CMA PART 1 E Working Capital Policy and Management 207 Questions

1! "ource# CMA 12$0 1%1 &n smaller 'usinesses in ()ic) t)e management o* cas) is 'ut one o* numerous *unctions per*ormed 'y t)e treasurer+ ,arious cost incenti,es and di,ersi*ication arguments suggest t)at surplus cas) s)ould 'e in,ested in A- Commercial paper.- .ankers/ acceptancesC- Money market mutual *unds0- Corporate 'onds2! "ource# CMA 01$2 1%7 A *irm )as daily cas) receipts o* 3200+000- A commercial 'ank )as o**ered to reduce t)e collection time 'y 2 daysT)e 'ank re4uires a mont)ly *ee o* 35+000 *or pro,iding t)is ser,ice- &* money market rates (ill a,erage 126 during t)e year+ t)e additional annual income 7loss8 o* )a,ing t)e ser,ice is A- 3725+0008.- 325+000C- 311+2500- 31$+0002! "ource# CMA 12$0 1%2 T)e prime lending rate o* commercial 'anks is an announced rate and is o*ten understated *rom t)e ,ie(point o* e,en t)e most credit%(ort)y *irms- W)ic) one o* t)e *ollo(ing re4uirements al(ays results in a )ig)er e**ecti,e interest rate9 A- A *loating rate *or t)e loan period.- A co,enant t)at restricts t)e issuance o* any ne( unsecured 'onds during t)e e:istence o* t)e loanC- T)e imposition o* a compensating 'alance (it) an a'solute minimum t)at cannot 'e met 'y current transaction 'alances0- T)e a'sence o* a c)arge *or any unused portion in t)e line o* credit5! "ource# CMA 01$2 1%$ A *irm/s current ratio is currently 1-7; to 1- Management kno(s it cannot ,iolate a (orking capital restriction contained in its 'ond indenture- &* t)e *irm/s current ratio *alls 'elo( 1-; to 1+ tec)nically it (ill )a,e de*aulted- &* current lia'ilities are 32;0 million+ t)e ma:imum ne( commercial paper t)at can 'e issued to *inance in,entory e:pansion is

A- 327;-00 million.- 312;-00 millionC- 3;12-;0 million0- 3527-;0 million;! "ource# CMA 01$2 1%12 A *irm o*ten *actors its accounts recei,a'le- T)e *inance company re4uires an $6 reser,e and c)arges a 1-;6 commission on t)e amount o* t)e recei,a'le- T)e remaining amount to 'e ad,anced is *urt)er reduced 'y an annual interest c)arge o* 116- W)at proceeds 7rounded to t)e nearest dollar8 (ill t)e *irm recei,e *rom t)e *inance company at t)e time a 3110+000 account t)at is due in 10 days is turned o,er to t)e *inance company9 A- 3$1+<;0.- 3$2+120C- 3<1+$<;0- 3<<+;;0-

1! "ource# CMA 12$2 1%22 A typical *irm doing 'usiness nationally cannot e:pect to accelerate its cas) in*lo( 'y A- Esta'lis)ing multiple collection centers t)roug)out t)e country.- Employing a lock'o: arrangementC- &nitiating controls to accelerate t)e deposit and collection o* large c)ecks0- Maintaining compensating 'alances rat)er t)an paying cas) *or 'ank ser,ices7! "ource# CMA 12$2 1%2; Merkle+ &nc- )as a temporary need *or *unds- Management is trying to decide 'et(een not taking discounts *rom one o* t)eir t)ree 'iggest suppliers+ or a 15-7;6 per annum rene(a'le discount loan *rom its 'ank *or 2 mont)s- T)e suppliers/ terms are as *ollo(s# =ort Co1>10+ net 20 Riley Manu*acturing Co2>1;+ net 10 ")ad+ &nc2>1;+ net <0 ?sing a 210%day year+ t)e c)eapest source o* s)ort%term *inancing in t)is situation is A- T)e 'ank.- =ort CoC- Riley Manu*acturing Co0- ")ad+ &nc$! "ource# CMA 01$5 1%2 T)e one item listed 'elo( t)at (ould (arrant t)e least amount o* consideration in credit and collection policy

decisions is t)e A- 31;0+000A- Quality o* accounts accepted.- 32;0+000.- Quantity discount gi,enC- 3$00+000C- Cas) discount gi,en0- 3500+0000- @e,el o* collection e:penditures<! "ource# CMA 12$5 1%20 &* t)e a,erage age o* in,entory is <0 days+ t)e a,erage age o* accounts paya'le is 10 days+ and t)e a,erage age o* accounts recei,a'le is 1; days+ t)e num'er o* days in t)e cas) *lo( cycle is A- 21; days.- Marketa'le securities le,el.- 1;0 daysC- <; days0- $; days10! "ource# CMA 12$5 1%22 Clay Corporation *ollo(s an aggressi,e *inancing policy in its (orking capital management ()ile @ott Corporation *ollo(s a conser,ati,e *inancing policy- W)ic) one o* t)e *ollo(ing statements is correct9 A- Clay )as a lo( ratio o* s)ort%term de't to total de't ()ile @ott )as a )ig) ratio o* s)ort%term de't to total de't.- Clay )as a lo( current ratio ()ile @ott )as a )ig) current ratioC- Clay )as less li4uidity risk ()ile @ott )as more li4uidity risk0- Clay/s interest c)arges are lo(er t)an @ott/s interest c)arges11! "ource# CMA 12$; 1%1 An increase in sales resulting *rom an increased cas) discount *or prompt payment (ould 'e e:pected to cause A- An increase in t)e operating cycle0- Ma:imiFe pro*its.- An increase in t)e a,erage collection periodC- A decrease in t)e cas) con,ersion cycle0- A decrease in purc)ase discounts taken12! "ource# CMA 12$1 1%20 CMR is a retail mail order *irm t)at currently uses a central collection system t)at re4uires all c)ecks to 'e sent to its .oston )ead4uarters- An a,erage o* ; days is re4uired *or mailed c)ecks to 'e recei,ed+ 5 days *or CMR to process t)em and 1 days *or t)e c)ecks to clear t)roug) its 'ankA proposed lock'o: system (ould reduce t)e mail and process time to 2 days and t)e c)eck clearing time to 1 day- CMR )as an a,erage daily collection o* 3100+000- &* CMR s)ould adopt t)e lock'o: system+ its a,erage cas) 'alance (ould increase 'y 11! "ource# CMA 12$1 1%2; T)e *ollo(ing *orms o* s)ort%term 'orro(ing are a,aila'le to a *irm# =loating lien =actoring Re,ol,ing credit C)attel mortgages .ankers/ acceptances @ines o* credit Commercial paper T)e *orms o* s)ort%term 'orro(ing t)at are unsecured credit are C- Proper relations)ip 'et(een current assets and current lia'ilities0- Proper 'lend o* marketa'le securities and cas)15! "ource# CMA 12$1 1%22 According to Co)n Maynard Deynes+ t)e t)ree maEor moti,es *or )olding cas) are *or A- Transactional+ psyc)ological+ and social purposes.- "peculati,e+ *iduciary+ and transactional purposesC- "peculati,e+ social+ and precautionary purposes0- Transactional+ precautionary+ and speculati,e purposes1;! "ource# CMA 12$1 1%25 W)en a company analyFes credit applicants and increases t)e 4uality o* t)e accounts reEected+ t)e company is attempting to A- Ma:imiFe sales.- &ncrease 'ad%de't lossesC- &ncrease t)e a,erage collection period12! "ource# CMA 12$1 1%22 "ome managers e:press t)e opinion t)at t)eir Acas) management pro'lems are not)ing more t)an in,entory pro'lems-A T)ey t)en proceed to use cas) management models+ suc) as t)e EBQ model+ to determine t)e A- Credit and collection policies-

A- =loating lien+ re,ol,ing credit+ c)attel mortgage+ and commercial paper.- =actoring+ c)attel mortgage+ 'ankers/ acceptances+ and line o* creditC- =loating lien+ c)attel mortgage+ 'ankers/ acceptances+ and line o* credit0- Re,ol,ing credit+ 'ankers/ acceptances+ line o* credit+ and commercial paper17! "ource# CMA 01$7 1%2; T)e carrying costs associated (it) in,entory management include A- &nsurance costs+ s)ipping costs+ storage costs+ and o'solescence.- "torage costs+ )andling costs+ capital in,ested+ and o'solescenceC- Purc)asing costs+ s)ipping costs+ set%up costs+ and 4uantity discounts lost0- B'solescence+ set%up costs+ capital in,ested+ and purc)asing costs-

7Re*ers to =act Pattern G18 Assuming Morton Company 'orro(s t)e money on t)e last day o* t)e discount period and repays it 20 days later+ t)e e**ecti,e interest rate on t)e loan is A- 12-006.- 12-226C- 12-2060- 12-5$621! "ource# CMA 01$$ 1%12 A compensating 'alance A- Compensates a *inancial institution *or ser,ices rendered 'y pro,iding it (it) deposits o* *unds.- &s used to compensate *or possi'le losses on a marketa'le securities port*olioC- &s a le,el o* in,entory )eld to compensate *or ,ariations in usage rate and lead time0- &s t)e amount o* prepaid interest on a loan22! "ource# CMA 01$$ 1%1$ T)e prime rate is t)e

1$! "ource# CMA 01$7 1%21 T)e ordering costs associated (it) in,entory management include A- &nsurance costs+ purc)asing costs+ s)ipping costs+ and spoilage.- B'solescence+ setup costs+ 4uantity discounts lost+ and storage costsC- Purc)asing costs+ s)ipping costs+ setup costs+ and 4uantity discounts lost0- ")ipping costs+ o'solescence+ setup costs+ and capital in,ested=act Pattern G1! Morton Company needs to pay a supplier/s in,oice o* 3;0+000 and (ants to take a cas) discount o* 2>10+ net 50T)e *irm can 'orro( t)e money *or 20 days at 126 per annum plus a 106 compensating 'alance1<! "ource# CMA 01$7 1%2< 7Re*ers to =act Pattern G18 T)e amount Morton Company must 'orro( to pay t)e supplier (it)in t)e discount period and co,er t)e compensating 'alance is A- 3;;+000.- 3;;+0;1C- 3;;+;;10- 3;5+555-

A- "iFe o* t)e commitment *ee on a commercial 'ank loan.- E**ecti,e cost o* a commercial 'ank loanC- E**ecti,e cost o* commercial paper0- Rate c)arged on 'usiness loans to 'orro(ers (it) )ig) credit ratings22! "ource# CMA 01$< 1%10 0etermining t)e appropriate le,el o* (orking capital *or a *irm re4uires A- E,aluating t)e risks associated (it) ,arious le,els o* *i:ed assets and t)e types o* de't used to *inance t)ese assets.- C)anging t)e capital structure and di,idend policy *or t)e *irmC- Maintaining s)ort%term de't at t)e lo(est possi'le le,el 'ecause it is ordinarily more e:pensi,e t)an long%term de't0- B**setting t)e pro*ita'ility o* current assets and current lia'ilities against t)e pro'a'ility o* tec)nical insol,ency25! "ource# CMA 01$$ 1%20 W)ic) one o* t)e *ollo(ing ratios (ould pro,ide t)e 'est measure o* li4uidity9 A- "ales minus returns to total de't-

20! "ource# CMA 01$7 1%20

.- Total assets minus good(ill to total e4uity-

C- Current assets minus in,entories to current lia'ilities0- Current lia'ilities to long%term de't2;! "ource# CMA 01$< 1%11 "ince Mars)+ &nc- is e:periencing a s)arp increase in sales acti,ity and a steady increase in production+ t)e management o* Mars) )as adopted an aggressi,e (orking capital policy- T)ere*ore+ t)e company/s current le,el o* net (orking capital A- Would most likely 'e t)e same as in any ot)er type o* 'usiness condition as 'usiness cycles tend to 'alance out o,er time.- Would most likely 'e lo(er t)an under ot)er 'usiness conditions in order t)at t)e company can ma:imiFe pro*its ()ile minimiFing (orking capital in,estmentC- Would most likely 'e )ig)er t)an under ot)er 'usiness conditions so t)at t)ere (ill 'e su**icient *unds to replenis) assets0- Would most likely 'e )ig)er t)an under ot)er 'usiness conditions as t)e company/s pro*its are increasing21! "ource# CMA 01$< 1%12 ")ort%term+ unsecured promissory notes issued 'y large *irms are kno(n as A- Agency securities-

2<! "ource# CMA 01$< 1%1; T)e economic order 4uantity 7EBQ8 *ormula can 'e adapted in order *or a *irm to determine t)e optimal split 'et(een cas) and marketa'le securities- T)e EBQ model assumes all o* t)e *ollo(ing e:cept t)at A- T)e cost o* a transaction is independent o* t)e dollar amount o* t)e transaction.- &nterest rates are constant o,er t)e s)ort runC- T)ere is an opportunity cost associated (it) )olding cas)+ 'eginning (it) t)e *irst dollar0- Cas) *lo( re4uirements are random20! "ource# CMA 01$< 1%17 A small retail 'usiness (ould most likely *inance its merc)andise in,entory (it) A- Commercial paper.- A terminal (are)ouse receipt loanC- A line o* credit0- A c)attel mortgage21! "ource# CMA 12$< 1%15 W)ic) security is most o*ten )eld as a su'stitute *or cas)9 A- Treasury 'ills.- Common stock-

.- .ankers/ acceptancesC- IoldC- Commercial paper0- Aaa corporate 'onds0- Repurc)ase agreements27! "ource# CMA 01$< 1%12 Met)ods o* accelerating cas) collections include all o* t)e *ollo(ing e:cept A- 0ecentraliFed collections.- Electronic *unds trans*ersC- Compensating 'alances0- @ock'o: systems2$! "ource# CMA 01$< 1%15 ")ort%term securities issued 'y t)e =ederal Housing Administration are kno(n as A- Agency securities.- .ankers/ acceptancesC- Commercial paper0- Repurc)ase agreements"ales Bld Credit Je( Credit Policy Policy %%%%%%%%%% %%%%%%%%%% 32+100+000 32+<10+000 22! "ource# CMA 12$< 1%11 T)e *ollo(ing in*ormation regarding a c)ange in credit policy (as assem'led 'y t)e Wilson Wa: Company- T)e company )as a re4uired rate o* return o* 106 and a ,aria'le cost ratio o* 10622! "ource# CMA 12$< 1%1; A c)ange in credit policy )as caused an increase in sales+ an increase in discounts taken+ a reduction in t)e in,estment in accounts recei,a'le+ and a reduction in t)e num'er o* dou't*ul accounts- .ased upon t)is in*ormation+ (e kno( t)at A- Jet pro*it )as increased.- T)e a,erage collection period )as decreasedC- Iross pro*it )as declined0- T)e siFe o* t)e discount o**ered )as decreased-

A,erage collection period 20 days 21 days T)e preta: cost o* carrying t)e additional in,estment in recei,a'les+ using a 210%day year+ (ould 'e A- 3;+710.- 3<+100C- 3$+1100- 3<10-

C- 7-;260- <-;<62$! "ource# CMA 12$< 1%22 T)e principal ad,antage o* using commercial paper as a s)ort%term *inancing instrument is t)at it A- &s usually c)eaper t)an a commercial 'ank loan.- &s readily a,aila'le to almost all companies-

25! "ource# CMA 12$< 1%17 &n in,entory management+ t)e sa*ety stock (ill tend to increase i* t)e A- Carrying cost increases.- Cost o* running out o* stock decreasesC- Karia'ility o* t)e lead time increases0- Karia'ility o* t)e usage rate decreases2;! "ource# CMA 12$< 1%1$ T)e *ollo(ing in*ormation regarding in,entory policy (as assem'led 'y t)e CRC Corporation- T)e company uses a ;0%(eek year in all calculations"ales 10+000 units per year Brder 4uantity 2+000 units "a*ety stock 1+200 units @ead time 5 (eeks T)e reorder point is A- 2+200 units-

C- B**ers security+ i-e-+ collateral+ to t)e lender0- Can 'e purc)ased (it)out commission costs2<! "ource# CMA 12<0 1%1< 0uring t)e year+ Mason Company/s current assets increased 'y 3120+ current lia'ilities decreased 'y 3;0+ and net (orking capital A- &ncreased 'y 370.- 0id not c)angeC- 0ecreased 'y 31700- &ncreased 'y 317050! "ource# CMA 12<0 1%20 T)e amount o* in,entory t)at a company (ould tend to )old in sa*ety stock (ould increase as t)e A- "ales le,el *alls to a permanently lo(er le,el.- Cost o* carrying in,entory decreases-

.- 2+100 unitsC- Karia'ility o* sales decreasesC- 100 units0- Cost o* running out o* stock decreases0- 1+200 units21! "ource# CMA 12$< 1%20 W)ic) one o* t)e *ollo(ing is a spontaneous source o* *inancing9 A- Jotes paya'le.- @ong%term de'tC- Prepaid interest0- Trade credit27! "ource# CMA 12$< 1%21 T)e Altmane Corporation (as recently 4uoted terms on a commercial 'ank loan o* 76 discounted interest (it) a 206 compensating 'alance- T)e term o* t)e loan is 1 yearT)e e**ecti,e cost o* 'orro(ing is 7rounded to t)e nearest )undredt)8 A- $-7;6.- 0ecrease in t)e operating cycle.- <-516C- Percentage o* sales t)at )a,e 'een collected a*ter a gi,en time period0- Amount o* recei,a'les t)at )a,e 'een outstanding *or gi,en lengt)s o* time52! "ource# CMA 12<0 1%22 As a company 'ecomes more conser,ati,e (it) respect to (orking capital policy+ it (ould tend to )a,e a7n8 A- &ncrease in t)e ratio o* current lia'ilities to noncurrent lia'ilities51! "ource# CMA 12<0 1%22 An aging o* accounts recei,a'le measures t)e A- A'ility o* t)e *irm to meet s)ort%term o'ligations.- A,erage lengt) o* time t)at recei,a'les )a,e 'een outstanding-

C- 0ecrease in t)e 4uick ratio0- &ncrease in t)e ratio o* current assets to noncurrent assets52! "ource# CMA 12<0 1%2$ Cor'in+ &nc- can issue 2%mont) commercial paper (it) a *ace ,alue o* 31+000+000 *or 3<$0+000- Transaction costs (ill 'e 31+200- T)e e**ecti,e annualiFed percentage cost o* t)e *inancing+ 'ased on a 210%day year+ (ill 'e A- $-5$6.- $-116C- $-0060- 2-006-

An organiFation (ould usually o**er credit terms o* 2>10+ net 20 ()en A- T)e organiFation can 'orro( *unds at a rate e:ceeding t)e annual interest cost.- T)e organiFation can 'orro( *unds at a rate less t)an t)e annual interest costC- T)e cost o* capital approac)es t)e prime rate0- Most competitors are o**ering t)e same terms+ and t)e organiFation )as a s)ortage o* cas)5$! "ource# CMA 01<1 1%$ T)e result o* t)e economic order 4uantity *ormula indicates t)e A- Annual 4uantity o* in,entory to 'e carried-

55! "ource# CMA 12<0 1%20 @a(son Company )as t)e opportunity to increase annual sales 3100+000 'y selling to a ne(+ riskier group o* customers- .ased on sales+ t)e uncollecti'le e:pense is e:pected to 'e 1;6+ and collection costs (ill 'e ;6- T)e company/s manu*acturing and selling e:penses are 706 o* sales+ and its e**ecti,e ta: rate is 506- &* @a(son accepts t)is opportunity+ t)e company/s a*ter%ta: pro*it (ill increase 'y A- 35+000-

.- Annual usage o* materials during t)e yearC- "a*ety stock plus estimated in,entory *or t)e year0- Quantity o* eac) indi,idual order during t)e year5<! "ource# CMA 01<1 1%< T)e most direct (ay to prepare a cas) 'udget *or a manu*acturing *irm is to include A- ProEected sales+ credit terms+ and net income-

.- 31+000C- 310+0000- 3<+0005;! "ource# CMA 01<1 1%5 W)ic) group o* ratios (ould 'e use*ul in e,aluating t)e e**ecti,eness o* (orking capital management9 A- Pro*it margin+ acid%test ratio+ and return on assets.- Acid%test ratio+ in,entory turno,er ratio+ and a,erage collection period ratioC- &n,entory turno,er ratio+ times interest earned+ and de't%to%e4uity ratio0- Acid%test ratio+ current ratio+ and return on e4uity51! "ource# CMA 01<1 1%1 W)en a company o**ers credit terms o* 2>10+ net 20+ t)e annual interest cost+ 'ased on a 210%day year+ is A- 25-06.- 2;-26C- 21-060- 21-76C- Are usually sold in denominations o* a minimum o* 3100+00057! "ource# CMA 01<1 1%7 .- ProEected net income+ depreciation+ and good(ill amortiFationC- ProEected purc)ases+ percentages o* purc)ases paid+ and net income0- ProEected sales and purc)ases+ percentages o* collections+ and terms o* payments;0! "ource# CMA 01<1 1%10 Commercial paper A- Has a maturity date greater t)an 1 year.- &s usually sold only t)roug) in,estment 'anking dealersC- Brdinarily does not )a,e an acti,e secondary market0- Has an interest rate lo(er t)an Treasury 'ills;1! "ource# CMA 01<1 1%12 W)ic) one o* t)e *ollo(ing is not a c)aracteristic o* a negotia'le certi*icate o* deposit9 Jegotia'le certi*icates o* deposit A- Ha,e a secondary market *or in,estors.- Are regulated 'y t)e =ederal Reser,e "ystem-

0- Ha,e yields considera'ly greater t)an 'ankers/ acceptances and commercial paper;2! "ource# CMA 01<2 1%22 T)e optimal le,el o* in,entory is a**ected 'y all o* t)e *ollo(ing e:cept t)e A- ?sage rate o* in,entory per time period.- Cost per unit o* in,entoryC- Current le,el o* in,entory0- Cost o* placing an order *or merc)andise;2! "ource# CMA 01<2 1%22 &* a *irm/s credit terms re4uire payment (it)in 5; days 'ut allo( a discount o* 26 i* paid (it)in 1; days 7using a 210%day year8+ t)e appro:imate cost or 'ene*it o* t)e trade credit terms is A- 26-

0- 371+000;7! "ource# CMA 01<2 1%27 T)e *ollo(ing in*ormation applies to .randon Company# Purc)ases "ales %%%%%%%%% %%%%%%%% Canuary 3110+000 3100+000 =e'ruary 110+000 200+000 Marc) 110+000 250+000 April 150+000 200+000 May 150+000 210+000 Cune 120+000 250+000 A cas) payment e4ual to 506 o* purc)ases is made at t)e time o* purc)ase+ and 206 is paid in eac) o* t)e ne:t 2 mont)s- Purc)ases *or t)e pre,ious Jo,em'er and 0ecem'er (ere 31;0+000 per mont)- Payroll is 106 o* sales in t)e mont) it occurs+ and operating e:penses are 206 o* t)e *ollo(ing mont)/s sales 7Culy sales (ere 3220+0008- &nterest payments (ere 320+000 paid 4uarterly in Canuary and April- .randon/s cas) dis'ursements *or t)e mont) o* April (ere A- 3150+000-

.- 116.- 31;2+000C- 5$6C- 3200+0000- 2560- 32;5+000;5! "ource# CMA 01<2 1%25 T)e le,el o* sa*ety stock in in,entory management depends on all o* t)e *ollo(ing e:cept t)e A- @e,el o* uncertainty o* t)e sales *orecast.- @e,el o* customer dissatis*action *or 'ack ordersC- Cost o* running out o* in,entory0- Cost to reorder stockA- 3211+000;;! "ource# CMA 01<2 1%2; Jet (orking capital is t)e di**erence 'et(een A- Current assets and current lia'ilities0- 35$0+000.- =i:ed assets and *i:ed lia'ilitiesC- Total assets and total lia'ilities0- ")are)olders/ in,estment and cas);1! "ource# CMA 01<2 1%21 R@= Corporation )ad income 'e*ore ta:es o* 310+000 *or t)e year- &ncluded in t)is amount (ere depreciation o* 3;+000+ a c)arge o* 31+000 *or t)e amortiFation o* 'ond discounts+ and 35+000 *or interest e:pense- T)e estimated cas) *lo( *or t)e period is A- 310+000A- 320+000.- 311+000.- 3210+000C- 35<+000C- 31$0+000;<! "ource# CMA 12<2 1%20 .est Computers 'elie,es t)at its collection costs could 'e reduced t)roug) modi*ication o* collection procedures- T)is action is e:pected to result in a lengt)ening o* t)e a,erage collection period *rom 2$ days to 25 daysL )o(e,er+ t)ere (ill 'e no c)ange in uncollecti'le accounts- T)e company/s 'udgeted credit sales *or t)e coming year are 327+000+000+ and s)ort%term interest rates are e:pected to a,erage $6- To make t)e c)anges in collection procedures cost 'ene*icial+ t)e minimum sa,ings in collection costs 7using a 210%day year8 *or t)e coming year (ould )a,e to 'e .- 3522+000C- 3250+000;$! "ource# CMA 12<2 1%1< Price Pu'lis)ing is considering a c)ange in its credit terms *rom n>20 to 2>10+ n>20- T)e company/s 'udgeted sales *or t)e coming year are 325+000+000+ o* ()ic) <06 are e:pected to 'e made on credit- &* t)e ne( credit terms are adopted+ Price estimates t)at discounts (ill 'e taken on ;06 o* t)e credit salesL )o(e,er+ uncollecti'le accounts (ill 'e unc)anged- T)e ne( credit terms (ill result in e:pected discounts taken in t)e coming year o*

0- 321+00010! "ource# CMA 12<2 1%21 0artmoor Company/s 'udgeted sales *or t)e coming year are 350+;00+000+ o* ()ic) $06 are e:pected to 'e credit sales at terms o* n>20- 0artmoor estimates t)at a proposed rela:ation o* credit standards (ill increase credit sales 'y 206 and increase t)e a,erage collection period *rom 20 days to 50 days- .ased on a 210%day year+ t)e proposed rela:ation o* credit standards (ill result in an e:pected increase in t)e a,erage accounts recei,a'le 'alance o* A- 3;50+000.- 32+700+000C- 3<00+0000- 31+120+00011! "ource# CMA 12<2 1%22 ")a( Corporation is considering a plant e:pansion t)at (ill increase its sales and net income- T)e *ollo(ing data represent management/s estimate o* t)e impact t)e proposal (ill )a,e on t)e company# Current Proposal %%%%%%%%%% %%%%%%%%%% Cas) 3 100+000 3 120+000 Accounts paya'le 2;0+000 520+000 Accounts recei,a'le 500+000 ;00+000 &n,entory 2$0+000 510+000 Marketa'le securities 200+000 200+000 Mortgage paya'le 7current8 17;+000 22;+000 =i:ed assets 2+;00+000 2+;00+000 Jet income ;00+000 1;0+000 T)e e**ect o* t)e plant e:pansion on ")a(/s (orking capital (ill 'e a7n8 A- 0ecrease o* 31;0+000.- 0ecrease o* 320+000C- &ncrease o* 320+0000- &ncrease o* 3120+000-

A *irm/s current ratio is 1-7; to 1- According to a (orking capital restriction in t)e *irm/s 'ond indenture+ t)e *irm (ill tec)nically de*ault i* t)e current ratio *alls 'elo( 1-; to 1- &* current lia'ilities are 32;0 million+ t)e ma:imum ne( commercial paper t)at can 'e issued to *inance in,entory e:pansion an e4ui,alent amount (it)out a tec)nical de*ault is A- 327;-00 million.- 312;-00 millionC- 312-;0 million0- 3527-;0 million15! "ource# CMA 12<2 1%1< "tarrs Company )as current assets o* 3200+000 and current lia'ilities o* 3200+000- "tarrs could increase its (orking capital 'y t)e A- Prepayment o* 3;0+000 o* ne:t year/s rent.- Re*inancing o* 3;0+000 o* s)ort%term de't (it) long%term de'tC- Purc)ase o* 3;0+000 o* temporary in,estments *or cas)0- Collection o* 3;0+000 o* accounts recei,a'le1;! "ource# CMA 12<2 1%20 A lock%'o: system A- Reduces t)e need *or compensating 'alances.- Pro,ides security *or late nig)t depositsC- Reduces t)e risk o* )a,ing c)ecks lost in t)e mail0- Accelerates t)e in*lo( o* *unds11! "ource# CMA 12<2 1%21 A (orking capital tec)ni4ue ()ic) delays t)e out*lo( o* cas) is A- =actoring-

12! "ource# CMA 12<2 1%25 Moore Company/s 'udgeted sales and 'udgeted cost o* sales *or t)e coming year are 3;5+000+000 and 321+000+000+ respecti,ely- Moore )as made c)anges in its in,entory system t)at (ill increase turno,er *rom its current le,el o* nine times per year to 12 times per year- &* s)ort%term interest rates a,erage $6+ Moore/s cost sa,ings in t)e coming year (ill 'e A- 320+000.- 350+000C- 3$0+0000- 3120+00012! "ource# CMA 12<2 1%22

.- A dra*tC- A lock%'o: system0- Electronic *unds trans*er17! "ource# CMA 12$1 1%2< =inan Corporation/s management is considering a plant e:pansion t)at (ill increase its sales and )a,e commensurate impact on its net (orking capital positionT)e *ollo(ing in*ormation presents management/s estimate o* t)e impact t)e proposal (ill )a,e on =inanCurrent Proposal %%%%%%%%%% %%%%%%%%%% Cas) 3 100+000 3 110+000 Accounts paya'le 500+000 570+000 Accounts recei,a'le ;10+000 1<0+000

&n,entory 2;0+000 2$0+000 Marketa'le securities 200+000 200+000 =i:ed assets 2+;00+000 2+;00+000 Jet income ;00+000 1;0+000 T)e impact o* t)e plant e:pansion on =inan/s (orking capital (ould 'e A- A decrease o* 3100+000.- A decrease o* 3<;0+000C- An increase o* 3100+0000- An increase o* 3<;0+0001$! "ource# CMA 01$7 1%2$ Ric)ardson "upply )as a 3100 in,oice (it) payment terms o* 2>10+ net 10- Ric)ardson can eit)er take t)e discount or place t)e *unds in a money market account paying 16 interest- ?sing a 210%day year+ Ric)ardson/s cost o* not taking t)e cas) discount is A- 12-26.- $-76C- 1-560- 1-261<! "ource# C&A 11<2 &K%51 All decisions 'y *inancial managers s)ould 'e dri,en 'y t)e primary goal to A- Ma:imiFe re,enues-

ease its credit policy *or customers+ t)e amount o* products ordered *or its in,entory e,ery 4uarter (ill 'e A- &ncreased to accommodate )ig)er sales le,els.- Reduced to o**set t)e increased cost o* carrying accounts recei,a'leC- ?na**ected i* sa*ety stock is part o* t)e current 4uarterly order0- ?na**ected i* t)e C&T in,entory control system is used72! "ource# C&A 11$$ &K%;5 A corporation is currently e:periencing cas)%*lo( pro'lems and )as determined t)at it is in need o* s)ort%term credit- &t can eit)er use its trade credit on 3100+000 o* accounts paya'le (it) terms o* 1>10+ net 20 or a 20%day note (it) a 206 annual simple interest rate- W)ic) is t)e 'est alternati,e+ and ()at is its e**ecti,e rate o* interest 7rounded to a ()ole percentage and using a 210%day year89 A- T)e trade credit- &ts e**ecti,e rate is 106.- T)e trade credit- &ts e**ecti,e rate is 206C- T)e note- &ts e**ecti,e rate is 1760- T)e note- &ts e**ecti,e rate is 20672! "ource# C&A 11<1 &K%;1 An e:ample o* secured s)ort%term *inancing is A- Commercial paper-

.- MinimiFe *i:ed costs and ,aria'le costs.- A (are)ouse receiptC- "ta'iliFe gro(t)C- A re,ol,ing credit agreement0- Ma:imiFe stock)older (ealt)0- @ine o* credit70! "ource# C&A 0;<2 &K%;2 0etermining t)e amount and timing o* con,ersions o* marketa'le securities to cas) is a critical element o* a *inancial manager/s per*ormance- &n terms o* t)e rate o* return *orgone on con,erted securities and t)e cost o* suc) transactions+ t)e optimal amount o* cas) to 'e raised 'y selling securities is A- &n,ersely related to t)e rate o* return *orgone and directly related to t)e cost o* t)e transaction.- 0irectly related to t)e rate o* return *orgone and directly related to t)e cost o* t)e transactionC- 0irectly related to t)e rate o* return *orgone and in,ersely related to t)e cost o* t)e transaction0- &n,ersely related to t)e rate o* return *orgone and in,ersely related to t)e cost o* t)e transaction71! "ource# C&A 0;<2 &K%;2 A company ser,es as a distri'utor o* products 'y ordering *inis)ed products once a 4uarter and using t)at in,entory to accommodate t)e demand o,er t)e 4uarter- &* it plans to 75! "ource# C&A 0;<5 &K%;1 A manu*acturing *irm (ants to o'tain a s)ort term loan and )as approac)ed se,eral lending institutions- All o* t)e potential lenders are o**ering t)e same nominal interest rate 'ut t)e terms o* t)e loans ,ary- W)ic) o* t)e *ollo(ing com'inations o* loan terms (ill 'e most attracti,e *or t)e 'orro(ing *irm9 A- "imple interest+ no compensating 'alance.- 0iscount interest+ no compensating 'alanceC- "imple interest+ 206 compensating 'alance re4uired0- 0iscount interest+ 206 compensating 'alance re4uired7;! "ource# C&A 0;<2 &K%50 A condensed comparati,e 'alance s)eet *or a company appears 'elo(# 12%21%Mear 1 12%21%Mear 2

%%%%%%%%%%%% %%%%%%%%%%%% Cas) 350+000 320+000 Accounts recei,a'le 120+000 100+000 &n,entory 200+000 200+000 Property+ plant+ N e4uipment ;00+000 ;;0+000 Accumulated depreciation 72$0+0008 7250+0008 %%%%%%%% %%%%%%%% Total assets 3;$0+000 3150+000 OOOOOOOO OOOOOOOO Current lia'ilities 310+000 3100+000 @ong%term lia'ilities 2<0+000 520+000 "tock)olders/ e4uity 120+000 120+000 %%%%%%%% %%%%%%%% Total lia'ilities and e4uity 3;$0+000 3150+000 OOOOOOOO OOOOOOOO &n looking at li4uidity ratios at 'ot) 'alance s)eet dates+ ()at )appened to t)e 718 current ratio and 728 acid%test 74uick8 ratio9 718 728 Current Ratio Acid%Test Ratio %%%%%%%%%%%%% %%%%%%%%%%%%%%% A&ncreased .&ncreased C0ecreased 00ecreased 0ecreased &ncreased &ncreased 0ecreased

at an annual interest rate o* $6- As a condition o* t)e loan+ t)e company is re4uired to maintain a compensating 'alance o* 3100+000 in its c)ecking account- T)e c)ecking account earns interest at an annual rate o* 26- Brdinarily+ t)e company maintains a 'alance o* 3;0+000 in its account *or transaction purposes- W)at is t)e e**ecti,e interest rate o* t)e loan9 A- 7-776 .- $-226 C- <-2;6 0- $-;16 7<! "ource# CMA 01<5 1%22 All o* t)e *ollo(ing are ,alid reasons *or a 'usiness to )old cas) and marketa'le securities e:cept to A- "atis*y compensating 'alance re4uirements.- Maintain ade4uate cas) needed *or transactionsC- Meet *uture needs0- Earn ma:imum returns on in,estment assets$0! "ource# CMA 01<5 1%22 An automated clearing)ouse 7ACH8 electronic trans*er is a7n8 A- Electronic payment to a company/s account at a concentration 'ank.- C)eck t)at must 'e immediately cleared 'y t)e =ederal Reser,e .ankC- Computer%generated deposit ticket ,eri*ying deposit o* *unds0- C)eck%like instrument dra(n against t)e payor and not against t)e 'ank$1! "ource# CMA 01<5 1%25 Assume t)at eac) day a company (rites and recei,es c)ecks totaling 310+000- &* it takes ; days *or t)e c)ecks to clear and 'e deducted *rom t)e company/s account+ and only 5 days *or t)e deposits to clear+ ()at is t)e *loat9 A- 310+000

71! "ource# CMA 01<5 1%1< A company )as daily cas) receipts o* 31;0+000- T)e treasurer o* t)e company )as in,estigated a lock'o: ser,ice ()ere'y t)e 'ank t)at o**ers t)is ser,ice (ill reduce t)e company/s collection time 'y *our days at a mont)ly *ee o* 32+;00- &* money market rates a,erage 56 during t)e year+ t)e additional annual income 7loss8 *rom using t)e lock'o: ser,ice (ould 'e A- 31+000 .- 371+0008 C- 312+000 0- 3712+0008 77! "ource# CMA 01<5 1%20 ?sing a 210%day year+ ()at is t)e opportunity cost to a 'uyer o* not accepting terms 2>10+ net 5;9 A- ;;-176

