working capital policy and management

8/12/2019 Working Capital Policy and Management

1/64

CMA PART 1 EWorking Capital Policy

and Management207 Questions

1! "ource# CMA 12$0 1%1&n smaller 'usinesses in ()ic) t)e management o* cas) is'ut one o* numerous *unctions per*ormed 'y t)e treasurer+,arious cost incenti,es and di,ersi*ication argumentssuggest t)at surplus cas) s)ould 'e in,ested in

A- Commercial paper-

.- .ankers/ acceptances-

C- Money market mutual *unds-

- Corporate 'onds-

2! "ource# CMA 0$ 1%7

A *irm )as daily cas) receipts o* 3200+000- A commercial'ank )as o**ered to reduce t)e collection time 'y days-T)e 'ank re4uires a mont)ly *ee o* 35+000 *or pro,idingt)is ser,ice- &* money market rates (ill a,erage 126 duringt)e year+ t)e additional annual income loss8 o* )a,ing t)eser,ice is

A- 325+0008-

.- 325+000-

C- 3+250-

- 3$+000-

! "ource# CMA 12$0 1%T)e prime lending rate o* commercial 'anks is anannounced rate and is o*ten understated *rom t)e ,ie(pointo* e,en t)e most credit%(ort)y *irms- W)ic) one o* t)e*ollo(ing re4uirements al(ays results in a )ig)er e**ecti,einterest rate9

A- A *loating rate *or t)e loan period-

.- A co,enant t)at restricts t)e issuance o* any ne(unsecured 'onds during t)e e:istence o* t)e loan-

C- T)e imposition o* a compensating 'alance (it) ana'solute minimum t)at cannot 'e met 'y currenttransaction 'alances-

- T)e a'sence o* a c)arge *or any unused portion in

t)e line o* credit-

5! "ource# CMA 0$ 1%$A *irm/s current ratio is currently 1-7; to 1- Managementkno(s it cannot ,iolate a (orking capital restrictioncontained in its 'ond indenture- &* t)e *irm/s current ratio*alls 'elo( 1-; to 1+ tec)nically it (ill )a,e de*aulted- &*current lia'ilities are 32;0 million+ t)e ma:imum ne(commercial paper t)at can 'e issued to *inance in,entorye:pansion is

A- 37;-00 million-

.- 312;-00 million-

C- 3;2-;0 million-

- 357-;0 million-

;! "ource# CMA 0$ 1%1A *irm o*ten *actors its accounts recei,a'le- T)e *inancecompany re4uires an $6 reser,e and c)arges a 1-;6commission on t)e amount o* t)e recei,a'le- T)e remainingamount to 'e ad,anced is *urt)er reduced 'y an annualinterest c)arge o* 16- W)at proceeds rounded to t)enearest dollar8 (ill t)e *irm recei,e *rom t)e *inancecompany at t)e time a 3110+000 account t)at is due in 0days is turned o,er to t)e *inance company9

A- 3$1+10+ net 0 Riley Manu*acturing Co- 2>1;+ net 0 ")ad+ &nc- >1;+ net


2/64

decisions is t)e

A- Quality o* accounts accepted-

.- Quantity discount gi,en-

C- Cas) discount gi,en-

- @e,el o* collection e:penditures-

A- Clay )as a lo( ratio o* s)ort%term de't to totalde't ()ile @ott )as a )ig) ratio o* s)ort%term de't tototal de't-

.- Clay )as a lo( current ratio ()ile @ott )as a )ig)current ratio-

C- Clay )as less li4uidity risk ()ile @ott )as moreli4uidity risk-

- Clay/s interest c)arges are lo(er t)an @ott/sinterest c)arges-

11! "ource# CMA 12$; 1%An increase in sales resulting *rom an increased cas)discount *or prompt payment (ould 'e e:pected to cause

A- An increase in t)e operating cycle-

.- An increase in t)e a,erage collection period-

C- A decrease in t)e cas) con,ersion cycle-

- A decrease in purc)ase discounts taken-

12! "ource# CMA 12$ 1%0CMR is a retail mail order *irm t)at currently uses a centralcollection system t)at re4uires all c)ecks to 'e sent to i ts.oston )ead4uarters- An a,erage o* ; days is re4uired *ormailed c)ecks to 'e recei,ed+ 5 days *or CMR to process

t)em and 1 days *or t)e c)ecks to clear t)roug) its 'ank-A proposed lock'o: system (ould reduce t)e mail andprocess time to days and t)e c)eck clearing time to 1day- CMR )as an a,erage daily collection o* 3100+000- &*CMR s)ould adopt t)e lock'o: system+ its a,erage cas)'alance (ould increase 'y

A- 3;0+000-

.- 32;0+000-

C- 3$00+000-

- 3500+000-

1! "ource# CMA 12$ 1%"ome managers e:press t)e opinion t)at t)eir cas)management pro'lems are not)ing more t)an in,entorypro'lems- T)ey t)en proceed to use cas) managementmodels+ suc) as t)e EBQ model+ to determine t)e

A- Credit and collection policies-

.- Marketa'le securities le,el-

C- Proper relations)ip 'et(een current assets andcurrent lia'ilities-

- Proper 'lend o* marketa'le securities and cas)-

15! "ource# CMA 12$ 1%2According to o)n Maynard Deynes+ t)e t)ree maormoti,es *or )olding cas) are *or

A- Transactional+ psyc)ological+ and social purposes-

.- "peculati,e+ *iduciary+ and transactional purposes-

C- "peculati,e+ social+ and precautionary purposes-

- Transactional+ precautionary+ and speculati,epurposes-

1;! "ource# CMA 12$ 1%5W)en a company analyFes credit applicants and increasest)e 4uality o* t)e accounts reected+ t)e company isattempting to

A- Ma:imiFe sales-

.- &ncrease 'ad%de't losses-

C- &ncrease t)e a,erage collection period-

- Ma:imiFe pro*its-

1! "ource# CMA 12$ 1%;T)e *ollo(ing *orms o* s)ort%term 'orro(ing are a,aila'leto a *irm#

=loating lien =actoring

Re,ol,ing credit

C)attel mortgages

.ankers/ acceptances

@ines o* credit

Commercial paperT)e *orms o* s)ort%term 'orro(ing t)at are unsecuredcredit are


3/64

A- =loating lien+ re,ol,ing credit+ c)attel mortgage+and commercial paper-

.- =actoring+ c)attel mortgage+ 'ankers/acceptances+ and line o* credit-

C- =loating lien+ c)attel mortgage+ 'ankers/acceptances+ and line o* credit-

- Re,ol,ing credit+ 'ankers/ acceptances+ line o*credit+ and commercial paper-

17! "ource# CMA 0$7 1%2;T)e carrying costs associated (it) in,entory managementinclude

A- &nsurance costs+ s)ipping costs+ storage costs+ ando'solescence-

.- "torage costs+ )andling costs+ capital in,ested+ ando'solescence-

C- Purc)asing costs+ s)ipping costs+ set%up costs+ and4uantity discounts lost-

- B'solescence+ set%up costs+ capital in,ested+ andpurc)asing costs-

1$! "ource# CMA 0$7 1%2T)e ordering costs associated (it) in,entory managementinclude

A- &nsurance costs+ purc)asing costs+ s)ipping costs+and spoilage-

.- B'solescence+ setup costs+ 4uantity discounts lost+and storage costs-

C- Purc)asing costs+ s)ipping costs+ setup costs+ and4uantity discounts lost-

- ")ipping costs+ o'solescence+ setup costs+ andcapital in,ested-

=act Pattern G1!Morton Company needs to pay a supplier/s in,oice o*3;0+000 and (ants to take a cas) discount o* 2>10+ net 50-T)e *irm can 'orro( t)e money *or 0 days at 126 perannum plus a 106 compensating 'alance-

1

Re*ers to =act Pattern G18Assuming Morton Company 'orro(s t)e money on t)e lastday o* t)e discount period and repays it 0 days later+ t)ee**ecti,e interest rate on t)e loan is

A- 12-006-

.- 1-6-

C- 1-206-

- 1-5$6-

21! "ource# CMA 0$$ 1%1A compensating 'alance

A- Compensates a *inancial institution *or ser,icesrendered 'y pro,iding it (it) deposits o* *unds-

.- &s used to compensate *or possi'le losses on amarketa'le securities port*olio-

C- &s a le,el o* in,entory )eld to compensate *or,ariations in usage rate and lead time-

- &s t)e amount o* prepaid interest on a loan-

22! "ource# CMA 0$$ 1%1$T)e prime rate is t)e

A- "iFe o* t)e commitment *ee on a commercial 'ankloan-

.- E**ecti,e cost o* a commercial 'ank loan-

C- E**ecti,e cost o* commercial paper-

- Rate c)arged on 'usiness loans to 'orro(ers (it))ig) credit ratings-

2! "ource# CMA 0$< 1%10etermining t)e appropriate le,el o* (orking capital *or a*irm re4uires

A- E,aluating t)e risks associated (it) ,arious le,elso* *i:ed assets and t)e types o* de't used to *inancet)ese assets-

.- C)anging t)e capital structure and di,idend policy*or t)e *irm-

C- Maintaining s)ort%term de't at t)e lo(est possi'lele,el 'ecause it is ordinarily more e:pensi,e t)anlong%term de't-

- B**setting t)e pro*ita'ility o* current assets andcurrent lia'ilities against t)e pro'a'ility o* tec)nicalinsol,ency-

25! "ource# CMA 0$$ 1%20W)ic) one o* t)e *ollo(ing ratios (ould pro,ide t)e 'estmeasure o* li4uidity9

A- "ales minus returns to total de't-

.- Total assets minus good(ill to total e4uity-


4/64

C- Current assets minus in,entories to currentlia'ilities-

- Current lia'ilities to long%term de't-

2;! "ource# CMA 0$< 1%11

"ince Mars)+ &nc- is e:periencing a s)arp increase in salesacti,ity and a steady increase in production+ t)emanagement o* Mars) )as adopted an aggressi,e (orkingcapital policy- T)ere*ore+ t)e company/s current le,el o* net(orking capital

A- Would most likely 'e t)e same as in any ot)ertype o* 'usiness condition as 'usiness cycles tend to'alance out o,er time-

.- Would most likely 'e lo(er t)an under ot)er'usiness conditions in order t)at t)e company canma:imiFe pro*its ()ile minimiFing (orking capitalin,estment-

C- Would most likely 'e )ig)er t)an under ot)er'usiness conditions so t)at t)ere (ill 'e su**icient

*unds to replenis) assets-

- Would most likely 'e )ig)er t)an under ot)er'usiness conditions as t)e company/s pro*its areincreasing-

2! "ource# CMA 0$< 1%1")ort%term+ unsecured promissory notes issued 'y large*irms are kno(n as

A- Agency securities-


C- Commercial paper-

- Repurc)ase agreements-

27! "ource# CMA 0$< 1%12Met)ods o* accelerating cas) collections include all o* t)e*ollo(ing e:cept

