Part 2 Working Capital Management I Sol 30 Oct 2021 PDF

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Question 1 2.B.4 aq.cash.man_ LOS: 2.B.4 Lesson Reference: Cash Management Difficulty: medium Bloom Code: 4In preparing its August 31, Year 6, bank reconciliation, Malexa Corp. has the following information:Balance per bank statement, 8/31/Year 6 $18, Deposit in transit, 8/31/Year 6 $3, Return of cu...

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10/22/21, 1:34 PM

CMA Exam Review - Part 2 - Assessment Review

2.B.4.f aq.cash.man.0007_1710 LOS: 2.B.4.f Lesson Reference: Cash Management Difficulty: medium Bloom Code: 4 In preparing its August 31, Year 6, bank reconciliation, Malexa Corp. has the following information: Balance per bank statement, 8/31/Year 6 Deposit in transit, 8/31/Year 6

$18,050 $3,250

Return of customer's check for insufficient funds, 8/31/Year 6 Outstanding checks, 8/31/Year 6 Bank service charges for August Year 6

$600 $2,750 $100

At August 31, Year 6, Malexa's correct cash balance is: $17,850. Your Answer

$17,950. Correct

$18,550. $17,550.

 $17,850. The deposits in transit and the outstanding checks represent transactions that the entity has recorded but the bank has not yet recorded. The insufficient funds check ($600) and bank service charge ($100) are both items that the bank has recorded but the entity has not. They would be adjustments to the book balance, not the bank balance.

 $17,950. The deposits in transit and the outstanding checks represent transactions that the entity has recorded but the bank has not yet recorded. The insufficient funds check ($600) is an item that the bank has recorded but the entity has not. It would be an adjustment to the book balance, not the bank balance.

 $18,550. To determine the correct balance at August 31, Year 6, a partial bank reconciliation should be prepared. The balance per bank statement ($18,050) must be adjusted for any items that the bank has not yet recorded and also for any bank errors (none in this question). Balance per bank statement $18,050 Deposits in transit 3,250 Outstanding checks Correct balance

(2,750) $18,550

The deposits in transit and the outstanding checks represent transactions that the entity has recorded but the bank has not yet recorded. The insufficient funds check ($600) and bank service charge ($100) are both items that the bank has recorded but the entity has not. They would be adjustments to the book balance, not the bank balance.

 $17,550. The deposits in transit should be added, not subtracted, and the outstanding checks should be subtracted, not added, to arrive at the correct cash balance.

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2.B.4.m 2B4-LS20 LOS: 2.B.4.m Lesson Reference: Marketable Securities Management Difficulty: easy Bloom Code: 2 All of the following are typical reasons why companies invest in marketable securities

:

income generation. reserve liquidity. controlling outflows. Correct

improved credit rating.

 income generation. This answer is incorrect. Income generation is a typical reason why companies invest in marketable securities.

 reserve liquidity. This answer is incorrect. Reserve liquidity is a typical reason why companies invest in marketable securities.

 controlling outflows. This answer is incorrect. Controlling outflows is a typical reason why companies invest in marketable securities.

 improved credit rating. Companies invest in marketable securities for three main reasons: (1) reserve liquidity, to provide a source of 'near-cash' (or, instant cash) and cover any working capital; (2) controlling outflows, to earn interest on funds that are being held for predictable downstream cash outflows; and (3) income generation, to earn interest on surplus cash for which the company has no immediate use.

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2.B.4.j 2B4-CQ34 LOS: 2.B.4.j Lesson Reference: Cash Management Difficulty: medium Bloom Code: 3 Approximately what amount of compensating balance would be required for a stated interest rate of 10% to equal an effective interest rate of 10.31% on a $100,000,000 one-year loan? Correct

$3,000,000 $3,100,000 $310,000 Your Answer

Not enough information is given

 $3,000,000 The effective interest rate of 10.31%, or 0.1031 is equal to the interest on the loan divided by the usable funds. 0.1031 = (interest on the loan) ÷ (usable funds) 0.1031 = [$100,000,000(0.10)] ÷ ($100,000,000 − x), where x = the compensating balance Rearranging this equation, $10,310,000 − 0.1031x = $10,000,000 $310,000 = 0.1031x x = $3,006,789.53, or approximately $3,000,000.