.- 30 C- 3710+0008 0- 3;0+000

.- 21-$16 C- 22-276 0- 101-726 7$! "ource# CMA 01<5 1%21 A company o'tained a s)ort%term 'ank loan o* 3;00+000 $2! "ource# CMA 01<5 1%2; All o* t)e *ollo(ing are alternati,e marketa'le securities suita'le *or in,estment e:cept A- ?-"- Treasury 'ills.- Eurodollars-

capital o* a *irm9 C- Commercial paperA- Cas) payment o* payroll ta:es paya'le0- Con,erti'le 'onds.- Purc)ase o* a ne( plant *inanced 'y a 20%year mortgage$2! "ource# CMA 01<5 1%21 Assuming a 210%day year+ t)e current price o* a 3100 ?-"Treasury 'ill due in 1$0 days on a 16 discount 'asis is A- 3<7-00 .- 3<5-00 C- 3100-00 0- 3<2-00 $5! "ource# CMA 01<5 1%27 All o* t)e *ollo(ing are in,entory carrying costs e:cept A- "torage.- &nsuranceC- Bpportunity cost o* in,entory in,estment0- &nspections$;! "ource# CMA 01<5 1%2< A *irm t)at o*ten *actors its accounts recei,a'le )as an agreement (it) its *inance company t)at re4uires t)e *irm to maintain a 16 reser,e and c)arges 16 commission on t)e amount o* recei,a'les- T)e net proceeds (ould 'e *urt)er reduced 'y an annual interest c)arge o* 106 on t)e monies ad,anced- Assuming a 210%day year+ ()at amount o* cas) 7rounded to t)e nearest dollar8 (ill t)e *irm recei,e *rom t)e *inance company at t)e time a 3100+000 account t)at is due in <0 days is turned o,er to t)e *inance company9 A- 3<2+000 .- 3<0+000 C- 3$2+700 0- 3<0+17; $1! "ource# CMA 01<5 1%20 A *irm/s current ratio is 2 to 1- &ts 'ond indenture states t)at its current ratio cannot *all 'elo( 1-; to 1- &* current lia'ilities are 3200+000+ t)e ma:imum amount o* ne( s)ort%term de't t)e *irm can assume in order to *inance in,entory (it)out de*aulting is A- 3200+000 C- 21-006 .- 311+117 0- 21-$16 C- 3211+117 0- 31;0+000 $7! "ource# CMA 12<5 1%1; W)ic) one o* t)e *ollo(ing (ould increase t)e (orking <1! "ource# CMA 12<5 1%20 Handy operates a c)ain o* )ard(are stores across B)ioT)e controller (ants to determine t)e optimum sa*ety stock le,els *or an air puri*ier unit- T)e in,entory manager compiled t)e *ollo(ing data# T)e annual carrying cost o* <0! "ource# CMA 12<5 1%1$ &* a retailer/s terms o* trade are 2>10+ net 5; (it) a particular supplier+ ()at is t)e cost on an annual 'asis o* not taking t)e discount9 Assume a 210%day yearA- 25-006 .- 27-116 $<! "ource# CMA 12<5 1%17 Troy Toys is a retailer operating in se,eral cities- T)e indi,idual store managers deposit daily collections at a local 'ank in a non%interest 'earing c)ecking account- T(ice per (eek+ t)e local 'ank issues a depository trans*er c)eck 70TC8 to t)e central 'ank at )ead4uarters- T)e controller o* t)e company is considering using a (ire trans*er insteadT)e additional cost o* eac) trans*er (ould 'e 32;L collections (ould 'e accelerated 'y 2 daysL and t)e annual interest rate paid 'y t)e central 'ank is 7-26 70-026 per day8- At ()at amount o* dollars trans*erred (ould it 'e economically *easi'le to use a (ire trans*er instead o* t)e 0TC9 Assume a 2;0%day yearA- &t (ould ne,er 'e economically *easi'le.- 312;+000 or a'o,eC- Any amount greater t)an 31720- Any amount greater t)an 312+;00$$! "ource# CMA 12<5 1%11 T)e term As)ort%sellingA is t)e A- "elling o* a security t)at (as purc)ased 'y 'orro(ing money *rom a 'roker.- "elling o* a security t)at is not o(ned 'y t)e sellerC- "elling o* all t)e s)ares you o(n in a company in anticipation t)at t)e price (ill decline dramatically0- .etting t)at a stock (ill increase 'y a certain amount (it)in a gi,en period o* timeC- Cas) collection o* accounts recei,a'le0- Re*inancing a s)ort%term note paya'le (it) a t(o%year note paya'le-

in,entory appro:imates 206 o* t)e in,estment in in,entoryT)e in,entory in,estment per unit a,erages 3;0- T)e stockout cost is estimated to 'e 3; per unit- T)e company orders in,entory on t)e a,erage o* 10 times per year- Total cost O carrying cost P e:pected stockout cost- T)e pro'a'ilities o* a stockout per order cycle (it) ,arying le,els o* sa*ety stock are as *ollo(s# ?nits %%%%%%%%%%%%%%%%%%%%%%%%% "a*ety "tock "tockout Pro'a'ility %%%%%%%%%%%% %%%%%%%% %%%%%%%%%%% 200 0 06 100 100 1;6 0 100 1;6 0 200 126 T)e total cost o* sa*ety stock on an annual 'asis (it) a sa*ety stock le,el o* 100 units is A- 31+7;0 .- 31+<;0 C- 3;;0 0- 32+000 <2! "ource# CMA 12<5 1%21 An e:ample o* a carrying cost is A- 0isruption o* production sc)edules-

<;! "ource# CMA 12<5 1%25 A company plans to tig)ten its credit policy- T)e ne( policy (ill decrease t)e a,erage num'er o* days in collection *rom 7; to ;0 days and (ill reduce t)e ratio o* credit sales to total re,enue *rom 706 to 106- T)e company estimates t)at proEected sales (ill 'e ;6 less i* t)e proposed ne( credit policy is implemented- &* proEected sales *or t)e coming year are 3;0 million+ calculate t)e dollar impact on accounts recei,a'le o* t)is proposed c)ange in credit policy- Assume a 210%day yearA- 32+$17+55; decrease.- 31+;00+000 decreaseC- 32+222+225 decrease0- 31$+75<+77$ increase<1! "ource# CMA 12<5 1%20 &* a *irm increases its cas) 'alance 'y issuing additional s)ares o* common stock+ (orking capital A- Remains unc)anged and t)e current ratio remains unc)anged.- &ncreases and t)e current ratio remains unc)angedC- &ncreases and t)e current ratio decreases0- &ncreases and t)e current ratio increases-

.- Quantity discounts lostC- Handling costs0- "poilage<2! "ource# CMA 12<5 1%22 A *irm a,erages 35+000 in sales per day and is paid+ on an a,erage+ (it)in 20 days o* t)e sale- A*ter t)ey recei,e t)eir in,oice+ ;;6 o* t)e customers pay 'y c)eck+ ()ile t)e remaining 5;6 pay 'y credit card- Appro:imately )o( muc) (ould t)e company s)o( in accounts recei,a'le on its 'alance s)eet on any gi,en date9 A- 35+000 .- 3120+000 C- 35$+000 0- 3;5+000 <5! "ource# CMA 12<5 1%22 &* a *irm 'orro(s 3;00+000 at 106 and is re4uired to maintain 3;0+000 as a minimum compensating 'alance at t)e 'ank+ ()at is t)e e**ecti,e interest rate on t)e loan9 A- 10-06 .- 11-16 C- <-16 0- 12-26 <<! "ource# CMA 12<; 1%2 A,erage daily cas) out*lo(s are 32 million *or E,ans &nc- A ne( cas) management system can add 2 days to t)e dis'ursement sc)edule- Assuming E,ans earns 106 on e:cess *unds+ )o( muc) s)ould t)e *irm 'e (illing to pay per year *or t)is cas) management system9 <$! "ource# CMA 12<; 1%2 T)e (orking capital *inancing policy t)at su'Eects t)e *irm to t)e greatest risk o* 'eing una'le to meet t)e *irm/s maturing o'ligations is t)e policy t)at *inances A- =luctuating current assets (it) long%term de't.- Permanent current assets (it) long%term de'tC- Permanent current assets (it) s)ort%term de't0- =luctuating current assets (it) s)ort%term de't<7! "ource# CMA 12<; 1%1 T)e "te(art Co- uses t)e economic order 4uantity 7EBQ8 model *or in,entory management- A decrease in ()ic) one o* t)e *ollo(ing ,aria'les (ould increase t)e EBQ9 A- Annual sales.- Cost per orderC- "a*ety stock le,el0- Carrying costs-

A- 31+000+000 .- 32+000+000 C- 31+;00+000 0- 3100+000 100! "ource# CMA 12<; 1%5 T)e a,erage collection period *or a *irm measures t)e num'er o* days A- A*ter a typical credit sale is made until t)e *irm recei,es t)e payment.- =or a typical c)eck to AclearA t)roug) t)e 'anking systemC- .eyond t)e end o* t)e credit period 'e*ore a typical customer payment is recei,ed0- .e*ore a typical account 'ecomes delin4uent101! "ource# CMA 12<; 1%1 Cackson 0istri'utors sells to retail stores on credit terms o* 2>10+ net 20- 0aily sales a,erage 1;0 units at a price o* 3200 eac)- Assuming t)at all sales are on credit and 106 o* customers take t)e discount and pay on day 10 ()ile t)e rest o* t)e customers pay on day 20+ t)e amount o* Cackson/s accounts recei,a'le is A- 31+2;0+000

)ig)er t)an t)e cost o* a 'ank loan105! "ource# CMA 12<; 1%$ ")o(n 'elo( is a *orecast o* sales *or Cooper &nc- *or t)e *irst 5 mont)s o* t)e year 7all amounts are in t)ousands o* dollars8Canuary =e'ruary Marc) April %%%%%%% %%%%%%%% %%%%% %%%%% Cas) sales 31; 325 31$ 315 "ales on credit 100 120 <0 70 Bn a,erage+ ;06 o* credit sales are paid *or in t)e mont) o* sale+ 206 in t)e mont) *ollo(ing t)e sale+ and t)e remainder is paid 2 mont)s a*ter t)e mont) o* saleAssuming t)ere are no 'ad de'ts+ t)e e:pected cas) in*lo( *or Cooper in Marc) is A- 312$+000 .- 3122+000 C- 311<+000 0- 310$+000 10;! "ource# CMA 12<; 1%12 Ed(ards Manu*acturing Corporation uses t)e standard economic order 4uantity 7EBQ8 model- &* t)e EBQ *or Product A is 200 units and Ed(ards maintains a ;0%unit sa*ety stock *or t)e item+ ()at is t)e a,erage in,entory o* Product A9 A- 2;0 units-

.- 3<<0+000 .- 1;0 unitsC- 3<00+000 C- 12; units0- 3$10+000 0- 100 units102! "ource# CMA 12<; 1%; W)en t)e Economic Brder Quantity 7EBQ8 model is used *or a *irm t)at manu*actures its in,entory+ ordering costs consist primarily o* A- &nsurance and ta:esA- &nstallment loans.- B'solescence and deterioration.- Commercial paperC- "torage and )andlingC- Trade credit0- Production set%up0- .ankers/ acceptances102! "ource# CMA 12<; 1%7 W)ic) one o* t)e *ollo(ing statements concerning cas) discounts is correct9 A- T)e cost o* not taking a 2>10+ net 20 cas) discount is usually less t)an t)e prime rate.- Wit) trade terms o* 2>1;+ net 10+ i* t)e discount is not taken+ t)e 'uyer recei,es 5; days o* *ree creditC- T)e cost o* not taking t)e discount is )ig)er *or terms o* 2>10+ net 10 t)an *or 2>10+ net 200- T)e cost o* not taking a cas) discount is generally 107! "ource# CMA 12<; 1%10 T)e 0i:on Corporation )as an outstanding 1%year 'ank loan o* 3200+000 at a stated interest rate o* $6- &n addition+ 0i:on is re4uired to maintain a 206 compensating 'alance in its c)ecking account- Assuming t)e company (ould normally maintain a Fero 'alance in its c)ecking account+ t)e e**ecti,e interest rate on t)e loan is A- 1-56 .- $-06 C- 206 101! "ource# CMA 12<; 1%< W)ic) one o* t)e *ollo(ing *inancial instruments generally pro,ides t)e largest source o* s)ort%term credit *or small *irms9

0- 10-06 10$! "ource# CMA 12<; 1%11 Elan Corporation is considering 'orro(ing 3100+000 *rom a 'ank *or 1 year at a stated interest rate o* <6- W)at is t)e e**ecti,e interest rate to Elan i* t)is 'orro(ing is in t)e *orm o* a discounted note9 A- $-106

i O interest rate on marketa'le securities T O total demand *or cas) o,er a period o* time T)is *ormula is a modi*ication o* t)e economic order 4uantity 7EBQ8 *ormula used *or in,entory managementAssume t)at t)e *i:ed cost o* selling marketa'le securities is 310 per transaction and t)e interest rate on marketa'le securities is 16 per year- T)e company estimates t)at it (ill make cas) payments o* 312+000 o,er a one%mont) periodW)at is t)e a,erage cas) 'alance 7rounded to t)e nearest dollar89 A- 31+000

.- <-006 .- 32+000 C- <-$16 C- 32+515 0- <-$<6 0- 31+<2$ 10<! "ource# CMA 12<; 1%12 W)en managing cas) and s)ort%term in,estments+ a corporate treasurer is primarily concerned (it) A- Ma:imiFing rate o* return.- MinimiFing ta:esC- &n,esting in Treasury 'onds since t)ey )a,e no de*ault risk0- @i4uidity and sa*ety110! "ource# CMA 12<; 1%15 =oster &nc- is considering implementing a lock%'o: collection system at a cost o* 3$0+000 per year- Annual sales are 3<0 million+ and t)e lock'o: system (ill reduce collection time 'y 2 days- &* =oster can in,est *unds at $6+ s)ould it use t)e lock'o: system9 Assume a 210%day yearA- Mes+ producing sa,ings o* 3150+000 per year.- Mes+ producing sa,ings o* 310+000 per yearC- Jo+ producing a loss o* 320+000 per year0- Jo+ producing a loss o* 310+000 per yearA- 32+000 111! "ource# CMA 12<; 1%1; W)ic) one o* t)e *ollo(ing pro,ides a spontaneous source o* *inancing *or a *irm9 A- Accounts paya'le.- Mortgage 'ondsC- Accounts recei,a'le0- 0e'entures112! "ource# CMA 01<1 1%10 A company uses t)e *ollo(ing *ormula in determining its optimal le,el o* cas)Q 2'T C O s4uare root o* %%%%% i &*# ' O *i:ed cost per transaction 11;! "ource# CMA 01<1 1%12 A company (it) 35-$ million in credit sales per year plans to rela: its credit standards+ proEecting t)at t)is (ill increase credit sales 'y 3720+000- T)e company/s a,erage collection period *or ne( customers is e:pected to 'e 7; days+ and t)e payment 'e)a,ior o* t)e e:isting customers is not e:pected to c)ange- Karia'le costs are $06 o* salesT)e *irm/s opportunity cost is 206 'e*ore ta:es- Assuming a 210%day year+ ()at is t)e company/s 'ene*it 7loss8 on t)e planned c)ange in credit terms9 A- 30 .- 32$+$00 .- 312+000 C- 30 0- 31+000 112! "ource# CMA 01<1 1%11 A company o'tained a s)ort%term 'ank loan o* 32;0+000 at an annual interest rate o* 16- As a condition o* t)e loan+ t)e company is re4uired to maintain a compensating 'alance o* 3;0+000 in its c)ecking account- T)e company/s c)ecking account earns interest at an annual rate o* 26Brdinarily+ t)e company maintains a 'alance o* 32;+000 in its c)ecking account *or transaction purposes- W)at is t)e e**ecti,e interest rate o* t)e loan9 A- 1-556 .- 7-006 C- ;-$06 0- 1-116 115! "ource# CMA 01<1 1%12 A *irm )as daily cas) receipts o* 3100+000 and collection time o* 2 days- A 'ank )as o**ered to reduce t)e collection time on t)e *irm/s deposits 'y 2 days *or a mont)ly *ee o* 3;00- &* money market rates are e:pected to a,erage 16 during t)e year+ t)e net annual 'ene*it 7loss8 *rom )a,ing t)is ser,ice is

C- Karia'ility o* sales decreasesC- 3155+000 0- Cost o* running out o* stock decreases0- 3120+000 111! "ource# CMA 01<1 1%15 W)ic) one o* t)e *ollo(ing responses is not an ad,antage to a corporation t)at uses t)e commercial paper market *or s)ort%term *inancing9 A- T)is market pro,ides more *unds at lo(er rates t)an ot)er met)ods pro,ide.- T)e 'orro(er a,oids t)e e:pense o* maintaining a compensating 'alance (it) a commercial 'ankC- T)ere are no restrictions as to t)e type o* corporation t)at can enter into t)is market0- T)is market pro,ides a 'road distri'ution *or 'orro(ing117! "ource# CMA 01<1 1%1; "potec) Co-/s 'udgeted sales and 'udgeted cost o* sales *or t)e coming year are 3212+000+000 and 3122+;00+000+ respecti,ely- ")ort%term interest rates are e:pected to a,erage ;6- &* "potec) could increase in,entory turno,er *rom its current $-0 times per year to 10-0 times per year+ its e:pected cost sa,ings in t)e current year (ould 'e A- 311;+12; .- 30 C- 32+212+;00 0- 3$2$+12; 11$! "ource# CMA 01<1 1%11 0etermining t)e appropriate le,el o* (orking capital *or a *irm re4uires A- C)anging t)e capital structure and di,idend policy o* t)e *irm.- Maintaining s)ort%term de't at t)e lo(est possi'le le,el 'ecause it is generally more e:pensi,e t)an long%term de'tC- B**setting t)e 'ene*it o* current assets and current lia'ilities against t)e pro'a'ility o* tec)nical insol,ency0- Maintaining a )ig) proportion o* li4uid assets to total assets in order to ma:imiFe t)e return on total in,estments11<! "ource# CMA 01<1 1%17 T)e amount o* in,entory t)at a company (ould tend to )old in stock (ould increase as t)e A- "ales le,el *alls to a permanently lo(er le,el.- Cost o* carrying in,entory decreases120! "ource# CMA 01<1 1%2< All o* t)e *ollo(ing statements in regard to (orking capital are correct e:cept A- Current lia'ilities are an important source o* *inancing *or many small *irms.- Pro*ita'ility ,aries in,ersely (it) li4uidityC- T)e )edging approac) to *inancing in,ol,es matc)ing maturities o* de't (it) speci*ic *inancing needs0- =inancing permanent in,entory 'uildup (it) long%term de't is an e:ample o* an aggressi,e (orking capital policy121! "ource# CMA 01<1 1%20 A company enters into an agreement (it) a *irm t)at (ill *actor t)e company/s accounts recei,a'le- T)e *actor agrees to 'uy t)e company/s recei,a'les+ ()ic) a,erage 3100+000 per mont) and )a,e an a,erage collection period o* 20 days- T)e *actor (ill ad,ance up to $06 o* t)e *ace ,alue o* recei,a'les at an annual rate o* 106 and c)arge a *ee o* 26 on all recei,a'les purc)ased- T)e controller o* t)e company estimates t)at t)e company (ould sa,e 31$+000 in collection e:penses o,er t)e year- =ees and interest are not deducted in ad,ance- Assuming a 210%day year+ ()at is t)e annual cost o* *inancing9 A- 10-06 .- 12-06 C- 15-06 0- 17-;6 122! "ource# CMA 12<1 1%; A (orking capital tec)ni4ue t)at increases t)e paya'le *loat and t)ere*ore delays t)e out*lo( o* cas) is A- Concentration 'anking.- A dra*tC- Electronic 0ata &nterc)ange 7E0&80- A lock'o: system122! "ource# CMA 12<1 1%1 A c)ange in credit policy )as caused an increase in sales+ an increase in discounts taken+ a decrease in t)e amount o* 'ad de'ts+ and a decrease in t)e in,estment in accounts recei,a'le- .ased upon t)is in*ormation+ t)e company/s A- A,erage collection period )as decreased.- Percentage discount o**ered )as decreasedC- Accounts recei,a'le turno,er )as decreased-

0- Working capital )as increased125! "ource# CMA 12<1 1%$ As a company 'ecomes more conser,ati,e in its (orking capital policy+ it (ould tend to )a,e a7n8 A- 0ecrease in its acid%test ratio.- &ncrease in t)e ratio o* current lia'ilities to noncurrent lia'ilitiesC- &ncrease in t)e ratio o* current assets to units o* output0- &ncrease in *unds in,ested in common stock and a decrease in *unds in,ested in marketa'le securities=act Pattern G2! Cy'erAge Butlet+ a relati,ely ne( store+ is a ca*e t)at o**ers customers t)e opportunity to 'ro(se t)e &nternet or play computer games at t)eir ta'les ()ile t)ey drink co**eeT)e customer pays a *ee 'ased on t)e amount o* time spent signed on to t)e computer- T)e store also sells 'ooks+ tee%s)irts+ and computer accessories- Cy'erAge )as 'een paying all o* its 'ills on t)e last day o* t)e payment period+ t)us *or*eiting all supplier discounts- ")o(n 'elo( are data on Cy'erAge/s t(o maEor ,endors+ including a,erage mont)ly purc)ases and credit termsA,erage Mont)ly Kendor Purc)ases Credit Terms %%%%%%%%%% %%%%%%%%% %%%%%%%%%%%% We' Master 32;+000 2>10+ net 20 "o*tidee ;0+000 ;>10+ net <0 12;! "ource# CMA 12<1 1%10 7Re*ers to =act Pattern G28 Assuming a 210%day year and t)at Cy'erAge continues paying on t)e last day o* t)e credit period+ t)e company/s (eig)ted%a,erage annual interest rate *or trade credit 7ignoring t)e e**ects o* compounding8 *or t)ese t(o ,endors is A- 27-06 .- 2;-26 C- 2$-06 0- 20-26 121! "ource# CMA 12<1 1%11 7Re*ers to =act Pattern G28 ")ould Cy'erAge use trade credit and continue paying at t)e end o* t)e credit period9 A- Mes+ i* t)e cost o* alternati,e s)ort%term *inancing is less.- Mes+ i* t)e *irm/s (eig)ted%a,erage cost o* capital is e4ual to its (eig)ted%a,erage cost o* trade creditC- Jo+ i* t)e cost o* alternati,e long%term *inancing is greater0- Mes+ i* t)e cost o* alternati,e s)ort%term *inancing

is greater127! "ource# CMA 12<1 1%12 W)ic) one o* t)e *ollo(ing statements a'out trade credit is correct9 Trade credit is A- Jot an important source o* *inancing *or small *irms.- A source o* long%term *inancing to t)e sellerC- "u'Eect to risk o* 'uyer de*ault0- ?sually an ine:pensi,e source o* e:ternal *inancing12$! "ource# CMA 12<1 1%12 W)ic) one o* t)e *ollo(ing statements is most correct i* a seller e:tends credit to a purc)aser *or a period o* time longer t)an t)e purc)aser/s operating cycle9 T)e seller A- Will )a,e a lo(er le,el o* accounts recei,a'le t)an t)ose companies ()ose credit period is s)orter t)an t)e purc)aser/s operating cycle.- &s+ in e**ect+ *inancing more t)an Eust t)e purc)aser/s in,entory needsC- Can 'e certain t)at t)e purc)aser (ill 'e a'le to con,ert t)e in,entory into cas) 'e*ore payment is due0- Has no need *or a stated discount rate or credit period=act Pattern G2! T)e =rame "upply Company )as Eust ac4uired a large account and needs to increase its (orking capital 'y 3100+000- T)e controller o* t)e company )as identi*ied t)e *our sources o* *unds gi,en 'elo(A- Pay a *actor to 'uy t)e company/s recei,a'les+ ()ic) a,erage 312;+000 per mont) and )a,e an a,erage collection period o* 20 days- T)e *actor (ill ad,ance up to $06 o* t)e *ace ,alue o* recei,a'les at 106 and c)arge a *ee o* 26 on all recei,a'les purc)ased- T)e controller estimates t)at t)e *irm (ould sa,e 325+000 in collection e:penses o,er t)e year- Assume t)e *ee and interest are not deducti'le in ad,ance.- .orro( 3110+000 *rom a 'ank at 126 interest- A <6 compensating 'alance (ould 'e re4uiredC- &ssue 3110+000 o* 1%mont) commercial paper to net 3100+000- 7Je( paper (ould 'e issued e,ery 1 mont)s-8 0- .orro( 312;+000 *rom a 'ank on a discount 'asis at 206- Jo compensating 'alance (ould 'e re4uiredAssume a 210%day year in all o* your calculations12<! "ource# CMA 12<1 1%15 7Re*ers to =act Pattern G28 T)e cost o* Alternati,e A- is A- 10-06 .- 12-06

C- 12-26 0- 11-06

C- ?ncollecti'le accounts recei,a'le are (ritten o** against t)e allo(ance account0- Kacant land is sold *or less t)an t)e net 'ook ,alue-

120! "ource# CMA 12<1 1%1; 7Re*ers to =act Pattern G28 T)e cost o* Alternati,e .- is A- <-06 .- 12-06 C- 12-26

12;! "ource# CMA 01<7 1%$ Iaro Company+ a retail store+ is considering *oregoing sales discounts in order to delay using its cas)- "upplier credit terms are 2>10+ net 20- Assuming a 210%day year+ ()at is t)e annual cost o* credit i* t)e cas) discount is not taken and Iaro pays net 209 A- 25-06

0- 21-06 .- 25-;6 121! "ource# CMA 12<1 1%11 7Re*ers to =act Pattern G28 T)e cost o* Alternati,e C- is A- <-16 .- 10-06 C- 1$-26 0- 20-06 122! "ource# CMA 12<1 1%17 7Re*ers to =act Pattern G28 T)e cost o* Alternati,e 0- is A- 20-06 C- 27 days.- 2;-06 0- 20 daysC- 50-06 0- ;0-06 122! "ource# CMA 12<1 1%1$ W)ic) o* t)e *ollo(ing represents a *irm/s a,erage gross recei,a'les 'alance9 &- 0ays/ sales in recei,a'les : accounts recei,a'le turno,er&&- A,erage daily sales : a,erage collection period&&&- Jet sales>a,erage gross recei,a'lesA- & only.- & and && onlyC- && only0- && and &&& onlyA- &nsurance costs125! "ource# CMA 01<7 1%7 W)ic) one o* t)e *ollo(ing transactions (ould increase t)e current ratio and decrease net pro*it9 A- A *ederal income ta: payment due *rom t)e pre,ious year is paid.- A stock di,idend is declared.- Cost o* capital in,ested in t)e in,entoryC- Cost o* o'solescence0- ")ipping costs12<! "ource# CMA 01<7 1%12 Je(man Products )as recei,ed proposals *rom se,eral 12$! "ource# CMA 01<7 1%12 W)ic) one o* t)e *ollo(ing (ould not 'e considered a carrying cost associated (it) in,entory9 127! "ource# CMA 01<7 1%10 W)ic) one o* t)e *ollo(ing transactions does not c)ange t)e current ratio and does not c)ange t)e total current assets9 A- A cas) ad,ance is made to a di,isional o**ice.- A cas) di,idend is declaredC- ")ort%term notes paya'le are retired (it) cas)0- A *ully depreciated asset is sold *or cas)121! "ource# CMA 01<7 1%< Clauson &nc- grants credit terms o* 1>1;+ net 20 and proEects gross sales *or ne:t year o* 32+000+000- T)e credit manager estimates t)at 506 o* t)eir customers pay on t)e discount date+ 506 on t)e net due date+ and 206 pay 1; days a*ter t)e net due date- Assuming uni*orm sales and a 210%day year+ ()at is t)e proEected days/ sales outstanding 7rounded to t)e nearest ()ole day89 A- 20 days.- 25 daysC- 21-06 0- 21-76

'anks to esta'lis) a lock'o: system to speed up receiptsJe(man recei,es an a,erage o* 700 c)ecks per day a,eraging 31+$00 eac)+ and its cost o* s)ort%term *unds is 76 per year- Assuming t)at all proposals (ill produce e4ui,alent processing results and using a 210%day year+ ()ic) one o* t)e *ollo(ing proposals is optimal *or Je(man9 A- A 30-;0 *ee per c)eck.- A *lat *ee o* 312;+000 per yearC- A *ee o* 0-026 o* t)e amount collected0- A compensating 'alance o* 31+7;0+000150! "ource# CMA 01<7 1%15 T)e sales manager at Ryan Company *eels con*ident t)at+ i* t)e credit policy at Ryan/s (ere c)anged+ sales (ould increase and+ conse4uently+ t)e company (ould utiliFe e:cess capacity- T)e t(o credit proposals 'eing considered are as *ollo(s# Proposal A Proposal . %%%%%%%%%% %%%%%%%%%% &ncrease in sales 3;00+000 3100+000 Contri'ution margin 206 206 .ad de't percentage ;6 ;6 &ncrease in operating pro*its 37;+000 3<0+000 0esired return on sales 1;6 1;6 Currently+ payment terms are net 20- T)e proposed payment terms *or Proposal A and Proposal . are net 5; and net <0+ respecti,ely- An analysis to compare t)ese t(o proposals *or t)e c)ange in credit policy (ould include all o* t)e *ollo(ing *actors e:cept t)e A- Cost o* *unds *or Ryan.- Current 'ad de't e:perienceC- &mpact on t)e current customer 'ase o* e:tending terms to only certain customers0- .ank loan co,enants on days/ sales outstanding151! "ource# CMA 01<7 1%1; T)e treasury analyst *or Iart) Manu*acturing )as estimated t)e cas) *lo(s *or t)e *irst )al* o* ne:t year 7ignoring any s)ort%term 'orro(ings8 as *ollo(sCas) 7millions8 %%%%%%%%%%%%%%%%%%% &n*lo(s But*lo(s %%%%%%% %%%%%%%% Canuary 32 31 =e'ruary 2 5 Marc) 2 ; April 2 2 May 5 2 Cune ; 2 Iart) )as a line o* credit o* up to 35 million on ()ic) it pays interest mont)ly at a rate o* 16 o* t)e amount utiliFedIart) is e:pected to )a,e a cas) 'alance o* 32 million on Canuary 1 and no amount utiliFed on its line o* creditAssuming all cas) *lo(s occur at t)e end o* t)e mont)+ appro:imately )o( muc) (ill Iart) pay in interest during

t)e *irst )al* o* t)e year9 A- Rero.- 311+000 C- 3$0+000 0- 3122+000 152! "ource# CMA 01<7 1%11 M=C Corporation )as 100+000 s)ares o* stock outstanding- .elo( is part o* M=C/s "tatement o* =inancial Position *or t)e last *iscal yearM=C Corporation "tatement o* =inancial Position % "elected &tems 0ecem'er 21 Cas) 35;;+000 Accounts recei,a'le <00+000 &n,entory 1;0+000 Prepaid assets 5;+000 Accrued lia'ilities 2$;+000 Accounts paya'le ;;0+000 Current portion+ long%term notes paya'le 1;+000 W)at is t)e ma:imum amount M=C can pay in cas) di,idends per s)are and maintain a minimum current ratio o* 2 to 19 Assume t)at all accounts ot)er t)an cas) remain unc)angedA- 32-0; .- 32-;0 C- 32-2; 0- 32-$0 152! "ource# CMA 01<7 1%1< A company o'tained a s)ort%term 'ank loan o* 32;0+000 at an annual interest rate o* 16- As a condition o* t)e loan+ t)e company is re4uired to maintain a compensating 'alance o* 3;0+000 in its c)ecking account- T)e company/s c)ecking account earns interest at an annual rate o* 26Brdinarily+ t)e company maintains a 'alance o* 32;+000 in its c)ecking account *or transaction purposes- W)at is t)e e**ecti,e interest rate o* t)e loan9 A- 1-556 .- 7-006 C- ;-$06 0- 1-116 155! "ource# CMA 01<7 1%20 Demple is a ne(ly esta'lis)ed Eanitorial *irm+ and t)e o(ner is deciding ()at type o* c)ecking account to open- Demple is planning to keep a 3;00 minimum 'alance in t)e account *or emergencies and plans to (rite roug)ly $0 c)ecks per mont)- T)e 'ank c)arges 310 per mont) plus a 30-10 per c)eck c)arge *or a standard 'usiness c)ecking account (it) no minimum 'alance- Demple also )as t)e option o* a premium 'usiness c)ecking account t)at re4uires a 32+;00 minimum 'alance 'ut )as no mont)ly *ees or per c)eck c)arges- &* Demple/s cost o* *unds is 106+ ()ic) account

s)ould Demple c)oose9 A- "tandard account+ 'ecause t)e sa,ings is 325 per year.- Premium account+ 'ecause t)e sa,ings is 325 per yearC- "tandard account+ 'ecause t)e sa,ings is 311 per year0- Premium account+ 'ecause t)e sa,ings is 311 per year15;! "ource# CMA 01<7 1%20 =ranklin &nc- is a medium%siFe manu*acturer o* toys t)at makes 2;6 o* its sales to Mega Company+ a maEor national discount retailing *irm- Mega (ill 'e re4uiring =ranklin and ot)er suppliers to use Electronic 0ata &nterc)ange 7E0&8 *or in,entory replenis)ment and trade payment transactions as opposed to t)e paper%'ased systems pre,iously used- =ranklin (ould consider all o* t)e *ollo(ing to 'e ad,antages o* using E0& in its dealings (it) Mega e:cept A- Access to Mega/s in,entory 'alances o* =ranklin/s products.- .etter status tracking o* deli,eries and paymentsC- Compati'ility (it) =ranklin/s ot)er procedures and systems0- Reduction in t)e payment *loat151! "ource# CMA 01$< 1%2; All o* t)e *ollo(ing are e:amples o* imputed costs e:cept A- T)e stated interest paid on a 'ank loan.- T)e use o* t)e *irm/s internal cas) *unds to purc)ase assetsC- Assets t)at are considered o'solete t)at maintain a net 'ook ,alue0- 0ecelerated depreciation157! "ource# C&A 11<; &K%21 W)ic) o* t)e *ollo(ing *inancial ratios is used to assess t)e li4uidity o* a company9 A- 0ays/ "ales Butstanding.- Total 0e't to Total Assets RatioC- Pro*it Margin on "ales0- Current Ratio15$! "ource# C&A 11<2 &K%51 T)e *ollo(ing account 'alances represent t)e end%o*%year 'alance s)eet o* a companyAccounts paya'le Accounts recei,a'le 7net8 3 17+000 11;+000

Accumulated depreciation %% 'uilding 2<$+;00 Accumulated depreciation %% e4uipment ;0+;00 Cas) 27+;00 Common stock 7310 par ,alue8 100+000 0e*erred income ta:es paya'le 27+;00 E4uipment 121+000 &ncome ta:es paya'le 70+000 &n,entory 2;7+000 @and and 'uilding 7;2+000 @ong%term notes paya'le 122+000 Trading securities 15+000 Jotes paya'le (it)in 1 year ;5+000 Bt)er current lia'ilities 22+;00 Paid%in capital in e:cess o* par 1;0+000 Prepaid e:penses 27+000 Retained earnings 502+;00 T)e company/s 4uick ratio is A- 1-52 .- 1-0$ C- 0-<7 0- 0-$2 15<! "ource# C&A 11<2 &K%;2 T)e *ollo(ing are t)e Canuary 1 and Cune 20 'alance s)eets o* a company# Assets 7in millions8 Can- 1 Cune 20 %%%%%%%%%%%%%%%%%%%% %%%%%% %%%%%%% Cas) 32 35 Accounts recei,a'le ; 5 &n,entories $ 10 =i:ed assets 10 11 %%% %%% Total assets 321 32< OOO OOO Accounts paya'le 32 32 Jotes paya'le 5 2 Accrued (ages 1 2 @ong%term de't < 11 "tock)older/s e4uity 10 10 %%% %%% Total lia'ilities and stock)older/s e4uity 321 32< OOO OOO =rom Canuary 1 to Cune 20+ t)e net (orking capital A- 0ecreased 'y 31 million.- "tayed t)e sameC- &ncreased 'y 31 million0- &ncreased 'y 32 million1;0! "ource# C&A 0;<1 &K%;2 A gro(ing company is assessing current (orking capital re4uirements- An a,erage o* ;$ days is re4uired to con,ert ra( materials into *inis)ed goods and to sell t)em- T)en an a,erage o* 22 days is re4uired to collect on recei,a'les- &* t)e a,erage time t)e company takes to pay *or its ra( materials is 1; days a*ter t)ey are recei,ed+ t)en t)e total cas) con,ersion cycle *or t)is company is A- 11 days.- 51 days-

C- 7; days0- <0 days=act Pattern G5! A company )as a current ratio o* 1-5+ a 4uick+ or acid test+ ratio o* 1-2+ and t)e *ollo(ing partial summary 'alance s)eet# Cas) 310 Current lia'ilities @ong%term Accounts recei,a'le SS lia'ilities &n,entory SS ")are)olders/ =i:ed assets SS e4uity Total lia'ilities Total assets 3100 and e4uity 3SS 50 20 3SS