A- ecentraliFed collections-

.- Electronic *unds trans*ers-

C- Compensating 'alances-

- @ock'o: systems-

2$! "ource# CMA 0$< 1%15")ort%term securities issued 'y t)e =ederal Housing

Administration are kno(n as

A- Agency securities-



- Repurc)ase agreements-

2

A- Treasury 'ills-

.- Common stock-

C- Iold-

- Aaa corporate 'onds-

2! "ource# CMA 12$< 1%1;A c)ange in credit policy )as caused an increase in sales+an increase in discounts taken+ a reduction in t)e in,estmentin accounts recei,a'le+ and a reduction in t)e num'er o*dou't*ul accounts- .ased upon t)is in*ormation+ (e kno(t)at

A- Jet pro*it )as increased-

.- T)e a,erage collection period )as decreased-

C- Iross pro*it )as declined-

- T)e siFe o* t)e discount o**ered )as decreased-

! "ource# CMA 12$< 1%1T)e *ollo(ing in*ormation regarding a c)ange in creditpolicy (as assem'led 'y t)e Wilson Wa: Company- T)ecompany )as a re4uired rate o* return o* 106 and a,aria'le cost ratio o* 06-

Bld Credit Je( Credit Policy Policy %%%%%%%%%% %%%%%%%%%% "ales 3+00+000 3+


5/64

A,erage collection period 0 days daysT)e preta: cost o* carrying t)e additional in,estment inrecei,a'les+ using a 0%day year+ (ould 'e

A- 3;+70-

.- 3

A- "ales le,el *alls to a permanently lo(er le,el-

.- Cost o* carrying in,entory decreases-

C- Karia'ility o* sales decreases-

- Cost o* running out o* stock decreases-

51! "ource# CMA 12


6/64

C- ecrease in t)e 4uick ratio-

- &ncrease in t)e ratio o* current assets tononcurrent assets-

5! "ource# CMA 12

A- Has a maturity date greater t)an 1 year-

.- &s usually sold only t)roug) in,estment 'ankingdealers-

C- Brdinarily does not )a,e an acti,e secondarymarket-

- Has an interest rate lo(er t)an Treasury 'ills-

;1! "ource# CMA 0


7/64

- Ha,e yields considera'ly greater t)an 'ankers/acceptances and commercial paper-

;2! "ource# CMA 0


8/64

- 3+000-

0! "ource# CMA 120- artmoor estimates t)at a proposed

rela:ation o* credit standards (ill increase credit sales 'y206 and increase t)e a,erage collection period *rom 0days to 50 days- .ased on a 0%day year+ t)e proposedrela:ation o* credit standards (ill result in an e:pectedincrease in t)e a,erage accounts recei,a'le 'alance o*

A- 3;50+000-

.- 32+700+000-

C- 3


9/64

&n,entory ;0+000 $0+000Marketa'le securities 200+000 200+000=i:ed assets 2+;00+000 +;00+000Jet income ;00+000 ;0+000T)e impact o* t)e plant e:pansion on =inan/s (orkingcapital (ould 'e

A- A decrease o* 3100+000-

.- A decrease o* 3

A- &n,ersely related to t)e rate o* return *orgone anddirectly related to t)e cost o* t)e transaction-

.- irectly related to t)e rate o* return *orgone anddirectly related to t)e cost o* t)e transaction-

C- irectly related to t)e rate o* return *orgone andin,ersely related to t)e cost o* t)e transaction-

- &n,ersely related to t)e rate o* return *orgone andin,ersely related to t)e cost o* t)e transaction-

71! "ource# C&A 0;


10/64

%%%%%%%%%%%% %%%%%%%%%%%%Cas) 350+000 30+000Accounts recei,a'le 120+000 100+000&n,entory 200+000 00+000Property+ plant+ N e4uipment ;00+000 ;;0+000Accumulated depreciation 2$0+0008 50+0008 %%%%%%%% %%%%%%%%Total assets 3;$0+000 350+000

OOOOOOOO OOOOOOOOCurrent lia'ilities 30+000 3100+000@ong%term lia'ilities

.- C)eck t)at must 'e immediately cleared 'y t)e=ederal Reser,e .ank-

C- Computer%generated deposit ticket ,eri*yingdeposit o* *unds-

- C)eck%like instrument dra(n against t)e payorand not against t)e 'ank-

$1! "ource# CMA 0


11/64


- Con,erti'le 'onds-

$! "ource# CMA 0

A- &t (ould ne,er 'e economically *easi'le-

.- 312;+000 or a'o,e-

C- Any amount greater t)an 317-

- Any amount greater t)an 32+;00-


12/64

in,entory appro:imates 206 o* t)e in,estment in in,entory-T)e in,entory in,estment per unit a,erages 3;0- T)estockout cost is estimated to 'e 3; per unit- T)e companyorders in,entory on t)e a,erage o* 10 times per year- Totalcost O carrying cost e:pected stockout cost- T)epro'a'ilities o* a stockout per order cycle (it) ,aryingle,els o* sa*ety stock are as *ollo(s#

?nits %%%%%%%%%%%%%%%%%%%%%%%%% "a*ety "tock "tockout Pro'a'ility %%%%%%%%%%%% %%%%%%%% %%%%%%%%%%% 200 0 06 100 100 1;6 0 100 1;6 0 200 126T)e total cost o* sa*ety stock on an annual 'asis (it) asa*ety stock le,el o* 100 units is

A- 31+7;0

.- 31+


13/64

A- 3+000+000

.- 3+000+000

C- 31+;00+000

- 300+000

100! "ource# CMA 1210+ net 0 t)an *or 2>10+ net 0-

- T)e cost o* not taking a cas) discount is generally

)ig)er t)an t)e cost o* a 'ank loan-

105! "ource# CMA 12


14/64

- 10-06

10$! "ource# CMA 12

- @i4uidity and sa*ety-

110! "ource# CMA 12


15/64

C- 3155+000

- 3120+000

11! "ource# CMA 0

- Cost o* running out o* stock decreases-

120! "ource# CMA 0


16/64

- Working capital )as increased-

125! "ource# CMA 1210+ net

A- 10-06

.- 12-06


17/64

C- 1-26

- 1-06

10! "ource# CMA 12


18/64

'anks to esta'lis) a lock'o: system to speed up receipts-Je(man recei,es an a,erage o* 700 c)ecks per daya,eraging 31+$00 eac)+ and its cost o* s)ort%term *unds is76 per year- Assuming t)at all proposals (ill producee4ui,alent processing results and using a 0%day year+()ic) one o* t)e *ollo(ing proposals is optimal *orJe(man9

A- A 30-;0 *ee per c)eck-

.- A *lat *ee o* 312;+000 per year-

C- A *ee o* 0-06 o* t)e amount collected-

- A compensating 'alance o* 31+7;0+000-

150! "ource# CMA 0


19/64

s)ould Demple c)oose9

A- "tandard account+ 'ecause t)e sa,ings is 35 peryear-

.- Premium account+ 'ecause t)e sa,ings is 35 peryear-

C- "tandard account+ 'ecause t)e sa,ings is 31 peryear-

- Premium account+ 'ecause t)e sa,ings is 31 peryear-

15;! "ource# CMA 0.- "tayed t)e same-

C- &ncreased 'y 31 million-

- &ncreased 'y 32 million-

1;0! "ource# C&A 0;


20/64

C- 7; days-

-


21/64

processing time to 2 days and t)e c)eck clearing time to 1day- @= )as an a,erage daily collection o* 31;0+000- &*@= adopts t)e lock'o: system+ its a,erage cas) 'alance(ill increase 'y

A- 31+200+000

.- 37;0+000

C- 300+000

- 35;0+000

=act Pattern G!Morton Company needs to pay a supplier/s in,oice o*30+000 and (ants to take a cas) discount o* 2>10+ net 50-T)e *irm can 'orro( t)e money *or 0 days at 116 perannum (it) a 10+ net 0- &* customers

can 'orro( at t)e prime rate+ at ()at prime rate must t)ecompany c)ange its terms o* credit in order to a,oid anundesira'le e:tension in its collection o* recei,a'les9

A- 26

.- ;6

C- 76

- $6

12! "ource# Pu'lis)erA company )as ust 'orro(ed 32 million *rom a 'ank- T)estated rate o* interest is 106- &* t)e loan is discounted andis repaya'le in one year+ t)e e**ecti,e rate on t)e loan isappro:imately

A- $-$


22/64

.- 350 million-

C- 3250 million-

- 31$0 million-

1! "ource# Pu'lis)erT)e *ollo(ing in*ormation regarding a c)ange in creditpolicy (as assem'led 'y t)e Wilson Wa: Company- T)ecompany )as a re4uired rate o* return o* 116 and a,aria'le cost ratio o* ;06- T)e opportunity cost o* a longercollection period is assumed to 'e negligi'le-

Bld Credit Policy Je( Credit Policy %%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%"ales 35+00+000 35+

and net (orking capital

A- &ncreased 'y 370-

.- id not c)ange-

C- ecreased 'y 3110+ net 0+ t)eannual interest cost 'ased on a 0%day year is

A- -76

.- 25-;6

C- 7-16

- ;;-6

17! "ource# Pu'lis)er

=@= Corporation )ad income 'e*ore ta:es o* 3;0+000-&ncluded in t)e calculation o* t)is amount (as depreciationo* 3+000+ a c)arge o* 37+000 *or t)e amortiFation o* 'onddiscounts+ and 3;+000 *or interest paid- T)e estimatedpreta: cas) *lo( *or t)e period is

A- 3;0+000

.- 3;7+000

C- 37+000


23/64

- 3+000

175! "ource# Pu'lis)erT)e *ollo(ing in*ormation applies to B:*ord Company#

Purc)ases "ales %%%%%%%%% %%%%%%%%

anuary 31;0+000 3100+000=e'ruary 31;0+000 3200+000Marc) 31;0+000 32;0+000April 310+000 32;0+000May 310+000 300+000une 3100+000 320+000A cas) payment e4ual to ;06 o* purc)ases is made at t)etime o* purc)ase+ and 2;6 is paid in eac) o* t)e ne:t 2mont)s- Purc)ases *or t)e pre,ious Jo,em'er andecem'er (ere 3150+000 per mont)- Payroll *or a mont)is 106 o* t)at mont)/s sales+ and ot)er operating e:pensesare 1;6 o* t)e *ollo(ing mont)/s sales uly sales (ere3210+0008- &nterest payments (ere 32;+000 paid 4uarterlyin anuary and April- B:*ord/s cas) dis'ursements *or t)emont) o* April (ere

A- 310+000

.- 3150+000

C- 3210+000

- 32;+000

17;! "ource# Pu'lis)erCat*ur Pu'lis)ing is considering a c)ange in its credit terms*rom n>20 to >10+ n>20- T)e company/s 'udgeted sales *ort)e coming year are 320+000+000+ o* ()ic) $06 aree:pected to 'e made on credit- &* t)e ne( credit terms areadopted+ Cat*ur management estimates t)at discounts (ill'e taken on 06 o* t)e credit salesL )o(e,er+ uncollecti'leaccounts (ill 'e unc)anged- T)e ne( credit terms (illresult in e:pected discounts taken in t)e coming year o*

