IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 921:

  During the year, Mason Compass current assets increased by $120, current liabilities decreased by $50, and net working capital

  A. Increased by $70.

  B. Did not change.

  C. Decreased by $170.

  D. Increased by $170.

  Correct Answer: D

  Net working capital is the excess of current assets over current liabilities. An increase in current assets oar decrease in current liabilities increases working capital. Thus, networking capital increased by $170 ($120

  + $50).

• Question 922:

  A company has a current ratio of 1 .9 and a quick ratio of .5. Which of the following transactions will increase both ratios?

  A. Pay off $10,000 of current liabilities.

  B. Borrow $10,000 on a short-term note.

  C. Transfer $10,000 of inventory to a vendor in full payment of a $10,000 account payable.

  D. Sell inventory for cash at a loss.

  Correct Answer: C

  This question is somewhat tricky because one of the ratios is less than 1.0, while the other is greater than

  1.0. If the current ratio is greater than 1.0, then paying off a current liability will increase the ratio. Thus, both answers (A) and (C) will increase the current ratio. However, transferring cash to a creditor will decrease the quick ratio if the present ratio is less than 1.0. Thus, only the transfer of a non-quick asset to a creditor will increase the quick ratio. For example, if the total of current assets was $190,000 and quick assets totaled $50,000, then current liabilities would have been $100,000. Transferring $10,000 of inventory would change the totals to $180,000 for current assets and $90,000 for current liabilities. Quick assets would remain at $50,000. The new current ratio would be 2.0 ($180,000 + $90,000), and the new quick ratio would be .556 ($50,000 + $90,000).

• Question 923:

  Which one of the following transactions does not change either the current ratio or the total current assets?

  A. A cash advance is made to a divisional office.

  B. A cash dividend is declared.

  C. Short-term notes payable are retired with cash.

  D. A fully depreciated asset is sold for cash.

  Correct Answer: A

  The current ratio is calculated by dividing current assets by current liabilities. Thus, any transaction that changes current assets or current liabilities changes the current ratio. A cash advance to a divisional office does not change current assets because the cash (a current asset) will be replaced by a receivable (a current asset). Current liabilities are also unaffected, so the cash advance affects neither the current ratio nor total current assets.

• Question 924:

  Which one of the following transactions would increase the current ratio and decrease net profit?

  A. A federal income tax payment due from the previous year is paid

  B. A stock dividend is declared

  C. Uncollectible accounts receivable are written off against the allowance account

  D. Vacant land is sold for less than the net book value

  Correct Answer: D

  The current ratio is calculated by dividing current assets by current liabilities. thus, any transaction that will either increase current assets or decrease current liabilities will increase the current ratio selling vacant for less than its book value(at a loss )would increase current assets (cash)and decrease net profit.

• Question 925:

  All of the following statements in regard to working capital are true except

  A. Current liabilities are an important source of financing for many small firms.

  B. Profitability varies inversely with liquid dilly.

  C. The hedging approach to financing involves matching maturities of debt with specific financing needs.

  D. Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy.

  Correct Answer: D

  Financing permanent inventory buildup, which is essentially a long-term investment, with long-term debt is a moderate or conservative working capital policy. An aggressive policy uses short-term, relatively low-cost debtor finance the inventory buildup. It focuses on high profitability potential, despite high risk and low liquidity. An aggressive policy reduces the current ratio and accepts a higher risk of short4erm lack of liquidity. Financing inventory with long-term debt increases the current ratio and accepts higher borrowing costs in exchange for greater liquidity and lower risk.

• Question 926:

  Determining the appropriate level of working capital for a firm requires

  A. Changing the capital structure and dividend policy of the firm.

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

  C. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.

  D. Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments.

  Correct Answer: C

  Working capital finance concerns the determination of the optimal level, mix, and use of current assets and current liabilities. The objective is to minimize the cost of maintaining liquidity, while guarding against the possibility of technical in solvency. Technical in solvency is defined as the inability to pay debts as they come due.

• Question 927:

  Networking capital is the difference between

  A. Current assets and current liabilities.

  B. Fixed assets and fixed liabilities.

  C. Total assets and total liabilities.

  D. Shareholders' investment and cash.

  Correct Answer: A

  Net working capital is defined by accountants as the difference between current assets and current liabilities. Working capital is a measure of short-term solvency.

• Question 928:

  An analyst covering Guilderland Mining Co. common stock estimates the following information for next

  years.

  Expected return on the market portfolio 12%

  Expected return on the Treasury securities 5% Expected beta of Guilderland 2.2

  Using the CAPM, the analyst's estimate of next year's risk premium for Guilderland's stock is closest to

  A. 7.0%

  B. 10.4%

  C. 15.4%

  D. 21.4%

  Correct Answer: C

• Question 929:

  Using the capital asset pricing model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-free rate is 6% is

  A. 6.0%

  B. 7.5%

  C. 17.5%

  D. 16.0%

  Correct Answer: D

• Question 930:

  Stock J has a beta of 1.2 and an expected return of 15.6%, and stock K has a beta of 0.8 and an expected return of 12.4%. What is the expected return on the market and the risk- free rate of return, consistent with the capital asset pricing model?

  A. Market is 14%; risk-free is 6%

  B. Market is 12.4%; risk-free is 0%

  C. Market is 14%; risk-free is 4%

  D. Market is 14%; risk-free is 1.6%

  Correct Answer: A