1;2! "ource# C&A 11<1 &K%27 7Re*ers to =act Pattern G;8 &n year 2 t)e company )ad cas) pro,ided 'y operations o* A- 321<+000 .- 3255+000 C- 3255+000 0- 351<+000 1;5! "ource# C&A 11<1 &K%2$ 7Re*ers to =act Pattern G;8 .ased on t)e year 2 year%end 'alance o* accounts recei,a'le and t)e year 2 income statement+ t)e company )ad an a,erage collection period *or year 2 o* A- 5< days.- ;2 daysC- 72 days0- 7$ days1;;! "ource# Pu'lis)er A *irm o*ten *actors its accounts recei,a'le- &ts *inance company re4uires a 16 reser,e and c)arges a 1-56 commission on t)e amount o* t)e recei,a'les- T)e remaining amount to 'e ad,anced is *urt)er reduced 'y an annual interest c)arge o* 1;6- W)at proceeds 7rounded to t)e nearest dollar8 (ill t)e *irm recei,e *rom t)e *inance company at t)e time a 3100+000 account due in 10 days is *actored9 A- 3<2+100 .- 3<1+12; C- 3<0+2$; 0- 3$;+000

1;1! "ource# C&A 11<1 &K%25 7Re*ers to =act Pattern G58 T)e company )as an accounts recei,a'le 'alance o* A- 312 .- 321 C- 321 0- 311 1;2! "ource# C&A 11<1 &K%2; 7Re*ers to =act Pattern G58 T)e company )as a *i:ed assets 'alance o* A- 30 .- 311 C- 3;$ 0- 315 =act Pattern G;! A company )as t)e *ollo(ing income statements# Mear 2 Mear 1 %%%%%%%%%% %%%%%%%%%% "ales 31+;00+000 31+500+000 Cost o* goods sold $00+000 7;0+000 Iross pro*it 700+000 1;0+000 "elling and admin- e:pense 12+000 10+000 0epreciation e:pense ;0+000 ;0+000 Earnings 'e*ore interest and ta:es 1$$+000 ;50+000 &nterest e:pense 100+000 100+000 Earnings 'e*ore ta:es ;$$+000 550+000 &ncome ta: 7;068 2<5+000 220+000 Jet income 2<5+000 220+000 "elected 'alance s)eet items are as *ollo(s# Mear 2 Mear 1 Mear%end Mear%end %%%%%%%% %%%%%%%% Accounts recei,a'le 3200+000 3200+000 Accounts paya'le 2;0+000 27;+000 Assume a 21;%day year in any calculations-

1;1! "ource# Pu'lis)er &* t)e a,erage age o* in,entory is 10 days+ t)e a,erage age o* t)e accounts paya'le is 20 days+ and t)e a,erage age o* accounts recei,a'le is 5; days+ t)e num'er o* days in t)e cas) *lo( cycle is A- 12; days.- <0 daysC- 7; days0- 10; days1;7! "ource# Pu'lis)er 0@= is a retail mail order *irm t)at currently uses a central collection system t)at re4uires all c)ecks to 'e sent to its .oston )ead4uarters- An a,erage o* 1 days is re4uired *or mailed c)ecks to 'e recei,ed+ 2 days *or 0@= to process t)em+ and 2 days *or t)e c)ecks to clear t)roug) its 'ankA proposed lock'o: system (ould reduce t)e mailing and

processing time to 2 days and t)e c)eck clearing time to 1 day- 0@= )as an a,erage daily collection o* 31;0+000- &* 0@= adopts t)e lock'o: system+ its a,erage cas) 'alance (ill increase 'y A- 31+200+000

can 'orro( at t)e prime rate+ at ()at prime rate must t)e company c)ange its terms o* credit in order to a,oid an undesira'le e:tension in its collection o* recei,a'les9 A- 26 .- ;6

.- 37;0+000 C- 76 C- 3100+000 0- $6 0- 35;0+000 =act Pattern G1! Morton Company needs to pay a supplier/s in,oice o* 310+000 and (ants to take a cas) discount o* 2>10+ net 50T)e *irm can 'orro( t)e money *or 20 days at 116 per annum (it) a <6 compensating 'alance- Assume a 210%day year1;$! "ource# Pu'lis)er 7Re*ers to =act Pattern G18 T)e amount Morton Company must 'orro( to pay t)e supplier (it)in t)e discount period and co,er t)e compensating 'alance is A- 310+000 .- 31;+<25 C- 315+11; 0- 3;$+$00 A- 26 1;<! "ource# Pu'lis)er 7Re*ers to =act Pattern G18 Assuming Morton Company 'orro(s t)e money on t)e last day o* t)e discount period and repays it 20 days later+ t)e e**ecti,e interest rate on t)e loan is A- 116 .- 106 C- 12-0<6 0- <-<06 110! "ource# Pu'lis)er 7Re*ers to =act Pattern G18 &* Morton *ails to take t)e discount and pays on t)e 50t) day+ ()at e**ecti,e rate o* annual interest is it paying t)e ,endor9 A- 26 .- 256 C- 25-5<6 0- 21-726 111! "ource# Pu'lis)er T)e )ig) cost o* s)ort%term *inancing )as recently caused a company to ree,aluate t)e terms o* credit it e:tends to its customers- T)e current policy is 1>10+ net 10- &* customers 11;! "ource# Pu'lis)er Management o* a company does not (ant to ,iolate a (orking capital restriction contained in its 'ond indenture&* t)e *irm/s current ratio *alls 'elo( 2-0 to 1+ tec)nically it (ill )a,e de*aulted- T)e *irm/s current ratio is no( 2-2 to 1&* current lia'ilities are 3200 million+ t)e ma:imum ne( commercial paper t)at can 'e issued to *inance in,entory e:pansion is A- 320 million115! "ource# Pu'lis)er A *irm )as daily cas) receipts o* 3200+000- A 'ank )as o**ered to pro,ide a lock'o: ser,ice t)at (ill reduce t)e collection time 'y 2 days- T)e 'ank re4uires a mont)ly *ee o* 32+000 *or pro,iding t)is ser,ice- &* money market rates are e:pected to a,erage 16 during t)e year+ t)e additional annual income 7loss8 o* using t)e lock'o: ser,ice is A- 7325+0008 .- 312+000 C- 320+000 0- 3;5+000 .- 1$-216 C- 25-5<6 0- 21-726 112! "ource# Pu'lis)er &* a *irm purc)ases ra( materials *rom its supplier on a 2>10+ net 50+ cas) discount 'asis+ t)e e4ui,alent annual interest rate 7using a 210%day year8 o* *orgoing t)e cas) discount and making payment on t)e 50t) day is 112! "ource# Pu'lis)er A company )as Eust 'orro(ed 32 million *rom a 'ank- T)e stated rate o* interest is 106- &* t)e loan is discounted and is repaya'le in one year+ t)e e**ecti,e rate on t)e loan is appro:imately A- $-$<6 .- <-0<6 C- 10-006 0- 11-116

and net (orking capital .- 350 millionA- &ncreased 'y 370C- 3250 million.- 0id not c)ange0- 31$0 millionC- 0ecreased 'y 31<0111! "ource# Pu'lis)er T)e *ollo(ing in*ormation regarding a c)ange in credit policy (as assem'led 'y t)e Wilson Wa: Company- T)e company )as a re4uired rate o* return o* 116 and a ,aria'le cost ratio o* ;06- T)e opportunity cost o* a longer collection period is assumed to 'e negligi'leBld Credit Policy Je( Credit Policy %%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%% "ales 35+100+000 35+<10+000 A,erage collection period 20 days 2; days T)e preta: cost o* carrying t)e additional in,estment in recei,a'les+ assuming a 210%day year+ is A- 3;+52< 0- 12-7<6 .- 310+$7$ C- 312+77$ 0- 3<$+$<0 117! "ource# Pu'lis)er T)e *ollo(ing in*ormation regarding in,entory policy (as assem'led 'y t)e TD= Corporation- T)e company uses a ;0%(eek year in all calculations"ales 12+000 units per year Brder 4uantity 5+000 units "a*ety stock 1+;00 units @ead time ; (eeks T)e reorder point is A- ;+;00 units .- 2+700 units C- 1+200 units 0- 250 units 11$! "ource# Pu'lis)er T)e =les)er Corporation (as recently 4uoted terms on a commercial 'ank loan o* 16 discounted interest (it) a 226 compensating 'alance- T)e term o* t)e loan is 1 yearT)e e**ecti,e cost o* 'orro(ing is 7rounded to t)e nearest )undredt)8 A- 1-006 .- 1-2$6 C- 7-1<6 0- $-226 11<! "ource# Pu'lis)er 0uring t)e year+ Mason Company/s current assets increased 'y 3120+ current lia'ilities decreased 'y 310+ 172! "ource# Pu'lis)er W)en a company o**ers credit terms o* 2>10+ net 20+ t)e annual interest cost 'ased on a 210%day year is A- 21-76 .- 25-;6 C- 27-16 0- ;;-16 172! "ource# Pu'lis)er =@= Corporation )ad income 'e*ore ta:es o* 3;0+000&ncluded in t)e calculation o* t)is amount (as depreciation o* 31+000+ a c)arge o* 37+000 *or t)e amortiFation o* 'ond discounts+ and 3;+000 *or interest paid- T)e estimated preta: cas) *lo( *or t)e period is A- 3;0+000 .- 3;7+000 C- 327+000 171! "ource# Pu'lis)er Parkison Company can increase annual sales 'y 31;0+000 i* it sells to a ne(+ riskier group o* customers- T)e uncollecti'le accounts e:pense is e:pected to 'e 116 o* sales+ and collection costs (ill 'e 56- T)e company/s manu*acturing and selling e:penses are 7;6 o* sales+ and its e**ecti,e ta: rate is 2$6- &* Parkison accepts t)is opportunity+ its a*ter%ta: income (ill increase 'y A- 32+$;0 .- 35+1;0 C- 37+;00 0- 3$+270 0- &ncreased 'y 31<0170! "ource# Pu'lis)er Randy+ &nc- can issue 2%mont) commercial paper (it) a *ace ,alue o* 31+;00+000 *or 31+5;0+000- Transaction costs (ill 'e 31+;00- T)e e**ecti,e annualiFed percentage cost o* t)e *inancing+ 'ased on a 210%day year+ (ill 'e A- 2-5;6 .- 2-;16 C- 15-226

0- 312+000 175! "ource# Pu'lis)er T)e *ollo(ing in*ormation applies to B:*ord Company# Purc)ases "ales %%%%%%%%% %%%%%%%% Canuary 31;0+000 3100+000 =e'ruary 31;0+000 3200+000 Marc) 31;0+000 32;0+000 April 3120+000 32;0+000 May 3120+000 3200+000 Cune 3100+000 3220+000 A cas) payment e4ual to ;06 o* purc)ases is made at t)e time o* purc)ase+ and 2;6 is paid in eac) o* t)e ne:t 2 mont)s- Purc)ases *or t)e pre,ious Jo,em'er and 0ecem'er (ere 3150+000 per mont)- Payroll *or a mont) is 106 o* t)at mont)/s sales+ and ot)er operating e:penses are 1;6 o* t)e *ollo(ing mont)/s sales 7Culy sales (ere 3210+0008- &nterest payments (ere 32;+000 paid 4uarterly in Canuary and April- B:*ord/s cas) dis'ursements *or t)e mont) o* April (ere A- 3120+000 .- 3150+000 C- 3210+000 0- 322;+000 17;! "ource# Pu'lis)er Cat*ur Pu'lis)ing is considering a c)ange in its credit terms *rom n>20 to 2>10+ n>20- T)e company/s 'udgeted sales *or t)e coming year are 320+000+000+ o* ()ic) $06 are e:pected to 'e made on credit- &* t)e ne( credit terms are adopted+ Cat*ur management estimates t)at discounts (ill 'e taken on 106 o* t)e credit salesL )o(e,er+ uncollecti'le accounts (ill 'e unc)anged- T)e ne( credit terms (ill result in e:pected discounts taken in t)e coming year o* A- 32$$+000

C- 312;+000 0- 322+;00 177! "ource# Pu'lis)er =lyn Company/s 'udgeted sales *or t)e coming year are e:pected to 'e 3;0+000+000+ o* ()ic) 7;6 are e:pected to 'e credit sales at terms o* n>20- =lyn estimates t)at a proposed rela:ation o* credit standards (ill increase credit sales 'y 2;6 and increase t)e a,erage collection period *rom 20 days to 20 days- .ased on a 210%day year+ t)e proposed rela:ation o* credit standards (ill result in an e:pected increase in t)e a,erage accounts recei,a'le 'alance o* A- 3;20+$50 .- 31+$22+<20 C- 32+0$2+250 0- 32+<01+270 17$! "ource# Pu'lis)er T)e Her' "alter Corporation is considering a plant e:pansion t)at (ill increase its sales and net income- T)e *ollo(ing data represent management/s estimate o* t)e impact t)e proposal (ill )a,e on t)e company# Current Proposed %%%%%%%% %%%%%%%% Cas) 3 120+000 3 150+000 Accounts paya'le 210+000 5;0+000 Accounts recei,a'le 500+000 ;;0+000 &n,entory 210+000 520+000 Marketa'le securities 1$0+000 1$0+000 Mortgage paya'le 7current8 110+000 210+000 =i:ed assets 2+200+000 2+200+000 Jet income 500+000 ;;0+000 T)e e**ect o* t)e plant e:pansion on "alter/s (orking capital (ill 'e a7n8 A- &ncrease o* 3250+000

.- 35$0+000 .- 0ecrease o* 310+000 C- 3210+000 C- &ncrease o* 3220+000 0- 3100+000 0- &ncrease o* 310+000 171! "ource# Pu'lis)er .est Computers 'elie,es t)at its collection costs could 'e reduced t)roug) modi*ication o* collection procedures- T)is action is e:pected to result in a lengt)ening o* t)e a,erage collection period *rom 20 to 2; daysL )o(e,er+ t)ere (ill 'e no c)ange in uncollecti'le accounts+ or in total credit sales- =urt)ermore+ t)e ,aria'le cost ratio is 106+ t)e opportunity cost o* a longer collection period is assumed to 'e negligi'le+ t)e company/s 'udgeted credit sales *or t)e coming year are 35;+000+000+ and t)e re4uired rate o* return is 16- To Eusti*y c)anges in collection procedures+ t)e minimum annual reduction o* costs 7using a 210%day year and ignoring ta:es8 must 'e A- 327;+000 .- 327+;00 17<! "ource# Pu'lis)er Renegade Company/s 'udgeted sales and 'udgeted cost o* sales *or t)e coming year are 3;0+000+000 and 32;+000+000+ respecti,ely- Renegade )as made c)anges in its in,entory system t)at (ill increase turno,er *rom its current le,el o* 10 times per year to 1; times per year- &* its cost o* capital is ;6+ Renegade/s preta: cost sa,ings in t)e coming year (ill 'e A- 3122+222 .- 31+111+117 C- 3$2+222 0- 3;$+222

1$0! "ource# Pu'lis)er "tarrs Company )as current assets o* 3500+000 and current lia'ilities o* 3200+000- "tarrs could increase its (orking capital 'y t)e A- Prepayment o* 3;0+000 o* ne:t year/s rent.- Re*inancing o* 3;0+000 o* s)ort%term de't (it) long%term de'tC- Ac4uisition o* land ,alued at 3;0+000 t)roug) t)e issuance o* common stock0- Purc)ase o* 3;0+000 o* trading securities *or cas)1$1! "ource# Pu'lis)er A *irm )as daily cas) receipts o* 3200+000- A commercial 'ank )as o**ered to reduce t)e collection time 'y 2 daysT)e 'ank re4uires a mont)ly *ee o* 32+000 *or pro,iding t)is ser,ice- &* t)e money market rates (ill a,erage 116 during t)e year+ t)e annual preta: income 7loss8 *rom using t)e ser,ice is A- 3720+0008 .- 320+000 C- 311+000 0- 312+000 1$2! "ource# Pu'lis)er A *irm/s current ratio is currently 1-70 to 1- Management kno(s it cannot ,iolate a (orking capital restriction contained in its 'ond indenture- &* t)e *irm/s current ratio *alls 'elo( 1-50 to 1+ tec)nically it (ill )a,e de*aulted- &* current lia'ilities are 3200 million+ t)e ma:imum ne( commercial paper t)at can 'e issued to *inance in,entory e:pansion is A- 3$0 million.- 3270 millionC- 31;0 million0- 32$0 million1$2! "ource# CMA 01<7 1%1< Hagar Company/s 'ank re4uires a compensating 'alance o* 206 on a 3100+000 loan- &* t)e stated interest on t)e loan is 76+ ()at is t)e e**ecti,e cost o* t)e loan9 A- ;-$26

'ank+ )as agreed to pro,ide a lock'o: system to CMC at a *i:ed *ee o* 3;0+000 per year and a ,aria'le *ee o* 30-;0 *or eac) payment processed 'y t)e 'ank- Bn a,erage+ CMC recei,es ;0 payments per day+ eac) a,eraging 320+000- Wit) t)e lock'o: system+ t)e company/s collection *loat (ill decrease 'y 2 days- T)e annual interest rate on money market securities is 16- &* CMC makes use o* t)e lock'o: system+ ()at (ould 'e t)e net 'ene*it to t)e company9 ?se 21; days per yearA- 3;<+12; .- 310+$7; C- 3;0+000 0- 3120+000 1$;! "ource# Pu'lis)er A *irm )as daily cas) receipts o* 3200+000 and is interested in ac4uiring a lock'o: ser,ice in order to reduce collection time- .ank 1/s lock'o: ser,ice costs 32+000 per mont) and (ill reduce collection time 'y 2 days- .ank 2/s lock'o: ser,ice costs 3;+000 per mont) and (ill reduce collection time 'y 5 days- .ank 2/s lock'o: ser,ice costs 3;00 per mont) and (ill reduce collection time 'y 1 day.ank 5/s lock'o: ser,ice costs 31+000 per mont) and (ill reduce collection time 'y 2 days- &* money market rates are e:pected to a,erage 16 during t)e year+ and t)e *irm (is)es to ma:imiFe income+ ()ic) 'ank s)ould t)e *irm c)oose9 A- .ank 1.- .ank 2C- .ank 20- .ank 51$1! "ource# CMA adap A maEor supplier )as o**ered Alp)a Corporation a year%end special purc)ase ()ere'y Alp)a could purc)ase 1$0+000 cases o* sport drink at 310 per case- Alp)a normally orders 20+000 cases per mont) at 312 per caseAlp)a/s cost o* capital is <6- &n calculating t)e o,erall opportunity cost o* t)is o**er+ t)e cost o* carrying t)e increased in,entory (ould 'e A- 322+500 .- 350+;00 C- 315+$00 0- 3$1+000

.- 7-006 C- $-506 0- $-7;6 1$5! "ource# CMA "amp Q1%1 Cle,eland Masks and Costumes &nc- 7CMC8 )as a maEority o* its customers located in t)e states o* Cali*ornia and Je,ada- Deystone Jational .ank+ a maEor (est coast 1$7! "ource# CMA "amp Q1%7 Bn Canuary 1+ "cott Corporation recei,ed a 3200+000 line o* credit at an interest rate o* 126 *rom Main "treet .ank and dre( do(n t)e entire amount on =e'ruary 1- T)e line o* credit agreement re4uires t)at an amount e4ual to 1;6 o* t)e loan 'e deposited into a compensating 'alance account- W)at is t)e e**ecti,e annual cost o* credit *or t)is loan arrangement9

A- 11-006 .- Bption 2.- 12-006 C- Bption 2C- 12-<56 0- Bption 50- 15-126 1$$! "ource# Pu'lis)er Iats'y+ &nc- is going to 'egin *actoring its accounts recei,a'le and )as collected in*ormation on t)e *ollo(ing *our *inance companies# Annual Re4uired &nterest Reser,es Commissions C)arge %%%%%%%% %%%%%%%%%%% %%%%%%%% Company A 16 1-56 1;6 Company . 76 1-26 126 Company C ;6 1-76 206 Company 0 $6 1-06 ;6 W)ic) company (ill gi,e Iats'y t)e )ig)est proceeds *rom a 3100+000 account due in 10 days9 Assume a 210%day yearA- Company A.- Company .A- MesL present ,alue is 3<+;10C- Company C.- MesL present ,alue is 311+2720- Company 0C- JoL present ,alue is 3$+15;1$<! "ource# Pu'lis)er Mason Company/s 'oard o* directors )as determined 5 options to increase (orking capital ne:t year- Bption 1 is to increase current assets 'y 3120 and decrease current lia'ilities 'y 3;0- Bption 2 is to increase current assets 'y 31$0 and increase current lia'ilities 'y 320- Bption 2 is to decrease current assets 'y 3150 and increase current lia'ilities 'y 320- Bption 5 is to decrease current assets 'y 3100 and decrease current lia'ilities 'y 37;- W)ic) option s)ould Mason c)oose to ma:imiFe net (orking capital9 A- Bption 1.- Bption 2C- Bption 20- Bption 51<0! "ource# Pu'lis)er Hendri:+ &nc- is interested in purc)asing a 3100 ?-"Treasury 'ill and (as presented (it) t)e *ollo(ing options# 0ue 0ate 0iscount Rate %%%%%%%% %%%%%%%%%%%%% Bption 1 1$0 days 16 Bption 2 210 days 2-;6 Bption 2 120 days $6 Bption 5 250 days 5-;6 &* Hendri: (is)es to 'uy t)e Treasury 'ill at t)e lo(est purc)asing price+ ()ic) option s)ould 'e c)osen+ assuming a 210%day year9 A- Bption 11<5! "ource# Pu'lis)er W)ic) o* t)e *ollo(ing is correct *or a *irm (it) 3100+000 in net earnings+ 10+000 s)ares+ and a 206 payout ratio9 A- Retained earnings (ill increase 'y 320+000.- Eac) s)are (ill recei,e a 30-20 di,idendC- 320+000 (ill 'e spent on ne( in,estment0- T)e di,idend per s)are (ill e4ual 32-001<;! "ource# Pu'lis)er A *irm )as 32 million in total assets and 31-1; million in e4uity- Ho( muc) o* its 3;00+000 capital 'udget s)ould 'e de't%*inanced to retain t)e same de't%e4uity ratio9 A- 3;0+000 0- JoL present ,alue is 37+5111<2! "ource# Pu'lis)er W)at is t)e e**ecti,e annual interest rate on a <6 APR automo'ile loan t)at )as mont)ly payments9 A- <6 .- <-2$6 C- <-$16 0- 10-<56 1<1! "ource# Pu'lis)er A credit card account t)at c)arges interest at t)e rate o* 1-2;6 per mont) (ould )a,e an annually compounded rate o* and an APR o* A- 11-0$6L 1;6 .- 15-;;6L 11-0$6 C- 12-1$6L 1;6 0- 1;6L 15-;;6 1<2! "ource# Pu'lis)er A man o**ers to 'uy your car (it) 5+ e4ual annual payments o* 32+000+ 'eginning 2 years *rom todayAssuming you/re indi**erent to cas) ,ersus credit+ t)at you can in,est at 106+ and t)at you (ant to recei,e 3<+000 *or t)e car+ s)ould you accept9

169 .- 322;+000 A- A price increase o* 3;1-;5C- 327;+000 0- 35;0+000 1<1! "ource# Pu'lis)er W)at is t)e 'ene*it *or a *irm (it) daily sales o* 31;+000 to 'e a'le to speed up collections 'y 2 days+ assuming an $6 annual opportunity cost o* *unds9 A- 32+500 daily 'ene*it.- 32+500 annual 'ene*itA- 32+500 annual 'ene*itC- 31;+000 annual 'ene*it.- 31+200 annual 'ene*it0- 320+000 annual 'ene*itC- 3100 annual 'ene*it1<7! "ource# Pu'lis)er A,erage daily collection o* c)ecks *or a *irm is 350+000T)e *irm also (rites on t)e a,erage 32;+000 o* c)ecks daily- &* t)e collection period *or c)ecks is ; days+ calculate t)e net *loatA- 32;+000 .- 350+000 A- 3$+000 C- 317;+000 .- 32;+000 0- 3200+000 C- 317;+000 1<$! "ource# Pu'lis)er T)e economic order 4uantity *or a product is ;00 unitsHo(e,er+ ne( orders re4uire 5 (orking%days lead time during ()ic) time $0 units (ill 'e used- Ii,en t)is in*ormation+ t)e correct economic order 4uantity is A- 520 units.- ;00 unitsC- ;0< units0- ;$0 units1<<! "ource# Pu'lis)er W)at is t)e economic order 4uantity *or an auto dealer selling 2+000 cars per year+ at a cost o* 3700 per order+ and a carrying cost o* 312; per automo'ile9 A- 120 cars0- 32+000 .- 11$ carsC- 1$2 cars0- 221 cars200! "ource# Pu'lis)er W)at )appens to t)e price o* a t)ree%year 31+000 'ond (it) an $6 coupon ()en interest rates c)ange *rom $6 to 205! "ource# Pu'lis)er 7Re*ers to =act Pattern G78 W)ic) item reduces HCC/s gross ta: lia'ility 'y t)e largest amount9 A- Iross income.- T)e ta:%e:empt interest e:clusion202! "ource# Pu'lis)er 7Re*ers to =act Pattern G78 W)at is HCC/s net ta: lia'ility9 A- 317+700 .- 31;+200 C- 3<+700 0- 3200+000 =act Pattern G7! T)e Hando Communications Corporation 7HCC8 )as Eust *inis)ed its *irst year o* operations- =or t)e year+ HCC )ad 3$0+000 o* income- HCC also earned 311+000 o* interest on a ta:%e:empt 'ond+ a 310+000 depreciation deduction+ and an 3$+000 ta: credit- Assume t)at HCC )as a 206 ta: rate0- 37+;00 annual 'ene*it202! "ource# Pu'lis)er A,erage daily collection o* c)ecks *or =irm T is 350+000=irm T also (rites+ on a,erage+ 32;+000 in c)ecks daily- &* t)e collection period *or c)ecks is *i,e days+ ()at is t)e net *loat *or =irm T9 .- A price decrease o* 3;1-;5C- A price increase o* 3;2-510- A price decrease o* 3;2-51201! "ource# Pu'lis)er W)at is t)e 'ene*it *or a *irm (it) daily sales o* 31;+000 to 'e a'le to reduce t)e collection period 'y 2 days+ gi,en an $6 annual opportunity cost o* *unds9

C- T)e depreciation deduction0- T)e ta: credit20;! "ource# CMA 12<1 2%11 Jone o* t)e *ollo(ing items are deducti'le in calculating ta:a'le income e:cept A- Estimated lia'ilities *or product (arranties e:pected to 'e incurred in t)e *uture.- 0i,idends on common stock declared 'ut not paya'le until ne:t yearC- .onus accrued 'ut not paid 'y t)e end o* t)e year to a cas)%'asis <06 s)are)older0- Kacation pay accrued on an employee%'y%employee 'asis201! "ource# CMA 12<1 2%12 All o* t)e *ollo(ing are adEustments>pre*erence items to corporate ta:a'le income in calculating alternati,e minimum ta:a'le income e:cept A- All o* t)e gain on an installment sale o* real property in e:cess o* 31;0+000.- Mining e:ploration and de,elopment costsC- A c)arita'le contri'ution o* appreciated property0- "ales commission earned in t)e current year 'ut paid in t)e *ollo(ing year207! "ource# Pu'lis)er T)e de*erral or nonrecognition o* gains is not allo(ed *or ta: purposes ()en t)e transaction is a7n8 A- ReorganiFation t)at is a c)ange in t)e *orm o* in,estment.- E:c)ange o* property t)at is used in a 'usiness *or like%kind propertyC- ReorganiFation t)at is considered a disposition o* assets0- &n,oluntary con,ersion o* property into 4uali*ied replacement property-

CMA PART 1 E Working Capital Policy and Management Ans(ers

1! "ource# CMA 12$0 1%1 Ans(er 7A8 is incorrect 'ecause a small *irm may not )a,e enoug) surplus cas) to in,est in commercial paper+ ()ic) usually consists o* secured or unsecured promissory notes o* large corporationsAns(er 7.8 is incorrect 'ecause t)e transactions cost o* 'ankers/ acceptances is )ig)- A 'anker/s acceptance is a uni4ue credit instrument used to *inance 'ot) domestic and international Asel*%li4uidatingA transactions- &t is usually initiated 'y a 'ank/s irre,oca'le letter o* credit on 'e)al* o* t)e 'ank/s customer+ on ()ic) t)e company doing 'usiness (it) t)e 'ank/s customer dra(s a time dra*tT)e company discounts t)e time dra*t (it) t)e company/s local 'ank and recei,es immediate payment- T)e local 'ank *or(ards t)e time dra*t to t)e 'ank customer *or paymentAns(er 7C8 is correct- A small *irm (it) surplus cas) s)ould in,est *or t)e )ig)est return and lo(est riskT)e a'ility to con,ert t)e in,estment into cas) (it)out a loss o* principal is also important- Money market mutual *unds in,est in money market certi*icates suc) as treasury 'ills+ negotia'le C0s+ and commercial paper- .ecause o* di,ersi*ication+ t)ese mutual *unds are superior to any single instrumentAns(er 708 is incorrect 'ecause an increase in interest rates could cause a su'stantial loss in principal2! "ource# CMA 01$2 1%7 Ans(er 7A8 is incorrect 'ecause t)e ser,ice (ill generate 325+000 in additional annual income+ not lossesAns(er 7.8 is correct- "ince collections (ill 'e speeded up 'y t)ree days+ at t)e rate o* 3200+000 per day+ t)e company (ill )a,e an additional 3100+000 to in,est- At 126+ t)e interest earned (ould 'e 372+000 per year- Ho(e,er+ t)e 'ank (ill c)arge 35$+000 712 mont)s : 35+000 per mont)8 *or its ser,ices- T)us+ t)e *irm (ill increase its income 'y 325+000 7372+000 % 35$+0008Ans(er 7C8 is incorrect 'ecause 311+250 is a nonsense num'erAns(er 708 is incorrect 'ecause 31$+000 assumes an annual 'ank c)arge o* 35+0002! "ource# CMA 12$0 1%2 Ans(er 7A8 is incorrect 'ecause t)e *loating interest rate is not al(ays )ig)er- &t s)ould *loat up or do(n (it) t)e prime rate-

Ans(er 7.8 is incorrect 'ecause a restriction on a ne( issuance does not raise t)e interest rate on money pre,iously 'orro(edAns(er 7C8 is correct- W)en a *irm 'orro(s money *rom t)e 'ank+ it is o*ten re4uired to keep a certain percentage o* t)e *unds in t)e 'ank at all times- T)ese compensating 'alances e**ecti,ely increase t)e rate o* interest on t)e money 'orro(ed *rom t)e 'ankAns(er 708 is incorrect 'ecause+ i* a *irm c)ooses not to use its *ull line o* credit and is not c)arged *or t)e unused portion+ t)e rate o* interest on t)e portion used does not increase5! "ource# CMA 01$2 1%$ Ans(er 7A8 is incorrect 'ecause 327; million is t)e minimum amount o* current assets re4uired to keep t)e current ratio at t)e *loor le,el o* 1-;Ans(er 7.8 is correct- &* current lia'ilities are 32;0 million and t)e current ratio 7current assets>current lia'ilities8 is 1-7;+ current assets must 'e 3527-; million 732;0 : 1-7;8- Hence+ i* T amount o* commercial paper is issued+ t)ere'y increasing 'ot) current assets and current lia'ilities 'y T+ t)e ne( current ratio 7()ic) cannot 'e less t)an 1-;8 is 312; million73527-; P T8>732;0 P T8 O 1-; 3527-; P T O 1-; 732;0 P T8 3527-; P T O 327; P 1-;T 3527-; O 327; P -;T 312-; O -;T T O 312; Ans(er 7C8 is incorrect 'ecause 3;12-; million is t)e sum o* t)e e:isting current assets and 312; millionAns(er 708 is incorrect 'ecause 3527-; million is t)e e:isting amount o* current assets;! "ource# CMA 01$2 1%12 Ans(er 7A8 is incorrect 'ecause 3$1+<;0 e4uals 3<<+;;0 minus 116 o* 3110+000Ans(er 7.8 is incorrect 'ecause 3$2+120 is a nonsense ans(erAns(er 7C8 is correct- T)e *actor (ill )old out 3$+$00 7$6 : 3110+0008 as a reser,e against returns and allo(ances and 31+1;0 71-;6 : 110+0008 as a commission- T)at lea,es 3<<+;;0 to 'e ad,anced to t)e seller- Ho(e,er+ interest at t)e rate o* 116 annually is also to 'e (it))eld- =or 10 days t)at interest (ould amount to appro:imately 32+1;; 7assuming a 210%day year8- T)e proceeds to 'e gi,en to t)e seller e4ual 3<1+$<; 73<<+;;0 % 32+1;;8Ans(er 708 is incorrect 'ecause 3<<+;;0 e4uals t)e amount recei,ed 'y t)e *irm plus t)e interest c)arge1! "ource# CMA 12$2 1%22

Ans(er 7A8 is incorrect 'ecause multiple collection centers t)roug)out t)e country (ill reduce t)e time re4uired to recei,e cas) in t)e mail- =or e:ample+ Cali*ornia customers o* a Je( Mork *irm (ould make payment to a West Coast center- T)us+ t)e company (ould recei,e t)e cas) t(o or t)ree days soonerAns(er 7.8 is incorrect 'ecause direct deposit 'y customers into a lock%'o: also speeds cas) into company accountsAns(er 7C8 is incorrect 'ecause special )andling o* large c)ecks is a cost%e**ecti,e (ay to deposit large amountsAns(er 708 is correct- Compensating 'alances are eit)er 718 an a'solute minimum 'alance or 728 a minimum a,erage 'alance t)at 'ank customers must keep at t)e 'ank- T)ese are generally re4uired 'y t)e 'ank to compensate *or t)e cost o* ser,ices rendered- Maintaining compensating 'alances (ill not accelerate a company/s cas) in*lo(s 'ecause less cas) (ill 'e a,aila'le e,en t)oug) t)e amount o* cas) coming in remains unc)anged7! "ource# CMA 12$2 1%2;

17-2026 7315-7;>3$;-2;8- T)us+ not paying ")ad+ &nc-/s in,oices on time (ould 'e t)e lo(est cost source o* capital+ at a cost o* 15-$5;6$! "ource# CMA 01$5 1%2 Ans(er 7A8 is incorrect 'ecause t)e 4uality o* accounts is important to credit policy since it is in,ersely related to 'ot) sales and 'ad de'tsAns(er 7.8 is correct- A 4uantity discount is an attempt to increase sales 'y reducing t)e unit price on 'ulk purc)ases- &t concerns only t)e price term o* an agreement+ not t)e credit term+ and t)us is unrelated to credit and collection policyAns(er 7C8 is incorrect 'ecause o**ering a cas) discount impro,es cas) *lo( and reduces recei,a'les and t)e cost o* e:tending creditAns(er 708 is incorrect 'ecause t)e le,el o* collection e:penditures must 'e considered ()en implementing a collection policy- T)e marginal cost o* a credit and collection policy s)ould not e:ceed its re,enue<! "ource# CMA 12$5 1%20

Ans(er 7A8 is incorrect 'ecause t)e actual annual percentage rate 'ased on *orgoing ")ad/s discount is 15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ank loan 717-2026 'ecause it is a discount loan8+ or t)e cost o* *orgoing t)e discounts allo(ed 'y =ort Co71$-1$268 and Riley Co- 711-22168Ans(er 7.8 is incorrect 'ecause t)e actual annual percentage rate 'ased on *orgoing ")ad/s discount is 15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ank loan 717-2026 'ecause it is a discount loan8+ or t)e cost o* *orgoing t)e discounts allo(ed 'y =ort Co71$-1$268 and Riley Co- 711-22168Ans(er 7C8 is incorrect 'ecause t)e actual annual percentage rate 'ased on *orgoing ")ad/s discount is 15-$5;6- T)is is lo(er t)an t)e rate on t)e 'ank loan 717-2026 'ecause it is a discount loan8+ or t)e cost o* *orgoing t)e discounts allo(ed 'y =ort Co71$-1$268 and Riley Co- 711-22168Ans(er 708 is correct- T)e *irst step is to determine t)e actual annual percentage interest rate *or eac) o* t)e *our options- Assuming a 3100 in,oice+ t)e =ort Company discount represents interest o* 31 on a loan o* 3<< *or 20 days 720%day credit period % 10%day discount period8- T)e annual interest rate is 1$-1$1$6 7210>208 periods : 731>3<<8!- T)e Riley Company discount represents an interest c)arge o* 32 on a loan o* 3<$L i-e-+ 'y not paying on t)e 1;t) day+ t)e company (ill )a,e t)e use o* 3<$ *or 5; days 710%day credit period % 1;%day discount period8- T)e num'er o* periods in a year (ould 'e $ 7210>5;8- T)e interest (ould 'e 11-2216 732>3<$ : $ periods8- T)e ")ad loan (ould 'e *or 3<7 at a cost o* 32- T)e loan (ould 'e *or 7; days 7<0 % 1;8Ii,en 5-$ interest periods in a year 7210>7;8+ t)e annual interest rate (ould 'e 15-$5;6 732>3<7 : 5-$8- T)e 'ank loan (as 4uoted at 15-7;6 on a discount 'asis- Bn a 3100 note+ t)e 'orro(er (ould only recei,e 3$;-2;+ gi,ing an interest rate o*