A- 32$$+000

.- 35$0+000

C- 30+000

- 300+000

17! "ource# Pu'lis)er.est Computers 'elie,es t)at its collection costs could 'ereduced t)roug) modi*ication o* collection procedures- T)isaction is e:pected to result in a lengt)ening o* t)e a,eragecollection period *rom 0 to ; daysL )o(e,er+ t)ere (ill'e no c)ange in uncollecti'le accounts+ or in total credit

sales- =urt)ermore+ t)e ,aria'le cost ratio is 06+ t)eopportunity cost o* a longer collection period is assumed to'e negligi'le+ t)e company/s 'udgeted credit sales *or t)ecoming year are 35;+000+000+ and t)e re4uired rate o*return is 6- To usti*y c)anges in collection procedures+t)e minimum annual reduction o* costs using a 0%dayyear and ignoring ta:es8 must 'e

A- 37;+000

.- 37+;00

C- 312;+000

- 322+;00

177! "ource# Pu'lis)er=lyn Company/s 'udgeted sales *or t)e coming year aree:pected to 'e 3;0+000+000+ o* ()ic) 7;6 are e:pected

to 'e credit sales at terms o* n>0- =lyn estimates t)at aproposed rela:ation o* credit standards (ill increase creditsales 'y 2;6 and increase t)e a,erage collection period*rom 20 days to 0 days- .ased on a 0%day year+ t)eproposed rela:ation o* credit standards (ill result in ane:pected increase in t)e a,erage accounts recei,a'le'alance o*

A- 3;20+$50

.- 31+$22+

A- 31+

.- 31+11+7

C- 3$+

- 3;$+


24/64

1$0! "ource# Pu'lis)er"tarrs Company )as current assets o* 3500+000 andcurrent lia'ilities o* 300+000- "tarrs could increase its(orking capital 'y t)e

A- Prepayment o* 3;0+000 o* ne:t year/s rent-

.- Re*inancing o* 3;0+000 o* s)ort%term de't (it)long%term de't-

C- Ac4uisition o* land ,alued at 3;0+000 t)roug) t)eissuance o* common stock-

- Purc)ase o* 3;0+000 o* trading securities *or cas)-

1$1! "ource# Pu'lis)erA *irm )as daily cas) receipts o* 300+000- A commercial'ank )as o**ered to reduce t)e collection time 'y 2 days-T)e 'ank re4uires a mont)ly *ee o* 3+000 *or pro,idingt)is ser,ice- &* t)e money market rates (ill a,erage 116during t)e year+ t)e annual preta: income loss8 *rom usingt)e ser,ice is

A- 30+0008

.- 30+000

C- 3+000

- 3+000

1$2! "ource# Pu'lis)erA *irm/s current ratio is currently 1-70 to 1- Managementkno(s it cannot ,iolate a (orking capital restrictioncontained in its 'ond indenture- &* t)e *irm/s current ratio*alls 'elo( 1-50 to 1+ tec)nically it (ill )a,e de*aulted- &*current lia'ilities are 3200 million+ t)e ma:imum ne(commercial paper t)at can 'e issued to *inance in,entorye:pansion is

A- 3$0 million-

.- 370 million-

C- 31;0 million-

- 32$0 million-

1$! "ource# CMA 0


25/64

A- 11-006

.- 12-006

C- 12-

A- Bption 1-

.- Bption 2-

C- Bption -

- Bption 5-

1


26/64

.- 322;+000

C- 327;+000

- 35;0+000

1

A- 32+500 annual 'ene*it-

.- 31+200 annual 'ene*it-

C- 300 annual 'ene*it-

- 37+;00 annual 'ene*it-

202! "ource# Pu'lis)erA,erage daily collection o* c)ecks *or =irm is 350+000-=irm also (rites+ on a,erage+ 3;+000 in c)ecks daily- &*t)e collection period *or c)ecks is *i,e days+ ()at is t)e net*loat *or =irm 9

A- 3$+000

.- 32;+000

C- 317;+000

- 3200+000

=act Pattern G7!T)e Hando Communications Corporation HCC8 )as ust*inis)ed its *irst year o* operations- =or t)e year+ HCC )ad3$0+000 o* income- HCC also earned 311+000 o* intereston a ta:%e:empt 'ond+ a 310+000 depreciation deduction+and an 3$+000 ta: credit- Assume t)at HCC )as a 06 ta:rate-

20! "ource# Pu'lis)erRe*ers to =act Pattern G78W)at is HCC/s net ta: lia'ility9

A- 317+700

.- 31;+00

C- 3


27/64

C- T)e depreciation deduction-

- T)e ta: credit-

20;! "ource# CMA 12


28/64

CMA PART 1 EWorking Capital Policy

and ManagementAns(ers

1! "ource# CMA 12$0 1%1

Ans(er A8 is incorrect 'ecause a small *irm may not)a,e enoug) surplus cas) to in,est in commercialpaper+ ()ic) usually consists o* secured or unsecuredpromissory notes o* large corporations-

Ans(er .8 is incorrect 'ecause t)e transactions costo* 'ankers/ acceptances is )ig)- A 'anker/sacceptance is a uni4ue credit instrument used to*inance 'ot) domestic and internationalsel*%li4uidating transactions- &t is usually initiated 'ya 'ank/s irre,oca'le letter o* credit on 'e)al* o* t)e'ank/s customer+ on ()ic) t)e company doing'usiness (it) t)e 'ank/s customer dra(s a time dra*t-T)e company discounts t)e time dra*t (it) t)e

company/s local 'ank and recei,es immediatepayment- T)e local 'ank *or(ards t)e time dra*t tot)e 'ank customer *or payment-

Ans(er C8 is correct- A small *irm (it) surplus cas)s)ould in,est *or t)e )ig)est return and lo(est risk-T)e a'ility to con,ert t)e in,estment into cas) (it)outa loss o* principal is also important- Money marketmutual *unds in,est in money market certi*icates suc)as treasury 'ills+ negotia'le Cs+ and commercialpaper- .ecause o* di,ersi*ication+ t)ese mutual *undsare superior to any single instrument-

Ans(er 8 is incorrect 'ecause an increase ininterest rates could cause a su'stantial loss inprincipal-

2! "ource# CMA 0$ 1%7

Ans(er A8 is incorrect 'ecause t)e ser,ice (illgenerate 325+000 in additional annual income+ notlosses-

Ans(er .8 is correct- "ince collections (ill 'espeeded up 'y t)ree days+ at t)e rate o* 3200+000per day+ t)e company (ill )a,e an additional300+000 to in,est- At 126+ t)e interest earned(ould 'e 372+000 per year- Ho(e,er+ t)e 'ank (illc)arge 35$+000 12 mont)s : 35+000 per mont)8 *orits ser,ices- T)us+ t)e *irm (ill increase its income 'y325+000 372+000 % 35$+0008-

Ans(er C8 is incorrect 'ecause 3+250 is anonsense num'er-

Ans(er 8 is incorrect 'ecause 3$+000 assumesan annual 'ank c)arge o* 35+000-

! "ource# CMA 12$0 1%

Ans(er A8 is incorrect 'ecause t)e *loating interestrate is not al(ays )ig)er- &t s)ould *loat up or do(n(it) t)e prime rate-

Ans(er .8 is incorrect 'ecause a restriction on ane( issuance does not raise t)e interest rate onmoney pre,iously 'orro(ed-

Ans(er C8 is correct- W)en a *irm 'orro(s money*rom t)e 'ank+ it is o*ten re4uired to keep a certainpercentage o* t)e *unds in t)e 'ank at all times- T)ese

compensating 'alances e**ecti,ely increase t)e rate o*interest on t)e money 'orro(ed *rom t)e 'ank-

Ans(er 8 is incorrect 'ecause+ i* a *irm c)oosesnot to use its *ull line o* credit and is not c)arged *ort)e unused portion+ t)e rate o* interest on t)e portionused does not increase-

5! "ource# CMA 0$ 1%$

Ans(er A8 is incorrect 'ecause 37; million is t)eminimum amount o* current assets re4uired to keept)e current ratio at t)e *loor le,el o* 1-;-

Ans(er .8 is correct- &* current lia'ilities are 32;0million and t)e current ratio current assets>current

lia'ilities8 is 1-7;+ current assets must 'e 357-;million 32;0 : 1-7;8- Hence+ i* amount o*commercial paper is issued+ t)ere'y increasing 'ot)current assets and current lia'ilities 'y + t)e ne(current ratio ()ic) cannot 'e less t)an 1-;8 is 312;million-

357-; 8>32;0 8 O 1-; 357-; O 1-; 32;0 8 357-; O 37; 1-; 357-; O 37; -; 32-; O -; O 312;

Ans(er C8 is incorrect 'ecause 3;2-; million is t)esum o* t)e e:isting current assets and 312; million-

Ans(er 8 is incorrect 'ecause 357-; million is t)ee:isting amount o* current assets-

;! "ource# CMA 0$ 1%1

Ans(er A8 is incorrect 'ecause 3$1+


29/64

Ans(er A8 is incorrect 'ecause multiple collectioncenters t)roug)out t)e country (ill reduce t)e timere4uired to recei,e cas) in t)e mail- =or e:ample+Cali*ornia customers o* a Je( ork *irm (ouldmake payment to a West Coast center- T)us+ t)ecompany (ould recei,e t)e cas) t(o or t)ree dayssooner-

Ans(er .8 is incorrect 'ecause direct deposit 'ycustomers into a lock%'o: also speeds cas) intocompany accounts-

Ans(er C8 is incorrect 'ecause special )andling o*large c)ecks is a cost%e**ecti,e (ay to deposit largeamounts-

Ans(er 8 is correct- Compensating 'alances areeit)er 18 an a'solute minimum 'alance or 28 aminimum a,erage 'alance t)at 'ank customers mustkeep at t)e 'ank- T)ese are generally re4uired 'y t)e'ank to compensate *or t)e cost o* ser,icesrendered- Maintaining compensating 'alances (ill notaccelerate a company/s cas) in*lo(s 'ecause lesscas) (ill 'e a,aila'le e,en t)oug) t)e amount o* cas)coming in remains unc)anged-

7! "ource# CMA 12$ 1%2;

Ans(er A8 is incorrect 'ecause t)e actual annualpercentage rate 'ased on *orgoing ")ad/s discount is15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ankloan 17-026 'ecause it is a discount loan8+ or t)ecost o* *orgoing t)e discounts allo(ed 'y =ort Co-1$-1$268 and Riley Co- 1-268-

Ans(er .8 is incorrect 'ecause t)e actual annualpercentage rate 'ased on *orgoing ")ad/s discount is15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ankloan 17-026 'ecause it is a discount loan8+ or t)ecost o* *orgoing t)e discounts allo(ed 'y =ort Co-1$-1$268 and Riley Co- 1-268-

Ans(er C8 is incorrect 'ecause t)e actual annualpercentage rate 'ased on *orgoing ")ad/s discount is15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ankloan 17-026 'ecause it is a discount loan8+ or t)ecost o* *orgoing t)e discounts allo(ed 'y =ort Co-1$-1$268 and Riley Co- 1-268-

Ans(er 8 is correct- T)e *irst step is to determinet)e actual annual percentage interest rate *or eac) o*t)e *our options- Assuming a 3100 in,oice+ t)e =ortCompany discount represents interest o* 31 on a loano* 3208 periods : 31>3

