MANAGEMENTADVI

SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

WORKI NGCAPI TALMANAGEMENT Stockhol der '

sequi t
y 10 10
NetWor kingCapi tal Tot alliabi l
iti
es and st ockhol der '
s $26 $29
i
. Dur i
ng 1990,Mason Company ’s currentasset sincreased by$120,cur rent equi ty
l
iabi
liti
esdecr easedby$50, andnetwor kingcapi t
al (
E) From Januar y1t oJune30, thenetwor ki
ngcapi tal(M)
a.I ncreasedby$70. c. Decr easedby$170. A.Decr easedby$1mi l
lion. C.Incr easedby$1mi ll
ion.
b.Di dnotchange. d.I ncr
easedby$170.CMA12901- 19 B.St ay edthesame. D.Incr easedby$2mi ll
ion.CI A 1192 I V-
52
i
i. Duri
ngt hey ear ,MasonCompany '
scur rentasset sincreasedby$130,cur rent
l
iabi
liti
esdecr easedby$60, andnetwor kingcapi t
al (
E) CovenantLi mitation
A.I ncreasedby$70. C.Decr easedby$190. Maximum LoanAv ailment
B.Di dnotchange. D.I ncreasedby$190. Gleim *.I tist hepol icyofFr anzCor p.t hatt hecur rentr atiocannotf allbelow1. 5t o1. 0.
It
scur rentliabi l
iti
esar eP400, 000andt hepr esentcur rentr atiois2t o1.How
i
ii
.Aser vi
ceent erpr i
se'swor kingcapit
al atthebegi nningofJanuarywas$70, 000. muchi st hemaxi mum l evelofnew shor t-
term l oansi tcansecur ewi thout
Thef oll
owi ngt ransact ionsoccur reddur ingJanuar y: viol
at i
ngt hepol icy?( M)
Per formedser vi
cesonaccount $30,
000 a.P400, 000 c. P266, 667
Pur chasedsuppl i
esonaccount 5,
000 b.P300, 000 d.P800, 000 RPCPA1096
Consumedsuppl i
es 4,
000
Pur chased of fice equi pment f or 2,
000 v. Af i
rm' scur rentr atioiscur rent l
y1. 70t o1.Managementknowsi tcannotv iol
atea
cash wor kingcapi talr estri
ctioncont ainedi nitsbondi ndent ure.I fthef irm'scur rent
Pai dshor t-term bankl oan 6,
500 rati
of all
sbel ow 1. 40t o1,t echnical lyitwillhav edef aul ted.I fcurrentl i
abi l
it
ies
Pai dsal ar i
es 10,
000 are$200mi l
lion,t hemaxi mum new commer cialpapert hatcanbei ssuedt o
Accr uedsal aries 3,
500 fi
nancei nvent oryexpansi oni s( M)
Whati st heamountofwor kingcapi
tal attheendofJanuar y?(M) A.$80mi ll
ion. C.$150mi l
li
on.
A.$80, 500 C.$50, 500 B .$ 3 70mi lli
o n. D.$ 2 80mi l
li
on. Gleim
B.$78, 500 D.$47, 500 CIA1193IV-36
vi.Af i
rm' scur rentr atioiscur rent l
y1. 75t o1.Managementknowsi tcannotv iol
atea
i
v.Thef oll
owi ngar etheJanuar y1andJune30bal ancesheetsofacompany : wor kingcapi talr estri
ctioncont ainedi nitsbondi ndent ure.I fthef irm'scur rent
Asset s( i
nmi l
li
ons) Jan.1 June30 rati
of al l
sbel ow1. 5t o1, techni callyitwi l
lhav edef aulted.I fcur rentliabil
iti
esar e
Cash $3 $4 $2 50mi ll
ion,th ema ximu m n ewc o mme rci
a lpa pe rthat canb eis suedt of inanc e
Account sr ecei v
abl e 5 4 inven toryex pa nsion is(M)
Invent or i
es 8 10 A.$375. 00mi ll
ion. C.$562. 50mi l
li
on.
Fixedasset s 10 11 B .$ 1 25 .
00mi ll
io n. D.$ 4 37.5 0mi l
li
on.CMA06831- 8,12921
Tot al asset s $26 $29 -23
Account spay able $2 $3
Not espay abl e 4 3 vii
.Managementofacompanydoesnotwantt ov i
ol ateawor kingcapi t
alr estri
ction
Accr uedwages 1 2 cont ainedi ni tsbondi ndent ure.I ft hef i
rm'scur rentr ati
of allsbelow 2. 0t o1,
Long- term debt 9 11 tech nicall
y i
t w il
l have de f
a ul
t ed.Th e fir
m's curre ntrati
oi s n ow2 .
2t o1 .Ifc ur
rent
li
abilit
iesar e$200mi ll
ion,t hemaxi mum new commer cialpapert hatcanbe
CMAEXAMI NATI ONQUESTI ONS Page1of1
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