Ans(er 7A8 is incorrect 'ecause 21; days is t)e result o* adding all t)ree cycles toget)er- &n,entory s)ould 'e reduced 'y accounts paya'le and increased 'y accounts recei,a'leAns(er 7.8 is incorrect 'ecause 1;0 days is t)e result o* adding in,entory and accounts paya'le&n,entory s)ould 'e reduced 'y accounts paya'le and increased 'y accounts recei,a'leAns(er 7C8 is correct- T)e cas) *lo( cycle 'egins ()en t)e *irm pays *or merc)andise it )as purc)ased and ends ()en it recei,es cas) *rom t)e sale o* t)e merc)andise- &n,entory is )eld *or an a,erage o* <0 days prior to sale+ 'ut t)e a,erage age o* accounts paya'le is 10 days- T)ere*ore+ t)e a,erage time 'et(een outlay and sale is 20 days- Recei,a'les are collected an a,erage o* 1; days a*ter sale- T)us+ t)e lengt) o* t)e cas) *lo( cycle is <; days 720 P 1;8Ans(er 708 is incorrect 'ecause $; days is t)e result o* adding in,entory and accounts paya'le and su'tracting accounts recei,a'le- &n,entory s)ould 'e reduced 'y accounts paya'le and increased 'y accounts recei,a'le10! "ource# CMA 12$5 1%22 Ans(er 7A8 is incorrect 'ecause Clay/s aggressi,e policy (ould result in more s)ort%term de't+ (it) attendant rene(al pro'lems and )ig) risk- @ott/s conser,ati,e policy (ould produce more long%term de't or e4uity *inancingAns(er 7.8 is correct- A conser,ati,e (orking capital management *inancing policy uses permanent capital to *inance permanent asset re4uirements and also some or all o* t)e *irm/s seasonal demands- T)us+ @ott/s current ratio 7current assets>current lia'ilities8

(ill 'e )ig) since its current lia'ilities (ill 'e relati,ely lo(- An aggressi,e policy entails *inancing some *i:ed assets and all t)e current assets (it) s)ort%term capital- T)is policy results in a lo(er current ratioAns(er 7C8 is incorrect 'ecause Clay is su'Eect to greater li4uidity risk t)an @ott since it )as greater s)ort%term de't- Hence+ it is at greater risk o* 'eing una'le to meet its maturing o'ligationsAns(er 708 is incorrect 'ecause a more conser,ati,e company (ould tend to *inance 'y means o* e4uity rat)er t)an de't capital- T)us+ t)e more conser,ati,e company (ould )a,e less interest e:pense11! "ource# CMA 12$; 1%1 Ans(er 7A8 is incorrect 'ecause t)e operating cycle (ould decrease since t)e a,erage time *rom cas) dis'ursement to cas) realiFation (ould 'e s)orterAns(er 7.8 is incorrect 'ecause t)e a,erage collection period (ould decrease since t)e a,erage time *rom cas) dis'ursement to cas) realiFation (ould 'e s)orterAns(er 7C8 is correct- &* t)e cause o* increased sales is an increase in t)e cas) discount+ it can 'e in*erred t)at t)e additional customers (ould pay during t)e discount period- T)us+ cas) (ould 'e collected more 4uickly t)an pre,iously and t)e cas) con,ersion cycle (ould 'e s)ortenedAns(er 708 is incorrect 'ecause more customers (ill take discounts12! "ource# CMA 12$1 1%20 Ans(er 7A8 is correct- C)ecks are currently tied up *or 10 days 7; *or mailing+ 5 *or processing+ and 1 *or clearing8- &* t)at (ere reduced to 5 days+ CMR/s cas) 'alance (ould increase 'y 31;0+000 71-; days : 3100+000 per day8Ans(er 7.8 is incorrect 'ecause c)ecks currently take 10 days to 'e credited to CMR/s cas) 'alance- T)e lock'o: system s)ortens t)is process to 5 days+ a di**erence o* 1 days- "ince t)e a,erage daily collection is 3100+000+ a period o* 1 e:tra days yields a 31;0+000 a,erage increase in t)e cas) 'alanceAns(er 7C8 is incorrect 'ecause c)ecks currently take 10 days to 'e credited to CMR/s cas) 'alance- T)e lock'o: system s)ortens t)is process to 5 days+ a di**erence o* 1 days- "ince t)e a,erage daily collection is 3100+000+ a period o* 1 e:tra days yields a 31;0+000 a,erage increase in t)e cas) 'alanceAns(er 708 is incorrect 'ecause c)ecks currently take 10 days to 'e credited to CMR/s cas) 'alance- T)e lock'o: system s)ortens t)is process to 5 days+ a di**erence o* 1 days- "ince t)e a,erage daily collection is 3100+000+ a period o* 1 e:tra

days yields a 31;0+000 a,erage increase in t)e cas) 'alance12! "ource# CMA 12$1 1%22 Ans(er 7A8 is incorrect 'ecause credit and collection policies concern recei,a'les and are not in*luenced 'y an EBQ model *or in,entory managementAns(er 7.8 is incorrect 'ecause t)e le,el o* marketa'le securities is in part determined 'y cas) needsAns(er 7C8 is incorrect 'ecause t)e relations)ip 'et(een current assets and current lia'ilities concerns many *actors ot)er t)an cas) managementAns(er 708 is correct- "ince cas) and in,entory are 'ot) nonearning assets+ in principle t)ey may 'e treated similarly- T)e alternati,e to )olding cas)+ )o(e,er+ is to )old marketa'le securities t)at do earn interest or di,idends- T)us+ a cas) management model (ould determine )o( muc) o* a *irm/s li4uidity s)ould 'e )eld as cas) and )o( muc) in t)e *orm o* marketa'le securities15! "ource# CMA 12$1 1%22 Ans(er 7A8 is incorrect 'ecause t)e t)ree maEor moti,es *or )olding cas)+ according to Deynesian economics+ are *or transactional+ precautionary+ and speculati,e purposesAns(er 7.8 is incorrect 'ecause t)e t)ree maEor moti,es *or )olding cas)+ according to Deynesian economics+ are *or transactional+ precautionary+ and speculati,e purposesAns(er 7C8 is incorrect 'ecause t)e t)ree maEor moti,es *or )olding cas)+ according to Deynesian economics+ are *or transactional+ precautionary+ and speculati,e purposesAns(er 708 is correct- Co)n Maynard Deynes+ *ounder o* Deynesian economics+ concluded t)at t)ere (ere t)ree maEor moti,es *or )olding cas)# *or transactional purposes as a medium o* e:c)ange+ precautionary purposes+ and speculati,e purposes 7'ut only during de*lationary periods81;! "ource# CMA 12$1 1%25 Ans(er 7A8 is incorrect 'ecause tig)tening credit (ill reduce sales and 'ad de't lossesAns(er 7.8 is incorrect 'ecause tig)tening credit (ill reduce sales and 'ad de't lossesAns(er 7C8 is incorrect 'ecause+ most likely+ )ig)er 4uality accounts (ill mean a s)orter a,erage collection periodAns(er 708 is correct- &ncreasing t)e 4uality o* t)e accounts reEected means t)at *e(er sales (ill 'e made- T)e company is t)ere*ore not trying to ma:imiFe its sales or increase its 'ad de't losses- T)e o'Eecti,e is to reduce 'ad de't losses and t)ere'y

ma:imiFe pro*its1<! "ource# CMA 01$7 1%2< 11! "ource# CMA 12$1 1%2; Ans(er 7A8 is incorrect 'ecause a c)attel mortgage is a loan secured 'y personal property 7mo,a'le property suc) as e4uipment or li,estock8- Also+ a *loating lien is secured 'y property+ suc) as in,entory+ t)e composition o* ()ic) may 'e constantly c)angingAns(er 7.8 is incorrect 'ecause a c)attel mortgage is a loan secured 'y personal property 7mo,a'le property suc) as e4uipment or li,estock8- Also+ *actoring is a *orm o* *inancing in ()ic) recei,a'les ser,e as securityAns(er 7C8 is incorrect 'ecause a c)attel mortgage is a loan secured 'y personal property 7mo,a'le property suc) as e4uipment or li,estock8- Also+ a *loating lien is secured 'y property+ suc) as in,entory+ t)e composition o* ()ic) may 'e constantly c)angingAns(er 708 is correct- An unsecured loan is a loan made 'y a 'ank 'ased on credit in*ormation a'out t)e 'orro(er and t)e a'ility o* t)e 'orro(er to repay t)e o'ligation- T)e loan is not secured 'y collateral+ 'ut is made on t)e signature o* t)e 'orro(erRe,ol,ing credit+ 'ankers/ acceptances+ lines o* credit+ and commercial paper are all unsecured means o* 'orro(ing17! "ource# CMA 01$7 1%2; Ans(er 7A8 is incorrect 'ecause s)ipping costs are ordering costs+ not carrying costsAns(er 7.8 is correct- Carrying costs include storage costs+ )andling costs+ insurance costs+ interest on capital in,ested+ and o'solescenceAns(er 7C8 is incorrect 'ecause it states ,arious ordering 7or manu*acturing8 costsAns(er 708 is incorrect 'ecause t)e set%up costs *or a production run are e4ui,alent to ordering costsAdditionally+ purc)asing costs are considered costs o* ordering1$! "ource# CMA 01$7 1%21 21! "ource# CMA 01$$ 1%12 Ans(er 7A8 is incorrect 'ecause insurance costs and o'solescence are carrying costsAns(er 7.8 is incorrect 'ecause o'solescence+ spoilage+ interest on in,ested capital+ and storage costs are carrying costsAns(er 7C8 is correct- Brdering costs are costs incurred ()en placing and recei,ing orders- Brdering costs include purc)asing costs+ s)ipping costs+ setup costs *or a production run+ and 4uantity discounts lostAns(er 708 is incorrect 'ecause o'solescence+ spoilage+ interest on in,ested capital+ and storage costs are carrying costsAns(er 7A8 is correct- .anks sometimes re4uire a 'orro(er to keep a certain percentage o* t)e *ace amount o* a loan in a noninterest%'earing c)ecking account- T)is re4uirement raises t)e e**ecti,e rate o* interest paid 'y t)e 'orro(er- T)is greater rate compensates a 'ank *or ser,ices pro,ided and results in greater pro*ita'ility *or t)e *inancial institution=unds kept as a compensating 'alance can o*ten 'e (it)dra(n i* a certain a,erage 'alance is maintainedAns(er 7.8 is incorrect 'ecause+ in *inancial accounting+ a ,aluation allo(ance is used to re*lect losses on marketa'le securitiesAns(er 7C8 is incorrect 'ecause sa*ety stock is )eld Ans(er 7A8 is incorrect 'ecause 3;;+000 is 1106 o* t)e in,oiceAns(er 7.8 is incorrect 'ecause 3;;+0;1 is a nonsense num'erAns(er 7C8 is incorrect 'ecause 3;;+;;1 assumes no cas) discountAns(er 708 is correct- T)e company (ill need 35<+000 7<$6 : 3;0+0008 to pay o** t)e in,oice- &n addition+ it (ill need a compensating 'alance e4ual to 106 o* t)e loan- T)is can 'e (ritten in e4uation *orm as# @oan O 35<+000 P 7-18@oanT)us+ t)e loan amount needed is 3;5+555 735<+000>-<820! "ource# CMA 01$7 1%20 Ans(er 7A8 is incorrect 'ecause 12-006 assumes t)at t)e company )as access to loan *unds o* 3;5+555Ans(er 7.8 is correct- T)e company (ill need 35<+000 7<$6 : 3;0+0008 to pay o** t)e in,oice- &n addition+ it (ill need a compensating 'alance e4ual to 106 o* t)e loan- T)us+ t)e loan amount needed is 3;5+555 735<+000>-<8T)e interest at 126 annually on a 20%day loan o* 3;5+555 is 3;55-55 73;5+555 : 126 : 20>2108Ho(e,er+ t)e company )as access to only 35<+000T)us+ t)e interest e:pense on usa'le *unds is at an annual rate o* 12-226 712 mont)s : 3;55-55>35<+0008Ans(er 7C8 is incorrect 'ecause 3;5+555+ not 3;;+000+ is t)e amount o* t)e loan+ and t)e annual interest e:pense s)ould 'e di,ided 'y 35<+000 o* usa'le *unds+ not 3;0+000Ans(er 708 is incorrect 'ecause 3;5+555+ not 3;;+0;1+ is t)e amount o* t)e loan used to determine annual interest e:pense-

*or suc) purposesAns(er 708 is incorrect 'ecause interest deducted in ad,ance is discount interest22! "ource# CMA 01$$ 1%1$ Ans(er 7A8 is incorrect 'ecause t)e prime rate )as not)ing to do (it) a commitment *ee on a 'ank loanAns(er 7.8 is incorrect 'ecause t)e e**ecti,e rate on most companies/ 'ank loans (ill 'e muc) )ig)er t)an t)e prime rateAns(er 7C8 is incorrect 'ecause t)e prime rate is a 'ank loan rate+ not t)e rate on commercial paperAns(er 708 is correct- T)e prime interest rate is t)e rate c)arged 'y commercial 'anks to t)eir 'est 7t)e largest and *inancially strongest8 'usiness customers&t is traditionally t)e lo(est rate c)arged 'y 'anksHo(e,er+ in recent years+ 'anks )a,e 'een making loans at still lo(er rates in response to competition *rom t)e commercial paper market22! "ource# CMA 01$< 1%10 Ans(er 7A8 is incorrect 'ecause management o* *i:ed assets is not a *actor in (orking capital managementAns(er 7.8 is incorrect 'ecause capital structure and di,idend policy are *actors in,ol,ed in capital structure *inance+ not in (orking capital *inancial managementAns(er 7C8 is incorrect 'ecause s)ort%term de't is usually less e:pensi,e t)an long%term de'tAns(er 708 is correct- A company must maintain a le,el o* (orking capital su**icient to pay 'ills as t)ey come due- =ailure to do so is tec)nical insol,ency and can result in in,oluntary 'ankruptcy?n*ortunately+ )olding current assets *or purposes o* paying 'ills is not pro*ita'le *or a company 'ecause t)ey usually o**er a lo( return compared (it) longer%term in,estments- T)us+ t)e skill*ul management o* (orking capital re4uires a 'alancing o* a *irm/s desire *or pro*it (it) its need *or ade4uate li4uidity25! "ource# CMA 01$$ 1%20 Ans(er 7A8 is incorrect 'ecause it does not re*er to e:penses t)at )a,e to 'e paid out o* t)e sales dollarsAlso+ t)e sales re,enue a,aila'le to pay lia'ilities is indetermina'le- T)us+ sales minus de't ser,ice is not a li4uidity measureAns(er 7.8 is incorrect 'ecause *i:ed assets are included in t)e numerator o* t)e ratioL )ence+ t)is ratio is not a measure o* li4uidityAns(er 7C8 is correct- @i4uidity is t)e degree to ()ic) assets can 'e con,erted to cas) in t)e s)ort run to meet maturing o'ligations- T)e usual measures o* li4uidity are t)e current ratio and t)e 4uick

7acid%test8 ratio- T)e 4uick ratio is t)e 'est measure o* s)ort%term li4uidity 'ecause it uses only t)e most li4uid assets 7cas)+ marketa'le securities+ and recei,a'les8 in t)e calculationL in,entories are not included 'ecause t)ey are t(o steps a(ay *rom cas) 7t)ey )a,e to 'e sold+ and t)en t)e recei,a'le )as to 'e collected8Ans(er 708 is incorrect 'ecause using only lia'ilities in t)e calculation ignores t)e assets a,aila'le to pay t)e lia'ilities2;! "ource# CMA 01$< 1%11 Ans(er 7A8 is incorrect 'ecause t)e gro(ing *irm is more apt to emp)asiFe production rat)er t)an protecting against tec)nical insol,ency 'y maintaining a )ig) le,el o* (orking capitalAns(er 7.8 is correct- W)en a *irm )as an aggressi,e (orking capital policy+ management keeps t)e in,estment in (orking capital at a minimum- T)us+ a gro(ing company (ould (ant to in,est its *unds in capital goods and not in idle assets- T)is policy ma:imiFes return on in,estment at t)e price o* t)e risk o* minimal li4uidityAns(er 7C8 is incorrect 'ecause t)e company (ill pre*er to e:pend *unds on capital goodsAns(er 708 is incorrect 'ecause t)e company needs its pro*its to in,est in ne( production e4uipment in order to gro(21! "ource# CMA 01$< 1%12 Ans(er 7A8 is incorrect 'ecause an agency security is issued 'y a corporation or agency created 'y t)e ?-"- go,ernment- E:amples are go,ernment securities issued 'y t)e 'odies t)at *inance mortgages+ suc) as t)e =ederal Jational Mortgage Association 7=annie Mae8Ans(er 7.8 is incorrect 'ecause 'ankers/ acceptances are dra*ts dra(n on deposits at a 'ankT)e acceptance 'y t)e 'ank guarantees payment at maturity- T)ey are normally used to *inance a speci*ic transactionAns(er 7C8 is correct- Commercial paper is t)e term *or t)e s)ort%term 7typically less t)an < mont)s8+ unsecured+ large denomination 7o*ten o,er 3100+0008 promissory notes issued 'y large+ credit%(ort)y companies to ot)er companies and institutional in,estors- &n many instances+ t)e maturity date is only a *e( days a*ter issuanceAns(er 708 is incorrect 'ecause a repurc)ase agreement in,ol,es a secured loan to a go,ernment securities dealer- &t allo(s t)e 'uyer to retain interest income alt)oug) t)e seller%dealer can repurc)ase a*ter a speci*ied time27! "ource# CMA 01$< 1%12 Ans(er 7A8 is incorrect 'ecause it is a common

met)od o* accelerating cas) collectionsAns(er 7.8 is incorrect 'ecause it is a common met)od o* accelerating cas) collectionsAns(er 7C8 is correct- Karious met)ods o* accelerating cas) collections include decentraliFed collection outposts 7normally one in eac) =ederal Reser,e 0istrict8+ electronic *unds trans*ers+ centraliFed 'anking *or all company 'ranc)es to a,oid )a,ing to maintain minimum 'alances in se,eral locations+ and lock'o: systems- A compensating 'alance is a minimum a,erage or a'solute amount t)at must 'e maintained in a 'ank account- Hence+ it is not a means o* accelerating cas) collections- T)is re4uirement means t)at less cas) is a,aila'le to t)e depositorAns(er 708 is incorrect 'ecause it is a common met)od o* accelerating cas) collections2$! "ource# CMA 01$< 1%15 Ans(er 7A8 is correct- A s)ort%term security issued 'y a corporation or agency created 'y t)e ?-"go,ernment+ suc) as t)e =ederal Housing Administration+ is an agency security 7agency issue8Among t)e largest issuers o* agency securities 7e:cluding t)e Treasury8 are t)e =ederal Home @oan .anks+ t)e =ederal Jational Mortgage Association 7=annie Mae8+ and t)e ot)er entities t)at pro,ide credit to *armers and )ome 'uyers- Bt)er issuers o* )ome mortgage%'acked securities include t)e Io,ernment Jational Mortgage Association 7Iinnie Mae8 and t)e =ederal Home @oan Mortgage Corporation 7=reddie Mac8Ans(er 7.8 is incorrect 'ecause 'ankers/ acceptances are issued 'y commercial 'anks to *inance speci*ic transactionsAns(er 7C8 is incorrect 'ecause commercial paper is a s)ort%term+ unsecured+ promissory note issued 'y a commercial enterpriseAns(er 708 is incorrect 'ecause a repurc)ase agreement in,ol,es ()at is in essence a secured loan to a dealer in go,ernment securities2<! "ource# CMA 01$< 1%1; Ans(er 7A8 is incorrect 'ecause it is an assumption o* t)e EBQ modelAns(er 7.8 is incorrect 'ecause it is an assumption o* t)e EBQ modelAns(er 7C8 is incorrect 'ecause it is an assumption o* t)e EBQ modelAns(er 708 is correct- T)e EBQ *ormula is a deterministic model t)at re4uires a kno(n demand *or in,entory or+ in t)is case+ t)e amount o* cas) needed- T)us+ t)e cas) *lo( re4uirements cannot 'e random- T)e model also assumes a gi,en carrying 7interest8 cost and a *lat transaction cost *or con,erting marketa'le securities to cas)+ regardless o* t)e amount (it)dra(n20! "ource# CMA 01$< 1%17 Ans(er 7A8 is incorrect 'ecause only large companies (it) e:cellent credit ratings )a,e access to t)e commercial paper marketAns(er 7.8 is incorrect 'ecause a retail store must )a,e instant access to its in,entory to pro,ide continuous ser,ices to customers- T)us+ a loan on a terminal (are)ouse receipt loan (ould not 'e suita'le 'ecause t)e in,entory (ould not 'e in t)e immediate possession o* t)e sellerAns(er 7C8 is correct- A small retail store (ould not )a,e access to maEor capital markets- &n *act+ t)e only options a,aila'le+ outside o* o(ner *inancing+ are 'ank loans and a line o* credit *rom suppliers- &t is t)is latter alternati,e t)at is most o*ten used 'ecause it permits t)e store to *inance in,entories *or 20 to 10 days (it)out incurring interest cost- A line o* credit is an arrangement 'et(een a 'ank and a 'orro(er in ()ic) t)e 'ank commits itsel* to lend up to a certain ma:imum amount to t)e 'orro(er in a gi,en periodAns(er 708 is incorrect 'ecause a c)attel mortgage is most o*ten used *or *inancing mo,ea'le e4uipment- &t is not (ell%suited to *inancing in,entory o* a small retailer (it) )ig) turno,er 'ecause o* t)e di**iculty o* identi*ication21! "ource# CMA 12$< 1%15 Ans(er 7A8 is correct- A treasury 'ill is a s)ort%term ?-"- go,ernment o'ligation t)at is sold at a discount *rom its *ace ,alue- A treasury 'ill is )ig)ly li4uid and nearly risk%*ree+ and it is o*ten )eld as a su'stitute *or cas)Ans(er 7.8 is incorrect 'ecause it lacks t)e li4uidity necessary to 'e a cas) su'stitute- &t can also 'e 4uite a risky in,estmentAns(er 7C8 is incorrect 'ecause it lacks t)e li4uidity necessary to 'e a cas) su'stitute- &t can also 'e 4uite a risky in,estmentAns(er 708 is incorrect 'ecause it lacks t)e li4uidity necessary to 'e a cas) su'stitute- &t can also 'e 4uite a risky in,estment22! "ource# CMA 12$< 1%1; Ans(er 7A8 is incorrect 'ecause no statement can 'e made (it) respect to pro*its (it)out kno(ing costsAns(er 7.8 is correct- An increase in discounts taken accompanied 'y declines in recei,a'les 'alances and dou't*ul accounts all indicate t)at collections on t)e increased sales )a,e 'een accelerated- Accordingly+ t)e a,erage collection period must )a,e declined- T)e a,erage collection period is a ratio calculated 'y di,iding t)e num'er o* days in a year 721;8 'y t)e recei,a'le turno,er- T)us+ t)e )ig)er t)e turno,er+ t)e s)orter t)e a,erage collection period- T)e turno,er increases ()en eit)er sales 7t)e numerator8 increase+ or recei,a'les 7t)e denominator8 decrease-

Accomplis)ing 'ot) )ig)er sales and a lo(er recei,a'les increases t)e turno,er and results in a s)orter collection periodAns(er 7C8 is incorrect 'ecause no statement can 'e made (it) respect to pro*its (it)out kno(ing costsAns(er 708 is incorrect 'ecause t)e discount may )a,e 'een increased+ ()ic) )as led to 4uicker payments22! "ource# CMA 12$< 1%11 Ans(er 7A8 is correct- T)e *irst step is to determine t)e a,erage in,estment in recei,a'les under eac) policy- ?nder t)e old policy+ a,erage daily sales are 310+000 732+100+000>210 days8- Ii,en a 20%day a,erage collection period+ t)e a,erage recei,a'les 'alance is 3200+000 7310+000 : 20 days8- ?nder t)e ne( policy+ a,erage daily sales are 311+000 732+<10+000>210 days8+ and t)e a,erage recei,a'les 'alance is 32<1+000 7311+000 : 21 days8- Hence+ t)e a,erage 'alance is 3<1+000 )ig)er under t)e ne( policy- .ecause t)e company/s incremental 7,aria'le8 costs are 106 o* sales+ t)e e:tra in,estment is only 3;7+100 7106 : 3<1+0008- T)e interest rate+ or re4uired rate o* return+ is 106- T)us+ t)e incremental carrying cost is 3;+710 7106 : 3;7+1008Ans(er 7.8 is incorrect 'ecause 3<+100 e4uals t)e 106 re4uired rate o* return times t)e 3<1+000 di**erential 'et(een t)e a,erage recei,a'les 'alancesAns(er 7C8 is incorrect 'ecause t)e di**erential 'et(een t)e a,erage recei,a'les 'alances is 3<1+000+ not 3121+000Ans(er 708 is incorrect 'ecause 3<10 assumes a 106 ,aria'le cost ratio25! "ource# CMA 12$< 1%17 Ans(er 7A8 is incorrect 'ecause an increase in in,entory carrying costs makes it less economical to carry sa*ety stocks- T)us+ sa*ety stocks (ill 'e reducedAns(er 7.8 is incorrect 'ecause+ i* t)e cost o* stockouts declines+ t)e incenti,e to carry large sa*ety stocks is reducedAns(er 7C8 is correct- A company maintains sa*ety stocks to protect itsel* against t)e losses caused 'y stockouts- T)ese can take t)e *orm o* lost sales or lost production time- "a*ety stock is necessary 'ecause o* t)e ,aria'ility in lead time and usage ratesAs t)e ,aria'ility in lead time increases+ a company (ill tend to carry larger sa*ety stocksAns(er 708 is incorrect 'ecause a decline in t)e ,aria'ility o* usage makes it easier to plan orders+ and sa*ety stocks (ill 'e less necessary2;! "ource# CMA 12$< 1%1$ Ans(er 7A8 is incorrect 'ecause 2+200 units is t)e sum o* t)e order 4uantity units plus t)e sa*ety stock in

unitsAns(er 7.8 is correct- T)e reorder point is t)e in,entory le,el at ()ic) an order s)ould 'e placedT)is le,el is t)e in,entory to 'e sold during t)e lead time plus any sa*ety stock- &* (eekly sales are 200 units 710+000>;0 (eeks8 and t)e lead time is 5 (eeks+ sales during t)e lead time s)ould 'e $00 unitsAdding t)e $00 units o* e:pected sales to t)e 1+200 units o* sa*ety stock produces a reorder point o* 2+100 unitsAns(er 7C8 is incorrect 'ecause t)e reorder point is calculated 'y adding sales during t)e lead time 710+000>;0 (eeks8 : 5 (eeks! to t)e units o* sa*ety stockAns(er 708 is incorrect 'ecause 1+200 units e4uals t)e units o* sa*ety stock re4uired21! "ource# CMA 12$< 1%20 Ans(er 7A8 is incorrect 'ecause it occurs as a result o* transactions apart *rom purc)ase transactions- &n ot)er (ords+ suc) credit is arranged separately *rom t)e transactions to ac4uire t)e assets 'eing *inancedAns(er 7.8 is incorrect 'ecause it occurs as a result o* transactions apart *rom purc)ase transactions- &n ot)er (ords+ suc) credit is arranged separately *rom t)e transactions to ac4uire t)e assets 'eing *inancedAns(er 7C8 is incorrect 'ecause prepaid interest is not a source o* *inancingAns(er 708 is correct- Trade credit is a spontaneous source o* *inancing 'ecause it arises automatically as part o* t)e purc)ase transaction27! "ource# CMA 12$< 1%21 Ans(er 7A8 is incorrect 'ecause $-7;6 e4uals 370 di,ided 'y 3$00Ans(er 7.8 is incorrect 'ecause <-516 e4uals 370 di,ided 'y 3755Ans(er 7C8 is incorrect 'ecause 7-;26 e4uals 370 di,ided 'y 3<20Ans(er 708 is correct- Assuming a 31+000 loan+ t)e interest at 76 *or 1 year is 370- Hence+ t)e proceeds o* t)e loan are 3<20 731+000 % 3708- Also+ 206 o* t)e note+ or 3200+ cannot 'e used 'y t)e 'orro(er 'ecause o* t)e compensating 'alance re4uirementConse4uently+ only 3720 is a,aila'le *or use 'y t)e 'orro(er- Paying 370 interest *or t)e use o* 3720 gi,es an interest rate o* 3<-;<6 7370>372082$! "ource# CMA 12$< 1%22 Ans(er 7A8 is correct- Commercial paper is a *orm o* unsecured note t)at is sold 'y only t)e most credit%(ort)y companies- &t is issued at a discount *rom its *ace ,alue and )as a maturity period o* less t)an < mont)s- Commercial paper usually carries a

lo( interest rate in comparison to ot)er means o* *inancingAns(er 7.8 is incorrect 'ecause only large companies (it) good credit ratings can *ind 'uyers *or t)eir commercial paperAns(er 7C8 is incorrect 'ecause commercial paper is unsecuredAns(er 708 is incorrect 'ecause in,estors must pay a commission similar to t)at on ot)er in,estment securities2<! "ource# CMA 12<0 1%1< Ans(er 7A8 is incorrect 'ecause net (orking capital increased 'y 3170Ans(er 7.8 is incorrect 'ecause net (orking capital increased 'y 3170Ans(er 7C8 is incorrect 'ecause net (orking capital increased 'y 3170Ans(er 708 is correct- Working capital is t)e e:cess o* current assets o,er current lia'ilities- An increase in current assets or a decrease in current lia'ilities (ill increase (orking capital- T)us+ net (orking capital increased 'y 3170 73120 P 3;0850! "ource# CMA 12<0 1%20 Ans(er 7A8 is incorrect 'ecause lo(er demand reduces t)e possi'ility o* a stockout- Hence+ t)e *irm can carry a lo(er le,el o* sa*ety stockAns(er 7.8 is correct- A *irm/s economic order 4uantity is a *unction o* demand+ carrying costs+ and ordering costs- A decrease in carrying costs permits a company to carry more in,entory at t)e same cost and t)ere'y reduce stockout costsAns(er 7C8 is incorrect 'ecause+ i* demand can 'e predicted (it) greater accuracy 7,aria'ility decreases8+ a stockout is less likely and sa*ety stock can 'e reducedAns(er 708 is incorrect 'ecause+ i* carrying cost is constant+ a reduction in t)e cost o* a stockout Eusti*ies a smaller sa*ety stock51! "ource# CMA 12<0 1%22 Ans(er 7A8 is incorrect 'ecause an aging sc)edule is used *or recei,a'les+ not lia'ilities-

column+ etc- T)e amount in eac) category can t)en 'e multiplied 'y an estimated 'ad de't percentage t)at is 'ased on a company/s credit e:perience and ot)er *actors- T)e t)eory is t)at t)e oldest recei,a'les are t)e least likely to 'e collecti'le- Aging t)e recei,a'les and estimating t)e uncollecti'le amounts is one met)od o* arri,ing at t)e appropriate 'alance s)eet ,aluation o* t)e accounts recei,a'le account52! "ource# CMA 12<0 1%22 Ans(er 7A8 is incorrect 'ecause an increase in current lia'ilities relati,e to noncurrent lia'ilities (ould increase li4uidity riskAns(er 7.8 is incorrect 'ecause a decrease in t)e normal operating cycle permits a lo(er le,el o* (orking capital- &* assets can 'e con,erted to cas) more 4uickly+ current assets can 'e reducedAns(er 7C8 is incorrect 'ecause a decrease in t)e 4uick ratio signi*ies t)at 4uick assets 7cas)+ recei,a'les+ and marketa'le securities8 are decreasing relati,e to current lia'ilitiesAns(er 708 is correct- A conser,ati,e (orking capital policy results in an increase in (orking capital 7current assets % current lia'ilities8- &t is typi*ied 'y a reduction in li4uidity risk- &ncreasing t)e current ratio+ ()et)er 'y decreasing current lia'ilities or increasing current assets+ minimiFes t)e risk t)at t)e company (ill not 'e a'le to meet its o'ligations as t)ey *all dueT)us+ an increasing ratio o* current to noncurrent assets means t)at a company is *orgoing t)e potentially )ig)er returns on long%term assets in order to guard against s)ort%term cas) *lo( pro'lems-

52! "ource# CMA 12<0 1%2$ Ans(er 7A8 is incorrect 'ecause t)e annual interest cost (ill 'e $-116Ans(er 7.8 is correct- T)e total cost to t)e company (ill 'e 321+200 7320+000 discount P 31+200 o* transaction costs8+ and t)e net amount a,aila'le (ill 'e 3<7$+$00- T)e annualiFed amount o* t)e costs is 3$5+$00 75 : 321+2008- Accordingly+ t)e annual interest cost (ill 'e $-116 73$5+$00>3<7$+$008Ans(er 7C8 is incorrect 'ecause t)e annual interest cost (ill 'e $-116Ans(er 708 is incorrect 'ecause t)e annual interest cost (ill 'e $-11655! "ource# CMA 12<0 1%20

Ans(er 7.8 is incorrect 'ecause an aging sc)edule concerns speci*ic accounts+ not a,eragesAns(er 7C8 is incorrect 'ecause an aging sc)edule *ocuses on uncollected recei,a'lesAns(er 708 is correct- T)e purpose o* an aging o* recei,a'les is to classi*y recei,a'les 'y due dateT)ose t)at are current 7not past due8 are listed in one column+ t)ose less t)an 20 days past due in anot)er

Ans(er 7A8 is incorrect 'ecause a*ter%ta: income (ill increase 'y 31+000Ans(er 7.8 is correct- T)e company/s manu*acturing and selling costs e:clusi,e o* 'ad de'ts e4ual 706 o* sales- Hence+ t)e gross pro*it on t)e 3100+000 increase in sales (ill 'e 320+000 7206 : 3100+0008Assuming 31;+000 o* 'ad de'ts and 3;+000 o* collection e:pense+ t)e increase in pre%ta: income (ill

'e 310+000 7320+000 % 320+0008- Conse4uently+ a*ter%ta: income (ill increase 'y 31+000 310+000 % 7506 : 310+0008!Ans(er 7C8 is incorrect 'ecause a*ter%ta: income (ill increase 'y 31+000Ans(er 708 is incorrect 'ecause a*ter%ta: income (ill increase 'y 31+0005;! "ource# CMA 01<1 1%5 Ans(er 7A8 is incorrect 'ecause pro*it margin and return on assets are measures o* t)e management o* all assetsAns(er 7.8 is correct- Working capital e4uals current assets minus current lia'ilities- T)e acid%test ratio e4uals 4uick assets 7current assets % in,entory % prepaid e:penses8 di,ided 'y current lia'ilities&n,entory 7a current asset8 turno,er e4uals cost o* goods sold di,ided 'y a,erage in,entory- T)e a,erage collection period 7num'er o* days/ sales in accounts recei,a'le+ a current asset8 e4uals t)e num'er o* days in a year di,ided 'y t)e accounts recei,a'le turno,er 7net credit sales>a,erage recei,a'les8- T)e *oregoing are some o* t)e many ratios t)at can 'e used to e,aluate (orking capital managementAns(er 7C8 is incorrect 'ecause times interest earned and t)e de't%to%e4uity ratio are measures o* capital structure managementAns(er 708 is incorrect 'ecause return on e4uity is a measure o* capital structure management51! "ource# CMA 01<1 1%1 Ans(er 7A8 is incorrect 'ecause t)e annual interest cost is 21-76Ans(er 7.8 is incorrect 'ecause t)e annual interest cost is 21-76Ans(er 7C8 is incorrect 'ecause t)e annual interest cost is 21-76Ans(er 708 is correct- Assume t)at t)e gross amount o* an in,oice is 31+000- Wit) a 26 discount+ t)e 'uyer (ill pay only 3<$0 on t)e tent) day- T)us+ t)e seller is *orgoing 320 to recei,e payment 20 days sooner t)an (ould ot)er(ise 'e re4uired- T)e 20%day interest rate is -0205 7320>3<$08- T)e num'er o* 20%day periods in a year is 1$ 7210>208- &* t)e interest rate is 2-056 *or eac) 20%day period+ t)e annual interest rate 7rounded to t)e nearest tent)8 is 21-76 71$ : 2-056857! "ource# CMA 01<1 1%7 Ans(er 7A8 is incorrect 'ecause+ i* t)e company does not need cas)+ it (ould not o**er cas) discounts+ regardless o* its cost o* capital+ unless re4uired to matc) competitionAns(er 7.8 is incorrect 'ecause t)e a'ility to 'orro(

at a lo(er rate is a reason *or not o**ering cas) discountsAns(er 7C8 is incorrect 'ecause t)e relations)ip 'et(een t)e cost o* capital and t)e prime rate may not 'e rele,ant i* t)e *irm cannot 'orro( at t)e prime rateAns(er 708 is correct- .ecause t)ese terms in,ol,e an annual interest cost o* o,er 216+ a company (ould not o**er t)em unless it desperately needed cas)- Also+ credit terms are typically some()at standardiFed (it)in an industry- T)us+ i* most companies in t)e industry o**er similar terms+ a *irm (ill likely 'e *orced to matc) t)e competition or lose market s)are5$! "ource# CMA 01<1 1%$ Ans(er 7A8 is incorrect 'ecause t)e annual 4uantity o* in,entory demanded is an input into t)e *ormula+ not t)e resultAns(er 7.8 is incorrect 'ecause annual usage is a determinant o* annual demand+ ()ic) is an input into t)e *ormulaAns(er 7C8 is incorrect 'ecause sa*ety stock is not re*lected in t)e 'asic EBQ *ormulaAns(er 708 is correct- T)e EBQ model is a deterministic model t)at calculates t)e ideal order 7or production lot8 4uantity gi,en speci*ied demand+ ordering or setup costs+ and carrying costs- T)e model minimiFes t)e sum o* in,entory carrying costs and eit)er ordering or production setup costs5<! "ource# CMA 01<1 1%< Ans(er 7A8 is incorrect 'ecause net income includes noncas) elementsAns(er 7.8 is incorrect 'ecause net income includes noncas) elements+ e-g-+ good(ill amortiFation and depreciationAns(er 7C8 is incorrect 'ecause collection percentages must 'e considered+ and net income includes noncas) elementsAns(er 708 is correct- T)e most direct (ay o* preparing a cas) 'udget re4uires incorporation o* sales proEections and credit terms+ collection percentages+ estimated purc)ases and payment terms+ and ot)er cas) receipts and dis'ursements- &n ot)er (ords+ preparation o* t)e cas) 'udget re4uires consideration o* 'ot) in*lo(s and out*lo(s;0! "ource# CMA 01<1 1%10 Ans(er 7A8 is incorrect 'ecause commercial paper usually )as a maturity date o* 270 days or less to a,oid securities registration re4uirementsAns(er 7.8 is incorrect 'ecause commercial paper is o*ten issued directly 'y t)e 'orro(ing *irm-