Ans(er C8 is correct- T)e cas) *lo( cycle 'egins()en t)e *irm pays *or merc)andise it )as purc)asedand ends ()en it recei,es cas) *rom t)e sale o* t)emerc)andise- &n,entory is )eld *or an a,erage o*


30/64

(ill 'e )ig) since its current lia'ilities (ill 'e relati,elylo(- An aggressi,e policy entails *inancing some *i:edassets and all t)e current assets (it) s)ort%termcapital- T)is policy results in a lo(er current ratio-

Ans(er C8 is incorrect 'ecause Clay is su'ect togreater li4uidity risk t)an @ott since it )as greaters)ort%term de't- Hence+ it is at greater risk o* 'eing

una'le to meet its maturing o'ligations-

Ans(er 8 is incorrect 'ecause a more conser,ati,ecompany (ould tend to *inance 'y means o* e4uityrat)er t)an de't capital- T)us+ t)e more conser,ati,ecompany (ould )a,e less interest e:pense-

11! "ource# CMA 12$; 1%

Ans(er A8 is incorrect 'ecause t)e operating cycle(ould decrease since t)e a,erage time *rom cas)dis'ursement to cas) realiFation (ould 'e s)orter-

Ans(er .8 is incorrect 'ecause t)e a,eragecollection period (ould decrease since t)e a,eragetime *rom cas) dis'ursement to cas) realiFation

(ould 'e s)orter-

Ans(er C8 is correct- &* t)e cause o* increased salesis an increase in t)e cas) discount+ it can 'e in*erredt)at t)e additional customers (ould pay during t)ediscount period- T)us+ cas) (ould 'e collected more4uickly t)an pre,iously and t)e cas) con,ersion cycle(ould 'e s)ortened-

Ans(er 8 is incorrect 'ecause more customers (illtake discounts-

12! "ource# CMA 12$ 1%0

Ans(er A8 is correct- C)ecks are currently tied up

*or 10 days ; *or mailing+ 5 *or processing+ and1 *or clearing8- &* t)at (ere reduced to 5 days+CMR/s cas) 'alance (ould increase 'y 3;0+000-; days : 3100+000 per day8-

Ans(er .8 is incorrect 'ecause c)ecks currently

take 10 days to 'e credited to CMR/s cas)'alance- T)e lock'o: system s)ortens t)is process to

5 days+ a di**erence o* days- "ince t)e a,erage

daily collection is 3100+000+ a period o* e:tradays yields a 3;0+000 a,erage increase in t)e cas)'alance-

Ans(er C8 is incorrect 'ecause c)ecks currently



daily collection is 3100+000+ a period o* e:tradays yields a 3;0+000 a,erage increase in t)e cas)'alance-

Ans(er 8 is incorrect 'ecause c)ecks currently



daily collection is 3100+000+ a period o* e:tra

days yields a 3;0+000 a,erage increase in t)e cas)'alance-

1! "ource# CMA 12$ 1%

Ans(er A8 is incorrect 'ecause credit and collectionpolicies concern recei,a'les and are not in*luenced

'y an EBQ model *or in,entory management-

Ans(er .8 is incorrect 'ecause t)e le,el o*marketa'le securities is in part determined 'y cas)needs-

Ans(er C8 is incorrect 'ecause t)e relations)ip'et(een current assets and current lia'ilities concernsmany *actors ot)er t)an cas) management-

Ans(er 8 is correct- "ince cas) and in,entory are'ot) nonearning assets+ in principle t)ey may 'etreated similarly- T)e alternati,e to )olding cas)+)o(e,er+ is to )old marketa'le securities t)at do earninterest or di,idends- T)us+ a cas) managementmodel (ould determine )o( muc) o* a *irm/s li4uiditys)ould 'e )eld as cas) and )o( muc) in t)e *orm o*

marketa'le securities-

15! "ource# CMA 12$ 1%2

Ans(er A8 is incorrect 'ecause t)e t)ree maormoti,es *or )olding cas)+ according to Deynesianeconomics+ are *or transactional+ precautionary+ andspeculati,e purposes-

Ans(er .8 is incorrect 'ecause t)e t)ree maormoti,es *or )olding cas)+ according to Deynesianeconomics+ are *or transactional+ precautionary+ andspeculati,e purposes-

Ans(er C8 is incorrect 'ecause t)e t)ree maormoti,es *or )olding cas)+ according to Deynesianeconomics+ are *or transactional+ precautionary+ andspeculati,e purposes-

Ans(er 8 is correct- o)n Maynard Deynes+*ounder o* Deynesian economics+ concluded t)att)ere (ere t)ree maor moti,es *or )olding cas)# *ortransactional purposes as a medium o* e:c)ange+precautionary purposes+ and speculati,e purposes'ut only during de*lationary periods8-

1;! "ource# CMA 12$ 1%5

Ans(er A8 is incorrect 'ecause tig)tening credit (illreduce sales and 'ad de't losses-

Ans(er .8 is incorrect 'ecause tig)tening credit (illreduce sales and 'ad de't losses-

Ans(er C8 is incorrect 'ecause+ most likely+ )ig)er4uality accounts (ill mean a s)orter a,eragecollection period-

Ans(er 8 is correct- &ncreasing t)e 4uality o* t)eaccounts reected means t)at *e(er sales (ill 'emade- T)e company is t)ere*ore not trying toma:imiFe its sales or increase its 'ad de't losses- T)eo'ecti,e is to reduce 'ad de't losses and t)ere'y


31/64

ma:imiFe pro*its-

1! "ource# CMA 12$ 1%;

Ans(er A8 is incorrect 'ecause a c)attel mortgage isa loan secured 'y personal property mo,a'leproperty suc) as e4uipment or li,estock8- Also+ a

*loating lien is secured 'y property+ suc) as in,entory+t)e composition o* ()ic) may 'e constantly c)anging-

Ans(er .8 is incorrect 'ecause a c)attel mortgage isa loan secured 'y personal property mo,a'leproperty suc) as e4uipment or li,estock8- Also+*actoring is a *orm o* * inancing in ()ic) recei,a'lesser,e as security-

Ans(er C8 is incorrect 'ecause a c)attel mortgage is

a loan secured 'y personal property mo,a'leproperty suc) as e4uipment or li,estock8- Also+ a*loating lien is secured 'y property+ suc) as in,entory+t)e composition o* ()ic) may 'e constantly c)anging-

Ans(er 8 is correct- An unsecured loan is a loan

made 'y a 'ank 'ased on credit in*ormation a'outt)e 'orro(er and t)e a'ility o* t)e 'orro(er to repayt)e o'ligation- T)e loan is not secured 'y collateral+'ut is made on t)e signature o* t)e 'orro(er-Re,ol,ing credit+ 'ankers/ acceptances+ lines o*credit+ and commercial paper are all unsecuredmeans o* 'orro(ing-

17! "ource# CMA 0$7 1%2;

Ans(er A8 is incorrect 'ecause s)ipping costs areordering costs+ not carrying costs-

Ans(er .8 is correct- Carrying costs include storagecosts+ )andling costs+ insurance costs+ interest oncapital in,ested+ and o'solescence-

Ans(er C8 is incorrect 'ecause it states ,ariousordering or manu*acturing8 costs-

Ans(er 8 is incorrect 'ecause t)e set%up costs *ora production run are e4ui,alent to ordering costs-Additionally+ purc)asing costs are considered costso* ordering-

1$! "ource# CMA 0$7 1%2

Ans(er A8 is incorrect 'ecause insurance costs ando'solescence are carrying costs-

Ans(er .8 is incorrect 'ecause o'solescence+

spoilage+ interest on in,ested capital+ and storagecosts are carrying costs-

Ans(er C8 is correct- Brdering costs are costsincurred ()en placing and recei,ing orders- Brderingcosts include purc)asing costs+ s)ipping costs+ setupcosts *or a production run+ and 4uantity discountslost-

Ans(er 8 is incorrect 'ecause o'solescence+spoilage+ interest on in,ested capital+ and storagecosts are carrying costs-

1

Ans(er A8 is incorrect 'ecause 12-006 assumest)at t)e company )as access to loan *unds o*3;5+555-

Ans(er .8 is correct- T)e company (ill need3535


32/64

*or suc) purposes-

Ans(er 8 is incorrect 'ecause interest deducted inad,ance is discount interest-

22! "ource# CMA 0$$ 1%1$

Ans(er A8 is incorrect 'ecause t)e prime rate )asnot)ing to do (it) a commitment *ee on a 'ank loan-

Ans(er .8 is incorrect 'ecause t)e e**ecti,e rate onmost companies/ 'ank loans (ill 'e muc) )ig)er t)ant)e prime rate-

Ans(er C8 is incorrect 'ecause t)e prime rate is a'ank loan rate+ not t)e rate on commercial paper-

Ans(er 8 is correct- T)e prime interest rate is t)erate c)arged 'y commercial 'anks to t)eir 'est t)elargest and *inancially strongest8 'usiness customers-&t is traditionally t)e lo(est rate c)arged 'y 'anks-Ho(e,er+ in recent years+ 'anks )a,e 'een makingloans at still lo(er rates in response to competition*rom t)e commercial paper market-

2! "ource# CMA 0$< 1%10

Ans(er A8 is incorrect 'ecause management o**i:ed assets is not a *actor in (orking capitalmanagement-

Ans(er .8 is incorrect 'ecause capital structure anddi,idend policy are *actors in,ol,ed in capitalstructure *inance+ not in (orking capital *inancialmanagement-

Ans(er C8 is incorrect 'ecause s)ort%term de't isusually less e:pensi,e t)an long%term de't-

Ans(er 8 is correct- A company must maintain ale,el o* (orking capital su**icient to pay 'ills as t)eycome due- =ailure to do so is tec)nical insol,encyand can result in in,oluntary 'ankruptcy-?n*ortunately+ )olding current assets *or purposes o*paying 'ills is not pro*ita'le *or a company 'ecauset)ey usually o**er a lo( return compared (it)longer%term in,estments- T)us+ t)e skill*ulmanagement o* (orking capital re4uires a 'alancingo* a *irm/s desire *or pro*it (it) its need *or ade4uateli4uidity-

25! "ource# CMA 0$$ 1%20

Ans(er A8 is incorrect 'ecause it does not re*er toe:penses t)at )a,e to 'e paid out o* t)e sales dollars-

Also+ t)e sales re,enue a,aila'le to pay lia'ilities isindetermina'le- T)us+ sales minus de't ser,ice is nota li4uidity measure-

Ans(er .8 is incorrect 'ecause *i:ed assets areincluded in t)e numerator o* t)e ratioL )ence+ t)is ratiois not a measure o* li4uidity-

Ans(er C8 is correct- @i4uidity is t)e degree to()ic) assets can 'e con,erted to cas) in t)e s)ortrun to meet maturing o'ligations- T)e usual measureso* li4uidity are t)e current ratio and t)e 4uick

acid%test8 ratio- T)e 4uick ratio is t)e 'est measureo* s)ort%term li4uidity 'ecause it uses only t)e mostli4uid assets cas)+ marketa'le securities+ andrecei,a'les8 in t)e calculationL in,entories are notincluded 'ecause t)ey are t(o steps a(ay *rom cas)t)ey )a,e to 'e sold+ and t)en t)e recei,a'le )as to'e collected8-