i
ssuedt
ofi
nancei
nvent
oryexpansi
oni
s(M) Ef
fectofPl antExpansi ononWor kingCapital
A.$20mil
l
ion. C.$240mi
l
li
on. x. Shaw Cor porati
oni sconsi deringapl antexpansi ont hatwi l
lincr easei t
ssales
B.$40mil
l
ion. D.$180mi
l
li
on. Gl eim andneti ncome.Thef ollowi ngdat arepresentmanagement ’
sest imat eoft he
i
mpactt hepr oposal wil
l hav eont hecompany :
v
ii
i
.IkenBer ryFar mshas$5mi ll
ionincur rentasset s,$3mi l
li
oni ncur rentl i
abili
ti
es, Current Proposal
andi t
si nitialinv ent orylev eli s$1mi l
lion. Thecompanypl anst oi ncreasei ts Cash $100,000 $120, 000
i
nv entor y,andi twi llraiseaddi ti
onalshor t-
term debt( thatwi l
lshow upasnot es Account spay able 350,
000 430,000
pay ableont hebal ancesheet )topurchaset hei nventor y.Assumet hatthev al
ueof Account sreceivabl e 400,
000 500,000
ther emai ningcur rentasset swi l
lnotchange. Thecompany ’
sbondcov enants Invent ory 380,
000 460,000
requirei tt omai nt ainacur rentr ati
ot hatisgr eatert hanorequalt o1. 5.Whati s Mar ket ablesecur iti
es 200,
000 200,000
themax imum amountt hatt hecompanycani ncreasei t
si nv entorybef or eitis Mor tgagepay able( cur r
ent ) 175,
000 325,000
restri
ct edbyt hesecov enant s? Fixedasset s 2,500,
000 3,500,000
a. $0. 50mi l
li
on d.$1. 66mi ll
ion Neti ncome 500,
000 650,000
b.$1. 00mi l
li
on e. $2. 33mi ll
ion Theef f
ectoft hepl antexpansi onofShaw’ swor kingcapi talwil
lbea( n)( M)
c. $1. 33mi l
li
on Brigham a.Decr easeof$150, 000. c. I ncreaseof$30, 000.
b.Decr easeof$30, 000. d.I ncreaseof$120, 000.CMA12921- 22
Maxi mum CashDi vi
dend
i
x.MFC Cor por ati
onhas100, 000shar esofst ockout standing. Bel ow i spar tof xi
.Finan Cor poration's managementi s considering a pl antexpansi on t hatwi l
l
MFC’ sSt at ementofFi nanci al Positi
onf orthel astfiscal year. i
ncreasei tssal esandhav ecommensur at eimpactoni tsnetwor kingcapital
MFCCor poration positi
on.The f ollowi ng inf ormation presentsmanagement '
sest i
mat eoft he
Stat ementofFi nancialPosi ti
on–Sel ect edItems i
mpactt hepr oposal wil
l hav eonFi nan.
December31, 1996 Cur rent Proposal
Cash $100, 000 $110, 000
Cash $455,000 Account spay abl e 400,000 470,000
Account sr ecei vable 900,000 Account sreceiv able 560,000 690,000
Inv ent ory 650,000 Invent ory 350,000 380,000
Pr epai dasset s 45,000 Mar ket ablesecur iti
es 200,000 200,000
Fixedasset s 2,500,000 3,500,000
Accr uedl i
abiliti
es 285,000 Neti ncome 500,000 650,000
Account spay abl e 550,000
Theimpactoft hepl antexpansi ononFi nan'swor ki
ngcapi t
alwoul dbe( M)
Cur rentpor tion, long- t
erm not espay able 65,000
A.Adecr easeof$100, 000. C.Ani ncreaseof$100, 000.
Whati st hemaxi mum amountMFCcanpayi ncashdi vi
dendspershar eand B.Adecr easeof$950, 000. D.Ani ncreaseof$950, 000.CMA12861-
mai ntai nami nimum cur rentr ati
oof2t o1?Assumet hatal laccount sot herthan 29
cashr emai nunchanged.( M)
a.$2. 05 c. $3. 35 xi
i
.TheHer bSal t
erCor porationi sconsideringapl antexpansi onthatwi llincreasei
ts
b.$2. 50 d.$3. 80 CMA06971- 16 sal
esandneti ncome.Thef oll
owingdat ar epresentmanagement 'sest imateof
t
hei
mpactt
hepr
oposal
wil
lhav
eont
hecompany
:
CMAEXAMI
NATI
ONQUESTI
ONS Page2of2
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Current Proposed Aggressive

Cash $120, 000 $140,000 49.NormalCompanyhast ot
alf i
xedassetsofP100, 000andnocur rentliabi
li
ti
es.
Accountspayabl e 360,000 450,
000 Thet abl
ebel owdispl
aysitswi devar
iati
onincur rentassetcomponent s:
Accountsreceivable 400,000 550,
000 1stQtr 2ndQtr 3rdQtr 4thQtr
I
nventory 360,000 420,
000 Cash P 20,000 P 10, 000 P 15, 000 P 20, 000
Marketabl
esecur it
ies 180,000 180,
000 Account s 66,000 25,000 47,
000 88,000
Mortgagepay able(cur
rent
) 160,000 310,
000 receivabl
e
Fi
xedasset s 2,300,000 3,200,
000 Inventory 20,000 65,000 59,
000 10,000
Netincome 400,000 550,
000 Total P106,000 P100, 000 P121, 000 P118, 000
Theeffectoftheplantexpansi
ononSalt
er'
sworkingcapit
alwil
lbea(n)(M) IfNor mal’
spol i
cyistof i
nanceal lf
ixedasset sandhal fthepermanentcur rent
A.Increaseof$240, 000 C.Incr
easeof$230, 000 assetswi thlong-t
ermf i
nancingandt her estwi thshor t
-t
ermfinancing,whati s
B.Decr easeof$10, 000 D.Incr
easeof$10, 000 Glei
m theleveloflong-t
ermfinancing?(D)
A.P68, 000 C.P150, 000
WORKI NGCAPI TALFI NANCI NGPOLI CY B.P100, 000 D.P155, 625 Pol Bobadil
l
a
Moder ate
xi
i
i
.Wi l
dthingAmusementCompany ’
stotalasset sf l
uct uatebet ween$320, 000andWor ki
ngCapi talPolicyOpt ions
$410,000, whi l
ei tsfi
xedasset sr
emai nconst antat$260, 000.Ifthefir
mf ol
lowsaxiv.
MasonCompany 'sboar dofdi r
ectorshasdet ermi ned4opt ionst oincrease
mat uri
tymat chingormoder at eworki
ngcapi t
alfinanci ngpol icy,whatistheli
kel y workingcapi talnexty ear .Option1i st oi ncreasecur rentasset sby$120and
l
ev elofitslong- termf i
nancing?(E) decreasecur rentl i
abili
tiesby$50.Opt i
on2i st oincreasecur rentasset sby$180
a.$90, 000 d.$410, 000 andi ncr
easecur rentliabi li
ti
esby$30.Opt ion3i st odecr easecur rentasset sby
b.$260, 000 e. $320, 000 $140andi ncreasecur rentl i
abili
ti
esby$20.Opt ion4i st odecr easecur rent
c. $350, 000 Bri
gham assetsby$100anddecr easecur rentliabili
tiesby$75.Whi chopt i
onshoul d
Masonchooset omaxi mi zenetwor kingcapi tal?
Conser v
ative A.Opt i
on1. C.Opt i
on3.
23.GreatCompanyhasP8, 000,000 in currentasset s,P3, 500,000 ofwhi ch ar e B.Opt i
on2. D.Opt i
on4. Gleim
considered per manentcur rentassets. I naddi t
ion,t hef irm hasP6, 000,000
i
nv estedinf ixedasset s.GreatCompanywi shest of inanceal lfixedassetsandxv.JarrettEnt er
prisesi sconsi dering whethert o pursuea r est ri
cted orr el
ax ed
permanentcur rentasset spl ushalfofi tst empor arycur r
entasset swithlong- cur rentasseti nv est
mentpol i
cy.Thef ir
m’ sannualsal esare$400, 000;i t
sf i
xed
termf inancingcost ing15%. Shor t-
termf inancingcur rent l
ycost s10%. Gr eat assetsare$100, 000; debtandequi tyareeach50per centoft otalasset s.EBITi s
Company ’sear ningsbef oreinter
estandt axesar eP2, 200, 000.Incomet axratei s $36,000,thei nterestrat eont hef i
rm’sdebti s10per cent,andt hef irm’staxr ate
40%. is40per cent.Wi thar est ri
ctedpol i
cy,currentasset swi l
lbe15per centofsal es.
How muchwoul dRealCompany ’searni
ngsaf t
ert axesbeundert hisfi
nanci ng Underar elaxedpol icy ,cur r
entasset swi llbe25per centofsal es.Whati st he
plan? dif
ferencei nthepr oject edROEsbet weent her estri
ctedandr elaxedpol ici
es?( M)
A.P112, 500 C.P225, 000 a.0. 0% d.1. 6%
B.P127, 500 D.P85, 000 PolBobadil
la b.6. 2% e. 3. 8%
c. 5.4% Bri
gham

