IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 901:

  The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows: Garth has a line of creditor unto $4 million on which it pays interest monthly ate rate of 1% of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

  

  A. $O

  B. $61,000

  C. $80,000

  D. $132,000

  Correct Answer: B

  The sum of the beginning balance and inflows exceeds the outflows for the first 2 months. At the end of March, however1 Garth must use $2,000,000 of its line of credit ($2,000,000 beginning balance + $6,000,000 inflows--$10,000,000 outflows). Thus, interest for April is $20,000 ($2,000,000 x 1%). The net cash outflow for April (ignoring short-term borrowings) is $1,000,000 of an additional $1,000,000 of the line of credit. However, the $20,000 of interest for April must also be paid, so the amount of the line of credit used in May is $3,020,000 ($2,000,000 + $1,000,000 + $20,000). Interest for May is therefore $30,200 ($3,020,000 x 1%). Given the net cash inflow for May of $2,000,000 (again ignoring short-term borrowings) and the borrowing of $30,200 to pay the interest for May, the amount of the line of credit used in June is $1,050,200. Interest in June is $10,502 ($1,050,200 x 1%), and total interest is $60,702 ($20,000 + $30,200 + $10,502). Consequently, the closest answer is $61, 000.

• Question 902:

  A firm has daily cash receipts of $100,000 and collection time of 2 days. A bank has offered to reduce the collection time on the firm's deposits by 2 days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is

  A. $3,000

  B. $12,000

  C. $0

  D. $6,000

  Correct Answer: D

  If collection time is 2 days, and average daily receipts are $100, 0001 the average cash balance will increase by $200,000 if the bank's system is adopted. At a 6% interest rate, $200,000 will generate $12,000 of interest revenue annually. The $500 monthly charge by the bank will result in an annual expense of $6,000. Thus1 the net annual benefit is $6,000 ($12,000 --$6,000).

• Question 903:

  Shown below is a forecast of sales for Cooper Inc. for the first 4 months of the year (all amounts are in thousands of dollars).

  

  On average, 50% of credit sales are paid for in the month of sale, 30% in the month following the sale, and the remainder is paid 2 months after the month of sale. Assuming there are no bad debts1the expected cash inflows for Cooper in March is

  A. $138,000

  B. $122,000

  C. $119,000

  D. $108,000

  Correct Answer: C

  Cash inflows for March would consist of 50% of March credit sales ($90 x 50% = 30% of February credit sales ($120 x 30% = $36), plus 20% of January credit sales ($100 x 20% = $20), plus sales for March of $18. Consequently, total collections equal $119,000.

• Question 904:

  RLE Corporation had income before taxes of $60,000 for the year. Included in this amount were depreciation of $5,000, a charge of $6,000 for the amortization of bond discounts, and $4,000 for interest expense. The estimated cash flow for the period is

  A. $60000

  B. $66,000

  C. $49000

  D. $71000

  Correct Answer: D

  To determine cash flow for the period, all noncash expenses should be added back to net income. Adding the $5,000 of depreciation and the $6,000 of discount amortization to the $60,000 of net income produces a cash flow of $71,000.

• Question 905:

  The most direct way to prepare a cash budget for a manufacturing firm into include

  A. Projected sales, credit terms, and net income.

  B. Projected net income, depreciation, and goodwill amortization.

  C. Projected purchases, percentages of purchases paid, and net income.

  D. Projected sales and purchases, percentages of collections, and terms of payments.

  Correct Answer: D

  The most direct way of preparing a cash budget requires incorporation of sales projections and credit terms, collection percentages, estimated purchases and payment terms, and other cash receipts and disbursements. In other words, preparation of the cash budget requires consideration of both inflows and outflows.

• Question 906:

  Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

  A. 12.00%.

  B. 13.33%.

  C. 13.20%.

  D. 1348%.

  Correct Answer: B

  The company will need $49,000 (98% x $50,000) to pay off the invoice. In addition, it will need a compensating balance equal to 10% of the loan. Thus, the loan amount needed is $54,444 ($49,000 ?.9). The interest at 12% annually on a 30-day loan of $54,444 is $544.44 ($54,444 x 12% x 30 ?360). However, the company has access to only $49,000. Thus, the interest expense on usable funds is at an annual rate of 13.33% (12 months x $544.44?49,000).

• Question 907:

  Yonder Motors sells 20,000 automobiles per year for $25,000 each. The firm's average receivables are $30,000,000 and average inventory is $40,000,000. Yoder's average collection period is closest to which one of the following? Assume a 365-day year.

  A. 17 days.

  B. 22 days.

  C. 29 days.

  D. 61 days.

  Correct Answer: B

• Question 908:

  The amount Morton Company must borrow to pay the supplier within the discount period and cover the compensating balance is

  A. $55,000.

  B. $55,056.

  C. $55,556.

  D. $54,444.

  Correct Answer: D

  The company will need $49,000 (98% x $501000) to pay off the invoice. In addition, it will need a

  compensating balance equal to 10% of the loan. This can be written in equation form as:

  Loan $49,000 + (.1) Loan.

  Thus, the loan amount needed is $54,444 ($49,000 ?.9).

• Question 909:

  The Herb Salter Corporation is considering a plant expansion that will increase its sales and net income. The following data represent management's estimate of the impact the proposal will have on the company:

  

  The effect of the plant expansion on Salter's networking capital will be a (n)

  A. Increase of $240,000

  B. Decrease of $10,000

  C. Increase of $230,000

  D. Increase of $10,000

  Correct Answer: B

• Question 910:

  Stars Company has current assets of $400,000 and current liabilities of $300,000. Stars could increase its networking capital by the

  A. Prepayment of $50,000 of next year's rent.

  B. Refinancing of $50,000 of short-term debt with long-term debt.

  C. Acquisition of land valued at $50,000 through the issuance of common stock.

  D. Purchase of $50000 of trading securities for cash.

  Correct Answer: B

  Networking capital is defined as the excess of current assets over current liabilities. Refinancing short-term debt with long-term debt decreases current liabilities with no effect on current assets, resulting 11in an increase in working capital.