IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 911:

  A man offers to buyyourcarwith4 equal annual payments of $3,000, beginning 2 years from today. Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9000 for the car, should you accept?

  A. Yes; present value is $9,510.

  B. Yes; present value is $11,373.

  C. No; present value is $8646.

  D. No; present value is $7461.

  Correct Answer: C

  A normal present-value-of-an annuity table assumes the first payment is one year away. In this case, the first payment is two years away. Thus, this should be viewed as a five- payment annuity minus one payment. The factor at 10% for five payments is 3.791. Subtract from that the initial payment (year 1) which will not be made, a factor of .909, leaving a factor of 2.882. Multiplying 2.882 times $3,000 results in a present value of $8,646.

• Question 912:

  As a company becomes more conservative in its working capital policy, it would tend to have a(n)

  A. Decrease in its acid-test ratio.

  B. Increase in the ratio of current liabilities to concurrent liabilities.

  C. Increase in the ratio of current assets to units of output.

  D. Increase in funds invested in common stock and a decrease in funds invested in marketable securities.

  Correct Answer: C

  A conservative working capital policy minimizes liquidity risk by increasing working capital (current assets -- current liabilities). The result is that the company forgoes the potentially higher returns available from using the additional working capital to acquire long-term assets. A conservative working capital policy is characterized by a higher current ratio (current assets + current liabilities) and acid-test ratio (quick assets

  + current liabilities). Thus, the company will increase current assets or decrease current liabilities. Conservative policy finances assets using long-term or permanent funds rather than short- term sources.

• Question 913:

  Since Marsh, Inc. is experiencing a sharp increase in sales activity and a steady increase in production, the management of Marsh has adopted an aggressive working capital policy. Therefore, the company's current level of net working capital

  A. Would most likely be the same as in any other type of business condition as business cycles tend to balance out overtime?

  B. Would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment.

  C. Would most likely be higher than under other business conditions so that there will be sufficient funds to replenish assets.

  D. Would most likely be higher than under other business conditions as the company's profits are increasing.

  Correct Answer: B

  When a firm has an aggressive working capital policy, management keeps the investment in working capital at a minimum. Thus, a growing company would want to invest its funds in capital goods and not in idle assets. This policy maximizes return on investment at the price of the risk of minimal liquidity.

• Question 914:

  Determining the appropriate level of working capital for firm requires

  A. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.

  B. Changing the capital structure and dividend policy for the firm.

  C. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt.

  D. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.

  Correct Answer: D

  A company must maintain a level of working capital sufficient to pay bills as they come due. Failure to do so is technical insolvency and can result in involuntary bankruptcy. Unfortunately, holding current assets for purposes of paying bills is not profitable for a company because they usually offer a low return compared with longer-term investments. Thus, the skillful management of working capital requires a balancing of a firm's desire for profit with its need for adequate liquidity.

• Question 915:

  Management of a firm does not want to violate a working capital restriction contained in its bond indenture. If the firm's current ratio falls below 2.0 to 1, technically it will have defaulted. The firm's current ratio is now

  2.2 to 1. If current liabilities are $200 million, the maximum new commercial paper that can be issued to finance inventory expansion is

  A. $20 million.

  B. $40 million.

  C. $240 million.

  D. $180 million.

  Correct Answer: B

• Question 916:

  Claus on, Inc. grants credit terms of 1/15. Net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40% of their customers pay on the discount date1 40% on the net due date, and 20% pay 15 days after the net due date. Assuming uniform sales and a 360-day year1 what is the projected days' sales outstanding (rounded to the nearest whole day)?

  A. 20 days.

  B. 24 days.

  C. 27 days.

  D. 30 days.

  Correct Answer: C

  Given that 40% of sales will be collected on the 15th day, 40% on the 30th day, and 20% on the 45th day, the days' sales outstanding can be determined by weighting the collection period for each group of `receivables by its collection percentage. Hence, the projected days' sales outstanding equal 27 days [(40% x 15) ?(40% x 30) + (20% x 45)].

• Question 917:

  Which one of the following statements is most likely to be true if a seller extends creditor a purchaser for a period of time longer than the purchaser's operating cycle? The seller A. Will have a lower level of accounts receivable than those companies whose credit period is shorter than the purchaser's operating cycle.

  A. Will have a lower level of accounts receivable than those companies whose credit period is shorter than the purchaser's operating cycle.

  B. Is, in effect, financing more than just the purchaser's inventory needs.

  C. Can be certain that the purchaser will be able to convert the inventory into cash before payment is due.

  D. Has no need for a stated discount rate or credit period.

  Correct Answer: B

  The normal operating cycle is defined as the period from the acquisition of inventory to the collection of the account receivable. If trade credit is foray period longer than the normal operating cycle, the seller must therefore be financing more than just the purchase of inventory.

• Question 918:

  A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that

  A. Net profit has increased.

  B. The average collection period has decreased.

  C. Gross profit has declined.

  D. The size of the discount offered has decreased.

  Correct Answer: B

  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 lower receivables increases the turnover and results in a shorter collection period.

• Question 919:

  Speech Co.'s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively. Short-term interest rates are expected to average 5%. If Speech could increase inventory turnover from its current 8.0 times permeate 10.0 times per year, its expected cost savings in the current year would be

  A. $165,625

  B. $0

  C. $3,312,500

  D. $828,125

  Correct Answer: A

  If cost of sales is $132,500,000, and the inventory turnover rate is 8.0 times per year, the average inventory is $16,562,500 ($132,500,000 ?8). If the turnover increases to 10.0 times annually, the average inventory will decline to $13,250,000 ($132,500,000 ?10), a decrease of $3,312,500. At a 5% rate, reducing working capital by $3,312,500 will save the company $165,625 ($3,312,500 x .05).

• Question 920:

  MEC Corporation has 100,000 shares of stock outstanding. Below is part of Mac's Statement of Financial Position for the last fiscal year.

  

  What is the maximum amount MEC can pay in cash dividends per share and maintain a minimum current ratio of 2 to 1? Assume that all accounts other than cash remain unchanged.

  A. $2.05

  B. $2.50

  C. $3.35

  D. $3.80

  Correct Answer: B

  Before the dividend, total current assets equal $2050, 000 ($455,000 cash + $900,000 receivables + $650,000 inventory + $45,000 prepaid assets). Current liabilities total $900000 ($285,000 accrued liabilities + $550,000 accounts payable + $65,000 current portion of long-term debt). The payment of the cash dividend will not change current liabilities, so a current ratio of 2 to 1 requires that current assets be maintained at a minimum of $1,800,000 (2 x $900,000). Thus, cash can decrease by $250,000 ($2,050,000 -- $1,800,000). The maximum per-share rate is $2.50 ($250,000 + 100,000 shares).