Ans(er 7C8 is correct- Commercial paper is a *orm o* unsecured note t)at is sold 'y only t)e most credit(ort)y companies- &t is issued at a discount *rom its *ace ,alue and )as a maturity period o* 270 days or less- Commercial paper usually carries a lo( interest rate in comparison to ot)er means o* *inancing- "MA 5M+ ?nderstanding =inancial &nstruments+ o'ser,es t)at no general 7acti,e8 secondary market e:ists *or commercial paper+ 'ut t)at Amost dealers or organiFations (ill repurc)ase an issue t)at t)ey )a,e sold-A Ans(er 708 is incorrect 'ecause interest rates must 'e )ig)er t)an t)ose o* Treasury 'ills to entice in,estors- Commercial paper is more risky t)an Treasury 'ills;1! "ource# CMA 01<1 1%12 Ans(er 7A8 is incorrect 'ecause negotia'le C0s do )a,e a secondary market 7i-e-+ t)ey are negotia'le8Ans(er 7.8 is incorrect 'ecause negotia'le C0s are regulatedAns(er 7C8 is incorrect 'ecause negotia'le C0s are typically issued in a denomination o* 3100+000Ans(er 708 is correct- A certi*icate o* deposit 7C08 is a *orm o* sa,ings deposit t)at cannot 'e (it)dra(n 'e*ore maturity (it)out incurring a )ig) penalty- A negotia'le C0 can 'e traded- C0s usually )a,e a *airly )ig) rate o* return compared (it) ot)er sa,ings instruments 'ecause t)ey are *or *i:ed+ usually long%term periods- Ho(e,er+ t)eir yield is less t)an t)at o* commercial paper and 'ankers/ acceptances 'ecause t)ey are less risky;2! "ource# CMA 01<2 1%22 Ans(er 7A8 is incorrect 'ecause t)e usage rate o* in,entory is a *actor in determining )o( muc) in,entory to carryAns(er 7.8 is incorrect 'ecause t)e cost o* in,entory a**ects carrying costs and a *irm (ants to minimiFe its in,entory carrying costsAns(er 7C8 is correct- T)e optimal le,el o* in,entory is a**ected 'y t)e *actors in t)e economic order 4uantity 7EBQ8 model and deli,ery or production lead times- T)ese *actors are t)e annual demand *or in,entory+ t)e carrying cost+ ()ic) includes t)e interest on *unds in,ested in in,entory+ t)e usage rate+ and t)e cost o* placing an order or making a production run- T)e current le,el o* in,entory )as not)ing to do (it) t)e optimal in,entory le,elAns(er 708 is incorrect 'ecause t)e cost o* placing an order a**ects )o( o*ten orders are placed- A *irm (ants to minimiFe its ordering costs;2! "ource# CMA 01<2 1%22 Ans(er 7A8 is incorrect 'ecause t)e 26 sa,ings is *or 20 days onlyL t)e annualiFed interest rate paid *or recei,ing t)e money early is a'out 256-

Ans(er 7.8 is incorrect 'ecause 116 assumes eig)t discount periods o* 5; days eac) in a year rat)er t)an 12Ans(er 7C8 is incorrect 'ecause 5$6 assumes 1;%day discount periodsAns(er 708 is correct- Assume t)at an in,oice is due in 5; days- Ho(e,er+ t)e seller allo(s a 26 cas) discount i* t)e in,oice is paid (it)in 1; days- Ii,en early payment+ t)e seller (ill recei,e t)eir money at least 20 days 75; % 1;8 sooner t)an t)e contract re4uires- Ho(e,er+ t)e seller is e**ecti,ely paying 26 o* t)e in,oice price to recei,e t)e money 20 days early- T)e appro:imate annual interest cost is 256 'ecause a 210%day year contains 12 periods o* 20 days eac);5! "ource# CMA 01<2 1%25 Ans(er 7A8 is incorrect 'ecause t)e ,aria'ility o* sales during t)e lead time is a *actor in t)e siFe o* sa*ety stocksAns(er 7.8 is incorrect 'ecause t)e cost o* stockouts+ including t)e opportunity cost o* customer dissatis*action+ is considered in determining sa*ety stockAns(er 7C8 is incorrect 'ecause t)e cost o* running out o* in,entory+ o*ten an opportunity cost+ is a considerationAns(er 708 is correct- T)e le,el o* sa*ety stock is 'ased on t)e deli,ery lead time and t)e ,aria'ility o* sales during t)e lead time- T)e cost o* stockouts+ usually in t)e *orm o* opportunity costs+ is also considered- "a*ety stocks are irrele,ant to t)e economic order 4uantity- T)us+ t)e cost to reorder+ ()ic) is incorporated into t)e EBQ model+ does not a**ect t)e le,el o* sa*ety stock;;! "ource# CMA 01<2 1%2; Ans(er 7A8 is correct- Jet (orking capital is de*ined as t)e di**erence 'et(een current assets and current lia'ilities- Working capital is a measure o* s)ort%term sol,encyAns(er 7.8 is incorrect 'ecause (orking capital re*ers to t)e di**erence 'et(een current assets and current lia'ilitiesL *i:ed assets are not a componentAns(er 7C8 is incorrect 'ecause total assets and total lia'ilities are not components o* (orking capitalL only current items are includedAns(er 708 is incorrect 'ecause s)are)olders/ e4uity is not a component o* (orking capitalL only current items are included in t)e concept o* (orking capital;1! "ource# CMA 01<2 1%21 Ans(er 7A8 is incorrect 'ecause t)e cas) *lo( *or t)e period is greater t)an net income gi,en noncas) e:penses in t)e *orm o* depreciation and 'ond

discount amortiFationAns(er 7.8 is incorrect 'ecause 311+000 does not re*lect t)e noncas) e:pense *or depreciationAns(er 7C8 is incorrect 'ecause t)e 3;+000 o* depreciation and t)e 31+000 *or amortiFation s)ould 'e added 'ack to+ not su'tracted *rom+ incomeAns(er 708 is correct- To determine cas) *lo( *or t)e period+ all noncas) e:penses s)ould 'e added 'ack to net income- Adding t)e 3;+000 o* depreciation and t)e 31+000 o* discount amortiFation to t)e 310+000 o* net income produces a cas) *lo( o* 371+000-

a,erage amount in accounts recei,a'le 'e*ore any c)ange in credit termsAns(er 7C8 is incorrect 'ecause 3<00+000 (ould )a,e 'een t)e increase 'ased solely on t)e increased num'er o* days outstanding+ assuming no increase in salesAns(er 708 is correct- B* t)e 350+;00+000 o* sales+ $06 are e:pected to 'e on credit+ a total o* 322+500+000- A,erage daily credit sales are t)ere*ore 3<0+000 7322+500+000>2108- &* 20 days o* sales are outstanding at any one time+ t)e a,erage 'alance in accounts recei,a'le is 32+700+000- &* credit sales increase 'y 206+ t)e a*orementioned 3<0+000 a,erage o* daily sales (ill increase to 310$+000 71206 : 3<0+0008- =or an a,erage collection period o* 50 days+ t)e a,erage accounts recei,a'le 'alance (ill 'e 35+220+000 750 : 310$+0008- Hence+ t)e e:pected increase in t)e 'alance is 31+120+000 735+220+000 % 32+700+000811! "ource# CMA 12<2 1%22 Ans(er 7A8 is incorrect 'ecause (orking capital (ould decreaseAns(er 7.8 is correct- Working capital is de*ined as current assets minus current lia'ilities- Working capital is calculated as *ollo(s# Current Proposal %%%%%%%%%% %%%%%%%%%% Cas) 3 100+000 3 120+000 Accounts recei,a'le 500+000 ;00+000 &n,entory 2$0+000 510+000 Marketa'le securities 200+000 200+000 %%%%%%%%%% %%%%%%%%%% Total current assets 31+0$0+000 31+2$0+000 Accounts paya'le 2;0+000 520+000 Mortgage paya'le %% current 17;+000 22;+000 %%%%%%%%%% %%%%%%%%%% Total current lia'ilities 3 ;2;+000 3 7;;+000 %%%%%%%%%% %%%%%%%%%% Working capital 3 ;;;+000 3 ;2;+000 OOOOOOOOOO OOOOOOOOOO Working capital (ould decrease *rom t)e current 3;;;+000 to 3;2;+000 under t)e proposal+ a decline o* 320+000Ans(er 7C8 is incorrect 'ecause (orking capital (ould decreaseAns(er 708 is incorrect 'ecause (orking capital (ould decrease12! "ource# CMA 12<2 1%25 Ans(er 7A8 is incorrect 'ecause t)e sa,ings (ill 'e 3$0+000+ 'ased on a 31 million decline in a,erage in,entoryAns(er 7.8 is incorrect 'ecause t)e sa,ings (ill 'e 3$0+000+ 'ased on a 31 million decline in a,erage in,entoryAns(er 7C8 is correct- &n,entory turno,er e4uals cost o* sales di,ided 'y a,erage in,entory- Ii,en cost o*

;$! "ource# CMA 12<2 1%1< Ans(er 7A8 is correct- &* <06 o* t)e 325+000+000 o* sales are on credit+ 321+100+000 o* sales (ill 'e su'Eect to t)e discount- &* ;06 o* t)e credit customers take t)e discount+ discounts (ill 'e taken on sales o* 310+$00+000- T)e e:pected discount (ill 'e 3211+000 726 : 310+$00+0008Ans(er 7.8 is incorrect 'ecause 3522+000 (ould )a,e 'een t)e discount on all o* t)e credit salesAns(er 7C8 is incorrect 'ecause only <06 o* t)e sales are on creditL 3250+000 (ould 'e correct only i* a cas) discount (ere allo(ed on cas) sales as (ell as credit salesAns(er 708 is incorrect 'ecause 35$0+000 is 'ased on t)e assumption t)at all sales (ill 'e discounted;<! "ource# CMA 12<2 1%20 Ans(er 7A8 is incorrect 'ecause 321+000 is t)e minimum sa,ings re4uiredAns(er 7.8 is incorrect 'ecause 321+000 is t)e minimum sa,ings re4uiredAns(er 7C8 is incorrect 'ecause 321+000 is t)e minimum sa,ings re4uiredAns(er 708 is correct- Ii,en sales o* 327+000+000+ t)e a,erage amount o* daily sales must 'e 37;+000 7327+000+000>210 days8- T)e increased accounts recei,a'le 'alance is t)ere*ore 35;0+000 71 days : 37;+0008- Wit) an additional 35;0+000 o* capital in,ested in recei,a'les+ t)e company/s interest cost (ill increase 'y 321+000 per year 7$6 : 35;0+0008T)us+ t)e company must sa,e at least 321+000 per year to Eusti*y t)e c)ange in procedures10! "ource# CMA 12<2 1%21 Ans(er 7A8 is incorrect 'ecause 3;50+000 (ould )a,e 'een t)e increase i* t)e a,erage 'alance outstanding remained at 20 days o* salesAns(er 7.8 is incorrect 'ecause 32+700+000 is t)e

sales o* 321 million and a turno,er rate o* nine times+ t)e a,erage in,entory is 35 million 7321><8- &* t)e turno,er rate increases to 12 times+ t)e a,erage in,entory (ill decline to 32 million 7321>128+ t)ere'y releasing 31 million o* *unds- At an $6 interest rate+ t)e sa,ings on 31 million is 3$0+000Ans(er 708 is incorrect 'ecause t)e calculations s)ould 'e 'ased on cost o* goods sold+ not salesT)e 3120+000 *igure could only 'e o'tained i* t)e retail price o* t)e goods (ere used in t)e calculations12! "ource# CMA 12<2 1%22 Ans(er 7A8 is incorrect 'ecause 327; million is t)e amount o* current assets t)at (ould 'e re4uired to a,oid a ,iolation at t)e e:isting le,el o* current lia'ilitiesAns(er 7.8 is correct- T)e current ratio e4uals current assets di,ided 'y current lia'ilities- &* current lia'ilities are 32;0 million and t)e current ratio is 1-7; to 1+ current assets must 'e 3527-; million 732;0 : 1-7;8- T)e *ollo(ing is t)e *ormula *or t)e amount o* additional lia'ilities t)at can 'e incurred (it)out ,iolating t)e 'ond indenture# 73527-; P T8>732;0 P T8 O 1-; T e4uals t)e amount o* additional current lia'ilities 7commercial paper in t)is case8 t)at can 'e incurredT also e4uals t)e additional in,entory ac4uired (it) t)e *unds o'tained and t)e solution is as *ollo(s# 3527-; P T O 1-;732;0 P T8 3527-; P T O 327; P 1-;T 312-; O -;T T O 312; &* commercial paper is issued in t)e amount o* 312; million+ lia'ilities and current assets (ill rise to 327; million and 3;12-; million+ respecti,ely- T)e result (ill 'e a current ratio o* 1-; 73;12-;>327;8Ans(er 7C8 is incorrect 'ecause issuing only 312-; million o* commercial paper (ould result in a current ratio greater t)an t)e desired 1-; to 1Ans(er 708 is incorrect 'ecause 3527-; million o* commercial paper (ould put t)e *irm in ,iolation o* t)e 'ond indenture15! "ource# CMA 12<2 1%1< Ans(er 7A8 is incorrect 'ecause a prepayment o* e:penses does not c)ange current assets or current lia'ilities- Cas) decreases 'y t)e same amount t)at prepaid rent increasesAns(er 7.8 is correct- Working capital is t)e e:cess o* current assets o,er current lia'ilities- Re*inancing a s)ort%term de't (it) a long%term de't decreases current lia'ilities+ and t)e result is an increase in (orking capitalAns(er 7C8 is incorrect 'ecause t)e purc)ase o* temporary in,estments does not a**ect total current assetsL cas) is replaced 'y temporary in,estments+ anot)er current asset-

Ans(er 708 is incorrect 'ecause t)e collection o* a recei,a'le )as no e**ect on total current assets- T)e recei,a'le is replaced 'y an e4ual amount o* cas)1;! "ource# CMA 12<2 1%20 Ans(er 7A8 is incorrect 'ecause a lock%'o: system is not related to compensating 'alancesL a compensating 'alance may 'e re4uired 'y a co,enant in a loan agreement t)at re4uires a company to maintain a speci*ied 'alance during t)e term o* t)e loanAns(er 7.8 is incorrect 'ecause a lock%'o: system is a process 'y ()ic) payments are sent to a 'ank/s mail'o:+ ()ic) is c)ecked during normal post o**ice )oursAns(er 7C8 is incorrect 'ecause t)e use o* a lock%'o: system entails sending c)ecks t)roug) t)e mail to a post o**ice 'o:- T)us+ it does not reduce t)e risk o* losing c)ecks in t)e mailAns(er 708 is correct- A lock%'o: system accelerates t)e in*lo( o* *unds- A company maintains mail 'o:es+ o*ten in numerous locations around t)e country+ to ()ic) customers send payments- A 'ank c)ecks t)ese mail'o:es se,eral times a day+ and *unds recei,ed are immediately deposited to t)e company/s account (it)out *irst 'eing processed 'y t)e company/s accounting system+ t)ere'y )astening a,aila'ility o* t)e *unds11! "ource# CMA 12<2 1%21 Ans(er 7A8 is incorrect 'ecause *actoring is t)e sale o* recei,a'les and t)ere*ore concerns cas) in*lo(s+ not out*lo(sAns(er 7.8 is correct- A dra*t is a t)ree%party instrument in ()ic) one person 7t)e dra(er8 orders a second person 7t)e dra(ee8 to pay money to a t)ird person 7t)e payee8- A c)eck is t)e most common *orm o* dra*t- &t is an instrument paya'le on demand in ()ic) t)e dra(ee is a 'ank- Conse4uently+ a dra*t can 'e used to delay t)e out*lo( o* cas)- A dra*t can 'e dated on t)e due date o* an in,oice and (ill not 'e processed 'y t)e dra(ee until t)at date+ t)ere'y eliminating t)e necessity o* (riting a c)eck earlier t)an t)e due date or using an E=T- T)us+ t)e out*lo( is delayed until t)e c)eck clears t)e dra(ee 'ankAns(er 7C8 is incorrect 'ecause a lock%'o: system is a means o* accelerating cas) in*lo(sAns(er 708 is incorrect 'ecause an electronic *unds trans*er results in an immediate deduction *rom t)e payor/s 'ank account+ t)ere'y eliminating *loat-

1$! "ource# CMA 01$7 1%2$ Ans(er 7A8 is incorrect 'ecause t)e cost o* not taking t)e cas) discount is $-76- T)e company (ill initially lose 32 'y not taking t)e discount- T)is amount is partially o**set 'y interest earned on 3<$

*or ;0 days o* 3-$17- T)us+ t)e net cost is 31-1$2 732-00 % 3-$178- .ecause a 210%day year )as 7-2 periods o* ;0 days eac)+ t)e total annualiFed cost is 3$-;2 77-2 : 31-1$28- T)e loss rate is a'out $-76 73$-;2>3<$8Ans(er 7.8 is correct- T)e company (ill initially lose 32 'y not taking t)e discount- T)is amount is partially o**set 'y interest earned on 3<$ *or ;0 days o* 3-$17- T)us+ t)e net cost is 31-1$2 732-00 % 3-$178"ince a 210%day year )as 7-2 *i*ty%day periods+ t)e total annualiFed cost is 3$-;2 77-2 : 31-1$28- T)e loss rate is a'out $-76 73$-;2>3<$8Ans(er 7C8 is incorrect 'ecause t)e cost o* not taking t)e cas) discount is $-76- T)e company (ill initially lose 32 'y not taking t)e discount- T)is amount is partially o**set 'y interest earned on 3<$ *or ;0 days o* 3-$17- T)us+ t)e net cost is 31-1$2 732-00 % 3-$178- .ecause a 210%day year )as 7-2 periods o* ;0 days eac)+ t)e total annualiFed cost is 3$-;2 77-2 : 31-1$28- T)e loss rate is a'out $-76 73$-;2>3<$8Ans(er 708 is incorrect 'ecause t)e cost o* not taking t)e cas) discount is $-76- T)e company (ill initially lose 32 'y not taking t)e discount- T)is amount is partially o**set 'y interest earned on 3<$ *or ;0 days o* 3-$17- T)us+ t)e net cost is 31-1$2 732-00 % 3-$178- .ecause a 210%day year )as 7-2 periods o* ;0 days eac)+ t)e total annualiFed cost is 3$-;2 77-2 : 31-1$28- T)e loss rate is a'out $-76 73$-;2>3<$81<! "ource# C&A 11<2 &K%51 Ans(er 7A8 is incorrect 'ecause ma:imiFing ,alue is pre*era'le to ma:imiFing re,enues- T)e latter may in,ol,e actions t)at reduce stock prices+ *or e:ample+ actions t)at increase s)ort%term pro*its (it)out concern *or long%term conse4uencesAns(er 7.8 is incorrect 'ecause minimiFing costs (ill not necessarily ma:imiFe stock)older (ealt)Ans(er 7C8 is incorrect 'ecause sta'iliFing gro(t) (ill not necessarily ma:imiFe stock)older (ealt)Ans(er 708 is correct- T)e o'Eecti,e o* t)e *irm is to take t)ose actions (it)in legal and et)ical limits t)at (ill ma:imiFe t)e stock)olders/ (ealt)+ i-e-+ t)e price per s)are o* common stock- T)e market price o* t)e stock is largely t)e result o* t)e *irm/s in,estment and *inancing decisions70! "ource# C&A 0;<2 &K%;2 Ans(er 7A8 is correct- T)e optimal amount o* cas) to 'e raised 'y selling securities is calculated 'y a *ormula similar to t)at used to determine t)e economic order 4uantity *or in,entoryP C O 727=87T8>k8 P &*# C O Cas) to 'e raised T O Total cas) needed *or t)e period

= O Cost o* making a securities trade k O Bpportunity cost o* )olding cas) T)e optimal amount o* cas) to 'e raised 'y selling securities is in,ersely related to t)e rate o* return *orgone 7opportunity cost8 and directly related to t)e cost o* t)e transactionAns(er 7.8 is incorrect 'ecause a )ig) 7lo(8 opportunity cost results in a lo(er 7)ig)er8 optimal cas) 'alance+ ()ereas )ig) 7lo(8 transaction costs result in a )ig)er 7lo(er8 optimal cas) 'alanceAns(er 7C8 is incorrect 'ecause a )ig) 7lo(8 opportunity cost results in a lo(er 7)ig)er8 optimal cas) 'alance+ ()ereas )ig) 7lo(8 transaction costs result in a )ig)er 7lo(er8 optimal cas) 'alanceAns(er 708 is incorrect 'ecause a )ig) 7lo(8 opportunity cost results in a lo(er 7)ig)er8 optimal cas) 'alance+ ()ereas )ig) 7lo(8 transaction costs result in a )ig)er 7lo(er8 optimal cas) 'alance71! "ource# C&A 0;<2 &K%;2 Ans(er 7A8 is correct- Rela:ing t)e credit policy *or customers (ill lead to increased sales 'ecause more people (ill 'e eligi'le *or more credit- As sales increase+ purc)ase orders (ill increase to accommodate t)e )ig)er sales le,elsAns(er 7.8 is incorrect 'ecause in,entory s)ould 'e increased to accommodate )ig)er sales le,elsAns(er 7C8 is incorrect 'ecause sa*ety stock is 'ased on e:pected sales+ ()ic) are e:pected to riseAns(er 708 is incorrect 'ecause a Eust%in%time system is not used ()en a company orders in,entory once a 4uarter72! "ource# C&A 11$$ &K%;5 Ans(er 7A8 is incorrect 'ecause t)e e**ecti,e trade credit rate is 1<-$26 depending on t)e met)od o* calculationAns(er 7.8 is correct- T)e corporation can o'tain trade credit *or 20 additional days 'y not paying (it)in t)e discount period- &nstead o* paying 3<<+000 to satis*y its o'ligation (it)in 10 days+ it can pay 3100+000 at t)e end o* 20 days- T)e corporation (ill t)us incur 31+000 in interest to )old t)e 3<<+000 *or t)e 20 days- .ecause a 210%day year )as 1$ suc) periods+ t)e interest rate is appro:imately 1$-1$6 731+000>3<<+0008 : 1$!- Ho(e,er+ i* compounding e**ects are considered+ t)e rate is )ig)er- T)e e**ecti,e rate+ taking compounding into consideration+ is *ound using t)e *ollo(ing *ormula# 1$ E**ecti,e rate O 1 P 71+000><<+0008! % 1-0 O 1<-$26&n comparison+ t)e 20%day note )as an e**ecti,e annual rate o* 21-<56+ calculated as *ollo(s# 12 1 P 7-20>128! % 1-0 O 21-<56 T)ere*ore+ t)e corporation s)ould use trade credit to o'tain t)e s)ort%term credit-

Ans(er 7C8 is incorrect 'ecause t)e note )as an e**ecti,e rate+ including compounding e**ects+ o* 21-<56- T)e *ollo(ing is t)e calculation# 12 E**ecti,e rate O 1 P 7-20>128! % 1-0 O 21-<56Ans(er 708 is incorrect 'ecause t)e note )as an e**ecti,e rate+ including compounding e**ects+ o* 21-<56- T)e *ollo(ing is t)e calculation# 12 E**ecti,e rate O 1 P 7-20>128! % 1-0 O 21-<5672! "ource# C&A 11<1 &K%;1 Ans(er 7A8 is incorrect 'ecause commercial paper is a type o* unsecured+ s)ort%term promissory note issued 'y large *irms to ot)er *irms+ insurance companies+ mutual *unds+ etcAns(er 7.8 is correct- A document o* title is usually issued 'y a 'ailee co,ering goods in t)e 'ailee/s possession or care 7?CC 1%2018- &t represents o(ners)ip o* t)e goods and is ordinarily needed to o'tain t)e goods *rom t)e 'ailee- T)e t(o maEor types o* documents o* title are 'ills o* lading 7issued 'y carriers8 and (are)ouse receipts- A (are)ouse receipt is issued 'y a person engaged in t)e 'usiness o* storing goods *or )ire- "ecurity *or s)ort%term in,entory *inancing can 'e arranged i* t)e de'tor places its in,entory under t)e control o* t)e lender or its agent 7e-g-+ a pu'lic (are)ouse8+ and t)e lender )olds t)e (are)ouse receiptsAns(er 7C8 is incorrect 'ecause a re,ol,ing credit agreement is a *ormal line o* credit+ usually (it) a 'ank+ t)at large *irms o*ten useAns(er 708 is incorrect 'ecause a line o* credit is an arrangement+ ()ic) may 'e *ormal or in*ormal+ 'et(een a commercial 'ank and its customer concerning t)e ma:imum loan amount a,aila'le75! "ource# C&A 0;<5 &K%;1 Ans(er 7A8 is correct- T)e most desira'le set o* terms are t)ose t)at result in t)e lo(est cost o* 'orro(ing- 0iscount interest results in a )ig)er e**ecti,e 'orro(ing cost t)an simple interest 'ecause t)e 'ank deducts interest in ad,ance so t)e 'orro(er recei,es less t)an t)e *ace ,alue o* t)e loan- A compensating 'alance results in a )ig)er e**ecti,e 'orro(ing cost 'ecause t)e compensating 'alance is an amount o* cas) t)at t)e *irm is una'le to use- T)e c)eapest terms+ gi,en t)at all options )a,e t)e same nominal interest rate+ (ill 'e simple interest (it) no compensating 'alanceAns(er 7.8 is incorrect 'ecause discount interest results in a )ig)er e**ecti,e 'orro(ing cost t)an simple interest 'ecause t)e 'ank deducts interest in ad,ance so t)e 'orro(er recei,es less t)an t)e *ace ,alue o* t)e loanAns(er 7C8 is incorrect 'ecause a compensating 'alance results in a )ig)er e**ecti,e 'orro(ing cost

'ecause t)e compensating 'alance is an amount o* cas) t)at t)e *irm is una'le to useAns(er 708 is incorrect 'ecause discount interest and a compensating 'alance are disad,antageous to t)e 'orro(er7;! "ource# C&A 0;<2 &K%50 Ans(er 7A8 is incorrect 'ecause 'ot) ratios decreasedAns(er 7.8 is incorrect 'ecause 'ot) ratios decreasedAns(er 7C8 is incorrect 'ecause 'ot) ratios decreasedAns(er 708 is correct- T)e current ratio is determined 'y di,iding current assets 'y current lia'ilities- T)e acid%test ratio is determined 'y di,iding 4uick assets 'y current lia'ilities- At 0ecem'er 21+ year 1+ t)e current ratio is 1 to 1 7350+000 P 3120+000 P 3200+0008>310+000!- At 0ecem'er 21+ year 2+ t)e current ratio is 5-2 to 1 7320+000 P 3100+000 P 3200+0008>3100+000!- Hence+ t)ere (as a decrease in t)e current ratio- At 0ecem'er 21+ year 1+ t)e acid%test ratio is 2-117 to 1 7350+000 P 3120+0008>310+000!- At 0ecem'er 21+ year 2+ t)e acid%test ratio is 1-2 to 1 7320+000 P 3100+0008>3100+000!- T)us+ t)e acid%test ratio also declined71! "ource# CMA 01<5 1%1< Ans(er 7A8 is incorrect 'ecause a loss (ould result since t)e ser,ice c)arges e:ceed t)e additional interest re,enueAns(er 7.8 is correct- &* daily cas) receipts are 31;0+000+ and t)e lock'o: ser,ice (ill speed collection 'y *our days+ t)e company (ill )a,e a,aila'le an additional 3100+000 75 days : 31;0+0008- T)e result is increased interest re,enue o* 325+000 756 interest rate : 3100+0008- Ho(e,er+ t)e 32+;00 mont)ly ser,ice c)arges total 320+000 *or t)e year+ ()ic) is a 31+000 net loss 7325+000 interest re,enue % 320+000 mont)ly ser,ice c)arges8Ans(er 7C8 is incorrect 'ecause a loss (ould result since t)e ser,ice c)arges e:ceed t)e additional interest re,enueAns(er 708 is incorrect 'ecause t)e loss is 31+000+ t)e di**erence 'et(een t)e 325+000 o* additional interest re,enue and t)e 320+000 total ser,ice c)arge77! "ource# CMA 01<5 1%20 Ans(er 7A8 is incorrect 'ecause ;;-176 is 'ased on terms o* 2>10+ net 20Ans(er 7.8 is correct- Payments s)ould 'e made (it)in discount periods i* t)e return is more t)an t)e *irm/s cost o* capital- Wit) terms o* 2>10+ net 5;+ t)e 'uyer is earning a 26 sa,ings *or paying on t)e tent)

day+ or 2; days earlier t)an (ould ot)er(ise 'e re4uired- =or e:ample+ on a 31+000 in,oice+ t)e payment (ould 'e only 3<70- T)e 320 sa,ings is compara'le to interest earned on a 3<70 loan to t)e ,endor 7t)e payment is not due *or anot)er 2; days8T)e interest rate on t)is )ypot)etical loan is 2-0<27$6 7320>3<708- T)at return is *or a 2;%day period- AnnualiFing t)e return re4uires determining t)e num'er o* 2;%day periods in a year- Multiplying t)e return *or 2; days times t)e periods in a year results in an annual rate o* return o* a'out 21-$16 2-0<27$6 : 7210 days>2; days8!Ans(er 7C8 is incorrect 'ecause 22-276 is 'ased on an earning period o* ;0 daysAns(er 708 is incorrect 'ecause t)e discount is 26+ not <67$! "ource# CMA 01<5 1%21 Ans(er 7A8 is incorrect 'ecause t)e e**ecti,e interest rate must e:ceed t)e $6 contract rate 'ecause not all o* t)e 'orro(ed *unds are a,aila'le *or t)e de'tor/s useAns(er 7.8 is incorrect 'ecause $-226 assumes incremental earnings on t)e c)ecking account o* 32+000Ans(er 7C8 is incorrect 'ecause <-2;6 is 'ased on t)e assumption t)at t)e company ordinarily maintains a Fero 'alanceAns(er 708 is correct- B* t)e 3;00+000 'orro(ed+ t)e de'tor )as t)e use o* only 35;0+000- T)e compensating 'alance pro,ision re4uires a minimum 'alance t)at is 3;0+000 greater t)an t)e 'alance t)at t)e company usually maintains- At $6 on a 3;00+000 loan+ t)e annual interest e:pense is 350+000Ho(e,er+ t)is amount is reduced 'y t)e interest earned on t)e e:tra 3;0+000 in t)e c)ecking accountAt 26+ t)e e:tra 3;0+000 earns 31+;00 per yearT)us+ t)e net e:pense is 32$+;00- T)e e**ecti,e interest rate is $-;;;6 732$+;00>35;0+00087<! "ource# CMA 01<5 1%22 Ans(er 7A8 is incorrect 'ecause cas) is )eld to satis*y compensating 'alance re4uirements+ to *acilitate transactions+ and to meet *uture needsAns(er 7.8 is incorrect 'ecause cas) is )eld to satis*y compensating 'alance re4uirements+ to *acilitate transactions+ and to meet *uture needsAns(er 7C8 is incorrect 'ecause cas) is )eld to satis*y compensating 'alance re4uirements+ to *acilitate transactions+ and to meet *uture needsAns(er 708 is correct- A company (ill )old cas) and marketa'le securities to *acilitate 'usiness transactionsL cas) is a medium o* e:c)ange- Cas) and near%cas) items are also )eld to meet *uture needs+ to satis*y compensating 'alance re4uirements imposed 'y lenders+ and to pro,ide a precautionary 'alance *or security purposes- Cas) is usually not )eld in an attempt to earn ma:imum returns on in,estment

'ecause cas) and marketa'le securities are not usually t)e )ig)est paying in,estments$0! "ource# CMA 01<5 1%22 Ans(er 7A8 is correct- An ACH electronic *unds trans*er 7E=T8 is an electronic payment to a company/s account at a concentration 'ank- A concentration 'ank is a large 'ank to ()ic) a company trans*ers *unds *rom local depository 'anksT)ese local 'anks operate t)e company/s lock'o:es and t)us ser,e as collection points- T)e trans*er o* *unds to t)e concentration 'ank allo(s t)e company to take ad,antage o* economies o* scale in cas) management- T)e use o* ACHs *acilitates concentration 'anking- ACHs are electronic net(orks operated 'y t)e =ederal Reser,e 7e:cept *or t)e Je( Mork regional ACH association8 t)at guarantee 1%day clearingAns(er 7.8 is incorrect 'ecause a c)eck is not in,ol,ed in an E=TAns(er 7C8 is incorrect 'ecause an ACH trans*er in,ol,es t)e actual trans*er o* *unds electronicallyL it is not Eust a computer%generated documentAns(er 708 is incorrect 'ecause an E=T is not a c)eck%like instrument-

$1! "ource# CMA 01<5 1%25 Ans(er 7A8 is correct- T)e *loat period is t)e time 'et(een ()en a c)eck is (ritten and ()en it clears t)e payor/s c)ecking account- C)eck *loat results in an interest%*ree loan to t)e payor 'ecause o* t)e delay 'et(een payment 'y c)eck and its deduction *rom t)e 'ank account- &* c)ecks (ritten re4uire one more day to clear t)an c)ecks recei,ed+ t)e net *loat e4uals one day/s receipts- T)e company (ill )a,e *ree use o* t)e money *or one day- &n t)is case+ t)e amount is 310+000Ans(er 7.8 is incorrect 'ecause t)e company enEoys one day/s net *loat 'ecause its c)ecks clear more slo(ly t)an its depositsAns(er 7C8 is incorrect 'ecause t)e net *loat is positi,e- T)e company can (rite c)ecks 7up to 310+0008 e,en ()en it )as no money 'ecause t)e c)ecks do not clear until a day a*ter deposits clearAns(er 708 is incorrect 'ecause t)e net *loat represents t)e di**erence 'et(een ()en deposits clear and ()en dis'ursements clear$2! "ource# CMA 01<5 1%2; Ans(er 7A8 is incorrect 'ecause ?-"- Treasury 'ills are s)ort%term marketa'le securitiesAns(er 7.8 is incorrect 'ecause Eurodollars are s)ort%term marketa'le securitiesAns(er 7C8 is incorrect 'ecause commercial paper is a s)ort%term marketa'le security-

