IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 841:

  Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there will be no change in uncollectible accounts. The compass budgeted credit sales for the coming year are $27 000,000, and short-term interest rates are expected to average 8%. To make the changes in collection procedures cost beneficial, the minimum savings in collection costs (using a 360dayyear) forth coming year would have to be

  A. $30000

  B. $360,000

  C. $180,000

  D. $36,000

  Correct Answer: D

  Given sales of $27,000,000, the average amount of daily sales must be $75000 ($27,000,000 ii ?360 days). The increased accounts receivable balance is therefore $450 .000 ($75,000 x 6 days). With an additional $450,000 of capital invested in receivables, the compass interest cost will increase by $36,000 per year ($450,000 x 8%). Thus, the company must save at least $36,000 per year to justify the change in procedures.

• Question 842:

  Parkinson Company can increase annual sales by $150,000 if it sells to a new, riskier group of customers. The uncollectible accounts expense is expected to be 16% of sales, and collection costs will be 4%. The company's manufacturing and selling expenses are 75% of sales, and its effective tax rate is 38%. If Parkinson accepts this opportunity, its after-tax income will increase by

  A. $2,850

  B. $4,650

  C. $7,500

  D. $8,370

  Correct Answer: B

  The compass manufacturing and selling costs exclusive of bad debts equal 75% of sales. Hence, the gross profit on the $150,000 increase in sales will be $37,500 ($150,000 x 25%). Assuming $24,000 ($150,000 x 16%) of bad debts and $6,000 ($150,000 x4%) of collection expense, the increase in pretax income will be $7,500 ($37,500 -- $30,000). Consequently, after4ax income will increase by $4,650 [$7,500 -- ($7,500 x 38%)].

• Question 843:

  The following information regarding a change in credit policy was assembled byte Wilson Wax Company. The company has a required rate of return of 10% and a variable cost ratio of 60%.

  

  The pretax cost of carrying the additional investment in receivables, using a 360-dayyear, would be

  A. $5,760.

  B. $9,600.

  C. $8,160.

  D. $960.

  Correct Answer: A

  The first step is to determine the average investment in receivables under each policy. Under the old policy, average daily sales are $10,000 ($3 600,000 + 360 days). Given a 30-day average collection period, the average receivables balance is $300,000 ($10000 x 30 days). Under the new policy, average daily sales are $11,000 ($3,960,000 + 360 days), and the average receivables balance is $396,000 ($1 1,000 x 36 days). Hence, the average balance is $96,000 higher under the new policy. Because the compass incremental (variable) costs are 60% of sales, the extra investment is only $57,600 ($96,000 x 60%). The interest rate, or required rate of return, is 10%. Thus, the incremental carrying cost is $5,760 ($57,600 x l0%).

• Question 844:

  A firm has daily cash receipts of $300000. A commercial bank has offered to reduce the collection time by 2 days. The bank requires a monthly fee of $3000 for providing this service. If the money market rates will average 11% during the year, the annual pretax income (loss) from using the service is

  A. $(30,000)

  B. $30,000

  C. $66,000

  D. $63,000

  Correct Answer: B

  Even that collections will be accelerated by2 days, at the rate of $300000 per day, the firm will have an additional $600,000 to invest. At 11%, the interest earned will be $66,000 per year. However1 the bank will charge $36,000 ($3,000 per month x 12 months) for its services. Thus, the firm will increase its pretax income by $30000 ($66000-- $36J00).

• Question 845:

  A growing company is assessing current working capital requirements. An average of 58 days is required to convert raw materials into finished goods and to sell them. Then an average of 32 days is required to collect on receivables. If the average time the company takes to pay for its raw materials is 15 days after they are received, then the total cash conversion cycle for this company is

  A. 11 days.

  B. 41 days.

  C. 15 days.

  D. 90 days.

  Correct Answer: C

  The cash conversion cycle is the length of time between paying for purchases and receiving cash from the sale of finished goods. It equals the inventory conversion period, plus the receivables collection period, minus the payables deferral period, or75 days (58 days -`- 32 days -- 15 days).

• Question 846:

  Dart moor Company's budgeted sales for the coming year are $40,500,000, of which 80% are expected to be credit sales at terms of n/30. Dartmoor estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year. the proposed relaxation of credit standards will result in an expected increase in the average accounts receivable balance of

  A. $540,000

  B. $2,700,000

  C. $900,000

  D. $1,620,000

  Correct Answer: D

  Of the $40,500,000 of sales, 80% are expected to be on credit, a total of $32,400,000. Average daily credit sales are therefore $90,000 ($32,400,000 + 360). If 30 days of sales are outstanding at any one time, the average balance in accounts receivable is $2,700,000. If credit sales increase by 20%, the aforementioned $90,000 average of daily sales will increase to $108,000 ($90,000 x 120%). For an average collection period of 40 days, the average accounts receivable balance will be $4,320,000 ($108,000 x 40). Hence, the expected increase in the balance is $1 ,620,000 ($4,320J00 -- $2700,000).

• Question 847:

  If a firm's credit terms require payment within 45 days but allow a discount of 2% if paid within 15 days (using a 360-day year), the approximate cost or benefit of the trade credit terms is

  A. 2%.

  B. 16%.

  C. 48%.

  D. 24%

  Correct Answer: D

  Assume that an invoice is due in 45 days. However, the seller allows a 2% cash discount if the invoice is paid within 15 days. Given early payment1 the seller will receive their money at least 30 days (45--15) sooner than the contract requires. However, the seller is effectively paying 2% of the invoice price to receive the money 30 days early. The approximate annual interest cost is 24% because a 360-day year contains 12 periods of 30 days each.

• Question 848:

  An organization would usually offer credit terms of 2/101 net 30 when

  A. The organization can borrow funds at a rate exceeding the annual interest cost.

  B. The organization can borrow funds at a rate less than the annual interest cost.

  C. The cost of capital approaches the prime rate.

  D. Most competitors are offering the same terms, and the organization has a shortage of cash.

  Correct Answer: D

  Because these terms involve an annual interest cost of over 36%, a company would not offer them unless it desperately needed cash. Also, credit terms are typically somewhat standardized within an industry. Thus, if most companies in the industry offer similar terms. a firm will likely be forced to match the competition or lose market share.

• Question 849:

  When a company offers credit terms of 2/101 net 301 the annual interest cost1 based on a 360-dayyear, is

  A. 24.0%.

  B. 35.3%.

  C. 35.3%.

  D. 36.7%.

  Correct Answer: D

  Assume that the gross amount of an invoice is $1 .000. With a 2% discount1 the buyer will pay only $980 on the tenth day. Thus, the seller is forgoing $20 to receive payment 20 days sooner than would otherwise be required. The 20-day interest rate is .0204 ($20 $980). The number of 20-day periods in years 18(360 + 20). If the interest rate is 2.04% for each 20-day period, the annual interest rate (rounded to the nearest tenth) is 36.7% (18 x ,2.04%).

• Question 850:

  Lawson Company has the opportunity increase annual sales by $100,000 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 compass manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lawson accepts this opportunely, the company's after-tax profit will increase by

  A. $4,000.

  B. $6,000.

  C. $10,000.

  D. $9,000.

  Correct Answer: B

  The company's manufacturing and selling costs exclusive of bad debts equal 70% of sales. Hence, the gross profit on the $100,000 increase in sales will be $30,000 ($100,000 x 30%). Assuming $15,000 of bad debts and $5,000 of collection expense, the increase in pre4ax income will be $10,000 ($30,000--$20,000). Consequently, after-tax income will increase by $6,000 [$10,000 -- (40% $10,000)].