 $3,100,000 This answer is incorrect. This answer is an incorrect calculation of the amount of compensating balance. The $310,000 should have been divided by the exact amount of "x".

 $310,000 This answer is incorrect. This answer is an incomplete calculation of the amount of compensating balance. The $310,000 should have been divided by the amount of "x".

 Not enough information is given This answer is incorrect. There is enough information to determine the amount of compensating balance required for a stated interest rate of 10% to equal an effective interest rate of 10.31% on a $100,000,000 one-year loan.

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2.B.4.w 2B4-LS37_1810 LOS: 2.B.4.w Lesson Reference: Inventory Management Difficulty: easy Bloom Code: 1 Which of the following is an inventory control practice that minimizes investments in inventory by completing all operations as they are needed? Kanban Your Answer

Economic order quantity Correct

Just-in-time (JIT) Safety stock analysis

 Kanban This answer is incorrect. Kanban is not an inventory control practice that minimizes investments in inventory by completing all operations as they are needed.

 Economic order quantity This answer is incorrect. Economic order quantity is not an inventory control practice that minimizes investments in inventory by completing all operations as they are needed.

 Just-in-time (JIT) The underlying objective of a JIT system is to minimize all waste in manufacturing operations by meeting production targets with the minimum amount of materials, equipment, operators, and so on. This is accomplished by completing all operations just at the time they are needed.

 Safety stock analysis This answer is incorrect. Safety stock analysis is not an inventory control practice that minimizes investments in inventory by completing all operations as they are needed.

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2.B.4.f aq.cash.man.0004_1710 LOS: 2.B.4.f Lesson Reference: Cash Management Difficulty: medium Bloom Code: 3 A company has a receivables turnover of 10, an inventory turnover of 5, and a payables turnover of 12. The company's cash conversion cycle is

closest to:

110 days. 43 days. Your Answer

6 days. Correct

79 days.

 110 days. This is the receivables days + the inventory processing days. Remember that cash conversion cycle = receivables days + inventory processing days – payables payment period.

 43 days. This is the inventory processing days – the payables payment period. Remember that cash conversion cycle = receivables days + inventory processing days – payables payment period.

 6 days. This is the receivables days – the payables payment period. Remember that cash conversion cycle = receivables days + inventory processing days – payables payment period.

 79 days. Cash conversion cycle = receivables days + inventory processing days − payables payment period. Receivables days = 365 ÷ receivables turnover = 365 ÷ 10 = 36.5 days. Inventory processing days = 365 ÷ inventory turnover = 365 ÷ 5 = 73.0 days. Payables payment period = 365 ÷ payables turnover = 365 ÷ 12 = 30.4 days. Cash collection cycle = 36.5 + 73.0 − 30.4 = 79.1 days.

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2.B.4.n 2B3-LS52 LOS: 2.B.4.n Lesson Reference: Marketable Securities Management Difficulty: easy Bloom Code: 2 Which of the following markets is involved with the trading of debt securities with maturities of less than one year? Derivatives markets Your Answer

Capital markets Correct

Money markets Forex markets

 Derivatives markets This answer is incorrect. Derivatives markets are not involved with the trading of debt securities with maturities of less than one year.

 Capital markets This answer is incorrect. Capital markets are not involved with the trading of debt securities with maturities of less than one year.

 Money markets The market that is involved in the trading of debt securities with maturities of less than one year is called a money market.

 Forex markets This answer is incorrect. Forex markets are not involved with the trading of debt securities with maturities of less than one year.