Ans(er 708 is correct- Marketa'le securities are near%cas) items used primarily *or s)ort%term in,estment- E:amples include ?- "- Treasury 'ills+ Eurodollars+ commercial paper+ money%market mutual *unds (it) port*olios o* s)ort%term securities+ 'ankers/ acceptances+ *loating rate pre*erred stock+ and negotia'le C0s o* ?-"- 'anks- A con,erti'le 'ond is not a s)ort%term in,estment 'ecause its maturity date is usually more t)an one year in t)e *uture and its price can 'e in*luenced su'stantially 'y c)anges in interest rates or 'y c)anges in t)e in,estee/s stock price$2! "ource# CMA 01<5 1%21 Ans(er 7A8 is correct- T)e 16 discount rate is multiplied times t)e *ace amount o* t)e Treasury 'ill to determine t)e amount o* interest t)e lender (ill earn- T)e interest on t)is Treasury 'ill is 32 716 : -; year : 31008+ t)us t)e purc)ase price is 3<7 73100 % 328Ans(er 7.8 is incorrect 'ecause t)e interest is *or 1$0 days+ not a *ull yearAns(er 7C8 is incorrect 'ecause t)e purc)ase price (ill al(ays 'e less t)an t)e *ace ,alue ()en t)e Treasury 'ill is sold at a discountAns(er 708 is incorrect 'ecause t)e interest rate is 16 per year$5! "ource# CMA 01<5 1%27 Ans(er 7A8 is incorrect 'ecause storage and o'solescence and spoilage are in,entory )olding costsAns(er 7.8 is incorrect 'ecause insurance and o'solescence and spoilage are in,entory )olding costsAns(er 7C8 is incorrect 'ecause opportunity cost o* in,entory in,estment+ and o'solescence and spoilage are in,entory )olding costsAns(er 708 is correct- &n,entory carrying costs are incurred to )old in,entory- E:amples include t)e costs o* storage+ insurance+ security+ in,entory ta:es+ depreciation or rent o* (are)ouse *acilities+ o'solescence and spoilage+ and t)e opportunity cost o* in,entory in,estment- &nspection costs are not related to t)e lengt) o* time in,entory is )eld- T)ey are costs o* taking deli,ery and are 'est classi*ied as ordering costs-

corresponding to a current ratio o* 1-; may 'e determined *rom t)e *ollo(ing *ormula e4uating current assets and current lia'ilities 7let T O ne( in,entory and ne( de't8# 3500+000 P T O 1-;73200+000 P T8 500+000 P T O 3200+000 P 1-;T T O 3200+000 Ans(er 7.8 is incorrect 'ecause 311+117 assumes t)at current assets do not c)angeAns(er 7C8 is incorrect 'ecause additional assets and lia'ilities o* 3211+117 (ould cause t)e current ratio to drop 'elo( 1-;Ans(er 708 is incorrect 'ecause a 31;0+000 increase in current assets and lia'ilities (ould result in a current ratio greater t)an 1-;$7! "ource# CMA 12<5 1%1; Ans(er 7A8 is incorrect 'ecause a cas) payment o* payroll ta:es decreases current assets and current lia'ilities 'y e4ual amountsAns(er 7.8 is incorrect 'ecause 'uying a ne( plant (it) a 20%year mortgage )as no e**ect on current assets or current lia'ilitiesAns(er 7C8 is incorrect 'ecause cas) collection o* an account recei,a'le increases one current asset and decrease anot)er 'y t)e same amountAns(er 708 is correct- Working capital e4uals current assets minus current lia'ilities- Re*inancing a s)ort%term note (it) a t(o%year note paya'le decreases current lia'ilities+ t)us increasing (orking capital$$! "ource# CMA 12<5 1%11 Ans(er 7A8 is incorrect 'ecause margin trading in,ol,es 'uying securities 'y 'orro(ing *rom a 'rokerAns(er 7.8 is correct- ")ort%selling is accomplis)ed 'y 'orro(ing securities *rom a 'roker and selling t)ose securities- At a later time+ t)e loan is repaid 'y 'uying securities on t)e open market and returning t)em to t)e 'roker- T)e seller speculates t)at t)e stock/s market price (ill declineAns(er 7C8 is incorrect 'ecause t)e in,estor does not o(n t)e s)ares sold in a s)ort%saleAns(er 708 is incorrect 'ecause t)e s)ort%seller is 'etting t)at t)e stock (ill decrease in price-

$1! "ource# CMA 01<5 1%20 Ans(er 7A8 is correct- &* current lia'ilities are 3200+000 and t)e current ratio 7current assets>current lia'ilities8 is 2-0+ current assets must 'e 3500+000- &* s)ort%term de't is used to *inance ne( in,entory+ current assets and current lia'ilities (ill increase 'y t)e same amount- T)e amount o* ne( de't

$<! "ource# CMA 12<5 1%17 Ans(er 7A8 is incorrect 'ecause t)e 32; trans*er *ee is co,ered 'y t)e interest on 312+;00 *or 2 daysAns(er 7.8 is incorrect 'ecause 312;+000 is re4uired i* collections are accelerated 'y only one day-

Ans(er 7C8 is incorrect 'ecause t)e interest on 3172 *or 2 days is less t)an 3-07Ans(er 708 is correct- Ii,en a 32; *ee and an interest rate o* 0-026 per day *or 2 days+ t)e 'reake,en amount is 312+;00 32; trans*er *ee>72 : -026 interest rate8!- T)us+ t)e interest earned on a trans*er o* any amount greater t)an 312+;00 (ould e:ceed t)e 32; *ee<0! "ource# CMA 12<5 1%1$ Ans(er 7A8 is incorrect 'ecause 25-006 assumes payment o* 320 to 'orro( 31+000 *or 20 daysAns(er 7.8 is incorrect 'ecause 27-116 assumes terms o* 2>10+ net 50Ans(er 7C8 is incorrect 'ecause 21-006 assumes payment o* 320 to 'orro( 31+000 *or 20 daysAns(er 708 is correct- &* t)e gross amount o* t)e in,oice is 31+000+ t)e 'uyer (ill pay 3<70 31+000 : 71-0 % -028! i* 7s8)e takes t)e discount- &* 7s8)e does not+ 7s8)e (ill pay 320 *or t)e use o* 3<70 *or up to an additional 2; days- T)e percentage cost o* not taking t)e discount is t)e annualiFed interest rate+ t)at is+ t)e 320 cost di,ided 'y t)e 3<70 e**ecti,ely 'orro(ed *or 2; days+ multiplied 'y t)e num'er o* 2;%day periods in a 210%day year- T)us+ t)e cost o* *orgoing t)e discount is 21-$16 7320>3<708 : 7210>2;8!-

Ans(er 7C8 is incorrect 'ecause s)ipping and )andling costs are included in ac4uisition costsAns(er 708 is correct- &n,entory costs *all into t)ree categories# order or set%up costs+ carrying 7)olding8 costs+ and stockout costs- Carrying costs include storage costs *or in,entory items plus opportunity cost 7i-e-+ t)e cost incurred 'y in,esting in in,entory rat)er t)an making an income%earning in,estment8E:amples are insurance+ spoilage+ interest on in,ested capital+ o'solescence+ and (are)ousing costs<2! "ource# CMA 12<5 1%22 Ans(er 7A8 is incorrect 'ecause 35+000 is only one day/s salesAns(er 7.8 is correct- &* sales are 35+000 per day+ and customers pay in 20 days+ 20 days o* sales are outstanding+ or 3120+000- W)et)er customers pay 'y credit card or cas)+ collection re4uires 20 daysAns(er 7C8 is incorrect 'ecause in,oices are outstanding *or 20 days+ not 12 daysAns(er 708 is incorrect 'ecause 3;5+000 is 'ased on t)e 5;6 o* collections ,ia credit card<5! "ource# CMA 12<5 1%22 Ans(er 7A8 is incorrect 'ecause 106 is t)e nominal rateAns(er 7.8 is correct- At 106+ t)e interest on a 3;00+000 loan is 3;0+000 per year- Ho(e,er+ t)e 3;00+000 loan is e**ecti,ely reduced to 35;0+000 o* usa'le *unds 'y t)e compensating 'alance re4uirement- T)us+ t)e 'orro(er pays 3;0+000 o* interest *or a 35;0+000 loan+ an e**ecti,e rate o* 11-16 73;0+000>35;0+0008Ans(er 7C8 is incorrect 'ecause <-16 e4uals 3;0+000 di,ided 'y 3;;0+000Ans(er 708 is incorrect 'ecause 12-26 e4uals 3;;+000 di,ided 'y 35;0+000<;! "ource# CMA 12<5 1%25 Ans(er 7A8 is incorrect 'ecause t)e decrease (ill 'e 32+222+225Ans(er 7.8 is incorrect 'ecause t)e decrease (ill 'e 32+222+225Ans(er 7C8 is correct- &* sales are 3;0 million+ 706 o* ()ic) are on credit+ total credit sales (ill 'e 32; million- T)e recei,a'les turno,er e4uals 5-$ times per year 7210 days>7;%day collection period8Recei,a'les turno,er e4uals net credit sales di,ided 'y a,erage recei,a'les- Accordingly+ a,erage recei,a'les e4ual 37+2<1+117 732;+000+000>5-$8?nder t)e ne( policy+ sales (ill 'e 357-; million 7<;6 : 3;0+000+0008+ and credit sales (ill 'e 32$-; million 7106 : 357+;00+0008- T)e collection period (ill 'e reduced to ;0 days+ resulting in a turno,er o*

<1! "ource# CMA 12<5 1%20 Ans(er 7A8 is correct- Total cost is de*ined as carrying cost plus e:pected stockout cost- At 206 o* t)e 3;0 unit in,entory cost+ carrying cost is 310 per unit per year- T)us+ carrying cost *or 100 units o* sa*ety stock is 31+000- A stockout )as a 1;6 pro'a'ility at t)is le,el o* sa*ety stock+ and stockout costs are 3;00 7100 : 3;8 *or eac) occurrence- &* t)e *irm orders 10 times per year+ t)e e:pected num'er o* stockouts is 1-; 71;6 : 108- Hence+ total e:pected stockout cost *or t)e year is 37;0 73;00 : 1-;8- Total cost is 31+7;0 per year 731+000 P 37;08Ans(er 7.8 is incorrect 'ecause 31+<;0 is t)e sum o* t)e e:pected stockout costs *or stockouts o* 100 units and 200 unitsAns(er 7C8 is incorrect 'ecause t)e carrying cost alone is 310 per unit+ or 31+000 per yearAns(er 708 is incorrect 'ecause 32+000 is t)e carrying cost o* 200 units o* sa*ety stock<2! "ource# CMA 12<5 1%21 Ans(er 7A8 is incorrect 'ecause disruption o* production sc)edules may result *rom a stockoutAns(er 7.8 is incorrect 'ecause 4uantity discounts lost are related to ordering costs or in,entory ac4uisition costs-

7-2 times per year 7210>;08- T)e a,erage recei,a'les 'alance (ill t)ere*ore 'e 32+<;$+222 732$+;00+000>7-28+ a reduction o* 32+222+225 737+2<1+117 % 32+<;$+2228Ans(er 708 is incorrect 'ecause recei,a'les (ill decrease<1! "ource# CMA 12<5 1%20 Ans(er 7A8 is incorrect 'ecause 'ot) (orking capital and t)e current ratio increaseAns(er 7.8 is incorrect 'ecause 'ot) (orking capital and t)e current ratio increaseAns(er 7C8 is incorrect 'ecause 'ot) (orking capital and t)e current ratio increaseAns(er 708 is correct- Working capital is t)e e:cess o* current assets o,er current lia'ilities- T)e current ratio e4uals current assets di,ided 'y current lia'ilities- "elling stock *or cas) increases current assets and stock)olders/ e4uity+ (it) no e**ect on current lia'ilities- T)e result is an increase in (orking capital and t)e current ratio<7! "ource# CMA 12<; 1%1 Ans(er 7A8 is incorrect 'ecause a decrease in demand 7annual sales8+ ()ic) is in t)e numerator+ (ill decrease t)e EBQAns(er 7.8 is incorrect 'ecause a decrease in ordering costs (ill encourage more orders+ or a decrease in t)e EBQAns(er 7C8 is incorrect 'ecause a decrease in sa*ety stock le,els (ill not a**ect t)e EBQ+ alt)oug) it mig)t lead to a di**erent ordering pointAns(er 708 is correct- T)e EBQ model minimiFes t)e total o* ordering and carrying costs- T)e EBQ is calculated as *ollo(s# 1>2 270emand87Brder costs8 %%%%%%%%%%%%%%%%%%%%%%% Carrying costs per unit &ncreases in t)e numerator 7demand or ordering costs8 (ill increase t)e EBQ+ ()ereas decreases in demand or ordering costs (ill decrease t)e EBQ"imilarly+ a decrease in t)e denominator 7carrying costs8 (ill increase t)e EBQ<$! "ource# CMA 12<; 1%2 Ans(er 7A8 is incorrect 'ecause it is not particularly risky to *inance (orking capital needs *rom long%term de't sourcesAns(er 7.8 is incorrect 'ecause it is not particularly

risky to *inance (orking capital needs *rom long%term de't sourcesAns(er 7C8 is correct- =luctuating current assets can o*ten 'e *inanced (it) s)ort%term de't 'ecause t)e periodic li4uidation o* t)e assets pro,ides *unds to pay o** t)e de't- Ho(e,er+ *inancing permanent current assets (it) s)ort%term de't is a risky strategy 'ecause t)e assets may not 'e li4uidated in time to pay o** t)e de't at maturityAns(er 708 is incorrect 'ecause *inancing *luctuating current assets (it) s)ort%term de't is not as risky as *inancing permanent current assets (it) s)ort%term de't<<! "ource# CMA 12<; 1%2 Ans(er 7A8 is incorrect 'ecause 31 million is t)e increase in cas)+ not t)e interest earned on t)at additional cas)Ans(er 7.8 is incorrect 'ecause 32 million is t)e amount o* daily payments+ not t)e sa,ingsAns(er 7C8 is incorrect 'ecause t)e daily payments s)ould 'e multiplied 'y t(o+ not di,ided 'y t(oAns(er 708 is correct- &* cas) out*lo(s are 32 million per day+ )olding cas) 2 e:tra days means t)at a,erage 'alances s)ould increase 'y 31 million- At a 106 interest rate+ t)e additional 31 million (ould generate interest re,enue o* 3100+000 per yearT)us+ i* t)e system can 'e ac4uired *or 3100+000 or less+ it (ould 'e 'ene*icial to do so100! "ource# CMA 12<; 1%5 Ans(er 7A8 is correct- T)e a,erage collection period measures t)e num'er o* days 'et(een t)e date o* sale and t)e date o* collection- &t s)ould 'e related to a *irm/s credit terms- =or e:ample+ a *irm t)at allo(s terms o* 2>1;+ net 20+ s)ould )a,e an a,erage collection period o* some()ere 'et(een 1; and 20 daysAns(er 7.8 is incorrect 'ecause it descri'es t)e concept o* *loatAns(er 7C8 is incorrect 'ecause t)e a,erage collection period includes t)e total time 'e*ore a payment is recei,ed+ including t)e periods 'ot) 'e*ore and a*ter t)e end o* t)e normal credit periodAns(er 708 is incorrect 'ecause it descri'es t)e normal credit period101! "ource# CMA 12<; 1%1 Ans(er 7A8 is incorrect 'ecause 106 o* t)e sales (ill 'e paid *or (it)in t)e 10%day discount periodAns(er 7.8 is incorrect 'ecause 3<<0+000 is 'ased on a sales total o* 31+1;0+000 *or 20 days rat)er t)an 31+2;0+000Ans(er 7C8 is incorrect 'ecause 3<00+000 is 'ased

on a sales total o* 31+1;0+000 *or 20 days rat)er t)an 31+2;0+000Ans(er 708 is correct- T)e *irm )as daily sales o* 35;+000 consisting o* 1;0 units at 3200 eac)- =or 20 days+ sales total 31+2;0+000- =orty percent o* t)ese sales+ or 3;50+000+ (ill 'e uncollected 'ecause customers do not take t)eir discounts- T)e remaining 106+ or 3$10+000+ (ill 'e paid (it)in t)e discount period- Ho(e,er+ 'y t)e end o* 20 days+ only 2>2 o* t)e 3$10+000 (ill 'e collected 'ecause t)e sales *rom days 21 t)roug) 20 are still (it)in t)e discount period- T)ere*ore+ an additional 3270+000 73$10+000 % 3;50+0008 (ill still 'e uncollected a*ter t)e 20t) day+ 'ut (ill 'e su'Eect to a discount- &n total+ t)e a,erage recei,a'le 'alance is 3$10+000+ consisting o* 3;50+000 on ()ic) no discount (ill 'e taken and 3270+000 t)at (ill 'e paid (it)in t)e discount period102! "ource# CMA 12<; 1%; Ans(er 7A8 is incorrect 'ecause insurance and ta:es are carrying costsAns(er 7.8 is incorrect 'ecause o'solescence and deterioration are carrying costsAns(er 7C8 is incorrect 'ecause storage and )andling are carrying costsAns(er 708 is correct- A manu*acturer can use t)e EBQ model 'y su'stituting production set%up costs *or ordering costs- "et%up costs are t)e manu*acturer/s e4ui,alent o* ordering costs- T)e result is sometimes re*erred to as t)e economic 'atc) 4uantity102! "ource# CMA 12<; 1%7 Ans(er 7A8 is incorrect 'ecause t)e cost o* not taking a discount ()en terms are 2>10+ net 20 e:ceeds 216 annually+ ()ic) is )ig)er t)an t)e prime rate )as e,er 'eenAns(er 7.8 is incorrect 'ecause t)e 'uyer is paying t)e amount o* discount not taken in e:c)ange *or t)e e:tra 5; days o* creditAns(er 7C8 is incorrect 'ecause paying 26 *or 20 days o* credit is more e:pensi,e t)an paying 26 *or ;0 days o* t)e same amount o* creditAns(er 708 is correct- Payments s)ould 'e made (it)in t)e discount periods i* t)e cost o* not taking discounts e:ceeds t)e *irm/s cost o* capital- =or e:ample+ *ailing to take a discount ()en terms are 2>10+ net 20 means t)at t)e *irm is paying an e**ecti,e annual interest rate e:ceeding 216- T)us+ t)e cost o* not taking a discount is usually )ig)er t)an t)e cost o* a 'ank loan105! "ource# CMA 12<; 1%$ Ans(er 7A8 is incorrect 'ecause 312$+000 e4uals t)e sum o* =e'ruary credit sales and Marc) cas) sales-

Ans(er 7.8 is incorrect 'ecause 3122+000 e4uals ;06 o* Canuary credit sales+ 206 o* =e'ruary credit sales+ 206 o* Marc) credit sales+ and 1006 o* Marc) cas) salesAns(er 7C8 is correct- Cas) in*lo(s *or Marc) (ould consist o* ;06 o* Marc) credit sales 7;06 : 3<0 O 35;8+ plus 206 o* =e'ruary credit sales 7206 : 3120 O 3218+ plus 206 o* Canuary credit sales 7206 : 3100 O 3208+ plus cas) sales *or Marc) o* 31$- Conse4uently+ total collections e4ual 311<+000Ans(er 708 is incorrect 'ecause 310$+000 is t)e total sales *or Marc)+ not t)e total cas) collections *or Marc)10;! "ource# CMA 12<; 1%12 Ans(er 7A8 is incorrect 'ecause 2;0 is t)e ma:imum in,entory le,elAns(er 7.8 is correct- &* sa*ety stock is ;0 units+ t)e receipt o* an order s)ould increase t)e in,entory to 2;0- T)at amount (ill decline to ;0 Eust prior to t)e receipt o* t)e ne:t order- T)us+ t)e a,erage in,entory (ould 'e t)e a,erage o* 2;0 and ;0 72;0 P ;08>2!+ or 1;0 unitsAns(er 7C8 is incorrect 'ecause 12; units assumes an EBQ o* 2;0 units and no sa*ety stockAns(er 708 is incorrect 'ecause 100 units assumes no sa*ety stock101! "ource# CMA 12<; 1%< Ans(er 7A8 is incorrect 'ecause installment loans are usually a longer%term source o* *inancing and are more di**icult to ac4uire t)an trade creditAns(er 7.8 is incorrect 'ecause commercial paper is normally used only 'y large companies (it) )ig) credit ratingsAns(er 7C8 is correct- Trade credit is a spontaneous source o* *inancing 'ecause it arises automatically as part o* a purc)ase transaction- .ecause o* its ease in use+ trade credit is t)e largest source o* s)ort%term *inancing *or many *irms 'ot) large and smallAns(er 708 is incorrect 'ecause 'ankers/ acceptances are dra*ts dra(n on 'ank depositsL t)e acceptance is a guarantee o* payment at maturity107! "ource# CMA 12<; 1%10 Ans(er 7A8 is incorrect 'ecause )a,ing only $06 o* t)e 'orro(ed *unds a,aila'le means t)e e**ecti,e rate (ill 'e greater t)an t)e $6 contract rateAns(er 7.8 is incorrect 'ecause $6 is t)e nominal rateAns(er 7C8 is incorrect 'ecause 206 is t)e percentage o* t)e re4uired compensating 'alance-

Ans(er 708 is correct- T)e re4uirement to maintain a compensating 'alance o* 206 o* t)e 3200+000 loan means t)at t)e 'orro(er )as e**ecti,e use o* only $06 o* t)e loan+ or 3250+000- T)e $6 interest rate applied to a 3200+000 loan re4uires an annual interest e:penditure o* 325+000- &n turn+ paying 325+000 *or t)e use o* 3250+000 indicates an e**ecti,e interest rate o* 10610$! "ource# CMA 12<; 1%11 Ans(er 7A8 is incorrect 'ecause t)e lesser amount o* *unds a,aila'le on a discounted note means t)e e**ecti,e rate (ill 'e )ig)er t)an t)e contract rateAns(er 7.8 is incorrect 'ecause <6 is t)e nominal rate 7discount rate8Ans(er 7C8 is incorrect 'ecause <-$16 e4uals t)e nominal rate multiplied 'y <6Ans(er 708 is correct- Applying t)e <6 interest rate to a 3100+000 loan results in interest e:pense o* 3<+000- &* t)e loan is processed in t)e *orm o* a discounted note+ t)e interest (ill 'e deducted *rom t)e proceeds o* t)e loan- T)us+ t)e 3<+000 o* interest (ill 'e deducted *rom t)e 3100+000 note+ resulting in loan proceeds o* 3<1+000- T)e 'orro(er is paying 3<+000 *or a loan o* 3<1+000+ resulting in an e**ecti,e interest rate o* <-$<610<! "ource# CMA 12<; 1%12 Ans(er 7A8 is incorrect 'ecause most companies are not in 'usiness to earn )ig) returns on li4uid assets 7i-e-+ t)ey are )eld to *acilitate operations8Ans(er 7.8 is incorrect 'ecause t)e )olding o* cas) and cas)%like assets is not a maEor *actor in controlling ta:esAns(er 7C8 is incorrect 'ecause in,estments in Treasury 'onds do not )a,e su**icient li4uidity to ser,e as s)ort%term assetsAns(er 708 is correct- Cas) and s)ort%term in,estments are crucial to a *irm/s continuing success"u**icient li4uidity must 'e a,aila'le to meet payments as t)ey come due- At t)e same time+ li4uid assets are su'Eect to signi*icant control risk- T)ere*ore+ li4uidity and sa*ety are t)e primary concerns o* t)e treasurer ()en dealing (it) )ig)ly li4uid assets- Cas) and s)ort%term in,estments are )eld 'ecause o* t)eir a'ility to *acilitate routine operations o* t)e companyT)ese assets are not )eld *or purposes o* ac)ie,ing in,estment returns110! "ource# CMA 12<; 1%15 Ans(er 7A8 is incorrect 'ecause 3150+000 e4uals t)e 3$0+000 cost plus t)e in,estment earningsAns(er 7.8 is incorrect 'ecause t)e 3$0+000 cost s)ould 'e consideredAns(er 7C8 is correct- 0i,iding t)e 3<0 million o*

annual sales 'y 210 days produces daily sales o* 32;0+000- &* collection time is reduced 'y 2 days+ t)en 37;0+000 72 : 32;0+0008 (ill 'e a,aila'le *or in,estment- At an $6 rate o* return+ t)e additional 37;0+000 (ill earn 310+000 annually- T)is is 320+000 less t)an t)e 3$0+000 cost o* t)e systemT)e 320+000 loss means t)e company s)ould not in,est in t)e ne( systemAns(er 708 is incorrect 'ecause t)e earnings are 310+000111! "ource# CMA 12<; 1%1; Ans(er 7A8 is correct- Trade credit is a spontaneous source o* *inancing 'ecause it arises automatically as part o* a purc)ase transaction- .ecause o* its ease in use+ trade credit is t)e largest source o* s)ort%term *inancing *or many *irms 'ot) large and smallAns(er 7.8 is incorrect 'ecause mortgage 'onds and de'entures do not arise automatically as a result o* a purc)ase transactionAns(er 7C8 is incorrect 'ecause t)e use o* recei,a'les as a *inancing source re4uires an e:tensi,e *actoring arrangement and o*ten in,ol,es t)e creditor/s e,aluation o* t)e credit ratings o* t)e 'orro(er/s customersAns(er 708 is incorrect 'ecause mortgage 'onds and de'entures do not arise automatically as a result o* a purc)ase transaction112! "ource# CMA 01<1 1%10 Ans(er 7A8 is incorrect 'ecause 31+000 results *rom using 256 in t)e denominatorAns(er 7.8 is incorrect 'ecause 32+000 results *rom using 16 in t)e denominatorAns(er 7C8 is incorrect 'ecause 32+515 results *rom using 26 in t)e denominatorAns(er 708 is correct- T)e EBQ *or in,entory is a *unction o* ordering cost per order+ in,entory demand+ and carrying cost- &n t)e cas) model+ t)e *i:ed cost per sale o* securities is e4ui,alent to t)e ordering cost+ t)e demand *or cas) is similar to t)e demand *or in,entory+ and t)e interest rate is e**ecti,ely t)e cost o* carrying a dollar o* cas) *or t)e period- "u'stituting in t)e *ormula yields an optimal cas) 'alance o* a'out 31+<2$-

112! "ource# CMA 01<1 1%11 Ans(er 7A8 is correct- T)e 3;0+000 compensating 'alance re4uirement is partially satis*ied 'y t)e company/s practice o* maintaining a 32;+000 'alance *or transaction purposes- T)us+ only 32;+000 o* t)e loan (ill not 'e a,aila'le *or current use+ lea,ing 322;+000 o* t)e loan usa'le- At 16 interest+ t)e 32;0+000 loan (ould re4uire an interest payment o* 31;+000 per year- T)is is partially o**set 'y t)e 26 interest earned on t)e 32;+000 incremental 'alance+

or 3;00- "u'tracting t)e 3;00 interest earned *rom t)e 31;+000 o* e:pense results in net interest e:pense o* 315+;00 *or t)e use o* 322;+000 in *unds- 0i,iding 315+;00 'y 322;+000 produces an e**ecti,e interest rate o* 1-556Ans(er 7.8 is incorrect 'ecause 7-006 *ails to consider t)at t)e 32;+000 currently 'eing maintained counts to(ard t)e compensating 'alance re4uirementAns(er 7C8 is incorrect 'ecause ;-$6 *ails to consider t)e compensating 'alance re4uirementAns(er 708 is incorrect 'ecause 1-116 *ails to consider t)e interest earned on t)e incremental 'alance 'eing carried115! "ource# CMA 01<1 1%12 Ans(er 7A8 is incorrect 'ecause 32+000 miscalculates t)e annual ser,ice c)argeAns(er 7.8 is incorrect 'ecause 312+000 *ails to deduct t)e annual ser,ice c)arge *rom t)e interest earnedAns(er 7C8 is incorrect 'ecause 30 results *rom *iguring t)e interest earned *or only one day+ not t(oAns(er 708 is correct- &* collection time is 2 days+ and a,erage daily receipts are 3100+000+ t)e a,erage cas) 'alance (ill increase 'y 3200+000 i* t)e 'ank/s system is adopted- At a 16 interest rate+ 3200+000 (ill generate 312+000 o* interest re,enue annuallyT)e 3;00 mont)ly c)arge 'y t)e 'ank (ill result in an annual e:pense o* 31+000- T)us+ t)e net annual 'ene*it is 31+000 7312+000 % 31+000811;! "ource# CMA 01<1 1%12 Ans(er 7A8 is incorrect 'ecause t)e company 'ene*its *rom t)e c)ange in credit termsAns(er 7.8 is incorrect 'ecause 32$+$00 results *rom multiplying t)e contri'ution margin 'y t)e 206 interest rateAns(er 7C8 is incorrect 'ecause 3155+000 o,erlooks t)e costs created 'y )a,ing *unds in,ested in recei,a'les *or 7; daysAns(er 708 is correct- T)e incremental sales (ill produce an increased contri'ution margin o* 3155+000 7206 : 3720+0008- Ho(e,er+ t)at amount must 'e o**set 'y t)e cost o* *unds in,ested in recei,a'les- T)e ,aria'le costs associated (it) t)e incremental sales are 3;71+000 7$06 : 3720+0008Ii,en a 7;%day credit period+ t)e a,erage in,estment in recei,a'les e4uals 3120+000 3;71+000 : 77;>2108!- Accordingly+ t)e cost o* t)e in,estment in additional recei,a'les is 325+000 7206 opportunity cost : 3120+0008+ and t)e net 'ene*it o* t)e planned c)ange in credit terms is 3120+000 73155+000 % 325+0008111! "ource# CMA 01<1 1%15

Ans(er 7A8 is incorrect 'ecause lo(er rates are an ad,antage o* commercial paperAns(er 7.8 is incorrect 'ecause a,oidance o* compensating 'alance re4uirements is an ad,antage o* commercial paperAns(er 7C8 is correct- Commercial paper is a s)ort%term+ unsecured note paya'le issued in large denominations 'y maEor companies (it) e:cellent credit ratings- Maturities usually do not e:ceed 270 days- Commercial paper is a lo(er cost source o* *unds t)an 'ank loans+ and no compensating 'alances are re4uired- Commercial paper pro,ides a 'road and e**icient distri'ution o* de't+ and costly *inancing arrangements are a,oided- T)e market is not open to all companies 'ecause only maEor corporations (it) )ig) credit ratings can participateAns(er 708 is incorrect 'ecause 'road de't distri'ution is an ad,antage o* commercial paper117! "ource# CMA 01<1 1%1; Ans(er 7A8 is correct- &* cost o* sales is 3122+;00+000+ and t)e in,entory turno,er rate is $-0 times per year+ t)e a,erage in,entory is 311+;12+;00 73122+;00+000>$8- &* t)e turno,er increases to 10-0 times annually+ t)e a,erage in,entory (ill decline to 312+2;0+000 73122+;00+000>108+ a decrease o* 32+212+;00- At a ;6 rate+ reducing (orking capital 'y 32+212+;00 (ill sa,e t)e company 311;+12; 7-0; : 32+212+;008Ans(er 7.8 is incorrect 'ecause t)e *aster turno,er reduces (orking capital and releases *unds *or ot)er usesAns(er 7C8 is incorrect 'ecause 32+212+;00 is t)e decrease in a,erage in,entoryAns(er 708 is incorrect 'ecause 3$2$+12; is ;6 o* 311+;12+;0011$! "ource# CMA 01<1 1%11 Ans(er 7A8 is incorrect 'ecause capital structure and di,idends relate to capital structure *inance+ not (orking capital *inanceAns(er 7.8 is incorrect 'ecause s)ort%term de't is usually less e:pensi,e t)an long%term de'tAns(er 7C8 is correct- Working capital *inance concerns t)e determination o* t)e optimal le,el+ mi:+ and use o* current assets and current lia'ilities- T)e o'Eecti,e is to minimiFe t)e cost o* maintaining li4uidity+ ()ile guarding against t)e possi'ility o* tec)nical insol,ency- Tec)nical insol,ency is de*ined as t)e ina'ility to pay de'ts as t)ey come dueAns(er 708 is incorrect 'ecause li4uid assets do not ordinarily earn )ig) returns relati,e to long%term assets+ so )olding t)e *ormer (ill not ma:imiFe t)e return on total assets-

11<! "ource# CMA 01<1 1%17 Ans(er 7A8 is incorrect 'ecause permanently lo(er sales+ more predicta'le sales+ decreased stockout costs+ and decreased in,entory transit time are reasons *or decreasing in,entoryAns(er 7.8 is correct- &n,entory management attempts to minimiFe t)e total costs o* ordering+ carrying in,entory+ and stockouts- T)us+ a *irm incurs carrying costs to reduce ordering and stockout costs&* t)e cost o* carrying in,entory declines+ t)e in,entory le,el must increase to minimiFe total in,entory costsAns(er 7C8 is incorrect 'ecause permanently lo(er sales+ more predicta'le sales+ decreased stockout costs+ and decreased in,entory transit time are reasons *or decreasing in,entoryAns(er 708 is incorrect 'ecause permanently lo(er sales+ more predicta'le sales+ decreased stockout costs+ and decreased in,entory transit time are reasons *or decreasing in,entory120! "ource# CMA 01<1 1%2< Ans(er 7A8 is incorrect 'ecause current lia'ilities+ e-g-+ trade credit+ is a maEor source o* *unds *or small *irmsAns(er 7.8 is incorrect 'ecause li4uid in,estments tend to )a,e lo( returnsAns(er 7C8 is incorrect 'ecause matc)ing o* asset and lia'ility maturities is a moderate policy t)at minimiFes risk- T)e e:pectation is t)at cas) *lo(s *rom t)e assets (ill 'e a,aila'le to meet o'ligations *or t)e lia'ilitiesAns(er 708 is correct- =inancing permanent in,entory 'uildup+ ()ic) is essentially a long%term in,estment+ (it) long%term de't is a moderate or conser,ati,e (orking capital policy- An aggressi,e policy uses s)ort%term+ relati,ely lo(%cost de't to *inance t)e in,entory 'uildup- &t *ocuses on )ig) pro*ita'ility potential+ despite )ig) risk and lo( li4uidity- An aggressi,e policy reduces t)e current ratio and accepts a )ig)er risk o* s)ort%term lack o* li4uidity- =inancing in,entory (it) long%term de't increases t)e current ratio and accepts )ig)er 'orro(ing costs in e:c)ange *or greater li4uidity and lo(er risk121! "ource# CMA 01<1 1%20 Ans(er 7A8 is incorrect 'ecause 106 o,erlooks t)e *actor *eeAns(er 7.8 is incorrect 'ecause 126 o,erlooks t)e *act t)at t)e 26 *ee recurs e,ery mont)Ans(er 7C8 is incorrect 'ecause 156 miscalculates t)e *actor *ee and t)e sa,ings *rom reduced collection costsAns(er 708 is correct- &n an a,erage mont)+ t)e

company (ill recei,e 3$0+000 at t)e time t)e recei,a'les are sent to t)e *actor- B,er a year/s time+ t)e interest on t)is a,erage ad,ance o* 3$0+000 (ould 'e 3$+000 at 106 interest- &n addition+ t)e *actor (ill c)arge a 26 *actor *ee+ or 325+000 73100+000 : 12 : -028 o,er t)e course o* a yearHo(e,er+ t)is 325+000 *ee is o**set 'y t)e 31$+000 sa,ings in collection e:penses+ producing a net outlay o* only 31+000- Adding t)e 31+000 to t)e 3$+000 o* interest produces an annual net cost o* 315+0000i,iding t)e 315+000 cost 'y t)e 3$0+000 o* ad,anced *unds results in a cost o* 17-;6122! "ource# CMA 12<1 1%; Ans(er 7A8 is incorrect 'ecause concentration 'anking+ a lock'o: system+ and t)e use o* a local post o**ice 'o: are tec)ni4ues used to accelerate cas) receiptsAns(er 7.8 is correct- Payment 'y dra*t+ a t)ree%party instrument in ()ic) t)e dra(er orders t)e dra(ee to pay money to t)e payee+ is a means o* slo(ing cas) out*lo(s- A c)eck is t)e most common type o* dra*t- C)eck *loat arises *rom t)e delay 'et(een an e:penditure and t)e clearing o* t)e c)eck t)roug) t)e 'anking systemAns(er 7C8 is incorrect 'ecause E0& is t)e communication o* electronic documents directly *rom a computer in one entity to a computer in anot)er entity- T)us+ E0& e:pedites cas) payments- T)e payee recei,es t)e money almost instantaneouslyAns(er 708 is incorrect 'ecause concentration 'anking+ a lock'o: system+ and t)e use o* a local post o**ice 'o: are tec)ni4ues used to accelerate cas) receipts122! "ource# CMA 12<1 1%1 Ans(er 7A8 is correct- An increase in discounts taken accompanied 'y declines in recei,a'les 'alances and dou't*ul accounts all indicate t)at collections on t)e increased sales )a,e 'een accelerated- Accordingly+ t)e a,erage collection period must )a,e declined- T)e a,erage collection period is a ratio calculated 'y di,iding t)e num'er o* days in a year 721;8 'y t)e recei,a'le turno,er- T)us+ t)e )ig)er t)e turno,er+ t)e s)orter t)e a,erage collection period- T)e turno,er increases ()en eit)er sales 7t)e numerator8 increase+ or recei,a'les 7t)e denominator8 decreaseAccomplis)ing 'ot) )ig)er sales and a lo(er recei,a'les increases t)e turno,er and results in a s)orter collection periodAns(er 7.8 is incorrect 'ecause a decrease in t)e percentage discount o**ered pro,ides no incenti,e *or early paymentAns(er 7C8 is incorrect 'ecause accounts recei,a'le turno,er 7sales>a,erage recei,a'les8 )as increasedAns(er 708 is incorrect 'ecause no in*ormation is gi,en relati,e to (orking capital elements ot)er t)an recei,a'les- .ot) recei,a'les and cas) are elements o* (orking capital+ so an acceleration o* customer

payments (ill )a,e no e**ect on (orking capital125! "ource# CMA 12<1 1%$ Ans(er 7A8 is incorrect 'ecause a decrease in t)e acid%test ratio suggests an aggressi,e policy- A conser,ati,e company (ants a )ig)er acid%test ratio+ t)at is+ more li4uid assets relati,e to lia'ilitiesAns(er 7.8 is incorrect 'ecause a conser,ati,e company (ants (orking capital to 'e *inanced *rom long%term sourcesAns(er 7C8 is correct- A conser,ati,e (orking capital policy minimiFes li4uidity risk 'y increasing (orking capital 7current assets % current lia'ilities8T)e result is t)at t)e company *orgoes t)e potentially )ig)er returns a,aila'le *rom using t)e additional (orking capital to ac4uire long%term assets- A conser,ati,e (orking capital policy is c)aracteriFed 'y a )ig)er current ratio 7current assets>current lia'ilities8 and acid%test ratio 74uick assets>current lia'ilities8- T)us+ t)e company (ill increase current assets or decrease current lia'ilities- A conser,ati,e policy *inances assets using long%term or permanent *unds rat)er t)an s)ort%term sourcesAns(er 708 is incorrect 'ecause a conser,ati,e company seeks more li4uid 7marketa'le8 in,estments12;! "ource# CMA 12<1 1%10 Ans(er 7A8 is incorrect 'ecause 27-06 is 'ased on (eig)ts o* 32;+000 and 3;0+000Ans(er 7.8 is correct- &* t)e company pays We' Master (it)in 10 days+ it (ill sa,e 3;00 726 : 32;+0008- T)us+ t)e company is e**ecti,ely paying 3;00 to retain 325+;00 732;+000 % 3;008 *or 20 days 720 % 108- T)e annualiFed interest rate on t)is 'orro(ing is 21-72516 73;00>325+;008 : 7210 days>20 days8!- "imilarly+ t)e company is+ in e**ect+ paying "o*tidee 32+;00 7;6 : 3;0+0008 to )old 357+;00 73;0+000 % 32+;008 *or $0 days 7<0 % 108T)e annualiFed rate on t)is 'orro(ing is 22-1$526 732+;00>357+;008 : 7210 days>$0 days8!- T)e a,erage amount 'orro(ed *rom We' Master is 311+222-22 1 mont) : 325+;00 : 720 days>20 days8!+ and t)e a,erage amount 'orro(ed *rom "o*tidee is 3121+111-17 2 mont)s : 357+;00 : 7$0 days><0 days8!- T)us+ t)e (eig)ted a,erage o* t)ese t(o rates 'ased on a,erage 'orro(ings is 2;-26 U 21-72516 : 311+222-228 P 722+1$52 : 3121+111-178!>7311+222-22 P 3121+111-178V- T)is calculation+ )o(e,er+ understates t)e true cost o* not taking t)e discount 'ecause it does not consider t)e e**ects o* compoundingAns(er 7C8 is incorrect 'ecause 2$-06 is 'ased on (eig)ts o* 325+;00 and 357+;00Ans(er 708 is incorrect 'ecause 20-26 is an un(eig)ted a,erage o* t)e t(o interest rates121! "ource# CMA 12<1 1%11 Ans(er 7A8 is incorrect 'ecause t)e company s)ould

continue t)e current practice unless alternati,e s)ort%term *inancing is a,aila'le at a lo(er rateAns(er 7.8 is incorrect 'ecause t)e (eig)ted%a,erage cost o* capital is usually a concern in capital 'udgeting and is not as important in t)e decision process as t)e marginal cost o* capital=urt)ermore+ trade credit is Eust one element in t)e *irm/s *inancing structure- An optimal mi: o* *inancing sources may re4uire t)at trade credit 'e o'tained at less t)an t)e (eig)ted%a,erage cost o* capitalAns(er 7C8 is incorrect 'ecause t)e company s)ould maintain its current practice i* t)e cost o* alternati,e long%term *inancing is )ig)erAns(er 708 is correct- T)e company is currently paying an annual rate o* 2;-26 7see pre,ious 4uestion8 to o'tain trade credit and pay at t)e end o* t)e credit period- T)is policy s)ould 'e continued i* trade credit is t)e only source o* *inancing+ or i* ot)er sources are a,aila'le only at a )ig)er rate127! "ource# CMA 12<1 1%12 Ans(er 7A8 is incorrect 'ecause trade credit is an important source o* *inancing *or small *irmsAns(er 7.8 is incorrect 'ecause trade credit is ordinarily a s)ort%term source o* *inancingAns(er 7C8 is correct- Trade credit is a spontaneous source o* *inancing 'ecause it arises automatically as part o* a purc)ase transaction- T)e terms o* payment are set 'y t)e supplier+ 'ut trade credit usually re4uires payment (it)in a s)ort period o* time- Trade credit is an important source o* credit *or all 'usinesses 'ut especially *or 'uyers+ suc) as small 'usinesses+ t)at mig)t not )a,e access to ot)er credit markets- @ike all *orms o* *inancing+ trade credit is su'Eect to t)e risk o* 'uyer de*aultAns(er 708 is incorrect 'ecause t)e cost o* trade credit depends on t)e credit terms and t)e price paidA seller (it) generous payment terms may c)arge a )ig)er price *or its merc)andise12$! "ource# CMA 12<1 1%12 Ans(er 7A8 is incorrect 'ecause a seller t)at e:tends long%term credit (ill )a,e a )ig)er le,el o* recei,a'les t)an a *irm (it) a s)orter credit periodAns(er 7.8 is correct- T)e normal operating cycle is de*ined as t)e period *rom t)e ac4uisition o* in,entory to t)e collection o* t)e account recei,a'le- &* trade credit is *or a period longer t)an t)e normal operating cycle+ t)e seller must t)ere*ore 'e *inancing more t)an Eust t)e purc)ase o* in,entoryAns(er 7C8 is incorrect 'ecause t)e seller is not guaranteed t)at a purc)aser (ill resell t)e merc)andiseAns(er 708 is incorrect 'ecause o**ering a discount may accelerate payment-