CMAEXAMI
NATI
ONQUESTI
ONS Page3of3
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Compr ehensive A.$22, 775. C.$29, 750.

Quest i
ons56t hru61arebasedont hefollowi ngi nformat i
on. Git
man B.$26, 075. D.$21, 175.
I
rishAi rServiceshasdeter minedsev eralf actorsr elativ etoitsassetandf i
nanci
ng
mi x. 60.Thef i
rm' sannual profi
tsont otalassetsf orthepr evi
ousy earwas(M)
 Thef i
rm earns10percentannual lyoni tscur rentasset s. A.$20, 000. C.$23, 625.
 Thef i
rm earns20percentannual lyoni tsfixedasset s. B.$21, 500. D.$25, 750.
 Thef i
rm pays13percentannual lyoncur r
entl iabilit
ies.
 Thef i
rm pays17percentannual lyonl ongt ermf unds. 61.I
ft hefirm'scur rentli
abil
i
tiesi nDecemberwer e$40, 000,thenetworkingcapi
tal
 Thef i
rm'smont hl
ycurrent,f
ixedandt otalassetr equi rementsfort hepr evi
ous was( E)
yeararesummar i
zedinthet ablebelow: A.$140, 000. C.$10, 000.
Mont h CurrentAsset s FixedAsset s Tot alAsset s B.$ 60,000 . D . $ 10 ,
000.
January $45, 000 $100, 000 $145, 000
February 40,000 100, 000 140,000 Questions62t hr u68ar ebasedont hef oll
owingi nf ormation. Git
man
Mar ch 50,000 100, 000 150,000 Fl
um Packages, Inc.
April 55,000 100, 000 155,000
May 60,000 100, 000 160,000 Asset s Li
abilit
ies&
June 75,000 100, 000 175,000 Equity
July 75,000 100, 000 175,000 Cur r
entasset s $10,000 Cur rentLi abil
it
ies $5,
000
August 75,000 100, 000 175,000 Fi
xedasset s 20,000 Longt er m debt 12,
000
September 60,000 100, 000 160,000 Equity 13,
000
October 55,000 100, 000 155,000 Total $30,000 Tot al $30,
000
Nov ember 50,000 100, 000 150,000 Thecompanyear ns5per centoncur rentassetsand15per centonfi
xedassets.The
December 50,000 100, 000 150,000 fi
rm'scur r
entl iabil
i
tiescost7per centt omai nt ainandt heav er
ageannualcostof
l
ongt ermf undsi s20per cent.
56.Thef i
rm'smont hl
yaverageper manentf undsr equi r
ementi s(E)
A.$100, 000. C.$140, 000. 62.Thef i
rm' sinit
ialrat
ioofcur r
entt ototalasseti s_ ____.
B.$57, 500. D.$157, 500. A.1: 3 C.2: 3
B.3: 1 D.3: 2
57.Thef i
rm'smont hl
yaverageseasonal fundsr equi r
ementi s( M)
A.$17, 500. C.$40, 000. 63.Thef i
rm' sinit
ialnetworkingcapi talis
B.$57, 500. D.$157, 500. A. $5, 000. C.$5, 000.
B.$13, 000. D.$10, 000.
58.Thef i
rm'sannualfi
nancingcost soft heaggr essi vef i
nancingstrategyi s(M)
A.$21, 175. C.$24, 475. 64.Thef i
rm' sinit
ialannualprofi
tsont otalassetsi s
B.$26, 075. D.$22, 775. A.$2, 500. C.$3, 000.
B.$3, 500. D.$4, 500.
59.Thef i
rm'sannualfi
nancingcost sofconser vat iv
ef i
nanci ngstr
ategyi s( M)

CMAEXAMI
NATI
ONQUESTI
ONS Page4of4
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