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2.B.4.t 2B4-LS52 LOS: 2.B.4.t Lesson Reference: Accounts Receivable Management Difficulty: easy Bloom Code: 2 A credit manager considering whether to grant trade credit to a new customer is most likely to place primary emphasis on : *Source: Retired ICMA CMA Exam Questions. Correct

liquidity ratios. Your Answer

profitability ratios. growth ratios. valuation ratios.

 liquidity ratios. In considering to extend credit, a manager would be most concerned about whether or not the customer has an ability to repay the debt. Therefore, the manager would review the customer's liquidity ratios.

 profitability ratios. This answer is incorrect. A credit manager considering whether to grant trade credit to a new customer is not going to place primary emphasis on profitability ratios.

 growth ratios. This answer is incorrect. A credit manager considering whether to grant trade credit to a new customer is not going to place primary emphasis on growth ratios.

 valuation ratios. This answer is incorrect. A credit manager considering whether to grant trade credit to a new customer is not going to place primary emphasis on valuation ratios.

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2.B.4.g 2B4-LS13 LOS: 2.B.4.g Lesson Reference: Cash Management Difficulty: easy Bloom Code: 2 Which of the following techniques will

CMA Exam Review - Part 2 - Assessment Review

speed up collections?

Correct

Payable through draft (PTD). Cash concentration banking system. Your Answer

Lockbox system. ACH and Fedwire processing.

 Payable through draft (PTD). A PTD slows down the collection process. When the issuer's bank receives the check, the bank must present it to the issuer for final acceptance. Only then does the firm deposit the funds to cover the draft. This arrangement delays the time the firm has to have funds available and allows the firm to maintain smaller bank balances.

 Cash concentration banking system. This answer is incorrect. A cash concentration banking system will speed up collections.

 Lockbox system. This answer is incorrect. A lockbox system will speed up collections.

 ACH and Fedwire processing. This answer is incorrect. ACH and Fedwire processing will speed up collections.

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2.B.4.j aq.cash.man.0006_1710 LOS: 2.B.4.j Lesson Reference: Cash Management Difficulty: medium Bloom Code: 4 On December 31, 20X4, West Company had the following cash balances: Cash in banks: $1,800,000 Petty cash funds (all funds were reimbursed on 12/31/X4): $50,000 Cash in banks includes $600,000 of compensating balances against short-term borrowing arrangements at December 31, 20X4. The compensating balances are not legally restricted as to withdrawal by West. In the current assets section of West's December 31, 20X4, balance sheet, what total amount should be reported as cash? Correct

$1,850,000 $1,200,000 $1,250,000 $1,800,000

 $1,850,000 All petty cash funds were reimbursed, meaning that there is currently $50,000 in petty cash, which should be included in the total amount of cash reported. Generally, cash held by a bank as a compensating balance is included as cash on the balance sheet.

 $1,200,000 Remember to consider the petty cash funds. Also, cash held by a bank as a compensating balance is included as cash on the balance sheet.

 $1,250,000 Generally, cash held by a bank as a compensating balance is included as cash on the balance sheet.

 $1,800,000 Remember to consider the petty cash funds.

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2.B.4.r 2B4-CQ16 LOS: 2.B.4.r Lesson Reference: Accounts Receivable Management Difficulty: hard Bloom Code: 5 Harson Products currently has a conservative credit policy and is in the process of reviewing three other credit policies. The current credit policy (Policy A) results in sales of $12 million per year. Policies B and C involve higher sales, accounts receivable and inventory balances, as well as higher bad debt and collection costs. Policy D grants longer payment terms than Policy C, but charges customers interest if they take advantage of the lengthy payment terms. The policies are outlined below.