Ans(er 8 is incorrect 'ecause using only lia'ilitiesin t)e calculation ignores t)e assets a,aila'le to payt)e lia'ilities-

2;! "ource# CMA 0$< 1%11

Ans(er A8 is incorrect 'ecause t)e gro(ing *irm ismore apt to emp)asiFe production rat)er t)anprotecting against tec)nical insol,ency 'y maintaininga )ig) le,el o* (orking capital-

Ans(er .8 is correct- W)en a *irm )as an aggressi,e(orking capital policy+ management keeps t)ein,estment in (orking capital at a minimum- T)us+ agro(ing company (ould (ant to in,est its *unds incapital goods and not in idle assets- T)is policy

ma:imiFes return on in,estment at t)e price o* t)e risko* minimal li4uidity-

Ans(er C8 is incorrect 'ecause t)e company (illpre*er to e:pend *unds on capital goods-

Ans(er 8 is incorrect 'ecause t)e company needsits pro*its to in,est in ne( production e4uipment in

order to gro(-

2! "ource# CMA 0$< 1%1

Ans(er A8 is incorrect 'ecause an agency security isissued 'y a corporation or agency created 'y t)e?-"- go,ernment- E:amples are go,ernmentsecurities issued 'y t)e 'odies t)at *inancemortgages+ suc) as t)e =ederal Jational MortgageAssociation =annie Mae8-

Ans(er .8 is incorrect 'ecause 'ankers/acceptances are dra*ts dra(n on deposits at a 'ank-T)e acceptance 'y t)e 'ank guarantees payment atmaturity- T)ey are normally used to *inance a speci*ictransaction-

Ans(er C8 is correct- Commercial paper is t)e term*or t)e s)ort%term typically less t)an < mont)s8+unsecured+ large denomination o*ten o,er 3100+0008promissory notes issued 'y large+ credit%(ort)ycompanies to ot)er companies and institutionalin,estors- &n many instances+ t)e maturity date is only

a *e( days a*ter issuance-

Ans(er 8 is incorrect 'ecause a repurc)aseagreement in,ol,es a secured loan to a go,ernmentsecurities dealer- &t allo(s t)e 'uyer to retain interestincome alt)oug) t)e seller%dealer can repurc)asea*ter a speci*ied time-

27! "ource# CMA 0$< 1%12

Ans(er A8 is incorrect 'ecause it is a common


33/64

met)od o* accelerating cas) collections-

Ans(er .8 is incorrect 'ecause it is a commonmet)od o* accelerating cas) collections-

Ans(er C8 is correct- Karious met)ods o*accelerating cas) collections include decentraliFedcollection outposts normally one in eac) =ederal

Reser,e istrict8+ electronic *unds trans*ers+centraliFed 'anking *or all company 'ranc)es toa,oid )a,ing to maintain minimum 'alances in se,erallocations+ and lock'o: systems- A compensating'alance is a minimum a,erage or a'solute amountt)at must 'e maintained in a 'ank account- Hence+ itis not a means o* accelerating cas) collections- T)isre4uirement means t)at less cas) is a,aila'le to t)edepositor-

Ans(er 8 is incorrect 'ecause it is a commonmet)od o* accelerating cas) collections-

2$! "ource# CMA 0$< 1%15

Ans(er A8 is correct- A s)ort%term security issued

'y a corporation or agency created 'y t)e ?-"-go,ernment+ suc) as t)e =ederal HousingAdministration+ is an agency security agency issue8-Among t)e largest issuers o* agency securitiese:cluding t)e Treasury8 are t)e =ederal Home @oan.anks+ t)e =ederal Jational Mortgage Association=annie Mae8+ and t)e ot)er entities t)at pro,idecredit to *armers and )ome 'uyers- Bt)er issuers o*)ome mortgage%'acked securities include t)eIo,ernment Jational Mortgage Association IinnieMae8 and t)e =ederal Home @oan MortgageCorporation =reddie Mac8-

Ans(er .8 is incorrect 'ecause 'ankers/acceptances are issued 'y commercial 'anks to*inance speci*ic transactions-

Ans(er C8 is incorrect 'ecause commercial paper isa s)ort%term+ unsecured+ promissory note issued 'y acommercial enterprise-

Ans(er 8 is incorrect 'ecause a repurc)aseagreement in,ol,es ()at is in essence a secured loanto a dealer in go,ernment securities-

2

Ans(er A8 is incorrect 'ecause only largecompanies (it) e:cellent credit ratings )a,e access tot)e commercial paper market-

Ans(er .8 is incorrect 'ecause a retail store must)a,e instant access to its in,entory to pro,idecontinuous ser,ices to customers- T)us+ a loan on aterminal (are)ouse receipt loan (ould not 'e suita'le'ecause t)e in,entory (ould not 'e in t)e immediatepossession o* t)e seller-

Ans(er C8 is correct- A small retail store (ould not)a,e access to maor capital markets- &n *act+ t)eonly options a,aila'le+ outside o* o(ner *inancing+ are'ank loans and a line o* credit *rom suppliers- &t ist)is latter alternati,e t)at is most o*ten used 'ecause itpermits t)e store to *inance in,entories *or 0 to 0days (it)out incurring interest cost- A line o* credit isan arrangement 'et(een a 'ank and a 'orro(er in()ic) t)e 'ank commits itsel* to lend up to a certainma:imum amount to t)e 'orro(er in a gi,en period-

Ans(er 8 is incorrect 'ecause a c)attel mortgage ismost o*ten used *or *inancing mo,ea'le e4uipment- &tis not (ell%suited to *inancing in,entory o* a smallretailer (it) )ig) turno,er 'ecause o* t)e di**iculty o*identi*ication-

1! "ource# CMA 12$< 1%15

Ans(er A8 is correct- A treasury 'ill is a s)ort%term?-"- go,ernment o'ligation t)at is sold at a discount*rom its *ace ,alue- A treasury 'ill is )ig)ly li4uid andnearly risk%*ree+ and it is o*ten )eld as a su'stitute *orcas)-

Ans(er .8 is incorrect 'ecause it lacks t)e li4uiditynecessary to 'e a cas) su'stitute- &t can also 'e 4uitea risky in,estment-

Ans(er C8 is incorrect 'ecause it lacks t)e li4uiditynecessary to 'e a cas) su'stitute- &t can also 'e 4uitea risky in,estment-

Ans(er 8 is incorrect 'ecause it lacks t)e li4uiditynecessary to 'e a cas) su'stitute- &t can also 'e 4uitea risky in,estment-

2! "ource# CMA 12$< 1%1;

Ans(er A8 is incorrect 'ecause no statement can 'emade (it) respect to pro*its (it)out kno(ing costs-

Ans(er .8 is correct- An increase in discounts takenaccompanied 'y declines in recei,a'les 'alances anddou't*ul accounts all indicate t)at collections on t)eincreased sales )a,e 'een accelerated- Accordingly+t)e a,erage collection period must )a,e declined- T)ea,erage collection period is a ratio calculated 'ydi,iding t)e num'er o* days in a year ;8 'y t)erecei,a'le turno,er- T)us+ t)e )ig)er t)e turno,er+ t)es)orter t)e a,erage collection period- T)e turno,erincreases ()en eit)er sales t)e numerator8 increase+or recei,a'les t)e denominator8 decrease-


34/64

Accomplis)ing 'ot) )ig)er sales and a lo(errecei,a'les increases t)e turno,er and results in as)orter collection period-

Ans(er C8 is incorrect 'ecause no statement can 'emade (it) respect to pro*its (it)out kno(ing costs-

Ans(er 8 is incorrect 'ecause t)e discount may

)a,e 'een increased+ ()ic) )as led to 4uickerpayments-

! "ource# CMA 12$< 1%1

Ans(er A8 is correct- T)e *irst step is to determinet)e a,erage in,estment in recei,a'les under eac)policy- ?nder t)e old policy+ a,erage daily sales are310+000 3+00+000>0 days8- Ii,en a 0%daya,erage collection period+ t)e a,erage recei,a'les'alance is 300+000 310+000 : 0 days8- ?nder t)ene( policy+ a,erage daily sales are 311+0003+0 days8+ and t)e a,erage recei,a'les'alance is 3


35/64

lo( interest rate in comparison to ot)er means o**inancing-

Ans(er .8 is incorrect 'ecause only largecompanies (it) good credit ratings can *ind 'uyers*or t)eir commercial paper-

Ans(er C8 is incorrect 'ecause commercial paper is

unsecured-

Ans(er 8 is incorrect 'ecause in,estors must pay acommission similar to t)at on ot)er in,estmentsecurities-

Ans(er A8 is incorrect 'ecause lo(er demandreduces t)e possi'ility o* a stockout- Hence+ t)e *irmcan carry a lo(er le,el o* sa*ety stock-

Ans(er .8 is correct- A *irm/s economic order4uantity is a *unction o* demand+ carrying costs+ andordering costs- A decrease in carrying costs permits acompany to carry more in,entory at t)e same costand t)ere'y reduce stockout costs-

Ans(er C8 is incorrect 'ecause+ i* demand can 'epredicted (it) greater accuracy ,aria'ilitydecreases8+ a stockout is less likely and sa*ety stockcan 'e reduced-

Ans(er 8 is incorrect 'ecause+ i* carrying cost isconstant+ a reduction in t)e cost o* a stockout usti*iesa smaller sa*ety stock-

51! "ource# CMA 12


36/64

'e 310+000 30+000 % 320+0008- Conse4uently+a*ter%ta: income (ill increase 'y 3+000 310+000 %506 : 310+0008!-

Ans(er C8 is incorrect 'ecause a*ter%ta: income (illincrease 'y 3+000-

Ans(er 8 is incorrect 'ecause a*ter%ta: income (ill

increase 'y 3+000-

5;! "ource# CMA 0a,eragerecei,a'les8- T)e *oregoing are some o* t)e manyratios t)at can 'e used to e,aluate (orking capitalmanagement-

Ans(er C8 is incorrect 'ecause times interest earnedand t)e de't%to%e4uity ratio are measures o* capitalstructure management-

Ans(er 8 is incorrect 'ecause return on e4uity is ameasure o* capital structure management-

5! "ource# CMA 0208- & *t)e interest rate is 2-056 *or eac) 20%day period+ t)e

annual interest rate rounded to t)e nearest tent)8 is-76 1$ : 2-0568-

57! "ource# CMA 0

Ans(er .8 is incorrect 'ecause net income includesnoncas) elements+ e-g-+ good(ill amortiFation anddepreciation-

Ans(er C8 is incorrect 'ecause collectionpercentages must 'e considered+ and net incomeincludes noncas) elements-

Ans(er 8 is correct- T)e most direct (ay o*preparing a cas) 'udget re4uires incorporation o*sales proections and credit terms+ collectionpercentages+ estimated purc)ases and paymentterms+ and ot)er cas) receipts and dis'ursements- &not)er (ords+ preparation o* t)e cas) 'udget re4uires

consideration o* 'ot) in*lo(s and out*lo(s-

;0! "ource# CMA 0


37/64


38/64

discount amortiFation-

Ans(er .8 is incorrect 'ecause 3+000 does notre*lect t)e noncas) e:pense *or depreciation-

