IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 561:

  An example of secured short-term financing is

  A. Commercial paper.

  B. A warehouse receipt.

  C. A revolving credit agreement.

  D. Line of credit.

  Correct Answer: B

  A document of title is usually issued by a bailee covering goods in the bailee's possession or care (UCC 1201). It represents ownership of the goods and is ordinarily needed to obtain the goods from the baillee. The two major types of documents of title are bills of lading (issued by carriers) and warehouse receipts. A warehouse receipt is issued by a person engaged in the business of storing goods for hire. Security for short-term inventory financing can be arranged if the debtor places its inventory under the control of the lender or its agent (e g , a public warehouse), and the lender holds the warehouse receipts.

• Question 562:

  A corporation is currently experiencing cash-flow problems and has determined that it is in need of short-term credit. It can either use its trade credit on $100,000 of accounts payable with terms of 1/10, net 30 or a 30-day note with a 20% annual simple interest rate. Which is the best alternative, and what is its effective rate of interest (rounded to a whole percentage and using a 360-day year)?

  A. The trade credit. Its effective rate is 10%.

  B. The trade credit. Its effective rate is 20%.

  C. The note. Its effective rate is 17%

  D. The note. Its effective rate is 20%.

  Correct Answer: B

• Question 563:

  Price Publishing is considering a change in its credit terms from n/30 to 2/10, n/30. The company's budgeted sales for the coming year are $24,000,000, of which 90% are expected to be made on credit. If the new credit terms are adopted. Price estimates that discounts will be taken on 50% of the credit sales; however, uncollectible accounts will be unchanged. The new credit terms will result in expected discounts taken in the coming year of

  A. $216,000.

  B. $432,000.

  C. $240,000.

  D. $480,000.

  Correct Answer: A

  If 90% of the $24,000,000 of sales are on credit, $21,600,000 of sales will be subject to the discount. If 50% of the credit customers take the discount, discounts will be taken on sales of $10,800,000. The expected discount will be $216,000 ($10,800,000 x 2%).

• Question 564:

  Which one of the following is a spontaneous source of financing?

  A. Notes payable.

  B. Long-term debt.

  C. Prepaid interest

  D. Trade credit.

  Correct Answer: D

  Trade credit is a spontaneous source of financing because it arises automatically as part ofi1 purchase transaction

• Question 565:

  Short-term securities issued by the Federal Housing Administration are known as

  A. Agency securities

  B. Bankers' acceptances.

  C. Commercial paper

  D. Repurchase agreements.

  Correct Answer: A

  A short-term secunt1t issued by a corporation or agency created by the U.S. government, such as the Federal Housing Administration, is an agency security (agency issue). Among the largest issuers of agency securities (excluding the Treasury) are the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the other entities that provide credit to farmers and home buyers. Other issuers of home mortgage- backed securities include the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

• Question 566:

  Clay Corporation follows an aggressive financing policy in its working capital management while Los Corporation follows a conservative financing policy. Which one of the following statements is correct?

  A. Clay has a low ratio of short-term debt to total debt while Lott has a high ratio of short-term debt to total debt.

  B. Clay has a low current ratio while Lott has a high current ratio

  C. Clay has less liquidity risk while Lott has more liquidity risk.

  D. Clay's interest charges are lower than Lott's interest charges.

  Correct Answer: B

  A conservative working capital management financing policy uses permanent capital to finance permanent asset requirements and also some or all of the firm's seasonal demands. Thus, Lott's current ratio (current assets/current liabilities) will be high since its current liabilities will be relatively low. An aggressive policy entails financing some fixed assets and all the current assets with short-term capital. This policy results in a lower current ratio.

• Question 567:

  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

  Correct Answer: C

  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 cash flow cycle is 95 days (30 + 65)

• Question 568:

  The one item listed below that would warrant the least amount of consideration in credit and collection policy decisions is the

  A. Quality of accounts accepted.

  B. Quantity discount given.

  C. Cash discount given.

  D. Level of collection expenditures.

  Correct Answer: B

  A quantity discount is an attempt to increase sales by reducing the unit price on bulk purchases. It concerns only the price term of an agreement, not the credit term, and thus is unrelated to credit and collection policy.

• Question 569:

  Merkle, 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:

  

  Using a 360-day year, the cheapest source of short-term financing in this situation is ,/16

  A. The bank.

  B. Fort Co

  C. Riley Manufacturing Co.

  D. Shad, Inc.

  Correct Answer: D

• Question 570:

  A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's checking account earns interest at an annual rate of 2%. Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?

  A. 6.44%

  B. 7.00%

  C. 5.80%

  D. 6.66%

  Correct Answer: A

  The $50,000 compensating balance requirement is partially satisfied by the company's practice of maintaining a $25,000 balance for transaction purposes. Thus, only $25,000 of the loan will not be available for current use, leaving $225,000 of the loan usable. At 6% interest, the $250,000 loan would require an interest payment of $15,000 per year. This is partially offset by the 2% interest earned on the $25,000 incremental balance, or $500 Subtracting the $500 interest earned from the $15,000 of expense results in net interest expense of $14,500 for the use of $225,000 in funds. Dividing $14,500 by $225,000 produces an effective interest rate of 6.44%.