65.Ifthef irm wast oshi ft$3, 000ofcur rentasset stof ixedasset s,t hef i
rm'snet of30 day s,and an av erage pay mentper iod of60 day s. The f irm'scash
wor kingcapi talwoul d_ ____,t heannualpr ofit
sont otalasset swoul d__ __
_,and conv er sioncy cleis_ ___
_day s.(E)
ther i
skoft echni cal insolvencywoul d_ ____,r
espect ively. A.70 C. 10
A.i ncr ease; decr ease; i
ncrease C.i ncrease; decrease; decrease B.50 D.110 Gitman
B.decr ease; incr ease; decrease D.decr ease; i
ncrease; i
ncrease
xv i
.Iftheav erageageofi nv entoryi s60day s,t heav er
ageageoft heaccount s
66.Ifthef irm wast oshi ft$7, 000off i
xedasset stocur r
entasset s,t hef i
rm'snet pay ablei s30day s,andt heav erageageofaccount srecei vablei s45day s,the
wor kingcapi talwoul d_ ____,t heannualpr ofit
sont otalasset swoul d__ __
_,and numberofday sinthecashf l
owcy cleis( E)
ther i
skofnotbei ngabl etomeetcur r
entobl igati
onswoul d_ ____,respect i
vel
y. A.135day s. C.75day s.
A.i ncr ease; decr ease; i
ncrease C.i ncrease; decrease; decrease B.90day s. D.105day s. Glei
m
B.decr ease; incr ease; decrease D.decr ease; i
ncrease; i
ncrease
xv i
i. I ft heav erageday sofi nvent oryis90day s,t heaver ageageofaccount s
67.Ifthef irm wast oshi f
t$2, 000ofcur rentliabili
ti
est ol ongt ermf unds,t hefir
m's pay ablei s60day s,andt heav erageageofaccount srecei vablei s65day s,the
networ kingcapi talwoul d__ ___,t
heannualcostoff i
nancingwoul d_ _
___,andthe numberofday sinthecashf l
owcy cleis( E)
ri
skoft echni cal insol vencywoul d_____,respect i
vely. a.215day s c. 95day s
A.decr ease; decr ease; i
ncrease C.decr ease; i
ncrease; decrease b.150day s d.85day sCMA12841- 20, RPCPA1096
B.i ncr ease; increase; decrease D.i ncrease; decrease; decrease
xv
ii
i
.Fort heCookCount yCompany ,theav erageageofaccount sr ecei vablei s60
68.The f i
rm woul dl ike t oi ncrease its cur rentr at i
o. Thi s goalwoul d be day s,t heav erageageofaccount spay ablei s45day s,andt heav erageageof
accompl ishedmostpr of i
tablyby i
nv ent oryi s72day s.Assumi nga360- dayy ear ,whati sthel engt hoft hef i
rm’s
A.i ncr easingcur rentl i
abi l
iti
es. C.i ncreasingcur rentasset s. cashconv ersi
oncy cle?( E)
B.decr easingcur rentl i
abiliti
es. D.decr easingcur rentasset s. a.87day s d.48day s
b.90day s e. 66day s
CASHMANAGEMENT c. 65day s Br i
gham
CashConv er si
onCy cle
29.Af ir
m hasanav er ageageofi nvent
or yof60day s,anav eragecol lecti
onper i
odxix.A gr owi ng companyi s assessi ng cur rentwor king capi talr equi rement s.An
of45 day s,and an av erage pay mentper i
od of30 day s. The f i
rm'scash av er ageof58day si srequi redt oconv ertrawmat eri
alsintof i
nishedgoodsand
conv ersioncy clei s_ _____day s.(E) tosel lt hem.Thenanav erageof32day si sr equi r
edt ocol lectonr ecei vables.I f
A.15 C.75 theav eraget i
met hecompanyt akest opayf ori tsr awmat erialsis15day safter
B.45 D.135 Gitman theyar er eceived,thent het otalcashconv ersioncy cl ef
ort hiscompanyi s(E)
A.11day s. C.75day s.
34.Af i
rm hasanav er ageageofi nventoryof101day s, anav eragecol lecti
onper i
od B.41day s. D.90day s. CIA0596I V-53
of49 day s,and an av erage pay mentper i
od of60 day s. The f i
rm'scash
conv ersioncy clei s( E) xx.Spar tanSpor t
ingGoodshas$5mi ll
ioni ni nv entor yand$2mi ll
ioni naccount s
A.150day s. C.112day s. recei vable.I t
sav eragedai lysalesar e$100, 000.Thecompany ’
spay abl esdef erral
B.90day s. D.8day s Gitman period( account spay abledi videdbydai lypur chases)i s30day s.Whati st he
l
engt hoft hecompany ’scashconv ersioncy cl e?( E)
37.Af ir
m hasanav er ageageofi nvent
or yof20day s,anav eragecol lecti
onper i
od a.100day s d. 40day s
CMAEXAMI NATI ONQUESTI ONS Page5of5
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