Ans(er C8 is incorrect 'ecause t)e 3;+000 o*depreciation and t)e 3+000 *or amortiFation s)ould'e added 'ack to+ not su'tracted *rom+ income-

Ans(er 8 is correct- To determine cas) *lo( *ort)e period+ all noncas) e:penses s)ould 'e added'ack to net income- Adding t)e 3;+000 o*depreciation and t)e 3+000 o* discount amortiFationto t)e 30+000 o* net income produces a cas) *lo(o* 371+000-

;$! "ource# CMA 12

Ans(er .8 is incorrect 'ecause 3+000 is t)eminimum sa,ings re4uired-

Ans(er C8 is incorrect 'ecause 3+000 is t)eminimum sa,ings re4uired-

Ans(er 8 is correct- Ii,en sales o* 327+000+000+

t)e a,erage amount o* daily sales must 'e 37;+000327+000+000>0 days8- T)e increased accountsrecei,a'le 'alance is t)ere*ore 35;0+000 days :37;+0008- Wit) an additional 35;0+000 o* capitalin,ested in recei,a'les+ t)e company/s interest cost

(ill increase 'y 3+000 per year $6 : 35;0+0008-T)us+ t)e company must sa,e at least 3+000 peryear to usti*y t)e c)ange in procedures-

0! "ource# CMA 12


39/64

sales o* 3 million and a turno,er rate o* nine times+t)e a,erage in,entory is 35 million 3>128+ t)ere'yreleasing 31 million o* *unds- At an $6 interest rate+t)e sa,ings on 31 million is 3$0+000-

Ans(er 8 is incorrect 'ecause t)e calculations

s)ould 'e 'ased on cost o* goods sold+ not sales-T)e 3120+000 *igure could only 'e o'tained i* t)eretail price o* t)e goods (ere used in t)e calculations-

! "ource# CMA 1232;0 8 O 1-; e4uals t)e amount o* additional current lia'ilities

commercial paper in t)is case8 t)at can 'e incurred- also e4uals t)e additional in,entory ac4uired (it)t)e *unds o'tained and t)e solution is as *ollo(s#

357-; O 1-;32;0 8 357-; O 37; 1-; 32-; O -; O 312; &* commercial paper is issued in t)e amount o* 312;

million+ lia'ilities and current assets (ill rise to 37;million and 3;2-; million+ respecti,ely- T)e result(ill 'e a current ratio o* 1-; 3;2-;>37;8-

Ans(er C8 is incorrect 'ecause issuing only 32-;million o* commercial paper (ould result in a currentratio greater t)an t)e desired 1-; to 1-

Ans(er 8 is incorrect 'ecause 357-; million o*commercial paper (ould put t)e *irm in ,iolation o*t)e 'ond indenture-

5! "ource# CMA 12


40/64

*or ;0 days o* 3-$17- T)us+ t)e net cost is 31-1$32-00 % 3-$178- .ecause a 0%day year )as 7-2periods o* ;0 days eac)+ t)e total annualiFed cost is3$-;2 7-2 : 31-1$8- T)e loss rate is a'out $-763$-;2>3

Ans(er A8 is incorrect 'ecause ma:imiFing ,alue ispre*era'le to ma:imiFing re,enues- T)e latter mayin,ol,e actions t)at reduce stock prices+ *or e:ample+actions t)at increase s)ort%term pro*its (it)outconcern *or long%term conse4uences-

Ans(er .8 is incorrect 'ecause minimiFing costs (illnot necessarily ma:imiFe stock)older (ealt)-

Ans(er C8 is incorrect 'ecause sta'iliFing gro(t)(ill not necessarily ma:imiFe stock)older (ealt)-

Ans(er 8 is correct- T)e o'ecti,e o* t)e *irm is totake t)ose actions (it)in legal and et)ical limits t)at(ill ma:imiFe t)e stock)olders/ (ealt)+ i-e-+ t)e priceper s)are o* common stock- T)e market price o* t)estock is largely t)e result o* t)e *irm/s in,estment and*inancing decisions-

70! "ource# C&A 0;


41/64

Ans(er C8 is incorrect 'ecause t)e note )as ane**ecti,e rate+ including compounding e**ects+ o*21-128! % 1-0 O 21-30+000!- At ecem'er 1+year 2+ t)e current ratio is 5- to 1 30+000 3100+000 300+0008>3100+000!- Hence+ t)ere(as a decrease in t)e current ratio- At ecem'er 1+year 1+ t)e acid%test ratio is 2-7 to 1 350+000 3120+0008>30+000!- At ecem'er 1+ year 2+ t)eacid%test ratio is 1- to 1 30+000 3100+0008>3100+000!- T)us+ t)e acid%test ratio alsodeclined-

7! "ource# CMA 010+ net 5;+ t)e'uyer is earning a 6 sa,ings *or paying on t)e tent)


42/64

day+ or ; days earlier t)an (ould ot)er(ise 'ere4uired- =or e:ample+ on a 31+000 in,oice+ t)epayment (ould 'e only 3

Ans(er A8 is incorrect 'ecause cas) is )eld tosatis*y compensating 'alance re4uirements+ to*acilitate transactions+ and to meet *uture needs-

Ans(er .8 is incorrect 'ecause cas) is )eld tosatis*y compensating 'alance re4uirements+ to*acilitate transactions+ and to meet *uture needs-

Ans(er C8 is incorrect 'ecause cas) is )eld tosatis*y compensating 'alance re4uirements+ to*acilitate transactions+ and to meet *uture needs-

Ans(er 8 is correct- A company (ill )old cas) andmarketa'le securities to *acilitate 'usinesstransactionsL cas) is a medium o* e:c)ange- Cas) andnear%cas) items are also )eld to meet *uture needs+ tosatis*y compensating 'alance re4uirements imposed'y lenders+ and to pro,ide a precautionary 'alance*or security purposes- Cas) is usually not )eld in anattempt to earn ma:imum returns on in,estment

'ecause cas) and marketa'le securities are notusually t)e )ig)est paying in,estments-

$0! "ource# CMA 0


43/64

Ans(er 8 is correct- Marketa'le securities arenear%cas) items used primarily *or s)ort%termin,estment- E:amples include ?- "- Treasury 'ills+Eurodollars+ commercial paper+ money%marketmutual *unds (it) port*olios o* s)ort%term securities+'ankers/ acceptances+ *loating rate pre*erred stock+and negotia'le Cs o* ?-"- 'anks- A con,erti'le

'ond is not a s)ort%term in,estment 'ecause itsmaturity date is usually more t)an one year in t)e*uture and its price can 'e in*luenced su'stantially 'yc)anges in interest rates or 'y c)anges in t)ein,estee/s stock price-

$! "ource# CMA 0currentlia'ilities8 is 2-0+ current assets must 'e 3500+000- &*s)ort%term de't is used to *inance ne( in,entory+current assets and current lia'ilities (ill increase 'yt)e same amount- T)e amount o* ne( de't

corresponding to a current ratio o* 1-; may 'edetermined *rom t)e *ollo(ing *ormula e4uatingcurrent assets and current lia'ilities let O ne(in,entory and ne( de't8#

3500+000 O 1-;3200+000 8 500+000 O 300+000 1-; O 3200+000

Ans(er .8 is incorrect 'ecause 3+7 assumest)at current assets do not c)ange-

Ans(er C8 is incorrect 'ecause additional assetsand lia'ilities o* 32+7 (ould cause t)e currentratio to drop 'elo( 1-;-

Ans(er 8 is incorrect 'ecause a 31;0+000increase in current assets and lia'ilities (ould result ina current ratio greater t)an 1-;-

$7! "ource# CMA 12


44/64

Ans(er C8 is incorrect 'ecause t)e interest on 317*or 2 days is less t)an 3-07-

Ans(er 8 is correct- Ii,en a 32; *ee and aninterest rate o* 0-026 per day *or 2 days+ t)e'reake,en amount is 32+;00 32; trans*er *ee>2 :-026 interest rate8!- T)us+ t)e interest earned on a

trans*er o* any amount greater t)an 32+;00 (oulde:ceed t)e 32; *ee-

35;0+0008-

Ans(er C8 is incorrect 'ecause


45/64

7-2 times per year 0>;08- T)e a,erage recei,a'les'alance (ill t)ere*ore 'e 3+7-28+ a reduction o* 3++537+22

2emand8Brder costs8

%%%%%%%%%%%%%%%%%%%%%%%

Carrying costs per unit

&ncreases in t)e numerator demand or orderingcosts8 (ill increase t)e EBQ+ ()ereas decreases in

demand or ordering costs (ill decrease t)e EBQ-"imilarly+ a decrease in t)e denominator carryingcosts8 (ill increase t)e EBQ-

Ans(er A8 is incorrect 'ecause 3 million is t)eincrease in cas)+ not t)e interest earned on t)atadditional cas)-

Ans(er .8 is incorrect 'ecause 3 million is t)eamount o* daily payments+ not t)e sa,ings-

Ans(er C8 is incorrect 'ecause t)e daily paymentss)ould 'e multiplied 'y t(o+ not di,ided 'y t(o-

Ans(er 8 is correct- &* cas) out*lo(s are 3 millionper day+ )olding cas) 2 e:tra days means t)ata,erage 'alances s)ould increase 'y 3 million- At a106 interest rate+ t)e additional 3 million (ouldgenerate interest re,enue o* 300+000 per year-T)us+ i* t)e system can 'e ac4uired *or 300+000 orless+ it (ould 'e 'ene*icial to do so-

100! "ource# CMA 12


46/64

on a sales total o* 31+;0+000 *or 0 days rat)er t)an31+;0+000-

Ans(er 8 is correct- T)e *irm )as daily sales o*35;+000 consisting o* 1;0 units at 300 eac)- =or 0days+ sales total 31+;0+000- =orty percent o* t)esesales+ or 3;50+000+ (ill 'e uncollected 'ecausecustomers do not take t)eir discounts- T)e remaining

06+ or 3$10+000+ (ill 'e paid (it)in t)e discountperiod- Ho(e,er+ 'y t)e end o* 0 days+ only 2> o*t)e 3$10+000 (ill 'e collected 'ecause t)e sales*rom days 21 t)roug) 0 are still (it)in t)e discountperiod- T)ere*ore+ an additional 3270+0003$10+000 % 3;50+0008 (ill still 'e uncollected a*tert)e 0t) day+ 'ut (ill 'e su'ect to a discount- &ntotal+ t)e a,erage recei,a'le 'alance is 3$10+000+consisting o* 3;50+000 on ()ic) no discount (ill 'etaken and 3270+000 t)at (ill 'e paid (it)in t)ediscount period-

102! "ource# CMA 1210+ net 0 means t)at t)e *irm is paying an e**ecti,eannual interest rate e:ceeding 6- T)us+ t)e cost o*not taking a discount is usually )ig)er t)an t)e cost o*a 'ank loan-

