IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 891:

  A compensating balance

  A. Compensates a financial institution for services rendered by providing it with deposits of funds.

  B. Is used to compensate for possible losses on a marketable securities portfolio.

  C. Is a level of inventory held to compensate for variations in usage rate and lead time?

  D. Is the amount of prepaid interest on a loan?

  Correct Answer: A

  Banks sometimes require a borrower to keep a certain percentage of the face amount of a loan in a no interest-bearing checking account. This requirement raises the effective rate of interest paid by the borrower. This greater rate compensates a bank for services provided and results in greater profit ability for the financial institution. Funds kept as a compensating balance can often be withdrawn if a certain average balance is maintained.

• Question 892:

  Assume that each day company writes and receives checks totaling $10,000. If it takes 5 days for the checks to clear and be deducted from the company's account, and only 4 days for the deposits to clear, what is the float?

  A. $10,000

  B. R$0

  C. $(10,000)

  D. $50,000

  Correct Answer: A

  The float period is the time between when a check is written and when it clears the payer's checking account. Check float results in an interest-free loan to the pay or because of the delay between payment by check and its deduction from the bank account. If checks written require one more day to clear than checks received, the net float equals one dais receipts. The company will have free use of the money for one day. In this case, the amount is $10,000.

• Question 893:

  A working capital technique that increases the payable float and therefore delays the outflow of cash is

  A. Concentration banking.

  B. A draft.

  C. Electronic Data Interchange (EDI).

  D. A lockbox system.

  Correct Answer: B

  Payment by draft, a three-party instrument in which the drawer orders the drawer to pay money to the payee, is a means of slowing cash outflows. A check is the most common type of draft. Check float arises from the delay between expenditure and the clearing of the check through the banking system.

• Question 894:

  Troy Toys is a retailer operating in several cities. The individual store managers deposit daily collections at a local bank in a non-interest bearing checking account. Twice per week1 the local bank issues a depository transfer check (DTC)to the central bank at headquarters. The controller of the company is considering using a wire transfer instead. The additional cost of each transfer would be $25; collections would be accelerated by 2 days; and the annual interest rate paid by the central bank is 7.2%(0.02% per day). At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of the DTC? Assume a 360-day year.

  A. It would never be economically feasible.

  B. $125000 or above.

  C. Any amount greater than $173.

  D. Any amount greater than $62,500.

  Correct Answer: D

  Given a $25 fee and an interest rate of 0.02% per day for2 days, the breakeven amount is $62,500 [$25 transfer fee + (2 x .02% interest rate)]. Thus, the interest earned on a transfer of any amount greater than $62,500 would exceed the $25 fee.

• Question 895:

  DLE is a retail mail order firm that currently uses a central collection system that requires all checks to be sent to its Boston headquarters. An average of 6 days is required for mailed checks to be received, 3 days for DLE to process them, and 2 days for the checks to clear through its bank. A proposed lockbox system would reduce the mailing and processing time to 2 days and the check clearing time to 1 day. DLF has an average daily collection of $ 150.000. If DLE adopts the lockbox system, its average cash balance will increase by

  A. $1,200,000

  B. $750,000

  C. $600,000

  D. $450,000

  Correct Answer: A

  Checks are currently tied up for 11 days (6 for mailing. 3for processing, and 2for clearing). If 1, that period were reduced to 3 days, Dale's cash balance would increase by $1,200,000 ($150,000 per day x 8 days).

• Question 896:

  If the average age of inventory is 60 days, the average age of the accounts payable is 30 days, and the average age of accounts receivable is 45 days, the number of days in the cash flow cycle is

  A. 135 days.

  B. 90 days.

  C. 75 days.

  D. 105 days.

  Correct Answer: C

  The cash flow cycle begins when the firm pays for merchandise it has purchased and ends when the firm receives cash from the sale of the merchandise. Inventory is held for an average of 60 days prior to sale, but the average age of accounts payable is 30 days. Consequently, the average time between outlay and sale is 30 days. Receivables are collected an average of 45 days after sale, so the length of the cash flow cycle is 75 days (30 + 45).