b. 60day
s e. 33day
s youranal ysis,y ouwantt odet erminet hef i
rm’ scashconv er sioncy cl
e.Usi ngt he
c. 50day
s Bri
gham foll
owi ngi nf ormat i
onanda360- dayy ear,whati syourest imat eoft hef i
rm’s
currentcashconv er sioncycle?( M)
31.Af i
r m pur chasedr aw mat erialsonaccountandpai df ort hem wi thin30day s. Cur renti nvent or y=$120, 000.
Ther awmat eri
alswer eusedi nmanuf actur ingaf i
ni shedgoodsol donaccount Annual sales=$600, 000.
100day saf terther aw mat er i
alswer epur chased.Thecust omerpai df ort he Account srecei vabl e=$160, 000.
fi
nishedgood60day slater.Thef ir
m' scashconv ersioncy cleis_ ___ __day s.(M) Account spay able=$25, 000.
A.10 C.130 Tot alannual pur chases=$360, 000.
B.70 D.190 Gitman Pur chasescr edi tt erms:net30day s.
Recei v ablescr edi tter ms:net50day s.
87.Af irm wi thacashconv ersi
oncy cleof175day scanst r
etchi tsav er agepay ment a. 49day s d.168day s
periodf rom 30day st o45day s. Thi swi llr esul ti na( n)_ _
_ __i nt hecash b.193day s e. 143day s
conv ersioncy cl
eof_ ____day s.(M) c. 100day s Brigham
A.i ncr ease, 15 C.i ncr ease, 45
B.decr ease, 15 D.decr ease, 45 Gitman xxiv.Gast onPi st onCor p.hasannualsal esof$50, 000,000andmai ntai
nsanav erage
i
nv ent or yl ev elof $15, 000, 000.The av er age account sr eceivabl
e bal ance
xx
i
.Por taSt adi um Inc.hasannualsal esof$40, 000, 000andkeepsav eragei nv ent or y out st andi ngi s$10, 000,000.Thecompanymakesal lpurchasesoncr editandhas
of$10, 000, 000.Onav erage,t hefirm hasaccount srecei vableof$8, 000, 000.The al way spai dont he30t hday .Thecompanyi snowgoi ngt ot akef ul
ladv antageof
fi
rm buy sal lrawmat erial
soncr edit,itst r
adecr editter msar enet30day s, andi t t radecr editandpayi tssuppl iersont he40t hday .Ifsalescanbemai ntainedat
paysont ime.Thef i
rm’smanager sar esear chingf orway stoshor tent hecash exi sting l ev els buti nventor y can be l ower ed by $2, 000, 000 and account s
conv ersioncy cl
e.Ifsalescanbemai ntainedatexi st inglevelsbuti nventor ycan r ecei vablel ower ed by$2, 000, 000,whatwi llbet henetchangei nt hecash
bel ower edby$2, 000,000andaccount sr ecei vabl el ower edby$1, 000, 000,what conv er sioncy cle?( Assumet herear e360day sinthey ear .)(M)
wil
l bet henetchangei nthecashconv ersioncy cle?Usea360- dayy ear.(M) a.- 14. 4day s d.- 25. 6day s
a.+105day s d. - 27day s b.- 18. 8day s e. -38. 8day s
b.- 105day s e. - 3day s c. - 28. 8day s Brigham
c. +27day s Bri
gham
xx
v
.KolanI nc.hasannualsal esof$36, 500, 000( $100,000adayona365- daybasi s).
xxii. Bul lyCor porati
onpur chasesr aw mat er i
alsonJul y1.I tconv ert
st her aw Onav er age, thecompanyhas$12, 000, 000i ni nventoryand$8, 000,000inaccount s
mat erialsi nt oinventorybySept ember30.Howev er,Bul l
ypay sf ort hemat eri
als r eceiv able.Thecompanyi slooki ngf orway st oshortenitscashconv ersioncy cle,
onJul y20.OnOct ober31,i tsel l
st hef i
nishedgoodsi nvent ory.Then,t hef i
rm whi chi scal culat edona365- daybasi s.I tsCFOhaspr oposednew pol ici
est hat
coll
ect scashf rom thesal e1mont hl ateronNov ember30.I ft hissequence woul dr esulti na20per centr eductioni nbot hav eragei nv entor i
esandaccount s
accur atelyr epresentstheav eragewor kingcapi talcy cle,whati st hef irm' scash r eceiv ables.Thecompanyant ici
patest hatt hesepol ici
eswi llalsor educesal esby
conv ersioncy cl
einday s?( D) 10per cent .Account spay abl ewi l
lr emai nunchanged.Whatef f
ectwoul dt hese
A.92day s. C.123day s. policieshav eont hecompany ’scashconv ersi oncycle?(M)
B.133day s. D.153day s. Gl eim a.- 40day s d.+22day s
b.- 22day s e. +40day s
xx
ii
i
.You hav er ecentl
y been hi red t oi mpr ov et he per formance of Mul ti
plex c. - 13day s Brigham
Corpor at ion, whichhasbeenexper i
enci ngasev er ecashshor tage.Asonepar tof
CMAEXAMI NATI ONQUESTI ONS Page6of6
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE
x
xvi
.JordanAi rI nc.hasav eragei nventor yof$1, 000, 000.I tsest i
mat edannualsal esar e A.$50, 000 C.$37, 000
12mi ll
ionandt hef ir
m est imat esitsr eceivabl esconv ersionper i
odt obet wi ceas B.$57, 000 D.$63, 000 Gleim
l
ongasi t
si nv entoryconv er si
onper iod.Thef irm pay sitst r
adecr editont ime;i t
s
ter
msar enet30.Thef irm want stodecr easei tscashconv ersioncy cl
eby10day s.
xxvi
ii.RLFCor por ationhadi ncomebef or
et axesof$60, 000f ort hey ear1991.
I
tbel i
evest hati tcanr educei tsav er agei nvent or yto$900, 000.Assumea360- day I ncludedi nt hisamountwasdepr eci
ati
onof$5, 000,achar geof$6, 000f or
yearandt hatsal eswi llnotchange.Byhow muchmustt hef ir
m al sor educei t
s amor tizati
onofbonddi scount s,and$4,000f orint
erestexpense.Theest i
mated
account srecei vabletomeeti t
sgoal ofa10- dayr educt i
on?( D) cashf lowf ortheper iodi s( M)
a.$101, 900 d.$333, 520 a.$60, 000. c. $49, 000.
b.$1, 000, 000 e. $ 0 b.$66, 000. d.$71, 000. CMA06921- 26
c. $233, 333 Bri
gham
xxi
x. Shownbel owi saf or ecastofsal esforCooperI nc.f orthefirst4mont hsof
209. A f i
rm hasar r
anged f oral ockboxsy st em t or educecol lecti
on t imeof t hey ear(allamount sarei nthousandsofdol lar
s).
account sr ecei vable.Cur rentl
yt hef i
rm hasanav eragecol lectionper iodof43 Januar y February Mar ch Apr i
l
day s,anav er ageageofi nv entoryof50day s,andanav eragepay mentper iodof Cashsal es $15 $24 $18 $14
10day s.Thel ockboxsy st em wi l
lr educet heav eragecol l
ectionper i
odby3day s Sales on 100 120 90 70
byr educingpr ocessing,mai l
,andcl earingf loat . Thef irm' scashconv ersion credit
cycle_ __ _
_ .(E) Onav erage,50% ofcr edi tsalesar epaidf orinthemont hofsal e,30% i nthe
A.i ncreasesby3day s C.wi ll notchange mont hf oll
owi ngt hesal e, andt heremainderi spaid2mont hsaftert hemont hof
B.decr easesby3day s D.i s93day s sale.Assumi ngt herear enobaddebt s,theexpect edcashi nfl
ow f orCooperi n
Mar chi s(M)
Annual Sav ings A.$138, 000 C.$119, 000
81.Af i
r m hasannual operat ingout l
aysof$1, 800, 000andacashconv er
sioncy cl
eof B.$122, 000 D.$108, 000 CMA12951- 8
60day s. I ft hef i
rm cur rentlypay s12per centf ornegot iatedf i
nanci ngand
reducesi tscashconv er sioncy cl
et o50day s, theannual savingsi s Baumol ’sModel ofCashBal ances
A.$50, 000 C.$6, 000. NumberofConv er sions
B.$200, 000 D.$216, 000. Gitman 7.Supposet hatt hei nterestr ateonTr easurybi ll
sis6%, andev erysal eofbi ll
scost s
$20.Youpayoutcashatar ateof$400, 000amont h.Accor dingt oBaumol 's
82.Af irm hasacashconv er sioncy cleof60day s.Annualout lay sar e$12mi ll
ion model ofcashbal ances, howmanyt imesamont hshoul dyousel lbills?
andt hecostofnegot iatedf i
nanci ngi s12per cent.I ft hef i
rmr educesi ts A.30 C.7
aver ageageofi nventoryby10day s, theannual sav i
ngsi s__ ____. B.20 D.4 B&M
A.$104, 000 C.$28, 800
B.$144, 000 D.$40, 000 Gitman 6.Supposet hatt hei nterestr ateonTr easurybi ll
sis4%, andev erysal eofbi ll
scost s
$40.Youpayoutcashatar ateof$1,000,000aquar ter.Accor dingt oBaumol 's
CashFl ow modelofcash bal ances,how manyt i
mes a quar tershouldy ou sel lbil
l
s?
xxvi
i. FLF Cor por ati
on had i ncome bef oret axes of$50, 000.I ncluded i nt he ( Appr oximately .
)
calculat i
onoft hisamountwasdepr eciationof$6, 000, achar geof$7, 000f ort he A.20 C.12
amor ti
zationofbonddi scount s,and$5, 000f ori nterestpai d.Theest imat ed B.22 D.11 B&M
pretaxcashf l
owf ortheper i
odi s(M)
CMAEXAMI
NATI
ONQUESTI
ONS Page7of7
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