105! "ource# CMA 12


47/64

Ans(er 8 is correct- T)e re4uirement to maintain acompensating 'alance o* 206 o* t)e 300+000 loanmeans t)at t)e 'orro(er )as e**ecti,e use o* only$06 o* t)e loan+ or 3250+000- T)e $6 interest rateapplied to a 300+000 loan re4uires an annualinterest e:penditure o* 325+000- &n turn+ paying325+000 *or t)e use o* 3250+000 indicates ane**ecti,e interest rate o* 106-

10$! "ource# CMA 12

Ans(er C8 is incorrect 'ecause in,estments inTreasury 'onds do not )a,e su**icient li4uidity toser,e as s)ort%term assets-

Ans(er 8 is correct- Cas) and s)ort%termin,estments are crucial to a *irm/s continuing success-"u**icient li4uidity must 'e a,aila'le to meet paymentsas t)ey come due- At t)e same time+ li4uid assets aresu'ect to signi*icant control risk- T)ere*ore+ li4uidityand sa*ety are t)e primary concerns o* t)e treasurer()en dealing (it) )ig)ly li4uid assets- Cas) ands)ort%term in,estments are )eld 'ecause o* t)eira'ility to *acilitate routine operations o* t)e company-T)ese assets are not )eld *or purposes o* ac)ie,ing

in,estment returns-

110! "ource# CMA 12


48/64

or 3;00- "u'tracting t)e 3;00 interest earned *romt)e 31;+000 o* e:pense results in net interest e:penseo* 315+;00 *or t)e use o* 322;+000 in *unds- i,iding315+;00 'y 322;+000 produces an e**ecti,e interestrate o* -556-

Ans(er .8 is incorrect 'ecause 7-006 *ails toconsider t)at t)e 32;+000 currently 'eing maintained

counts to(ard t)e compensating 'alancere4uirement-

Ans(er C8 is incorrect 'ecause ;-$6 *ails toconsider t)e compensating 'alance re4uirement-

Ans(er 8 is incorrect 'ecause -6 *ails toconsider t)e interest earned on t)e incremental'alance 'eing carried-

115! "ource# CMA 0


49/64

11

Ans(er A8 is incorrect 'ecause current lia'ilities+e-g-+ trade credit+ is a maor source o* *unds *or small*irms-

Ans(er .8 is incorrect 'ecause li4uid in,estmentstend to )a,e lo( returns-

Ans(er C8 is incorrect 'ecause matc)ing o* assetand lia'ility maturities is a moderate policy t)atminimiFes risk- T)e e:pectation is t)at cas) *lo(s*rom t)e assets (ill 'e a,aila'le to meet o'ligations*or t)e lia'ilities-

Ans(er 8 is correct- =inancing permanentin,entory 'uildup+ ()ic) is essentially a long%termin,estment+ (it) long%term de't is a moderate orconser,ati,e (orking capital policy- An aggressi,epolicy uses s)ort%term+ relati,ely lo(%cost de't to*inance t)e in,entory 'uildup- &t *ocuses on )ig)pro*ita'ility potential+ despite )ig) risk and lo(li4uidity- An aggressi,e policy reduces t)e currentratio and accepts a )ig)er risk o* s)ort%term lack o*li4uidity- =inancing in,entory (it) long%term de'tincreases t)e current ratio and accepts )ig)er'orro(ing costs in e:c)ange *or greater li4uidity andlo(er risk-

121! "ource# CMA 0a,erage recei,a'les8 )as increased-

Ans(er 8 is incorrect 'ecause no in*ormation isgi,en relati,e to (orking capital elements ot)er t)anrecei,a'les- .ot) recei,a'les and cas) are elementso* (orking capital+ so an acceleration o* customer


50/64

payments (ill )a,e no e**ect on (orking capital-

125! "ource# CMA 12currentlia'ilities8 and acid%test ratio 4uick assets>currentlia'ilities8- T)us+ t)e company (ill increase currentassets or decrease current lia'ilities- A conser,ati,e

policy *inances assets using long%term or permanent*unds rat)er t)an s)ort%term sources-

Ans(er 8 is incorrect 'ecause a conser,ati,ecompany seeks more li4uid marketa'le8 in,estments-

12;! "ource# CMA 12325+;008 : 0days>20 days8!- "imilarly+ t)e company is+ in e**ect+paying "o*tidee 32+;00 ;6 : 3;0+0008 to )old357+;00 3;0+000 % 32+;008 *or $0 days


51/64

12

Ans(er A8 is incorrect 'ecause


52/64

t)e interest rate 'ased on t)e *ull in,oice price-

Ans(er 8 is correct- Bn a 31+000 in,oice+ t)ecompany could sa,e 320 'y paying (it)in t)ediscount period- T)us+ an immediate payment o*3

Ans(er .8 is incorrect 'ecause t)e annual cost is312;+000-

Ans(er C8 is incorrect 'ecause t)e annual cost is31+0$0-

Ans(er 8 is correct- Multiplying 700 c)ecks times0 days results in a total o* 2;2+000 c)ecks peryear- Accordingly+ under A8+ total annual cost is312+000 3-;0 : 2;2+0008+ ()ic) is less desira'let)an t)e 312;+000 *lat *ee in .8- Ii,en t)at t)eannual collections e4ual 35;+00+000 31+$00 :

700 : 08+ C8 is also less desira'le 'ecause t)eannual *ee (ould 'e 31+0$0 -06 :35;+00+0008- T)e 'est option is t)ere*ore tomaintain a compensating 'alance o* 31+7;0+000()en t)e cost o* *unds is 76+ resulting in a total costo* 3122+;00 -07 : 31+7;0+0008-

150! "ource# CMA 0


53/64

31+000+000 o* an additional 31+000+000 o* t)e line o*credit- Ho(e,er+ t)e 320+000 o* interest *or Aprilmust also 'e paid+ so t)e amount o* t)e line o* creditused in May is 3+020+000 32+000+000 31+000+000 320+0008- &nterest *or May ist)ere*ore 30+200 16 : 3+020+0008- Ii,en t)e netcas) in*lo( *or May o* 32+000+000 again ignorings)ort%term 'orro(ings8 and t)e 'orro(ing o*

30+200 to pay t)e interest *or May+ t)e amount o*t)e line o* credit used in une is 31+0;0+200- &nterestin une is 310+;02 16 : 31+0;0+2008+ and totalinterest is 30+702 320+000 30+200 310+;028-Conse4uently+ t)e closest ans(er is 31+000-

Ans(er C8 is incorrect 'ecause t)e company (ouldrepay t)e credit line at t)e end o* mont)s (it) apositi,e cas) *lo(-

Ans(er 8 is incorrect 'ecause t)e company (ouldrepay t)e credit line at t)e end o* mont)s (it) apositi,e cas) *lo(-

152! "ource# CMA 0


54/64

15! "ource# CMA 0$< 1%2;

Ans(er A8 is correct- An imputed cost is one t)at)as to 'e estimated- &t is a cost t)at e:ists 'ut is not*ormally recogniFed in t)e accounting system and ist)e result o* a process designed to recogniFeeconomic reality- An imputed cost is t)ere*ore

rele,ant to t)e decision%making process- =ore:ample+ t)e stated interest on a 'ank loan is not animputed cost 'ecause it is speci*ically stated andre4uires a dollar outlay- .ut t)e cost o* using retainedearnings as a source o* capital is unstated and )as to'e imputed-

Ans(er .8 is incorrect 'ecause t)e cost o* internallygenerated *unds is unstated-

Ans(er C8 is incorrect 'ecause t)e costs s)ould 'e(ritten o**-

Ans(er 8 is incorrect 'ecause understateddepreciation results in unstated costs-

157! "ource# C&A 11

Ans(er A8 is incorrect 'ecause a decrease o*31+000+000 results *rom omitting in,entories-

Ans(er .8 is incorrect 'ecause t)e di**erence'et(een all assets and all lia'ilities stayed t)e same-

Ans(er C8 is correct- Jet (orking capital e4ualscurrent assets cas)+ accounts recei,a'le+ in,entories

*or t)is company8 minus current lia'ilities accountspaya'le+ notes paya'le+ accrued (ages8- =romanuary 1 to une 0+ t)e net (orking capitalincreased 'y 31+000+000 U35 35 3108 % 3 3 328! % 3 3; 3$8 % 32 35 318!V-

Ans(er 8 is incorrect 'ecause an increase o*32+000+000 results *rom omitting accrued (ages-

1;0! "ource# C&A 0;


55/64

Ans(er C8 is correct- Total assets gi,en as 31008e4uals t)e sum o* cas) gi,en as 3108+ accountsrecei,a'le 32 as calculated in t)e preceding4uestion8+ in,entory+ and *i:ed assets- &n,entory can'e determined 'ecause it is included in current+ 'utnot 4uick+ assets+ and t)e current and 4uick ratios arekno(n- Current assets e4ual 352 1-5 current ratio :30 current lia'ilities+ as calculated in t)e preceding

4uestion8+ and t)e 4uick assets e4ual 3 1-2 4uickratio : 30 current lia'ilities8- T)us+ in,entory+ ()ic)is t)e only di**erence in t)is 4uestion 'et(een currentand 4uick assets+ e4uals 3 352 % 38- =i:edassets must t)en e4ual 3;$ 3100 total assets % 310cas) % 32 accounts recei,a'le % 3 in,entory8-

Ans(er 8 is incorrect 'ecause 35 assumes t)atin,entory is 30-

1;! "ource# C&A 11


56/64

-

Ans(er .8 is incorrect 'ecause 256 assumes t)att)e a,aila'le *unds e4ual 30+000-

Ans(er C8 is correct- .y *ailing to take t)e discount+t)e company is essentially 'orro(ing 3;$+$00 *or 0days- T)us+ at a cost o* 31+200+ t)e companyac4uires t)e use o* 3;$+$00+ resulting in a rate o*

2-050$16 31+200 3;$+$008 *or 0 days-Assuming a 0%day year+ t)e e**ecti,e annual rate is

25-5$10+ net 0 meant)at a 'uyer can sa,e 16 o* t)e purc)ase price 'ypaying ;0 days early- &n essence+ not taking t)ediscount results in t)e 'uyer/s 'orro(ing


57/64

3;5+000 per year- Ho(e,er+ t)e 'ank (ill c)arge325+000 12 mont)s : 32+000 per mont)8 *or itsser,ices- T)us+ t)e *irm (ill increase its income 'y30+000 3;5+000 % 325+0008-

Ans(er 8 is incorrect 'ecause 3;5+000 ignores t)e325+000 'ank ser,ice c)arge-

1;! "ource# Pu'lis)er

Ans(er A8 is incorrect 'ecause 320 million ignorest)e increase in current assets- T)is ans(er (ould 'eappropriate i* noncurrent assets (ere 'eing *inanced-

Ans(er .8 is correct- &* current lia'ilities are 3200

million and t)e current ratio current assets currentlia'ilities8 is 2-2+ current assets must 'e 3550 million2-2 : 3200 million8- &* amount o* commercialpaper is issued to *inance in,entory current assets8+t)ere'y increasing 'ot) current assets and currentlia'ilities 'y + t)e le,el o* current assets at ()ic) t)ene( current ratio (ill 'e 2-0 is 35$0 million 3550million 350 million o* commercial paper8-