12<! "ource# CMA 12<1 1%15 Ans(er 7A8 is incorrect 'ecause 106 is t)e interest rate on t)e amount ad,ancedAns(er 7.8 is incorrect 'ecause 126 is t)e sum o* t)e interest rate and t)e *ee percentageAns(er 7C8 is incorrect 'ecause 12-26 is t)e cost o* option .Ans(er 708 is correct- T)e *actor (ill ad,ance 3100+000 7$06 : 312;+0008- T)is amount is t)e a,erage 'alance outstanding t)roug)out t)e yearT)us+ annual interest (ill 'e 310+000 7106 : 3100+0008- &n addition+ t)e company (ill pay an annual *ee o* 320+000 726 : 312;+000 per mont) : 12 mont)s8+ so t)e total annual net cost is 311+000 7310+000 P 320+000 % 325+000 sa,ings8- Hence+ t)e annual cost is 116 7311+000>3100+000 loan8120! "ource# CMA 12<1 1%1; Ans(er 7A8 is incorrect 'ecause <6 is t)e compensating 'alance re4uirementAns(er 7.8 is incorrect 'ecause 126 is t)e contract rateAns(er 7C8 is correct- E,en t)oug) t)e company (ill 'orro( 3110+000+ it (ill )a,e use o* only 3100+100 'ecause a <6 compensating 'alance+ or 3<+<00+ must 'e maintained at all times- Conse4uently+ t)e e**ecti,e annual interest rate is 12-26 7126 : 3110+0008>3100+100!Ans(er 708 is incorrect 'ecause 216 is t)e sum o* t)e contract rate and t)e compensating 'alance re4uirement121! "ource# CMA 12<1 1%11 Ans(er 7A8 is incorrect 'ecause <-16 is t)e 1%mont) rate 'ased on t)e *ace amount o* t)e paperAns(er 7.8 is incorrect 'ecause 106 is t)e rate *or si: mont)sAns(er 7C8 is incorrect 'ecause 1$-26 is 'ased on t)e *ace amount o* t)e commercial paperAns(er 708 is correct- .y issuing commercial paper+ t)e company (ill recei,e 3100+000 and repay 3110+000 e,ery si: mont)s- T)us+ *or t)e use o* 3100+000 in *unds+ t)e company pays 310+000 in interest eac) si:%mont) period+ or a total o* 320+000 per year- T)e annual percentage rate is t)ere*ore 206 7320+000>3100+0008122! "ource# CMA 12<1 1%17 Ans(er 7A8 is incorrect 'ecause t)e e**ecti,e rate must e:ceed t)e contract rate o* 206Ans(er 7.8 is correct- T)e company (ill recei,e 3100+000 7$06 : 312;+0008 at an annual cost o* 32;+000+ so t)e annual interest rate is 2;6

732;+000>3100+0008Ans(er 7C8 is incorrect 'ecause 506 assumes no discount and a 1%mont) loan termAns(er 708 is incorrect 'ecause ;06 assumes a 1%mont) loan term122! "ource# CMA 12<1 1%1$ Ans(er 7A8 is incorrect 'ecause Alternati,e & cannot 'e correct- Jeit)er o* t)e multiplicands is a dollar *igure+ so t)e product could not 'e t)e dollar 'alance o* recei,a'lesAns(er 7.8 is incorrect 'ecause Alternati,e & cannot 'e correct- Jeit)er o* t)e multiplicands is a dollar *igure+ so t)e product could not 'e t)e dollar 'alance o* recei,a'lesAns(er 7C8 is correct- A *irm/s a,erage gross recei,a'les 'alance can 'e calculated 'y multiplying a,erage daily sales 'y t)e a,erage collection period 7days/ sales outstanding8- Alternati,ely+ annual credit sales can 'e di,ided 'y t)e accounts%recei,a'le turno,er 7net credit sales>a,erage accounts recei,a'le8 to o'tain t)e a,erage 'alance in recei,a'lesAns(er 708 is incorrect 'ecause Alternati,e &&& cannot 'e correct- &t contains a,erage gross recei,a'les+ t)e amount 'eing calculated125! "ource# CMA 01<7 1%7 Ans(er 7A8 is incorrect 'ecause paying t)e *ederal ta: lia'ility *rom t)e pre,ious year )as no e**ect on t)e current year/s net pro*itAns(er 7.8 is incorrect 'ecause a stock di,idend 7de'it retained earnings+ credit common stock8 )as no impact on eit)er t)e current ratio or net pro*itAns(er 7C8 is incorrect 'ecause (riting o** recei,a'les against an allo(ance account does not c)ange total current assets- T)e allo(ance account is a contra account in t)e current asset section o* t)e 'alance s)eetAns(er 708 is correct- T)e current ratio is calculated 'y di,iding current assets 'y current lia'ilities- T)us+ any transaction t)at (ill eit)er increase current assets or decrease current lia'ilities (ill increase t)e current ratio- "elling ,acant land *or less t)an its 'ook ,alue 7at a loss8 (ould increase current assets 7cas)8 and decrease net pro*it-

12;! "ource# CMA 01<7 1%$ Ans(er 7A8 is incorrect 'ecause t)e lengt) o* t)e e:tra credit period is 20 days+ not 20 daysAns(er 7.8 is incorrect 'ecause t)e lengt) o* t)e e:tra credit period is 20 days+ not 20 daysAns(er 7C8 is incorrect 'ecause 21-06 calculates

t)e interest rate 'ased on t)e *ull in,oice priceAns(er 708 is correct- Bn a 31+000 in,oice+ t)e company could sa,e 320 'y paying (it)in t)e discount period- T)us+ an immediate payment o* 3<$0 (ould sa,e t)e company 320+ and t)e interest rate c)arged *or )olding 3<$0 an additional 20 days 720 % 108 is 2-056 7320>3<$08- .ecause t)e num'er o* 20%day periods in a year is 1$ 7210>208+ t)e annual rate is 21-76 71$ : 2-0568121! "ource# CMA 01<7 1%< Ans(er 7A8 is incorrect 'ecause a,erage recei,a'les are outstanding *or muc) more t)an 20 daysAns(er 7.8 is incorrect 'ecause 25 days assumes 506 o* recei,a'les are collected a*ter 1; days and 106 a*ter 20 daysAns(er 7C8 is correct- Ii,en t)at 506 o* sales (ill 'e collected on t)e 1;t) day+ 506 on t)e 20t) day+ and 206 on t)e 5;t) day+ t)e days/ sales outstanding can 'e determined 'y (eig)ting t)e collection period *or eac) group o* recei,a'les 'y its collection percentage- Hence+ t)e proEected days/ sales outstanding e4ual 27 days 7506 : 1;8 P 7506 : 208 P 7206 : 5;8!Ans(er 708 is incorrect 'ecause more recei,a'les are collected on t)e 1;t) day t)an on t)e 5;t) dayL t)us+ t)e a,erage must 'e less t)an 20 days127! "ource# CMA 01<7 1%10 Ans(er 7A8 is correct- T)e current ratio is calculated 'y di,iding current assets 'y current lia'ilities- T)us+ any transaction t)at c)anges current assets or current lia'ilities c)anges t)e current ratio- A cas) ad,ance to a di,isional o**ice does not c)ange current assets 'ecause t)e cas) 7a current asset8 (ill 'e replaced 'y a recei,a'le 7a current asset8- Current lia'ilities are also una**ected+ so t)e cas) ad,ance a**ects neit)er t)e current ratio nor total current assetsAns(er 7.8 is incorrect 'ecause t)e declaration o* a cas) di,idend creates a current lia'ility+ ()ic) reduces t)e current ratioAns(er 7C8 is incorrect 'ecause retiring s)ort%term notes (it) cas) reduces current assets and current lia'ilitiesAns(er 708 is incorrect 'ecause selling a *ully depreciated asset increases cas)+ a current asset12$! "ource# CMA 01<7 1%12 Ans(er 7A8 is incorrect 'ecause it is an e:ample o* a carrying costAns(er 7.8 is incorrect 'ecause it is an e:ample o* a carrying costAns(er 7C8 is incorrect 'ecause it is an e:ample o* a carrying cost-

Ans(er 708 is correct- Carrying costs are incurred to )old in,entory- E:amples include suc) costs as (are)ousing+ insurance+ t)e cost o* capital in,ested in in,entories+ in,entory ta:es+ and t)e cost o* o'solescence and spoilage- Jeit)er s)ipping costs nor t)e initial cost o* t)e in,entory are carrying costs12<! "ource# CMA 01<7 1%12 Ans(er 7A8 is incorrect 'ecause t)e annual cost is 3121+000Ans(er 7.8 is incorrect 'ecause t)e annual cost is 312;+000Ans(er 7C8 is incorrect 'ecause t)e annual cost is 3121+0$0Ans(er 708 is correct- Multiplying 700 c)ecks times 210 days results in a total o* 2;2+000 c)ecks per year- Accordingly+ under 7A8+ total annual cost is 3121+000 73-;0 : 2;2+0008+ ()ic) is less desira'le t)an t)e 312;+000 *lat *ee in 7.8- Ii,en t)at t)e annual collections e4ual 35;2+100+000 731+$00 : 700 : 2108+ 7C8 is also less desira'le 'ecause t)e annual *ee (ould 'e 3121+0$0 7-026 : 35;2+100+0008- T)e 'est option is t)ere*ore to maintain a compensating 'alance o* 31+7;0+000 ()en t)e cost o* *unds is 76+ resulting in a total cost o* 3122+;00 7-07 : 31+7;0+0008150! "ource# CMA 01<7 1%15 Ans(er 7A8 is incorrect 'ecause t)e cost o* *unds is an o',ious element in t)e analysis o* any in,estmentAns(er 7.8 is correct- All *actors s)ould 'e considered t)at di**er 'et(een t)e t(o policies=actors t)at do not di**er+ suc) as t)e current 'ad de't e:perience+ are not rele,ant- Ryan must estimate t)e e:pected 'ad de't losses under eac) ne( policyAns(er 7C8 is incorrect 'ecause t)e impact on t)e current customer 'ase o* e:tending terms to only certain customers is rele,ant- T)e current customers may demand t)e same termsAns(er 708 is incorrect 'ecause e:isting loan agreements may re4uire Ryan to maintain certain ratios at stated le,els- T)us+ Ryan/s a'ility to increase recei,a'les and possi'le 'ad de't losses may 'e limited151! "ource# CMA 01<7 1%1; Ans(er 7A8 is incorrect 'ecause interest must 'e paid mont)ly ()en t)e credit line is used in April+ May+ and CuneAns(er 7.8 is correct- T)e sum o* t)e 'eginning 'alance and in*lo(s e:ceeds t)e out*lo(s *or t)e *irst 2 mont)s- At t)e end o* Marc)+ )o(e,er+ Iart) must use 32+000+000 o* its line o* credit 732+000+000 'eginning 'alance P 31+000+000 in*lo(s % 310+000+000 out*lo(s8- T)us+ interest *or April is 320+000 716 : 32+000+0008- T)e net cas) out*lo( *or April 7ignoring s)ort%term 'orro(ings8 is

31+000+000 o* an additional 31+000+000 o* t)e line o* credit- Ho(e,er+ t)e 320+000 o* interest *or April must also 'e paid+ so t)e amount o* t)e line o* credit used in May is 32+020+000 732+000+000 P 31+000+000 P 320+0008- &nterest *or May is t)ere*ore 320+200 716 : 32+020+0008- Ii,en t)e net cas) in*lo( *or May o* 32+000+000 7again ignoring s)ort%term 'orro(ings8 and t)e 'orro(ing o* 320+200 to pay t)e interest *or May+ t)e amount o* t)e line o* credit used in Cune is 31+0;0+200- &nterest in Cune is 310+;02 716 : 31+0;0+2008+ and total interest is 310+702 7320+000 P 320+200 P 310+;028Conse4uently+ t)e closest ans(er is 311+000Ans(er 7C8 is incorrect 'ecause t)e company (ould repay t)e credit line at t)e end o* mont)s (it) a positi,e cas) *lo(Ans(er 708 is incorrect 'ecause t)e company (ould repay t)e credit line at t)e end o* mont)s (it) a positi,e cas) *lo(152! "ource# CMA 01<7 1%11 Ans(er 7A8 is incorrect 'ecause 32-0; *ails to include prepaid assets 7prepaid e:penses8 as current assetsAns(er 7.8 is correct- .e*ore t)e di,idend+ total current assets e4ual 32+0;0+000 735;;+000 cas) P 3<00+000 recei,a'les P 31;0+000 in,entory P 35;+000 prepaid assets8- Current lia'ilities total 3<00+000 732$;+000 accrued lia'ilities P 3;;0+000 accounts paya'le P 31;+000 current portion o* long%term de't8- T)e payment o* t)e cas) di,idend (ill not c)ange current lia'ilities+ so a current ratio o* 2 to 1 re4uires t)at current assets 'e maintained at a minimum o* 31+$00+000 72 : 3<00+0008- T)us+ cas) can decrease 'y 32;0+000 732+0;0+000 % 31+$00+0008- T)e ma:imum per%s)are rate is 32-;0 732;0+000>100+000 s)ares8Ans(er 7C8 is incorrect 'ecause 32-2; *ails to include t)e current portion o* long%term de't as a current lia'ilityAns(er 708 is incorrect 'ecause 32-$0 *ails to consider prepaid assets as a current asset and t)e current portion o* long%term de't as a current lia'ility-

Ans(er 7.8 is incorrect 'ecause 7-006 *ails to consider t)at t)e 32;+000 currently 'eing maintained counts to(ard t)e compensating 'alance re4uirementAns(er 7C8 is incorrect 'ecause ;-$6 *ails to consider t)e compensating 'alance re4uirementAns(er 708 is incorrect 'ecause 1-116 *ails to consider t)e interest earned on t)e incremental 'alance 'eing carried155! "ource# CMA 01<7 1%20 Ans(er 7A8 is incorrect 'ecause t)e rele,ant cost o* t)e minimum premium account deposit is 'ased on t)e 32+000 incremental deposit+ not t)e *ull 32+;00Ans(er 7.8 is incorrect 'ecause t)e sa,ings on t)e premium account is 311Ans(er 7C8 is incorrect 'ecause t)e sa,ings on t)e premium account is 311Ans(er 708 is correct- T)e standard account (ill cost 310 per mont) plus 3$ in c)eck c)arges 73-10 : $0 c)ecks8+ *or a total o* 31$ per mont) or 3211 per year- T)e premium account )as no c)eck c)arges+ 'ut it (ill re4uire t)e depositor to maintain a 'alance o* 32+000 more t)an desired- At a 106 cost o* capital+ t)e incremental 32+000 minimum deposit (ill cost 3200 per year- T)us+ t)e premium account s)ould 'e selected 'ecause it is c)eaper 'y 311 per year15;! "ource# CMA 01<7 1%20 Ans(er 7A8 is incorrect 'ecause access to Mega/s in,entory in*ormation permits 'etter coordination o* production and deli,eriesAns(er 7.8 is incorrect 'ecause E0& allo(s *or instantaneous payment and noti*ication o* deli,eriesAns(er 7C8 is correct- Electronic data interc)ange is t)e electronic trans*er o* documents 'et(een 'usinesses- E0& (as de,eloped to en)ance Eust%in%time 7C&T8 in,entory management- Ad,antages include speed+ reduction o* clerical errors+ and elimination o* repetiti,e clerical tasks and t)eir costs&mpro,ed 'usiness relations)ips result 'ecause o* t)e mutual 'ene*its con*erred 'y E0&- Accordingly+ some organiFations re4uire E0&- Ho(e,er+ E0& entails t)e e:c)ange o* common 'usiness data con,erted into standard message *ormats- T)us+ t(o crucial re4uirements are t)at t)e participants agree on transaction *ormats and t)at translation so*t(are 'e de,eloped to con,ert messages into a *orm understanda'le 'y ot)er companies- Accordingly+ esta'lis)ing compati'ility (it) Mega/s procedures and systems (ill re4uire =ranklin to resol,e issues regarding compati'ility (it) its ot)er procedures and systemsAns(er 708 is incorrect 'ecause E0& eliminates t)e *loat period ()en payment is 'y electronic *unds trans*er 7E=T8-

152! "ource# CMA 01<7 1%1< Ans(er 7A8 is correct- T)e 3;0+000 compensating 'alance re4uirement is partially satis*ied 'y t)e company/s practice o* maintaining a 32;+000 'alance *or transaction purposes- T)us+ only 32;+000 o* t)e loan (ill not 'e a,aila'le *or current use+ lea,ing 322;+000 o* t)e loan usa'le- At 16 interest+ t)e 32;0+000 loan (ould re4uire an interest payment o* 31;+000 per year- T)is is partially o**set 'y t)e 26 interest earned on t)e 32;+000 incremental 'alance+ or 3;00- "u'tracting t)e 3;00 interest earned *rom t)e 31;+000 o* e:pense results in net interest e:pense o* 315+;00 *or t)e use o* 322;+000 in *unds- 0i,iding 315+;00 'y 322;+000 produces an e**ecti,e interest rate o* 1-556-

151! "ource# CMA 01$< 1%2; Ans(er 7A8 is correct- An imputed cost is one t)at )as to 'e estimated- &t is a cost t)at e:ists 'ut is not *ormally recogniFed in t)e accounting system and is t)e result o* a process designed to recogniFe economic reality- An imputed cost is t)ere*ore rele,ant to t)e decision%making process- =or e:ample+ t)e stated interest on a 'ank loan is not an imputed cost 'ecause it is speci*ically stated and re4uires a dollar outlay- .ut t)e cost o* using retained earnings as a source o* capital is unstated and )as to 'e imputedAns(er 7.8 is incorrect 'ecause t)e cost o* internally generated *unds is unstatedAns(er 7C8 is incorrect 'ecause t)e costs s)ould 'e (ritten o**Ans(er 708 is incorrect 'ecause understated depreciation results in unstated costs157! "ource# C&A 11<; &K%21 Ans(er 7A8 is incorrect 'ecause days/ sales outstanding is used to assess t)e e**iciency o* asset managementAns(er 7.8 is incorrect 'ecause t)e de't%to%assets ratio is used to assess de't management acti,itiesAns(er 7C8 is incorrect 'ecause pro*it margin is an indicator o* pro*ita'ilityAns(er 708 is correct- @i4uidity is t)e a'ility o* a company to meet its current o'ligations- T)e current ratio is a measure o* li4uidity 'ecause it is t)e ratio o* current assets to current lia'ilities15$! "ource# C&A 11<2 &K%51 Ans(er 7A8 is incorrect 'ecause 1-52 e:cludes t)e income ta:es paya'le *rom t)e current lia'ilitiesAns(er 7.8 is incorrect 'ecause 1-0$ includes prepaid e:penses in t)e 4uick assets and e:cludes income ta:es paya'le in t)e current lia'ilitiesAns(er 7C8 is correct- T)e acid test 74uick8 ratio e4uals 4uick assets 7cas)+ trading securities+ and accounts recei,a'le8 di,ided 'y current lia'ilitiesQuick assets total 3201+;00 7327+;00 cas) P 315+000 trading securities P 311;+000 net accounts recei,a'le8- Ii,en current lia'ilities o* 3212+;00 7317+000 accounts paya'le P 3;5+000 current notes paya'le P 370+000 income ta:es paya'le P 322+;00 ot)er current lia'ilities8+ t)e 4uick ratio is 0-<17 73201+;00>3212+;008Ans(er 708 is incorrect 'ecause 0-$2 includes de*erred income ta:es paya'le in t)e current lia'ilities15<! "ource# C&A 11<2 &K%;2

Ans(er 7A8 is incorrect 'ecause a decrease o* 31+000+000 results *rom omitting in,entoriesAns(er 7.8 is incorrect 'ecause t)e di**erence 'et(een all assets and all lia'ilities stayed t)e sameAns(er 7C8 is correct- Jet (orking capital e4uals current assets 7cas)+ accounts recei,a'le+ in,entories *or t)is company8 minus current lia'ilities 7accounts paya'le+ notes paya'le+ accrued (ages8- =rom Canuary 1 to Cune 20+ t)e net (orking capital increased 'y 31+000+000 U 735 P 35 P 3108 % 732 P 32 P 328! % 732 P 3; P 3$8 % 732 P 35 P 318!VAns(er 708 is incorrect 'ecause an increase o* 32+000+000 results *rom omitting accrued (ages1;0! "ource# C&A 0;<1 &K%;2 Ans(er 7A8 is incorrect 'ecause 11 days results *rom su'tracting t)e recei,a'les collection periodAns(er 7.8 is incorrect 'ecause 51 days results *rom su'tracting t)e recei,a'les collection period and adding t)e paya'les de*erral periodAns(er 7C8 is correct- T)e cas) con,ersion cycle is t)e lengt) o* time 'et(een paying *or purc)ases and recei,ing cas) *rom t)e sale o* *inis)ed goods- &t e4uals t)e in,entory con,ersion period+ plus t)e recei,a'les collection period+ minus t)e paya'les de*erral period+ or 7; days 7;$ days P 22 days % 1; days8Ans(er 708 is incorrect 'ecause <0 days omits t)e paya'les de*erral period1;1! "ource# C&A 11<1 &K%25 Ans(er 7A8 is incorrect 'ecause 312 e4uals current assets minus current lia'ilitiesAns(er 7.8 is correct- Total assets e4ual total lia'ilities and e4uity- Hence+ i* total assets e4ual 3100+ total lia'ilities and e4uity must e4ual 3100+ and current lia'ilities must e4ual 320 73100 % 350 % 3208.ecause t)e 4uick ratio e4uals t)e 4uick assets 7cas) P accounts recei,a'le8 di,ided 'y current lia'ilities+ t)e 4uick assets must e4ual 321 7320 : 1-2 4uick ratio8+ and t)e accounts recei,a'le 'alance is 321 7321 % 310 cas)8Ans(er 7C8 is incorrect 'ecause 321 e4uals t)e 4uick assetsAns(er 708 is incorrect 'ecause 311 e4uals t)e sum o* t)e 4uick assets and current lia'ilities1;2! "ource# C&A 11<1 &K%2; Ans(er 7A8 is incorrect 'ecause t)e sum o* cas)+ accounts recei,a'le+ and in,entory is less t)an 3100Ans(er 7.8 is incorrect 'ecause 311 is t)e result o* neglecting to su'tract t)e e4uity 'alance ()en calculating t)e current lia'ility 'alance-

Ans(er 7C8 is correct- Total assets 7gi,en as 31008 e4uals t)e sum o* cas) 7gi,en as 3108+ accounts recei,a'le 7321 as calculated in t)e preceding 4uestion8+ in,entory+ and *i:ed assets- &n,entory can 'e determined 'ecause it is included in current+ 'ut not 4uick+ assets+ and t)e current and 4uick ratios are kno(n- Current assets e4ual 352 71-5 current ratio : 320 current lia'ilities+ as calculated in t)e preceding 4uestion8+ and t)e 4uick assets e4ual 321 71-2 4uick ratio : 320 current lia'ilities8- T)us+ in,entory+ ()ic) is t)e only di**erence in t)is 4uestion 'et(een current and 4uick assets+ e4uals 31 7352 % 3218- =i:ed assets must t)en e4ual 3;$ 73100 total assets % 310 cas) % 321 accounts recei,a'le % 31 in,entory8Ans(er 708 is incorrect 'ecause 315 assumes t)at in,entory is 301;2! "ource# C&A 11<1 &K%27 Ans(er 7A8 is correct- Cas) pro,ided 'y operations e4uals net income+ plus depreciation+ minus t)e increase in accounts recei,a'le+ minus t)e decrease in accounts paya'le- T)e cas) pro,ided is 321<+000 32<5+000 P 3;0+000 % 73200+000 % 3200+0008 % 7327;+000 % 32;0+0008!- An increase in recei,a'les is a noncas) component o* net income- A decrease in accounts paya'le is added ()en adEusting cost o* goods sold to re*lect cas) paid to suppliers- T)us+ it is su'tracted ()en adEusting net income to a**ect cas) pro,ided 'y operationsAns(er 7.8 is incorrect 'ecause 3255+000 does not consider t)e c)anges in accounts recei,a'le and paya'le and su'tracts depreciationAns(er 7C8 is incorrect 'ecause 3255+000 does not consider t)e c)anges in accounts recei,a'le and paya'leAns(er 708 is incorrect 'ecause 351<+000 adds rat)er t)an su'tracts t)e increase in recei,a'les and t)e decrease in paya'les1;5! "ource# C&A 11<1 &K%2$ Ans(er 7A8 is incorrect 'ecause 5< days uses accounts recei,a'le *rom year 1 instead o* year 2Ans(er 7.8 is incorrect 'ecause ;2 days is t)e a,erage collection period *or year 1Ans(er 7C8 is correct- T)e a,erage collection period *or year 2 is 72 days 3200+000 accounts recei,a'le>731+;00+000 sales>21; days8!Ans(er 708 is incorrect 'ecause 7$ days uses year 1 annual sales1;;! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3<2+100 ignores interestAns(er 7.8 is incorrect 'ecause 3<1+12; *ails to deduct t)e 16 reser,e-

Ans(er 7C8 is correct- T)e *actor (ill (it))old 31+000 716 : 3100+0008 as a reser,e against returns and allo(ances and 31+500 71-56 : 3100+0008 as a commission- T)e remaining 3<2+100 (ill 'e reduced 'y interest at t)e rate o* 1;6 annually- T)e interest c)arge s)ould 'e 32+21;+ assuming a 210%day year 73<2+100 : -1;8 710%day payment period 210 days8!- T)e proceeds to 'e recei,ed 'y t)e seller e4ual 3<0+2$; 73<2+100 % 32+21;8Ans(er 708 is incorrect 'ecause 3$;+000 assumes t)at t)e only amount (it))eld is a *ull year/s interest on 3100+0001;1! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e age o* paya'les s)ould 'e deducted *rom t)e sum o* t)e ot)er itemsAns(er 7.8 is incorrect 'ecause t)e paya'les are not added to t)e in,entory period- T)ey are deductedAns(er 7C8 is correct- T)e cas) *lo( cycle 'egins ()en t)e *irm pays *or merc)andise it )as purc)ased and ends ()en t)e *irm recei,es cas) *rom t)e sale o* t)e merc)andise- &n,entory is )eld *or an a,erage o* 10 days prior to sale+ 'ut t)e a,erage age o* accounts paya'le is 20 days- Conse4uently+ t)e a,erage time 'et(een outlay and sale is 20 days- Recei,a'les are collected an a,erage o* 5; days a*ter sale+ so t)e lengt) o* t)e cas) *lo( cycle is 7; days 720 P 5;8Ans(er 708 is incorrect 'ecause 10; days e4uals t)e sum o* t)e in,entory cycle and t)e recei,a'les cycle1;7! "ource# Pu'lis)er Ans(er 7A8 is correct- C)ecks are currently tied up *or 11 days 71 *or mailing+ 2 *or processing+ and 2 *or clearing8- &* t)at period (ere reduced to 2 days+ 0@=/s cas) 'alance (ould increase 'y 31+200+000 7$ days : 31;0+000 per day8Ans(er 7.8 is incorrect 'ecause t)e decrease is $ days+ not ;Ans(er 7C8 is incorrect 'ecause 3100+000 represents only a 5%day sa,ingsAns(er 708 is incorrect 'ecause t)e lock'o: system (ill result in an additional $ days o* sa,ings+ not 21;$! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 310+000 is t)e in,oice amountAns(er 7.8 is incorrect 'ecause 31;+<25 assumes t)e amount paid to t)e supplier is 310+000Ans(er 7C8 is correct- T)e company (ill need 3;$+$00 7<$6 : 310+0008 to pay t)e in,oice- &n addition+ it (ill need a compensating 'alance e4ual to <6 o* t)e loan- T)e e4uation is @oan O 3;$+$00 P -0< @oan T)us+ t)e loan amount needed is 315+11; 73;$+$00

-<18Ans(er 708 is incorrect 'ecause 3;$+$00 is t)e amount to 'e paid to t)e supplier1;<! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 116 is t)e contract rate o* interestAns(er 7.8 is incorrect 'ecause t)e e**ecti,e rate is greater t)an t)e contract rate- T)e usa'le *unds are less t)an t)e *ace amount o* t)e noteAns(er 7C8 is correct- T)e interest at 116 annually on a 20%day loan o* 315+11; is 3;<2-20 315+11; : 116 : 720 2108!- Ho(e,er+ t)e company )as access to only 3;$+$00- T)e interest e:pense on usa'le *unds is t)ere*ore at an annual rate o* 12-0<6 12 mont)s : 73;<2-20 3;$+$008!Ans(er 708 is incorrect 'ecause t)e e**ecti,e rate is greater t)an t)e contract rate- T)e usa'le *unds are less t)an t)e *ace amount o* t)e note110! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 26 is t)e discount rate *or a 20%day periodAns(er 7.8 is incorrect 'ecause 256 assumes t)at t)e a,aila'le *unds e4ual 310+000Ans(er 7C8 is correct- .y *ailing to take t)e discount+ t)e company is essentially 'orro(ing 3;$+$00 *or 20 days- T)us+ at a cost o* 31+200+ t)e company ac4uires t)e use o* 3;$+$00+ resulting in a rate o* 2-050$16 731+200 3;$+$008 *or 20 daysAssuming a 210%day year+ t)e e**ecti,e annual rate is 25-5$<6 2-050$16 : 7210 days 20 days8!Ans(er 708 is incorrect 'ecause 21-726 assumes a 20%day discount period111! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e prime rate must 'e greater t)an 7-276 to make t)e company/s terms pre*era'le to t)ose o* a 'ankAns(er 7.8 is incorrect 'ecause t)e prime rate must 'e greater t)an 7-276 to make t)e company/s terms pre*era'le to t)ose o* a 'ankAns(er 7C8 is incorrect 'ecause t)e prime rate must 'e greater t)an 7-276 to make t)e company/s terms pre*era'le to t)ose o* a 'ankAns(er 708 is correct- Terms o* 1>10+ net 10 mean t)at a 'uyer can sa,e 16 o* t)e purc)ase price 'y paying ;0 days early- &n essence+ not taking t)e discount results in t)e 'uyer/s 'orro(ing <<6 o* t)e in,oice price *or ;0 days at a total interest c)arge o* 16 o* t)e in,oice price- .ecause a year )as 7-2 ;0%day periods 721; ;08+ t)e credit terms 1>10+ net 10 yield an e**ecti,e annualiFed interest c)arge o*

appro:imately 7-276 716 <<68 : 7-2!- &* t)e prime rate (ere )ig)er t)an 7-276+ t)e 'uyer (ould pre*er to 'orro( *rom t)e ,endor 7i-e-+ not pay (it)in t)e discount period8 rat)er t)an *rom a 'ankConse4uently+ an $6 prime rate could cause t)e ,endor/s recei,a'les to increase112! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e prepayment o* interest reduces t)e *unds a,aila'le+ resulting in an e**ecti,e interest rate greater t)an t)e contract rateAns(er 7.8 is incorrect 'ecause t)e prepayment o* interest reduces t)e *unds a,aila'le+ resulting in an e**ecti,e interest rate greater t)an t)e contract rateAns(er 7C8 is incorrect 'ecause 106 is t)e contract rate- T)e e**ecti,e rate is )ig)er 'ecause t)e *ull 32 million *ace amount o* t)e note (ill not 'e a,aila'le to t)e 'orro(erAns(er 708 is correct- &* t)e loan is discounted+ t)e 'orro(er recei,es t)e *ace amount minus t)e prepaid interest- T)us+ t)e 'orro(er (ill recei,e proceeds o* 31+$00+000 32+000+000 % 7106 : 32+000+0008!T)e e**ecti,e interest rate is 11-116 73200+000 31+$00+0008112! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 26 is t)e discount rateAns(er 7.8 is incorrect 'ecause 1$-216 is 'ased on t)e 50%day credit periodAns(er 7C8 is correct- T)e 'uyer could satis*y t)e 3100 o'ligation 'y paying 3<$ on t)e 10t) day- .y c)oosing to (ait until t)e 50t) day+ t)e 'uyer is e**ecti,ely paying a 32 interest c)arge *or t)e use o* 3<$ *or 20 days 750%day credit period % 10%day discount period8- T)e interest rate on ()at is essentially a 20%day loan is 2-050$16 732 3<$8E:trapolating t)is 20%day rate to a yearly rate in,ol,es multiplying 'y t)e num'er o* periods in a year- T)us+ t)e e**ecti,e annual rate is a'out 25-5<6 2-050$16 : 7210 20 days8!Ans(er 708 is incorrect 'ecause 21-726 is 'ased on a 20%day credit period115! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 7325+0008 ignores t)e additional interest re,enue *rom in,esting t)e increased *undsAns(er 7.8 is incorrect 'ecause 312+000 is 'ased on 2 days o* accelerated in*lo(s rat)er t)an 2Ans(er 7C8 is correct- .ecause collections (ill 'e accelerated 'y 2 days at a rate o* 3200+000 per day+ t)e company (ill )a,e an additional 3<00+000 to in,est- At a rate o* 16+ t)e interest earned (ill 'e

