IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 871:

  All of the following are alternative marketable securities suitable for investment except

  A. U.S.Treasurjbills.

  B. Eurodollars.

  C. Commercial paper.

  D. Convertible bonds.

  Correct Answer: D

  Marketable securities are near-cash items used primarily for short-term investment. Examples include U.S. Treasury bills, Eurodollars, commercial paper, money- market mutual funds with portfolios of short-term securities, bankers' acceptances, floating rate preferred stock1 and negotiable CDs of U.S. banks. A convertible bond is not a short4erm investment because its maturity date is usually more than one year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee's stock price.

• Question 872:

  The term short-selling is the

  A. Selling of a security that was purchased by borrowing money from a broker.

  B. Selling of a security that is not owned by the seller.

  C. Selling of all the shares you own in a company in anticipation that the price will decline dramatically.

  D. Betting that a stock will increase bays certain amount within a given period of time.

  Correct Answer: B

  Short-selling is accomplished by borrowing securities from a broker and selling those securities. At a later time, the loan is repaid by buying securities on the open market and returning them to the broker. The seller speculates that the stocks market price will decent.

• Question 873:

  When managing cash and short-term investments, a corporate treasurer is primarily concerned with

  A. Maximizing rate of return.

  B. Minimizing taxes.

  C. Investing in Treasury bonds since they have no default risk.

  D. Liquidly and safety.

  Correct Answer: D

  Cash and short-term investments are crucial to a firm's continuing success. Sufficient liquidly must be available to meet payments as they come due. At the same time, liquid assets are subject to significant control risk. Therefore, liquidly and safety are the primary concerns of the treasurer when dealing with highly liquid assets. Cash and short-term investments are held because of their ability to facilitate routine operations of the company. These assets are not held for purposes of achieving investment returns.

• Question 874:

  A consultant recommends that a company hold funds for the following two reasons:

  Reason #1: Cash needs can fluctuate substantially throughout the year. Reason #2: Opportunities for

  buying at a discount may appear during the year.

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  The three motives for holding cash are as a medium of exchange, as a precautionary measure, and for speculation. Reason #1 can be classified as a precautionary measure, and Reason #2 can be classified as holding cash for speculation.

• Question 875:

  CMR is a retail mail order firm currently using a central collection system that requires all checks to be sent to its Boston headquarters. An average of 5 days is required for mailed checks to be received, 4 days for CMR to process them, and 11/2 days for the checks to clear through the bank. A proposed lockbox system would reduce the mail and process time to 3 days and the check clearing time to 1 day. CMR has an average daily collection of $100,000. If CMR should adopt the Lockbox system, its average cash balance would increase by

  A. $250,000

  B. $400,000

  C. $650,000

  D. $800,000

  Correct Answer: C

  Checks are currently tied up for 10 1/2 days (5 for mailing, 4 for processing, and 11/2 for clearing). If that were reduced to 4 days, Car's cash balance would increase by $650000 (6 1/2 days x $100,000 per day).

• Question 876:

  The following information applies to Oxford Company: A cash payment equal to 50% of purchases is made at the time of purchase1 and 25% is paid in each of the next 2 months. Purchases for the previous November and December were $140,000 per month. Payroll for a month is 10% of that month's sales, and other operating expenses are 15% of the following month's sales (July sales were $210,000). Interest payments were $25,000 paid quarterly in January and April. Oxford's cash disbursements for the month of April were

  

  A. $130,000

  B. $140,000

  C. $210,000

  D. $235,000

  Correct Answer: D

• Question 877:

  A lock-box system

  A. Reduces the need for compensating balances.

  B. Provides security for late night deposits.

  C. Reduces the risk of having checks lost in the mail.

  D. Accelerates the inflow of funds.

  Correct Answer: D

  A lock-box system accelerates the inflow of funds. A company maintains mail boxes, often in numerous locations around the country, to which customers send payments. A bank checks these mailboxes several times a day, and funds received are immediately deposited to the company's account without first being processed by the company's accounting system, thereby hastening availability? the funds.

• Question 878:

  The following information applies to Brandon Company: A cash payment equal to 40% of purchases is made at the time of purchase1 and 30% is paid in each of the next 2 months. Purchases for the previous November and December were $150,000 per month. Payroll is 10% of sales in the month it occurs, and operating expenses are 20% of the following month's sales (July sales were $220,000). Interest payments were $20,000 paid quarterly in January and April. Brandon's cash disbursements for the month of April were

  

  A. $140,000.

  B. $152,000.

  C. $200,000.

  D. $254,000.

  Correct Answer: D

• Question 879:

  The Alumnae Corporation was recently quoted terms on a commercial bank loan of 7% discounted interest with a 20% compensating balance. The term of the loan is 1 year. The effective cost of borrowing is (rounded to the nearest hundredth)

  A. 8.75%.

  B. 941%.

  C. 7.53%.

  D. 9.59%.

  Correct Answer: D

  Assuming a $1,000 loan1 the interest at 7% for 1 year is $70. Hence, the proceeds of the loan are $930 ($1,000--$70). Also, 20% of the note or $2001 cannot be used by the borrower because of the compensating balance requirement. Consequently, only $730 is available for use by the borrower. Paying $70 interest for the use of $730 gives an interest rate of $9.59%_($70?$730).

• Question 880:

  Methods of accelerating cash collections include all of the following except

  A. Decentralized collections.

  B. Electronic funds transfers.

  C. Compensating balances.

  D. Lockbox systems.

  Correct Answer: C

  Various methods of accelerating cash collections include decentralized collection outposts (normally one in each Federal Reserve District), electronic funds transfers, centralized banking for all company branches to avoid having to maintain minimum balances in several locations, and lockbox systems. A compensating balance is a minimum average or absolute amount that must be maintained in a bank account. Hence, it is not a means of accelerating cash collections. This requirement means that less cash is available to the depositor.