20.H.Pottamus,Inc.
,has$2mill
i
onondeposi
twiththebank.Itnowwr
it
eschecks
4.Supposethatt
hei
nter
estrat
eonTreasur
ybi
ll
sis6%,andev er
ysaleofbi
l
lscost
s f or$100,000and$200,
000anddeposi
tsacheckfor$80,
000.Twoweeksl
ateri
t
$60. Youpayoutcashatar at
eof$800,000ay ear. Accordi
ngtoBaumol'
s l earnst hatthe$200,
000checkand$80,
000checkhav eclear
ed.Whatisthe
modelofcashbal
ances,
howmanyt i
mesayearshouldyousellbi
ll
s? company 'sdi
sbur
sementf
loat?
A.20 C.50 A.$300, 000 C.$100,000
B.35 D.15 B&M B.$220, 000 D.-$100,000 B&M

Q NetFl oat
5.Supposet hatt heint
erestr
ateonTreasurybi
ll
sis6%, andev erysaleofbill
scost s19.Onanav erageday ,acompanywr it
escheckst otali
ng$1, 500.Thesecheckst ake
$60. Youpayoutcashatar ateof$800,000ay ear . Accordingt oBaumol '
s 7day st ocl ear
.Thecompanyr eceivescheckst otal
ing$1, 800.Thesechecks
model ofcashbal ances,whati
sQ? take4day stoclear.Thecostofdebti s9%.Whati sthef i
rm'snetf l
oat?
A.$17, 376 D.$50,000 A.$300 C.$2, 100
B.$20, 000 E.$40,000 B.$3, 300 D.$1, 200 B&M
C.$10, 000 B&M
xxx. Assume t hateach daya companywr i
tes and r eceives checks t otal
ing
8.Supposet hatt heint
erestr
ateonTreasurybi
ll
sis6%, andev erysaleofbill
scost s $10, 000.I fittakes5day sf orthecheckst ocl earandbededuct edf rom the
$20.Youpayoutcashatar ateof$400,000amont h.Accor dingt oBaumol '
s company '
saccount ,andonl y4daysf orthedeposi tstocl ear,whati sthef l
oat?(E)
model ofcashbal ances,whati
sQ? A.$10, 000 C.$( 10,000)
A.$16, 000 D.$43,000 B.$0 D.$50, 000 CMA06941- 24
B.$24, 000 E.$57,000
C.$31, 000 B&M xxxi . Av er agedailycollect
ionofchecksf oraf i
rmi s$40, 000.Thef i
rm alsowr i
tes
ont heav erage$35, 000ofchecksdai ly.Ifthecol l
ectionper iodforchecksi s5
Fl
oat days, calculatethenetf l
oat.(E)
Avail
abili
tyFl oat A.$25, 000 C.$175, 000
18.Onanav er ageday ,acompanywr i
tescheckstot
ali
ng$1, 500.Thesecheckst ake B.$40, 000 D.$200, 000 Gl ei
m
7day st ocl ear .Thecompanyr eceiv
escheckst otal
ing$1, 800.Thesechecks
take4day st oclear.Thecostofdebtis9%.Whati sthef i
rm'savailabi
li
tyfloat? xxxii.
Jumpdi skCompanywr it
eschecksav er aging$15, 000aday ,andi tt
akesf ivedays
A.$10, 500 C.$1,800 fort hesecheckst o clear.Thef irm al so receiveschecksi ntheamountof
B.$7, 200 D.Noneoft heabov e B&M $17,000perday ,butt hef ir
m losest hreeday swhi lei t
sr ecei
ptsar ebei ng
deposi tedandcl eared.Whati sthefirm’snetf loatindol lars?( E)
DisbursementFl oat a.$126, 000 d.$24, 000
17.Onanav er ageday ,acompanywr i
tescheckstot
ali
ng$1, 500.Thesecheckst ake b.$75, 000 e. $16, 000
7day st ocl ear .Thecompanyr eceiv
escheckst otal
ing$1, 800.Thesechecks c. $32, 000 Brigham
take4day st oclear.Thecostofdebti s9%.Whati st hef i
rm'
sdi sbursement
fl
oat ? Annual Sav i
ngs
A.$10, 500 C.$1,800 12.Aspar tofauni onnegot i
ati
onagr eement ,theUni t
edCl ericalWor kersUni on
B.$1, 500 D.Noneoft heabov e B&M concededt obepai dev eryt woweeksi nsteadofev er yweek. A maj orfir
m
empl oy i
nghundr edsofcl eri
calworker shadaweekl ypay r
ollof$1, 000,000and
CMAEXAMI NATI ONQUESTI ONS Page8of8
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