Sales $12,000 $13,000 $14,000 $14,000 Average accts receivable 1,500 2,000 3,500 5,000 Average inventory Interest income

2,000 0

2,300 0

2,500 0

2,500 500

Bad debt expense

100

125

300

400

Collection cost

100

125

250

350

If the direct cost of products is 80% of sales and the cost of short-term funds is 10%, what is the optimal policy for Harson? Correct

Policy B Your Answer

Policy D Policy C Policy A

 Policy B The optimal plan for Harson is the one that maximizes total contribution margin. The contribution for each option is calculated as: Contribution margin = (contribution margin on annual revenue) − (bad debt expense) − (collection costs) + (interest income) − (interest costs on accounts receivable and inventory) Contribution margin on annual revenue = (annual revenue)(1 − variable cost ratio) Contribution margin on annual revenue = (annual revenue)(1 − 0.80) Contribution margin on annual revenue = (0.2)(annual revenue) Contribution margin = (0.2)(annual revenue) − (bad debt expense) − (collection costs) + (interest income) − (interest costs on accounts receivable and inventory) Contribution for Policy A = (0.2)($12,000) − $100 − $100 − $0 − (0.1) ($1,500 + $2,000) Contribution for Policy A = $2,400 − $100 − $100 − $0 − $350 = $1,850 Contribution margin for Policy B = (0.2)($13,000) − $125 − $125 − $0 − (0.1)($2,000 + $2,300) Contribution margin for Policy B = $2,600 − $125 - $125 − $0 − $430 = $1,920 Contribution for Policy C = (0.2)($14,000) − $300 − $250 − $0 − (0.1)($3,500 + $2,500) Contribution for Policy C = $2,800 − $300 − $250 − $0 − $600 = $1,650 Contribution for Policy D = (0.2)($14,000) − $400 − $350 + $500 − (0.1)($5,000 + $2,500) Contribution for Policy D = $2,800 − $400 − $350 + $500 − $750 = $1,800 Policy B offers the highest contribution margin of the four plans. https://app.efficientlearning.com/pv5/v8/5/app/cma/part2 2020.html?#

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 Policy D This answer is incorrect. The optimal plan for Harson is the one that maximizes total contribution margin. After calculating the contribution margin for all policies, Policy D does not offer the highest contribution margin of the four plans.

 Policy C This answer is incorrect. The optimal plan for Harson is the one that maximizes total contribution margin. After calculating the contribution margin for all policies, Policy C does not offer the highest contribution margin of the four plans.

 Policy A This answer is incorrect. The optimal plan for Harson is the one that maximizes total contribution margin. After calculating the contribution margin for all policies, Policy A does not offer the highest contribution margin of the four plans.

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2.B.4.r aq.acc.rm.0001_1710 LOS: 2.B.4.r Lesson Reference: Accounts Receivable Management Difficulty: medium Bloom Code: 3 An organization would usually offer credit terms of 2/10, net 30 when: the organization can borrow funds at a rate less than the annual interest cost. the cost of capital approaches the prime rate. most competitors are not offering discounts, and the organization has a surplus of cash. Correct

most competitors are offering the same terms, and the organization has a shortage of cash.

 the organization can borrow funds at a rate less than the annual interest cost. If the organization can borrow funds at a rate less than the annual interest cost, they would not be anxious enough to get the cash back to provide credit terms of 2/10, net 30. They could borrow money to meet any needs.

 the cost of capital approaches the prime rate. If the cost of capital is approaching the prime rate, the organization would not offer terms of 2/10, net 30. They could borrow money to meet any needs.

 most competitors are not offering discounts, and the organization has a surplus of cash. If competitors are not offering discounts, and the organization has a surplus of cash they would not offer credit terms of 2/10, net 30.

 most competitors are offering the same terms, and the organization has a shortage of cash. An organization would usually offer credit terms of 2/10, net 30 when most competitors are offering the same terms, and the organization has a shortage of cash.

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2.B.4.p 2B1-AT02 LOS: 2.B.4.p Lesson Reference: Marketable Securities Management Difficulty: easy Bloom Code: 2 When purchasing temporary investments, which one of the following period of time without significant price concessions?

describes the risk associated with the ability to sell the investment in a short

Financial risk Interest rate risk Correct

Liquidity risk Investment risk

 Financial risk This answer is incorrect. Financial risk does not best describe the risk associated with the ability to sell the investment in a short period of time without significant price concessions.

 Interest rate risk This answer is incorrect. Interest rate risk does not best describe the risk associated with the abi...