• Question 897:

  A firm has daily cash receipts of $300,000 and is interested in acquiring a lockbox service in order to reduce collection time. Bank l's lockbox service costs $3,000 per month and will reduce collection time by 3 days. Bank 2's lockbox service costs $5,000 per month and will reduce collection time by 4 days. Bank 3's lockbox service costs $500 per month and will reduce collection time by 1 day. Bank 4's lockbox service costs $1,000 per month and will reduce collection time by 2 days. If money market rates are expected to average 6% during the year, and the firm wishes to maximize income, which bank should the firm choose?

  A. Bank 1.

  B. Bank2.

  C. Bank3.

  D. Bank4.

  Correct Answer: D

  Because collections made using Bank 4's lockbox service will be accelerated by 2 days at a rate of $300,000 per day, the firm will have an additional $600,000 to invest. At a rate of 6%, the interest earned will be $36,000 per year. However, the bank will charge $12,000 ($1,000 per month x 12 months) for its services. Thus, the firm will gain $24,000 ($36,000 --$12,000).

• Question 898:

  Cleveland Masks and Costumes, Inc. (CMC) has a majority of its customers located in the states of California and Nevada. Keystone National Bank, a major west coast bank, has agreed to provide a Lockbox system to CMC at fixed fee of $50,000 per year and a variable fee of $0.50 for each payment processed by the bank. On average, CMC receives 50 payments per day, each averaging $20,000. With the lockbox system, the company's collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If CMC makes use of the lockbox system, what would be the net benefit to the company? Use 365 days per year.

  A. $59,125

  B. $60,875

  C. $50,000

  D. $120,000

  Correct Answer: B

  If payments are collected 2 days earlier, the company can earn $120,000 (50 payments per day x 2 days x $20,000 x .06) at a cost of $59,125 [$50,000 + (50 payments x $.50 x 365 days)], a gain of $60,875.

• Question 899:

  Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1 .800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-dayyear, which one of the following proposals is optimal for Newman?

  A. A $0.50 fee per check.

  B. Flatfeet of $125,000 per year.

  C. A fee of 0.03% of the amount collected.

  D. A compensating balance of $1,750,000.

  Correct Answer: D

  Multiplying 700 checks times 360 days results in a total of 252,000 checks per year. Accordingly, under (A). Total annual cost is $126,000 (252,000 x $50), which is less desirable than the $125,000 flat fee in (B). Given that the annual collections equal $453,600,000 (700 checks x $1 .800 x 360 days), (C) is also less desirable because the annual fee would be $136,080 ($453,600,000 x .03%). The best option is therefore to maintain a compensating balance of $1 .750,000 when the cost of funds is 7%, resulting in a total cost of $122,500 ($1,750,000 x.07).

• Question 900:

  Kemble is a newly established janitorial firm, and the owner is deciding what type of checking account to open. Kemble is planning to keep a $500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for standard business checking account with no minimum balance. Kemble also has the option of a premium business checking account that requires a $2,500 minimum balance but has no monthly fees or per check charges. If Kemble's cost of funds is 10%1 which account should Kemble choose?

  A. Standard account, because the savings is $34 per year.

  B. Premium account, because the savings is $34 per year.

  C. Standard account, because the savings is $16 per year.

  D. Premium account, because the savings is $16 per year.

  Correct Answer: D

  The standard account will cost $10 per month plus $8 in check charges (80 checks x $.10), for a total of $18 per month or $216 per year. The premium account has no check charges, but it will require the depositor to maintain a balance of $2,000 more than desired. At a 10% cost of capital, the incremental $2,000 minimum deposit will cost $200 per year. Thus, the premium account should be selected because it is cheaper by $16 per year.