thecostofshor tt
ermfundswas12per cent.Theeffectofthi
sconcessi
onwas daysisrequi
redformai l
edcheckst ober eceived,4daysf orCMRt oprocess
todelayclear
ingti
mebyoneweek.Duet otheconcession,
thefir
m them and1½day sforthecheckstoclearthroughi t
sbank.Apr oposedlockbox
A.r eal
izedanannuall
ossof$120,000. C. i ncreaseditscashcy
cle. syst
em wouldreducethemailandprocesst i
met o3day sandt hecheckclear
ing
B.r eal
izedanannualsavi
ngsof$120,000. D. ti
met o1day .CMRhasanav eragedail
ycol l
ectionof$100,000.IfCMRshoul d
decreasedit
scashturnov
er. Git
man adoptthel
ockboxsystem,it
saveragecashbal ancewouldincreaseby(E)
a.$250,000. c. $650,000.
Opportuni
tyCost b.$400,000. d.$800, 000. CMA12861- 30
xxxi
ii
.Whati st heoppor tunitycostofkeepi ngacashbal anceof$2mi ll
ion,i
fthe
dail
yinterestrateis0. 02%andt heav eraget ransacti
oncostofi nvesti
ngmoney xxxvii
.DLFi sar etailmailor derfir
mt hatcur rentlyusesacent ralcoll
ecti
onsy stem
overni
ghti s$50?( E) thatr equiresal lcheckst obesentt oi tsBost onheadquar t
ers.Anav erageof6
A.$50 C.$400 day sisr equiredf ormai l
edcheckst ober eceiv ed,3day sf orDLFt oprocesst hem,
B.$350 D.$40, 000 Gleim and2day sfort hecheckst ocleart hroughi tsbank.Apr oposedl ockboxsy stem
woul dr educet hemai li
ngandpr ocessi ngt imet o2day sandt hecheckcl earing
Questi
ons2and3ar ebasedont hefollowi nginformat i
on. CI A0595I V-45&46 timet o1day .DLFhasanav er
agedai lycol lectionof$150, 000.IfDLFadopt st he
Acompanyhasa10%costofbor r
owi ngandi ncursf i
xedcost sof$500f orobtaini
ng l ockboxsy st
em, i
tsaveragecashbal ancewi llincreaseby( E)
aloan.Ithasst able,pr edictablecashf l
ows,andt heest i
mat edt otalamountofnet A.$1, 200, 000 C.$600, 000
newcashneededf ort ransact i
onsf ort hey earis$175, 000.Thecompanydoesnot B.$750, 000 D.$450, 000 Glei
m
holdsafet
yst ocksofcash.
Dail
yI ncome( Loss)
xxxi
v.Whent heav eragecashbal anceoft hecompanyi shi gher,the<ListA>t he24.Assumet hattheav eragenumberofdai l
ypay ment stoal ock-boxis200,t he
cashbalancei s<ListB>. av eragesi zeoft hepay menti s$1, 000,t her ateofi nterestperdayi s0.02%( i
.e.
,
ListA ListB 0 .
0 002),th esa vingsinma i
ltimei s2d a ys, andt hes avi
ng sinp r
ocessingtimei s
A. Oppor tunit
ycostofhol ding Higher 1day .Whati st hedail
yr eturnfrom oper atingt hel ock-box?
B. Tot alt r
ansact i
ons cost s associ ated wi th Hi gher A.$80 C.$120
obt aining B.$100 D.$130 B&M
C. Oppor tunit
ycostofhol ding Lower
D. Tot al costsofhol ding Lower Incr
easei nAnnual Income( Loss)
xxxvii
i.Whatar etheexpect edannualsav ingsf rom al ockboxsy stem thatcollects
xxxv.I ftheav eragecashbal ancef ort hecompanydur i
ngt hey earis$20,916.50, 2 00c he ck sp er dayav eragi
n g$ 500e a ch, an dr edu cesma ili
nga ndp r
o cessing
theopportunitycostofhol dingcashf orthey earwi l
lbe timesby2. 0and0. 5days, r
espect i
vel y
, i
ft heannual i
nterestrateis6%?( E)
A.$2, 091.65 C.$8, 750.00 A .$ 250,00 0 C .$ 6,000
B.$4, 183.30 D.$17, 500.00 B.$12, 000 D.$15, 000 Glei
m

LockBoxServi
ce xxxi
x.Af ir
m hasdailycashrecei
ptsof$300,000.Abankhasof f
eredtoprovi
dea
Incr
easeinAv
erageCashBal ance l
o ckboxs er
vicet
hat wi
llr
educethecoll
ecti
ontimeb y3d ays.Thebankrequi
res
xxxvi
.CMRi sar et
ailmailorderf
ir
mthatcur
rent
lyusesacent
ralcol
l
ect
ionsyst
em amo nthl
yf eeof$ 2,
000for pr
ovi
dingthi
ss ervi
ce.Ifmo neyma r
ket r
atesare
thatr
equi
resallcheckstobesenttoitsBost
onheadquart
ers.Anaver
ageof5 exp ect
edtoa ver
age6 % dur
ingtheyear,t
hea ddi
tionalannuali
ncome( l
oss)of
usingthelockboxservi
ceis(E)
CMAEXAMI NATIONQUESTI ONS Page9of9
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

