IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 851:

  An aging of accounts receivable measures the

  A. Ability of the firm to meet short-term obligations.

  B. Average length of time that receivables have been outstanding.

  C. Percentage of sales that have been collected after a given time period.

  D. Amount of receive blest at have been outstanding for given lengths of time.

  Correct Answer: D

  The purpose of an aging of receivables is to classiN receivables by due date. Those that are current (not past due) are listed in one column, those less than 30 days past due in another column, etc. The amount in each category can then be multiplied by an estimated bad debt percentage that is based on a company's credit experience and other factors. The theory is that the oldest receivables are the least likely to be collectible. Aging the receivables and estimating the uncollectible amounts is one method of arriving at the appropriate balance sheet valuation of the accounts receivable account.

• Question 852:

  When a company analyzes credit applicants and increases the quality of the accounts rejected, the company is attempting to

  A. Maximize sales.

  B. Increase bad-debt losses.

  C. Increase the average collection period.

  D. Maximize profits.

  Correct Answer: D

  Increasing the quality of the accounts rejected means that fewer sales will be made. The company is therefore not trying to maximize its sales or increase its bad debt losses. The objective is to reduce bad debt losses and thereby maximize profits.

• Question 853:

  An increase in sales resulting from an increased cash discount for prompt payment would be expected to cause

  A. An increase in the operating cycle.

  B. An increase in the average collection period.

  C. A decrease in the cash conversion cycle.

  D. A decrease in purchase discounts taken.

  Correct Answer: C

  If the cause of increased sales is an increase in the cash discount, it can be inferred that the additional customers would pay during the discount period. Thus, cash would be collected more quickly than previously , and the cash conversion cycle would be shortened.

• Question 854:

  A firm averages $4000 in sales per day and is paid, on an average1 within 30 days of the sale. After they receive their invoice, 55% of the customers pay by check, while the remaining 45% pay by credit card. Approximately how much would the company show in accounts receivable on its balance sheet on any given date?

  A. $4000

  B. $120.000

  C. $48,000

  D. $54000

  Correct Answer: B

  If sales are $4000 per day, and customers pay in 30 days1 30 days of sales are outstanding, $120,000. Whether customers pay by credit card or cash, collection requires

• Question 855:

  The high cost of short--term financing has recently caused a company to reevaluate the terms of credit it extends to its customers. The current policy is 11101 net 60. If customers can borrow at the prime rate, at what prime rate must the company change its terms of credit in order to avoid an undesirable extension in its collection of receivables?

  A. 2%

  B. 5%

  C. 7%

  D. 8%

  Correct Answer: D

• Question 856:

  Which of the following represents a firm's average gross receivables balance?

  I. Days' sales in receivables x accounts receivable turnover.

  II.

  Average daily sales x average collection period. Ill. Net sales-average gross receivables.

  A.

  l only.

  B.

  l and II only.

  C.

  II only.

  D.

  II and Ill only.

  Correct Answer: C

  A firm's average gross receivables balance can be calculated by multiplying average daily sales by the average collection period (days' sales outstanding). Alternatively, annual credit sales can be divided by the accounts-receivable turnover (net credit sales ?average accounts receivable) to obtain the average balance in receivables.

• Question 857:

  A company with $4.8 million in credit sales per year plans to relax its credit standards1 projecting that this will increase credit sales by $720,000. The company's average collection period for new customers is expected to be 75 days, and the payment behavior of the existing customers is not expected to change. Variable costs are 80% of sales. The firm's opportunely cost is 20% before taxes. Assuming a 360-day year, what is the company's benefit (loss) on the planned change in credit terms?

  A. $0

  B. $28,800

  C. $144,000

  D. $120,000

  Correct Answer: D

  The incremental sales will produce an increased contribution margin of $144,000 ($720,000 x 20%). However, that amount must be offset by the cost of funds invested in receivables. The variable costs associated with the incremental sales are $576,000 ($720,000 x 80%). Given a 75-day credit period, the average investment in receivables equals $120,000 [$576,000 x (75 + 360)]. Accordingly, the cost of the investment in additional receivables is $24,000 ($120,000 x 20% opportunely cost), and the net benefit of the planned change in credit terms is $120,000 ($144000: $24,000).

• Question 858:

  A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales will be 5% less if the proposed new credit policy is implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.

  A. $3.819,445 decrease.

  B. $6,500,000 decrease.

  C. $3,333,334 decrease.

  D. $ 18.749778 increase.

  Correct Answer: C

  If sales are $50 million, 70% of which are on credit1 total credit sales will be $35 million. The receivables turnover equals 4.8 times per year (360 days + 75-day collection period). Receivables turnover equals net credit sales divided by average receivables. Accordingly, average receivables equal $7,291 ,667 ($35,000,000 + 4.8). Under the new policy, sales will be $47.5 million ($50,000,000 x 95%), and credit sales will be $28.5 million ($47,500,000 x 60%). The collection period will be reduced to 50 days, resulting in a turnover of 7.2 times per year (360 + 50). The average receivables balance will therefore be $3,958,333 ($28,500,000 + 7.2), a reduction of $3,333,334_($7,291,667 -- $3,958,333).

• Question 859:

  A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in the investment in accounts receivable. Based upon this information, the company's

  A. Average collection period has decreased.

  B. Percentage discount offered has decreased.

  C. Accounts receivable turnover has decreased.

  D. Working capital has increased.

  Correct Answer: A

  An increase in discounts taken accompanied by declines in receivables balances and doubtful accounts all indicate that collections on the increased sales have been accelerated. Accordingly, the average collection period must have declined. The average collection period is a ratio calculated by dividing the number of days in a year (365) by the receivable turnover. Thus, the higher the turnover, the shorter the average collection period. The turnover increases when either sales (the numerator) increase, or receivables (the denominator) decrease. Accomplishing both higher sales and a lower receivables increases the turnover and results in a shorter collection period.

• Question 860:

  The average collection period for a firm measures the number of days

  A. After a topical credit sale is made until the firm receives the payment.

  B. Foray pica check to" clear" through the banking system.

  C. Beyond the end of the credit period before atypical customer payment is received.

  D. Before a typical account becomes delinquent.

  Correct Answer: A

  The average collection period measures the number of days between the date of sale and the date of collection. It should be related to a firm's credit terms. For example. a firm that allows terms of 2/151 net 301 should have an average collection period of somewhere between 15 and 30 days.