company will need P49,000 (98% x P50,000) to pay off the invoice. In addition, it will need a
compensating balance equal to 10% of the loan. This can be written in equation form as:
Loan = P49,000 + .1 Loan

Thus, the loan amount needed is P54,444 (P49,000 / .9).

lv
The correct answer is (c). (CMA 687 1-30)
REQUIRED: The effective interest rate on the loan.
DISCUSSION: The interest at 12% annually on a 30-day loan of P54,444 (see preceding question) is P544.44
(P54,444 x 12% x 30/360). However, the company has access to only P49,000. Thus, the interest expense on
usable funds is at an annual rate of 13.33% (12 months x P544.44 / P49,000).

lvi
The correct answer is (a). (CMA 1289 1-16)
REQUIRED: The pretax cost of carrying an additional investment in receivables.
DISCUSSION: The first step is to determine the average investment in receivables under each policy. Under the
old policy, average daily sales are P10,000 (P3,600,000 / 360 days). Given a 30-day average collection period,
the average receivables balance is P300,000 (P10,000 x 30 days). Under the new policy, average daily sales are
P11,000 (P3,960,000 / 360 days), and the average receivables balance is P396,000 (P11,000 x 36 days).
Hence, the average balance is P96,000 higher under the new policy. Because the company's incremental
(variable) costs are 60% of sales, the extra investment is only P57,600 (60% x P96,000). The interest rate, or
required rate of return, is 10%. Thus, the incremental carrying cost is P5,760 (10% x P57,600).

lvii
The correct answer is (e). (CMA 1289 1-21)
REQUIRED: The effective cost of borrowing when the interest is computed as a discount and a compensating
balance is required.
DISCUSSION: Assuming a P1,000 loan, the interest at 7% for 1 year Is P70. Hence, the proceeds of the loan
are P930 (P1,000 - P70). Also, 20% of the note, or P200, cannot be used by the borrower because of the
compensating balance requirement. Consequently, only P730 Is available for use by the borrower. Paying P70
interest for the use of P730 gives and interest rate of P9.59% (P70 / P730).

lviii
The correct answer is (d). (CMA 1290 1-19)
REQUIRED: The effect on net working capital of an increase in current assets and a decrease in current
liabilities.
DISCUSSION: Working capital is the excess of current assets over current liabilities, An increase in current
assets or a decrease in current liabilities will increase working capital. Thus, net working capital increased by
P170 (P120 + P50).
Answers (a), (b), (c), and (e) are incorrect because net working capital increased by P170,

lix
The correct answer is (c). (CMA 1290 1-28)
REQUIRED: The effective annual percentage cost of financing using commercial paper.
DISCUSSION: The total cost to the company will be P21,200 (P20,000 discount + P1,200 of transaction costs),
and the net amount available will be P978,800. The annualized amount of the costs is P84,800 (4 x P21,200).
Accordingly, the annual interest cost will be 8.66% (P84,800 / P978,800).
Answers (a), (b), (d), and (e) are incorrect because the annual interest cost will be 8.66%.

lx
The correct answer is (b). (CMA 1290 1-30)
REQUIRED: The increase in after-tax profit as a result of an increase in sales.
DISCUSSION: The company's manufacturing and selling costs exclusive of bad debts equal 70% of sales.
Hence, the gross profit on the P100,000 increase in sales will be P30,000 (30% x P100,000), Assuming P15,000
of bad debts and P5,000 of collection expense, the increase in pre-tax income will be P10,000 (P30,000 -
P20,000). Consequently, after-tax income will increase by P6,000 [P10,000 - (40% x P10,000)],
Answers (a), (c), (d), and (e) are incorrect because after-tax income will increase by P6,000.

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