3550 8 3200 8 O 2-0 3550 O 23200 8 3550 O 3500 2 3550 O 3500 O 350

Ans(er C8 is incorrect 'ecause 3250 million is t)eamount o* (orking capital 'ot) 'e*ore and a*ter t)eissuance o* commercial paper-

Ans(er 8 is incorrect 'ecause 31$0 million is anonsense ans(er-


Ans(er A8 is correct- T)e cost o* carryingrecei,a'les e4uals a,erage recei,a'les times t)e,aria'le cost ratio times t)e cost o* money- ?nder t)eold policy+ a,erage daily sales are 312+77$

35+00+000 0 days8- Ii,en a 0%day a,eragecollection period+ t)e a,erage recei,a'les 'alance is3$+50 312+77$ : 0 days8- ?nder t)e ne(policy+ a,erage daily sales are 31+77$ 35+

Ans(er A8 is incorrect 'ecause t)e decrease incurrent lia'ilities increases (orking capital-

Ans(er .8 is incorrect 'ecause net (orking capitalincreased 'y 31


58/64

Ans(er C8 is correct- T)e total cost to t)e company(ill 'e 3;1+;00 ;0+000 discount 1+;00 o*transaction costs8+ and t)e net amount a,aila'le (ill'e 31+55$+;00- T)e annualiFed amount o* t)e costs is320+000 5 : 3;1+;008- Accordingly+ t)e annual

interest cost (ill 'e 15-226 320+000 31+55$+;008-

Ans(er 8 is incorrect 'ecause 1-710+ net 0-

Ans(er .8 is incorrect 'ecause 25-;6 assumesterms o* 2>10+ net 50-

Ans(er C8 is incorrect 'ecause 7-16 assumesterms o* >10+ net 50-

Ans(er 8 is correct- Assume t)at t)e gross amounto* an in,oice is 31+000- Ii,en a 6 discount+ t)e'uyer (ill pay 3


59/64

Ans(er C8 is incorrect 'ecause 312;+000 is t)ea,erage daily sales-

Ans(er 8 is correct- T)e cost o* carryingrecei,a'les e4uals a,erage recei,a'les times t)e,aria'le cost ratio times t)e cost o* money- Ii,ensales o* 35;+000+000+ regardless o* ()ic) collectionprocedures are applied+ t)e a,erage daily sales must

'e 312;+000 35;+000+000 0 days8- T)eincrease in t)e a,erage recei,a'les 'alance ist)ere*ore 32;+000 ; days : 312;+0008- Ii,en anadditional 32;+000 o* recei,a'les+ t)e company/sadditional re4uired in,estment in recei,a'les is37;+000 32;+000 : 06 ,aria'le cost ratio8+ andt)e incremental preta: cost o* t)is in,estment is322+;00 6 : 37;+0008- Accordingly+ t)ecollection costs must 'e reduced 'y a preta:minimum o* 322+;00 to o**set t)e cost o* t)eincreased in,estment in recei,a'les-


Ans(er A8 is incorrect 'ecause 3;20+$50 is 'asedon a 20%day collection period and a 2;6 increase incredit sales-

Ans(er .8 is correct- B* t)e 3;0+000+000 o* sales+7;6 are e:pected to 'e on credit+ a total o*37+;00+000- A,erage daily credit sales are

t)ere*ore 3105+17 37+;00+000 0 days8- &*t)e a,erage collection period is 20 days+ t)e a,erage'alance in accounts recei,a'le is 32+0$+50 20 :3105+178- &* credit sales increase 'y 2;6+ a,eragedaily sales (ill increase to 310+20< 12;6 :3105+178- =or an a,erage collection period o* 0days+ t)e a,erage accounts recei,a'le 'alance (ill 'e3+

Ans(er .8 is incorrect 'ecause 31+1+7 is t)edecrease in a,erage in,entory-

Ans(er C8 is incorrect 'ecause 3$+ results*rom using sales instead o* cost o* sales t)roug)outt)e calculation-

Ans(er 8 is correct- &n,entory turno,er e4uals costo* sales di,ided 'y a,erage in,entory- Ii,en cost o*sales o* 3;+000+000 and a turno,er rate o* 10 times+t)e a,erage in,entory is 3+;00+000- &* t)e turno,errate increases to 1; times+ t)e a,erage in,entory (ill

decline to 32++ 3;+000+000 1;8+ t)ere'yreleasing 31+1+7 o* *unds- At a ;6 cost o*capital+ t)e preta: sa,ings is 3;$+ ;6 :31+1+78-

1$0! "ource# Pu'lis)er

Ans(er A8 is incorrect 'ecause a prepayment o*e:penses does not c)ange current assets or currentlia'ilities- Cas) decreases 'y t)e same amount t)atprepaid rent increases-

Ans(er .8 is correct- Working capital is de*ined ast)e e:cess o* current assets o,er current lia'ilities-Re*inancing s)ort%term de't (it) long%term de'tdecreases current lia'ilities (it) no e**ect on currentassets+ resulting in an increase in (orking capital-

Ans(er C8 is incorrect 'ecause t)e ac4uisition o*land a noncurrent asset8 *or common stock ane4uity interest8 does not a**ect eit)er current assets orcurrent lia'ilities-

Ans(er 8 is incorrect 'ecause t)e purc)ase o*trading securities does not a**ect total current assets-Cas) is replaced 'y trading securities+ anot)er currentasset-


Ans(er A8 is incorrect 'ecause pro*its (ill increase'y 30+000- &nterest re,enue (ill e:ceed t)eincremental costs-


60/64

Ans(er .8 is correct- Ii,en t)at collections (ill 'eaccelerated 'y 2 days+ at t)e rate o* 300+000 perday+ t)e company (ill )a,e an additional 300+000to in,est- At 116+ t)e interest earned (ill 'e3+000 per year- Ho(e,er+ t)e 'ank (ill c)arge3+000 12 mont)s : 3+000 per mont)8 *or itsser,ices- T)us+ t)e *irm (ill increase its preta: income'y 30+000 3+000 % 3+0008-

Ans(er C8 is incorrect 'ecause 3+000 *ails tosu'tract t)e 3+000 cost o* t)e lock'o: system-

Ans(er 8 is incorrect 'ecause 3+000 assumest)e annual *ee is 3+000-


Ans(er A8 is incorrect 'ecause 3$0 million results ina current ratio o* 1-;0-

Ans(er .8 is incorrect 'ecause 370 million resultsin a current ratio o* 1-2;-

Ans(er C8 is correct- Ii,en t)at current lia'ilities

are 3200 million and t)e current ratio current assetscurrent lia'ilities8 is 1-70+ current assets must 'e350 million 3200 million : 1-708- &* amount o*commercial paper is issued+ t)ere'y increasing 'ot)current assets and current lia'ilities 'y + and t)ene( current ratio is t)e contractual minimum o* 1-50to 1+ t)e ma:imum amount o* commercial paper t)atcan 'e issued is 31;0 million-

350 8 current assets 3200 8 current lia'ilities O1-5 350 O 1-5 3200 8 350 O 2$0 1-5 350 O 32$0 -5 30 O -5 O 31;0

Ans(er 8 is incorrect 'ecause 32$0 million resultsin a current ratio o* 1-2


61/64

Ans(er .8 is incorrect 'ecause 12-006 is t)enominal rate o* interest-

Ans(er C8 is incorrect 'ecause 12-

current assets or a decrease in current lia'ilities (illincrease (orking capital- Bption 1 ma:imiFes MasonCompany/s net (orking capital+ increasing it 'y 31703120 3;08-

Ans(er .8 is incorrect 'ecause option 2 increasesnet (orking capital 'y 31;0-

Ans(er C8 is incorrect 'ecause option decreasesnet (orking capital 'y 310-

Ans(er 8 is incorrect 'ecause option 5 decreasesnet (orking capital 'y 32;-

1


62/64

Ans(er .8 is incorrect 'ecause eac) s)are (illrecei,e a 3 di,idend-

Ans(er C8 is incorrect 'ecause 370+000 is 'eingretained *or ne( in,estment-

Ans(er 8 is correct- Earnings per s)are is 310

3100+000 10+000 s)ares8- B* t)e 310+ 06 or 3is paid out as a di,idend-

1

Ans(er A8 is incorrect 'ecause it *ails to multiply t)enumerator 'y 2-

Ans(er .8 is incorrect 'ecause it does not includeall elements in t)e numerator-

Ans(er C8 is correct- T)e *ormula is#

EBQ O s4uare root o* 2+00087008! 12; O s4uare root o* +00 O 1+$

Ans(er 8 is incorrect 'ecause it (ill not minimiFet)e total costs o* ordering and )olding in,entory-


Ans(er A8 is incorrect 'ecause it re,erses t)einterest calculations-

Ans(er .8 is incorrect 'ecause a rate decline (illincrease t)e ,alue o* 'onds-

Ans(er C8 is correct- T)e decline in rates (ill

increase t)e ,alue o* 'onds already outstanding-"ince t)e market rate initially matc)ed t)e couponrate+ t)e ,alue (ould )a,e 'een 31+000- T)ecalculation o* ,alue *ollo(ing t)e rate decline (ould

'e as *ollo(s using 6 present ,alue ta'les-

3 $0 : 2-7011 O 3 21-$5 1+000 : -$


63/64

Ans(er 8 is incorrect 'ecause 37+;00 is dailysales+ 31;+000+ di,ided 'y t(o-


Ans(er A8 is incorrect 'ecause 3$+000 is a,erage

daily collections o* 350+000 ; days-

Ans(er .8 is correct- T)e net *loat *or a *irm is t)edollar di**erence 'et(een a company/s 'ank 'alanceand its 'ook 'alance o* cas)- T)is amount is *ound'y su'tracting t)e a,erage amount o* c)ecks (rittendaily+ 3;+000+ *rom t)e a,erage amount o* c)eckscollected daily+ 350+000- T)is num'er+ 3;+000+ ist)en multiplied 'y t)e a,erage collection period *orc)ecks+ ; days+ to get a net *loat o* 32;+000-

Ans(er C8 is incorrect 'ecause 317;+000 isa,erage daily (ritten c)ecks o* 3;+000 multiplied 'y; days-

Ans(er 8 is incorrect 'ecause 3200+000 is t)ea,erage daily collection o* c)ecks o* 350+000multiplied 'y ; days-


Ans(er A8 is incorrect 'ecause 317+700 is t)e grossta: lia'ility-

Ans(er .8 is incorrect 'ecause 31;+00 is t)e netta: lia'ility *ound ()en incorrectly treating t)e ta:credit as a direct reduction in ta:a'le income-

Ans(er C8 is correct- T)e *irst step in calculatingHCC/s net ta: lia'ility is to su'tract t)e e:clusion *orta:%e:empt interest *rom income+ *or a gross incomeamount o* 3


64/64

Ans(er 8 is correct- Ta:a'le income is adusted toarri,e at alternati,e minimum ta:a'le income- "omeo* t)e common adustments include gains or losses*rom long%term contracts+ gains on installment sales o*real property+ mining e:ploration and de,elopmentcosts+ c)arita'le contri'utions o* appreciatedproperty+ accelerated depreciation+ t)e accumulated

current earnings adustment+ and ta:%e:empt intereston pri,ate acti,ity 'onds issued a*ter August 7+ 1

working capital policy and management

Documents