3;5+000 per year- Ho(e,er+ t)e 'ank (ill c)arge 325+000 712 mont)s : 32+000 per mont)8 *or its ser,ices- T)us+ t)e *irm (ill increase its income 'y 320+000 73;5+000 % 325+0008Ans(er 708 is incorrect 'ecause 3;5+000 ignores t)e 325+000 'ank ser,ice c)arge11;! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 320 million ignores t)e increase in current assets- T)is ans(er (ould 'e appropriate i* noncurrent assets (ere 'eing *inancedAns(er 7.8 is correct- &* current lia'ilities are 3200 million and t)e current ratio 7current assets current lia'ilities8 is 2-2+ current assets must 'e 3550 million 72-2 : 3200 million8- &* T amount o* commercial paper is issued to *inance in,entory 7current assets8+ t)ere'y increasing 'ot) current assets and current lia'ilities 'y T+ t)e le,el o* current assets at ()ic) t)e ne( current ratio (ill 'e 2-0 is 35$0 million 73550 million P 350 million o* commercial paper873550 P T8 73200 P T8 O 2-0 3550 P T O 273200 P T8 3550 P T O 3500 P 2T 3550 O 3500 P T T O 350 Ans(er 7C8 is incorrect 'ecause 3250 million is t)e amount o* (orking capital 'ot) 'e*ore and a*ter t)e issuance o* commercial paperAns(er 708 is incorrect 'ecause 31$0 million is a nonsense ans(er111! "ource# Pu'lis)er Ans(er 7A8 is correct- T)e cost o* carrying recei,a'les e4uals a,erage recei,a'les times t)e ,aria'le cost ratio times t)e cost o* money- ?nder t)e old policy+ a,erage daily sales are 312+77$ 735+100+000 210 days8- Ii,en a 20%day a,erage collection period+ t)e a,erage recei,a'les 'alance is 32$2+250 7312+77$ : 20 days8- ?nder t)e ne( policy+ a,erage daily sales are 312+77$ 735+<10+000 210 days8+ and t)e a,erage recei,a'les 'alance is 35$2+220 7312+77$ : 2; days8- Hence+ t)e a,erage 'alance is 3<$+$<0 )ig)er under t)e ne( policy.ecause t)e company/s incremental 7,aria'le8 costs are ;06 o* sales+ t)e additional in,estment is 35<+55; 7;06 : 3<$+$<08- T)e interest rate+ or re4uired rate o* return+ is 116- T)us+ t)e incremental preta: carrying cost is 3;+52< 7116 : 35<+55;8Ans(er 7.8 is incorrect 'ecause 310+$7$ *ails to adEust *or t)e proportion o* incremental costs included in t)e additional recei,a'lesAns(er 7C8 is incorrect 'ecause 312+77$ is t)e a,erage daily sales under t)e ne( policyAns(er 708 is incorrect 'ecause 3<$+$<0 is t)e amount o* t)e additional recei,a'les-

117! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause ;+;00 units e4uals t)e order siFe plus t)e sa*ety stockAns(er 7.8 is correct- T)e reorder point e4uals t)e in,entory to 'e sold during t)e lead time plus any sa*ety stock- &* t)e (eekly sales are 250 units 712+000 ;0 (eeks8 and t)e lead time is ; (eeks+ sales during t)e lead time s)ould 'e 1+200 unitsAdding t)e 1+200 units o* e:pected sales to t)e 1+;00 units o* sa*ety stock produces a reorder point o* 2+700 unitsAns(er 7C8 is incorrect 'ecause 1+200 units omits sa*ety stockAns(er 708 is incorrect 'ecause 250 units is t)e a,erage (eekly usage11$! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 16 is t)e contract rateAns(er 7.8 is incorrect 'ecause 1-2$6 does not consider t)e compensating 'alance re4uirementAns(er 7C8 is incorrect 'ecause 7-1<6 assumes t)e interest is not paid in ad,anceAns(er 708 is correct- Assuming a 31+000 loan+ t)e interest at 16 *or 1 year is 310- Hence+ t)e proceeds o* t)e loan (it) discounted 7paid%in%ad,ance8 interest are 3<50 731+000 % 3108- Also+ 226 o* t)e note+ or 3220+ cannot 'e used 'y t)e 'orro(er 'ecause o* t)e compensating 'alance re4uirementConse4uently+ only 3720 is a,aila'le *or use- Paying 310 interest *or t)e use o* 3720 results in an e**ecti,e cost o* 'orro(ing o* $-226 7310 3720811<! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e decrease in current lia'ilities increases (orking capitalAns(er 7.8 is incorrect 'ecause net (orking capital increased 'y 31<0Ans(er 7C8 is incorrect 'ecause net (orking capital increased 'y 31<0Ans(er 708 is correct- Working capital is t)e e:cess o* current assets o,er current lia'ilities- An increase in current assets or a decrease in current lia'ilities increases (orking capital- T)us+ net (orking capital increased 'y 31<0 73120 P 3108170! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 2-5;6 ignores t)e transaction costs and *ails to annualiFe t)e percentageAns(er 7.8 is incorrect 'ecause 2-;16 *ails to annualiFe t)e result-

Ans(er 7C8 is correct- T)e total cost to t)e company (ill 'e 3;1+;00 7;0+000 discount P 1+;00 o* transaction costs8+ and t)e net amount a,aila'le (ill 'e 31+55$+;00- T)e annualiFed amount o* t)e costs is 3201+000 75 : 3;1+;008- Accordingly+ t)e annual interest cost (ill 'e 15-226 73201+000 31+55$+;008Ans(er 708 is incorrect 'ecause 12-7<6 ignores t)e transaction costs171! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 32+$;0 is 'ased on a 126 ta: rate+ t)e complement o* t)e actual ta: rateAns(er 7.8 is correct- T)e company/s manu*acturing and selling costs e:clusi,e o* 'ad de'ts e4ual 7;6 o* sales- Hence+ t)e gross pro*it on t)e 31;0+000 increase in sales (ill 'e 327+;00 72;6 : 31;0+0008Assuming 325+000 7116 : 31;0+0008 o* 'ad de'ts and 31+000 756 : 31;0+0008 o* collection e:pense+ t)e increase in preta: income (ill 'e 37+;00 7327+;00 % 320+0008- Conse4uently+ a*ter%ta: income (ill increase 'y 35+1;0 37+;00 % 72$6 : 37+;008!Ans(er 7C8 is incorrect 'ecause 37+;00 is t)e preta: incomeAns(er 708 is incorrect 'ecause 3$+270 omits collection costs *rom t)e calculation172! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 21-76 assumes terms o* 2>10+ net 20Ans(er 7.8 is incorrect 'ecause 25-;6 assumes terms o* 2>10+ net 50Ans(er 7C8 is incorrect 'ecause 27-16 assumes terms o* 2>10+ net 50Ans(er 708 is correct- Assume t)at t)e gross amount o* an in,oice is 31+000- Ii,en a 26 discount+ t)e 'uyer (ill pay 3<70 on t)e tent) day- T)us+ t)e seller is *orgoing 320 to recei,e payment 20 days sooner t)an (ould ot)er(ise 'e re4uired- T)e 20%day interest rate 7rounded8 is 2-0<6 7320 3<708- T)e num'er o* 20%day periods in a year is 1$ 7210 208&* t)e interest rate is 2-0<6 *or eac) 20%day period+ t)e annual interest rate 7rounded8 is ;;-16 71$ : 2-0<8172! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e cas) *lo( *or t)e period is greater t)an income gi,en noncas) e:penses in t)e *orm o* depreciation and 'ond discount amortiFationAns(er 7.8 is incorrect 'ecause 3;7+000 does not re*lect t)e noncas) e:pense *or depreciation-

Ans(er 7C8 is incorrect 'ecause t)e 31+000 o* depreciation and t)e 37+000 *or amortiFation s)ould 'e added to+ not su'tracted *rom+ incomeAns(er 708 is correct- To determine cas) *lo( *or t)e period+ all noncas) e:penses s)ould 'e added to income- Adding t)e 31+000 o* depreciation and t)e 37+000 o* discount amortiFation to 3;0+000 o* income produces a preta: cas) *lo( o* 312+000&nterest is not added 'ack to income 'ecause it re4uires a cas) payment175! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3120+000 e4uals t)e purc)ases *or t)e mont)Ans(er 7.8 is incorrect 'ecause 3150+000 e:cludes ot)er operating e:penses+ payroll+ and interestAns(er 7C8 is incorrect 'ecause 3210+000 e:cludes t)e 32;+000 interest paymentAns(er 708 is correct- T)e cas) dis'ursements *or t)e mont) o* April include ;06 o* April purc)ases+ 2;6 o* Marc) purc)ases+ 2;6 o* =e'ruary purc)ases+ April payroll 7106 o* April sales8+ ot)er operating e:penses 71;6 o* May sales8+ and an interest payment o* 32;+000;06 : 3120+000 O 3 1;+000 2;6 : 31;0+000 O 3 27+;00 2;6 : 31;0+000 O 3 27+;00 106 : 32;0+000 O 3 2;+000 1;6 : 3200+000 O 3 5;+000 &nterest O 3 2;+000 %%%%%%%% Total dis'ursements O 322;+000 17;! "ource# Pu'lis)er Ans(er 7A8 is correct- &* $06 o* t)e 320+000+000 o* sales are on credit+ 311+000+000 o* sales (ill 'e su'Eect to t)e discount- &* discounts are taken on 106 o* credit sales+ t)e e:pected discount (ill 'e 32$$+000 26 : 7106 : 311+000+0008!Ans(er 7.8 is incorrect 'ecause 35$0+000 is t)e potential discount on all credit salesAns(er 7C8 is incorrect 'ecause 3210+000 assumes all sales are on credit and t)at 106 o* discounts are takenAns(er 708 is incorrect 'ecause 3100+000 assumes all sales are on credit and t)at 1006 o* t)e discounts are taken171! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 327;+000 is t)e increased in,estment in recei,a'lesAns(er 7.8 is incorrect 'ecause 327+;00 results *rom omitting t)e ,aria'le cost ratio *rom t)e calculation-

Ans(er 7C8 is incorrect 'ecause 312;+000 is t)e a,erage daily salesAns(er 708 is correct- T)e cost o* carrying recei,a'les e4uals a,erage recei,a'les times t)e ,aria'le cost ratio times t)e cost o* money- Ii,en sales o* 35;+000+000+ regardless o* ()ic) collection procedures are applied+ t)e a,erage daily sales must 'e 312;+000 735;+000+000 210 days8- T)e increase in t)e a,erage recei,a'les 'alance is t)ere*ore 312;+000 7; days : 312;+0008- Ii,en an additional 312;+000 o* recei,a'les+ t)e company/s additional re4uired in,estment in recei,a'les is 327;+000 7312;+000 : 106 ,aria'le cost ratio8+ and t)e incremental preta: cost o* t)is in,estment is 322+;00 716 : 327;+0008- Accordingly+ t)e collection costs must 'e reduced 'y a preta: minimum o* 322+;00 to o**set t)e cost o* t)e increased in,estment in recei,a'les177! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3;20+$50 is 'ased on a 20%day collection period and a 2;6 increase in credit salesAns(er 7.8 is correct- B* t)e 3;0+000+000 o* sales+ 7;6 are e:pected to 'e on credit+ a total o* 327+;00+000- A,erage daily credit sales are t)ere*ore 3105+117 7327+;00+000 210 days8- &* t)e a,erage collection period is 20 days+ t)e a,erage 'alance in accounts recei,a'le is 32+0$2+250 720 : 3105+1178- &* credit sales increase 'y 2;6+ a,erage daily sales (ill increase to 3120+20< 712;6 : 3105+1178- =or an a,erage collection period o* 20 days+ t)e a,erage accounts recei,a'le 'alance (ill 'e 32+<01+270 720 : 3120+20<8- Hence+ t)e e:pected increase in t)e 'alance is 31+$22+<20 732+<01+270 % 32+0$2+2508Ans(er 7C8 is incorrect 'ecause 32+0$2+250 is t)e a,erage accounts recei,a'le 'alance 'e*ore any c)ange in credit termsAns(er 708 is incorrect 'ecause 32+<01+270 is t)e a,erage accounts recei,a'le 'alance gi,en t)e c)ange in credit terms17$! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3250+000 is t)e increase in current lia'ilitiesAns(er 7.8 is correct- Working capital is de*ined as current assets minus current lia'ilities- Working capital is calculated as *ollo(s# Current Proposed %%%%%%%% %%%%%%%% Cas) 3 120+000 3 150+000 Accounts recei,a'le 500+000 ;;0+000 &n,entory 210+000 520+000 Marketa'le securities 1$0+000 1$0+000 %%%%%%%%%% %%%%%%%%%% Total current assets 31+010+000 31+2<0+000 Accounts paya'le 7210+0008 75;0+0008 Mortgage paya'le % current 7110+0008 7210+0008

%%%%%%%%%% %%%%%%%%%% Total current lia'ilities 3 ;20+000 3 710+000 %%%%%%%%%% %%%%%%%%%% Working capital 3 ;50+000 3 ;20+000 OOOOOOOOOO OOOOOOOOOO Working capital decreases 'y 310+000 *rom t)e current 3;50+000 to 3;20+000 under t)e proposalAns(er 7C8 is incorrect 'ecause 3220+000 is t)e proposed increase in current assetsAns(er 708 is incorrect 'ecause 310+000 is t)e decrease in (orking capital17<! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3122+222 results *rom di,iding sales 'y 10 and cost o* sales 'y 1; and multiplying t)e di**erence 'et(een t)e t(o 4uotients 'y ;6Ans(er 7.8 is incorrect 'ecause 31+111+117 is t)e decrease in a,erage in,entoryAns(er 7C8 is incorrect 'ecause 3$2+222 results *rom using sales instead o* cost o* sales t)roug)out t)e calculationAns(er 708 is correct- &n,entory turno,er e4uals cost o* sales di,ided 'y a,erage in,entory- Ii,en cost o* sales o* 32;+000+000 and a turno,er rate o* 10 times+ t)e a,erage in,entory is 32+;00+000- &* t)e turno,er rate increases to 1; times+ t)e a,erage in,entory (ill decline to 32+222+222 732;+000+000 1;8+ t)ere'y releasing 31+111+117 o* *unds- At a ;6 cost o* capital+ t)e preta: sa,ings is 3;$+222 7;6 : 31+111+11781$0! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause a prepayment o* e:penses does not c)ange current assets or current lia'ilities- Cas) decreases 'y t)e same amount t)at prepaid rent increasesAns(er 7.8 is correct- Working capital is de*ined as t)e e:cess o* current assets o,er current lia'ilitiesRe*inancing s)ort%term de't (it) long%term de't decreases current lia'ilities (it) no e**ect on current assets+ resulting in an increase in (orking capitalAns(er 7C8 is incorrect 'ecause t)e ac4uisition o* land 7a noncurrent asset8 *or common stock 7an e4uity interest8 does not a**ect eit)er current assets or current lia'ilitiesAns(er 708 is incorrect 'ecause t)e purc)ase o* trading securities does not a**ect total current assetsCas) is replaced 'y trading securities+ anot)er current asset1$1! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause pro*its (ill increase 'y 320+000- &nterest re,enue (ill e:ceed t)e incremental costs-

Ans(er 7.8 is correct- Ii,en t)at collections (ill 'e accelerated 'y 2 days+ at t)e rate o* 3200+000 per day+ t)e company (ill )a,e an additional 3100+000 to in,est- At 116+ t)e interest earned (ill 'e 311+000 per year- Ho(e,er+ t)e 'ank (ill c)arge 321+000 712 mont)s : 32+000 per mont)8 *or its ser,ices- T)us+ t)e *irm (ill increase its preta: income 'y 320+000 7311+000 % 321+0008Ans(er 7C8 is incorrect 'ecause 311+000 *ails to su'tract t)e 321+000 cost o* t)e lock'o: systemAns(er 708 is incorrect 'ecause 312+000 assumes t)e annual *ee is 32+0001$2! "ource# Pu'lis)er

Ans(er 7A8 is incorrect 'ecause 3;<+12; is t)e annual lock'o: costAns(er 7.8 is correct- &* payments are collected 2 days earlier+ t)e company can earn 3120+000 7320+000 : ;0 payments per day : 2 days : -018 at a cost o* 3;<+12; 3;0+000 P 7;0 payments : 21; days : 3-;08!+ a gain o* 310+$7;Ans(er 7C8 is incorrect 'ecause 3;0+000 is t)e annual *i:ed *eeAns(er 708 is incorrect 'ecause 3120+000 is t)e annual sa,ings (it)out regard to costs1$;! "ource# Pu'lis)er

Ans(er 7A8 is incorrect 'ecause 3$0 million results in a current ratio o* 1-;0Ans(er 7.8 is incorrect 'ecause 3270 million results in a current ratio o* 1-2;Ans(er 7C8 is correct- Ii,en t)at current lia'ilities are 3200 million and t)e current ratio 7current assets current lia'ilities8 is 1-70+ current assets must 'e 3250 million 73200 million : 1-708- &* T amount o* commercial paper is issued+ t)ere'y increasing 'ot) current assets and current lia'ilities 'y T+ and t)e ne( current ratio is t)e contractual minimum o* 1-50 to 1+ t)e ma:imum amount o* commercial paper t)at can 'e issued is 31;0 million73250 P T8 current assets 73200 P T8 current lia'ilities O 1-5 3250 P T O 1-5 73200 P T8 3250 P T O 2$0 P 1-5T 3250 O 32$0 P -5T 310 O -5T T O 31;0 Ans(er 708 is incorrect 'ecause 32$0 million results in a current ratio o* 1-2<1$2! "ource# CMA 01<7 1%1< Ans(er 7A8 is incorrect 'ecause t)e 'orro(er )as access to less+ not more+ t)an t)e *ace amount o* t)e loanAns(er 7.8 is incorrect 'ecause t)e e**ecti,e rate is )ig)er t)an t)e contract rate as a result o* t)e compensating 'alance re4uirementAns(er 7C8 is incorrect 'ecause $-506 is 1206 o* t)e contract rateAns(er 708 is correct- &nterest on t)e loan is 37+000 776 : 3100+0008- Ii,en t)at t)e 'orro(er )as to maintain a 206 compensating 'alance+ only 3$0+000 3100+000 % 7206 : 3100+0008! is a,aila'le *or useT)us+ t)e company is paying 37+000 *or t)e use o* 3$0+000 in *unds at an e**ecti,e cost o* $-7;6 737+000 3$0+00081$5! "ource# CMA "amp Q1%1

Ans(er 7A8 is incorrect 'ecause .ank 1 (ill increase t)e *irm/s income 'y only 31$+000Ans(er 7.8 is incorrect 'ecause .ank 2 (ill increase t)e *irm/s income 'y only 312+000Ans(er 7C8 is incorrect 'ecause .ank 2 (ill increase t)e *irm/s income 'y only 312+000Ans(er 708 is correct- .ecause collections made using .ank 5/s lock'o: ser,ice (ill 'e accelerated 'y 2 days at a rate o* 3200+000 per day+ t)e *irm (ill )a,e an additional 3100+000 to in,est- At a rate o* 16+ t)e interest earned (ill 'e 321+000 per yearHo(e,er+ t)e 'ank (ill c)arge 312+000 712 mont)s : 31+000 per mont)8 *or its ser,ices- T)us+ t)e *irm (ill gain 325+000 7321+000 % 312+00081$1! "ource# CMA adap Ans(er 7A8 is correct- &* Alp)a makes t)e special purc)ase o* 1 mont)s o* in,entory 71$0+000 cases 20+000 cases per mont)8+ t)e a,erage in,entory *or t)e 1%mont) period (ill 'e 3<00+000 71$0+000 : 3108 2!- &* t)e special purc)ase is not made+ t)e a,erage in,entory *or t)e same period (ill 'e t)e a,erage mont)ly in,entory o* 31$0+000 720+000 : 3128 2!- Accordingly+ t)e incremental a,erage in,entory is 3720+000 73<00+000 % 31$0+0008+ and t)e interest cost o* t)e incremental 1%mont) in,estment is 322+500 73720+000 : <68 2!Ans(er 7.8 is incorrect 'ecause 350+;00 is t)e result o* assuming an incremental a,erage in,entory o* 3<00+000Ans(er 7C8 is incorrect 'ecause 315+$00 is t)e interest cost *or 12 mont)sAns(er 708 is incorrect 'ecause 3$1+000 is t)e result o* assuming an incremental a,erage in,entory o* 3<00+000 and a 12%mont) period1$7! "ource# CMA "amp Q1%7 Ans(er 7A8 is incorrect 'ecause 11-006 is t)e nominal rate *or 11 mont)s-

purc)ase price o* 3<7-22Ans(er 7.8 is incorrect 'ecause 12-006 is t)e nominal rate o* interestAns(er 7C8 is incorrect 'ecause 12-<56 e4uals 322+000 711 mont)s o* interest8 di,ided 'y 32;;+000Ans(er 708 is correct- Annual interest is 321+000 73200+000 : 1268+ and t)e amount a,aila'le is 32;;+000 3200+000 % 71;6 : 3200+0008!- T)us+ t)e e**ecti,e interest rate is 15-126 7321+000 32;;+00081$$! "ource# Pu'lis)er Ans(er 7A8 is correct- Company A (ill (it))old 31+000 716 : 3100+0008 as a reser,e against returns and allo(ances and 31+500 71-56 : 3100+0008 as a commission- T)e remaining 3<2+100 (ill 'e reduced 'y interest at t)e rate o* 1;6 annually- T)e interest c)arge (ill 'e 32+21;+ assuming a 210%day year 73<2+100 : -1;8 710%day payment period 210 days8!- T)e proceeds to 'e recei,ed 'y Iats'y e4ual 3<0+2$; 73<2+100 % 32+21;8Ans(er 7.8 is incorrect 'ecause Company . (ill produce proceeds o* only 3$<+<15Ans(er 7C8 is incorrect 'ecause Company C (ill produce proceeds o* only 3<0+1<0Ans(er 708 is incorrect 'ecause Company 0 (ill produce proceeds o* only 3<0+2511$<! "ource# Pu'lis)er Ans(er 7A8 is correct- Working capital is t)e e:cess o* current assets o,er current lia'ilities- An increase in current assets or a decrease in current lia'ilities (ill increase (orking capital- Bption 1 ma:imiFes Mason Company/s net (orking capital+ increasing it 'y 3170 73120 P 3;08Ans(er 7.8 is incorrect 'ecause option 2 increases net (orking capital 'y 31;0Ans(er 7C8 is incorrect 'ecause option 2 decreases net (orking capital 'y 3110Ans(er 708 is incorrect 'ecause option 5 decreases net (orking capital 'y 32;1<0! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause option 1 )as a purc)ase price o* 3<7-00Ans(er 7.8 is correct- To determine t)e amount o* interest t)e lender (ill earn+ t)e 2-;6 discount rate is multiplied 'y t)e *ace amount o* t)e Treasury 'ill- T)e interest on t)is Treasury 'ill is 32-;0 72-;6 : 1 year : 31008L t)us+ t)e purc)ase price is 3<1-;0 73100 % 32-;8Ans(er 7C8 is incorrect 'ecause option 2 )as a Ans(er 708 is incorrect 'ecause option 5 )as a purc)ase price o* 3<7-001<1! "ource# Pu'lis)er Ans(er 7A8 is correct- T)e annual percentage rate is easy to compute# multiply t)e 1-2;6 mont)ly rate times 12 mont)s to arri,e at 1;6- T)e compounded rate (ould 'e slig)tly )ig)er- T)us+ gi,en t)e alternati,es+ ans(er 7A8 is t)e only accepta'le alternati,e ()ere t)e compounded rate is greater t)an t)e 1;6 APR- To c)eck your solution+ look at an AAmount o* 1A ta'le *or 12 periods at 1-2;6- T)e accumulated interest is -1107;+ or 11-$6Ans(er 7.8 is incorrect 'ecause it )as 'ot) amounts (rongAns(er 7C8 is incorrect 'ecause t)e compounded rate (ill 'e greater t)an t)e 1;6 APRAns(er 708 is incorrect 'ecause it su'stitutes t)e APR *or t)e compounded rate1<2! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause it is 'ased on t)e *actor *or a *our%payment annuity starting ne:t yearAns(er 7.8 is incorrect 'ecause it is 'ased on *i,e payments instead o* *ourAns(er 7C8 is correct- A normal present%,alue%o*%an annuity ta'le assumes t)e *irst payment is one year a(ay- &n t)is case+ t)e *irst payment is t(o years a(ay- T)us+ t)is s)ould 'e ,ie(ed as a *i,e%payment annuity minus one payment- T)e *actor at 106 *or *i,e payments is 2-7<07- "u'tract *rom t)at t)e initial payment 7year 18 ()ic) (ill not 'e made+ a *actor o* -<0<0+ lea,ing a *actor o* 2-$$17- Multiplying 2-$$17 times 32+000 results in a present ,alue o* 3$+15;Ans(er 708 is incorrect 'ecause it is 'ased on t)ree payments1<2! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause <6 is t)e APRAns(er 7.8 is correct- An amount%o*%one ta'le can 'e used to *ind t)e e**ecti,e rate ()en t)e APR is kno(n- An annual rate o* <6 is e4ui,alent to -7;6 per mont)- ?sing t)e -7;6 column+ t)e accumulated interest *actor is -0<2$01+ or <-2$6 *or t)e yearAns(er 7C8 is incorrect 'ecause <-$16 is too )ig)Ans(er 708 is incorrect 'ecause 10-<56 is a nonsense ans(er1<5! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause retained earnings (ill increase 'y 370+000-

*our days earlierAns(er 7.8 is incorrect 'ecause eac) s)are (ill recei,e a 32 di,idendAns(er 7C8 is incorrect 'ecause 370+000 is 'eing retained *or ne( in,estmentAns(er 708 is correct- Earnings per s)are is 310 73100+000 10+000 s)ares8- B* t)e 310+ 206 or 32 is paid out as a di,idend1<;! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause it is not 'ased on t)e current 5;6 to ;;6 ratioAns(er 7.8 is correct- T)e current de't%e4uity ratio is 1-2; to 1-1;+ or 5;6 to ;;6- T)us+ to maintain t)is ratio+ 5;6 o* all ne( in,estment s)ould come *rom de't *inancing- Multiplying 5;6 times t)e 3;00+000 capital 'udget results in a need *or 322;+000 in de't *inancingAns(er 7C8 is incorrect 'ecause 327;+000 is t)e amount o* e4uity capital neededAns(er 708 is incorrect 'ecause it is not 'ased on t)e current 5;6 to ;;6 ratio1<1! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e 'ene*it is annually+ not dailyAns(er 7.8 is correct- "peeding up collections 'y t(o days (ill *ree up 320+000- At $6 interest+ t)e sa,ings in interest costs (ill 'e 32+500 annuallyAns(er 7C8 is incorrect 'ecause t)is is t)e amount o* daily salesAns(er 708 is incorrect 'ecause t)is is t)e reduction in recei,a'les1<7! "ource# Pu'lis)er Ans(er 7A8 is correct- T)e di**erence 'et(een collections and paya'les is 3;+000 daily- =i,e days/ (ort) amounts to 32;+000 o* *loatAns(er 7.8 is incorrect 'ecause 350+000 ignores t)e impact o* paya'les and t)e *i,e%day *loat periodAns(er 7C8 is incorrect 'ecause 317;+000 ignores t)e impact o* recei,a'lesAns(er 708 is incorrect 'ecause 3200+000 ignores t)e impact o* paya'les1<$! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause t)e lead time does not a**ect t)e amount o* EBQAns(er 7.8 is correct- T)e lead times does not a**ect t)e EBQ+ it Eust means t)e order s)ould 'e placed Ans(er 7.8 is incorrect 'ecause 31+200 is 31;+000 : $6Ans(er 7C8 is incorrect 'ecause 3100 is 731;+000 28 : $6Ans(er 7.8 is incorrect 'ecause a rate decline (ill increase t)e ,alue o* 'ondsAns(er 7C8 is correct- T)e decline in rates (ill increase t)e ,alue o* 'onds already outstanding"ince t)e market rate initially matc)ed t)e coupon rate+ t)e ,alue (ould )a,e 'een 31+000- T)e calculation o* ,alue *ollo(ing t)e rate decline (ould 'e as *ollo(s using 16 present ,alue ta'les3 $0 : 2-172011 O 3 212-$5 1+000 : -$2<11< O $2<-12 %%%%%%%%% 31+0;2-51 OOOOOOOOO T)e price s)ould increase 'y 3;2-51Ans(er 708 is incorrect 'ecause a rate decline (ill increase t)e ,alue o* 'onds201! "ource# Pu'lis)er Ans(er 7A8 is correct- T)e *irst step in calculating t)e 'ene*it recei,ed 'y a *irm *or speeding up collections is to multiply t)e amount o* daily sales 'y t)e num'er o* days sa,ed- &n t)is e:ample+ t)at amount (ould 'e 320+000 731;+000 : 28- T)is num'er is t)en multiplied 'y t)e annual opportunity cost o* *unds+ $6+ to get a 'ene*it o* 32+500Ans(er 7C8 is incorrect 'ecause t)e lead time does not a**ect t)e amount o* EBQAns(er 708 is incorrect 'ecause t)e lead time does not a**ect t)e amount o* EBQ1<<! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause it *ails to multiply t)e numerator 'y 2Ans(er 7.8 is incorrect 'ecause it does not include all elements in t)e numeratorAns(er 7C8 is correct- T)e *ormula is# EBQ O s4uare root o* 272+000877008! 12; O s4uare root o* 22+100 O 1+$22 Ans(er 708 is incorrect 'ecause it (ill not minimiFe t)e total costs o* ordering and )olding in,entory200! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause it re,erses t)e interest calculations-

Ans(er 708 is incorrect 'ecause 37+;00 is daily sales+ 31;+000+ di,ided 'y t(o202! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 3$+000 is a,erage daily collections o* 350+000 ; daysAns(er 7.8 is correct- T)e net *loat *or a *irm is t)e dollar di**erence 'et(een a company/s 'ank 'alance and its 'ook 'alance o* cas)- T)is amount is *ound 'y su'tracting t)e a,erage amount o* c)ecks (ritten daily+ 32;+000+ *rom t)e a,erage amount o* c)ecks collected daily+ 350+000- T)is num'er+ 3;+000+ is t)en multiplied 'y t)e a,erage collection period *or c)ecks+ ; days+ to get a net *loat o* 32;+000Ans(er 7C8 is incorrect 'ecause 317;+000 is a,erage daily (ritten c)ecks o* 32;+000 multiplied 'y ; daysAns(er 708 is incorrect 'ecause 3200+000 is t)e a,erage daily collection o* c)ecks o* 350+000 multiplied 'y ; days202! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause 317+700 is t)e gross ta: lia'ilityAns(er 7.8 is incorrect 'ecause 31;+200 is t)e net ta: lia'ility *ound ()en incorrectly treating t)e ta: credit as a direct reduction in ta:a'le incomeAns(er 7C8 is correct- T)e *irst step in calculating HCC/s net ta: lia'ility is to su'tract t)e e:clusion *or ta:%e:empt interest *rom income+ *or a gross income amount o* 31<+000 73$0+000 % 311+0008- Je:t+ t)e deprecation deduction is su'tracted *rom gross income+ *or a ta:a'le income o* 3;<+000 731<+000 % 310+0008- T)en+ t)e ta:a'le income is multiplied 'y t)e ta: rate+ *or a gross ta: lia'ility o* 317+700 73;<+000 : 2068- =inally+ net ta: lia'ility is computed 'y su'tracting t)e ta: credits *rom t)e gross ta: lia'ility- T)ere*ore+ HCC/s net ta: lia'ility is 3<+700 7317+700 % 3$+0008Ans(er 708 is incorrect 'ecause 32+000 is t)e net ta: lia'ility *ound ()en incorrectly treating t)e e:clusion as a credit205! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause an e:clusion or deduction reduces gross ta: lia'ility 'y t)e amount o* t)e e:clusion or deduction multiplied 'y t)e ta: rateT)ere*ore+ t)e e:clusion (ill reduce HCC/s gross ta: lia'ility 'y 32+200 7311+000 : -208+ and t)e deduction (ill reduce HCC/s gross ta: lia'ility 'y 32+000 7310+000 : -208Ans(er 7.8 is incorrect 'ecause an e:clusion or deduction reduces gross ta: lia'ility 'y t)e amount o* t)e e:clusion or deduction multiplied 'y t)e ta: rateT)ere*ore+ t)e e:clusion (ill reduce HCC/s gross ta: lia'ility 'y 32+200 7311+000 : -208+ and t)e

deduction (ill reduce HCC/s gross ta: lia'ility 'y 32+000 7310+000 : -208Ans(er 7C8 is incorrect 'ecause an e:clusion or deduction reduces gross ta: lia'ility 'y t)e amount o* t)e e:clusion or deduction multiplied 'y t)e ta: rateT)ere*ore+ t)e e:clusion (ill reduce HCC/s gross ta: lia'ility 'y 32+200 7311+000 : -208+ and t)e deduction (ill reduce HCC/s gross ta: lia'ility 'y 32+000 7310+000 : -208Ans(er 708 is correct- Credits directly reduce ta:es+ ()ereas e:clusions and deductions reduce income prior to t)e computation o* t)e gross ta: lia'ilityT)us+ t)e credit reduces t)e gross ta: lia'ility on a dollar%*or%dollar 'asis+ or 3$+000- An e:clusion or deduction reduces gross ta: lia'ility 'y t)e amount o* t)e e:clusion or deduction multiplied 'y t)e ta: rateAccordingly+ t)e e:clusion (ill reduce HCC/s gross ta: lia'ility 'y 32+200 7311+000 : 2068+ and t)e deduction (ill reduce HCC/s gross ta: lia'ility 'y 32+000 7310+000 : 2068- Iross income does not reduce t)e gross ta: lia'ilityL rat)er+ it increases t)e gross ta: lia'ility 'y 325+000 73$0+000 : 206820;! "ource# CMA 12<1 2%11 Ans(er 7A8 is incorrect 'ecause (arranty e:penses are not deducti'le until paidAns(er 7.8 is incorrect 'ecause di,idends on common stock are ne,er deducti'le 'y a corporationL t)ey are distri'utions o* a*ter%ta: incomeAns(er 7C8 is incorrect 'ecause amounts accrued 'y an accrual%'asis ta:payer to 'e paid to a related cas)%'asis ta:payer in a su'se4uent period are not deducti'le until t)e latter ta:payer includes t)e items in income- T)is rule e**ecti,ely puts related ta:payers on t)e cas) 'asisAns(er 708 is correct- "ec- 1127a8 states t)at a deduction is allo(ed *or t)e ordinary and necessary e:penses incurred during t)e year in any trade or 'usiness- A corporation may t)ere*ore deduct a reasona'le amount *or compensation- Accrued ,acation pay is a *orm o* compensation t)at results in an allo(a'le deduction *or *ederal income ta: purposes201! "ource# CMA 12<1 2%12 Ans(er 7A8 is incorrect 'ecause t)e gain on an installment sale o* real property in e:cess o* 31;0+000 is an adEustment to ta:a'le income *or purposes o* computing alternati,e minimum ta:a'le incomeAns(er 7.8 is incorrect 'ecause mining e:ploration and de,elopment costs are adEustments to ta:a'le income *or purposes o* computing alternati,e minimum ta:a'le incomeAns(er 7C8 is incorrect 'ecause a c)arita'le contri'ution o* appreciated property is an adEustment to ta:a'le income *or purposes o* computing alternati,e minimum ta:a'le income-

Ans(er 708 is correct- Ta:a'le income is adEusted to arri,e at alternati,e minimum ta:a'le income- "ome o* t)e common adEustments include gains or losses *rom long%term contracts+ gains on installment sales o* real property+ mining e:ploration and de,elopment costs+ c)arita'le contri'utions o* appreciated property+ accelerated depreciation+ t)e accumulated current earnings adEustment+ and ta:%e:empt interest on pri,ate acti,ity 'onds issued a*ter August 7+ 1<$1A sales commission accrued in t)e current year 'ut paid in t)e *ollo(ing year is not an e:ample o* an AMT adEustment207! "ource# Pu'lis)er Ans(er 7A8 is incorrect 'ecause a reorganiFation t)at is a mere c)ange in t)e *orm o* in,estment is nonta:a'leAns(er 7.8 is incorrect 'ecause a like%kind e:c)ange allo(s *or t)e de*erral o* gainAns(er 7C8 is correct- @ike%kind e:c)anges+ in,oluntary con,ersions+ and ta:%*ree reorganiFations are e:amples o* transactions t)at result in t)e de*erral or nonrecognition o* gain- A reorganiFation is nonta:a'le ()en it is considered a mere c)ange in in,estment+ not a disposition o* assetsAns(er 708 is incorrect 'ecause an in,oluntary con,ersion allo(s *or t)e de*erral o* gain-