A.($24,000) C.$30,
000 Bankchar ges $0. 30
B.$12,000 D.$54,
000 Glei
m Assume250pr ocessi ngday spery ear.(M)
A.$3, 273 C.$23, 500
xl.Fost erInc.i sconsi deringimpl ement ingal ockboxcol lect i
onsy stem atacostof B.$22, 675 D.$47, 000 Gleim
$80,000pery ear . Annualsal esar e$90mi ll
ion,andt hel ockboxsy stem wi l
l
reducecol lectiont i
meby3day s.I fFostercani nvestf undsat8%,shoul ditusexli
v. Cl evelandMasksandCost umesI nc.( CMC)hasamaj or i
tyofi tscust omer s
thelockboxsy st em?Assumea360- dayy ear.(E) l
ocat edi nt hest atesofCal i
f or niaandNev ada.Key st oneNat ionalBank,amaj or
a.Yes, produci ngsav i
ngsof$140, 000pery ear. westcoastbank,hasagr eedt opr ovideal ockboxsy st em t oCMCataf ixedf ee
b.Yes, produci ngsav i
ngsof$60, 000pery ear. of$50, 000pery earandav ariabl efeeof$0. 50foreachpay mentpr ocessedby
c. No, produci ngal ossof$20, 000pery ear . thebank.On av er age,CMC r eceives50 pay ment sperday ,each av eraging
d.No, produci ngal ossof$60, 000pery ear . CMA12951- 14 $20,000.Wi t
ht hel ockboxsy st em,t hecompany 'scol lectionf l
oatwi l
ldecr ease
by2day s.Theannuali nt erestr ateonmoneymar ketsecur i
ti
esi s6%.I fCMC
xl
i
.Cr ossCol l
ectiblescur rentlyf i
ll
smai lorder sfrom al lovert heU.S.andr eceipts makesuseoft hel ockboxsy st em, whatwoul dbet henetbenef i
ttot hecompany ?
comei nt oheadquar t
ersi nLi tt
leRock,Ar kansas.Thef ir
m’ sav erageaccount s Use365day spery ear.(M)
receivabl e( A/R)i s$2. 5mi l
l
ionandi sfinancedbyabankl oanwi th11per cent A.$59, 125 C.$50, 000
annuali nterest .Cr ossi sconsi deri
ngar egionallockboxsy st
em t ospeedup B.$60, 875 D.$120, 000 CMASampQ1- 6
coll
ect i
onst hati tbel i
eveswi l
lreduceA/ Rby20per cent.Theannualcostoft he
system i s$15, 000.Whati st heest i
mat ednetannualsav i
ngst ot hef i
rmf romOpt i
mal Lock-BoxAl ternat i
ve
i
mpl ement ingt hel ockboxsy stem?( M) xl
v.NewmanPr oduct shasr ecei vedpr oposal sf r
om sev eralbankst oest ablisha
a.$500, 000 d.$55, 000 l
ockboxsy stem t ospeedupr eceipts. Newmanr eceiv esanav erageof700
b.$30, 000 e. $40, 000 checksperdayav eraging$1, 800each, andi tscostofshor t-termf undsi s7%per
c. $60, 000 Bri
gham year.Assumi ngt hatal lproposal swi l
lpr oduceequi val entpr ocessingr esultsand
using a 360- dayy ear,whi ch one oft he f ol
lowing pr oposal sis opt i
malf or
xlii
. A companyhasdai lycash r eceiptsof$150, 000. The t r
easur eroft he Newman?( M) CMA06971- 13
companyhasi nv est i
gatedal ockboxser v
icewher ebyt hebankt hatof fer
st his a.A$0. 50f eepercheck. c. Af eeof0.03%oft heamount
servicewi l
lreducet hecompany ’scol l
ectiont i
mebyf ourday satamont hlyfeeof coll
ect ed.
$2,500.I fmoneymar ketr atesav erage4%dur ingthey ear,t headdi ti
onalannual b.Af l
atf eeof$125, 000pery ear . d.A compensat ing bal ance of
i
ncome( loss)f rom usi ngthel ockboxser vi
cewoul dbe( E) $1,750,000
a.$6, 000. c. $12, 000.
b.$( 6,000) . d.$( 12,000). CMA06941- 19 xl vi
. Af ir
m hasdai lycashr ecei ptsof$300, 000andi si nter estedi nacqui ringa
l
ockboxser vicei nor dertor educecol lectiont i
me.
xlii
i
. A bankerhasof feredt osetupandoper ateal ockboxsy stem f ory our  Bank1' sl ockboxser vicecost s$3, 000permont handwi llreducecol l
ection
company .Detai l
sar egi venbel ow.Est imat etheannual sav ings. timeby3day s.
Aver agenumberofdai lypay ment s 325  Bank2' sl ockboxser vicecost s$5, 000permont handwi llreducecol l
ection
Aver agesi zeofpay ment s $1, 250 timeby4day s.
Dailyinterestr ate 0.021%  Bank3' sl ockboxser v
icecost s$500permont handwi l
lr educecol l
ectiont i
me
Sav i
ngi nmai l
ingt ime 1.3day s by1day .
Sav i
ngi npr ocessi ngt i
me 0.9day s  Bank4' sl ockboxser vicecost s$1, 000permont handwi llreducecol l
ection
CMAEXAMI NATI ONQUESTI ONS Page10of10
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

ti
meby2day s. year ,theannual pretaxincome( loss)from usi ngt heser vicei s( M)
Ifmoneymar ketr atesar eexpect edt oav erage6%dur ingt hey ear,andt hef irm A.$( 30, 000) C.$66, 000
wishest omaxi mizei ncome, whichbankshoul dt hef i
rm choose?( M) B.$30, 000 D.$63, 000 Gl eim
A.Bank1. C.Bank3.
B.Bank2. D.Bank4. Gleim PointofI ndi ffer ence
li
. Av erage dai l
y cash out fl
ows ar e $3 mi ll
ion f orFar ms I nc. A new cash
OtherCashManagementSy stems managementsy stem canadd2day st ot hedi sbur sementschedul e.Assumi ng
Changei nPr of it(Loss) Far msear ns10%onexcessf unds,how muchshoul dt hef irm bewi ll
ingt opay
*. QRS makes l arge cash pay ment s averaging P17, 000 dai ly. The company pery earf ort hecashmanagementsy stem.( E)
changedf rom usi ngcheckst osi ghtdraftswhi chwi l
lper mi tittohol dunt oi t
s a.$6, 000, 000. c. $1, 500, 000.
cashf oroneext raday .IfQRScanuset heext racasht oear n14%annual ly
, what b.$3, 000, 000. d.$600, 000. CMA12951- 3
annual pesor eturnwi llitearn?( E)
a.P652. 10 c. P6. 52 li
i
.Tr oyToy si sar etail
eroper atinginsev eralci ti
es.I tsi ndividualst or emanager s
b.P6, 521. 00 d.P2, 380 RPCPA1097 deposi tdai l
ycol l
ections ata l ocalbank i n a noni nterest -
bear ing checki ng
account .Twi ceperweek, t
hel ocal bankissuesadeposi toryt r
ansf ercheck( DTC)
xl
vii
. Whati st hebenef itforaf i
rm withdail
ysal esof$15, 000t obeabl et oreduce t ot he cent ralbank atheadquar t
ers. The cont roll
eroft he company i s
thecol lect ionper i
odby2day s,givenan8%annual oppor tuni tycostoff unds?( M) consi der i
ngusi ngawi retransferinstead.Theaddi t i
onalcostofeacht ransf
er
A.$2, 400annual benef it
. C.$600annual benef i
t. woul dbe$25;col l
ect i
onswoul dbeaccel eratedbyt woday s;andanannual
B.$1, 200annual benef it
. D.$7, 500annual benef it. Gleim interestr at epai dbyt hecent ralbanki s7. 2%( 0.02%perday ).Atwhatamountof
dollar st ransf erred woul di tbeeconomi callyf easi bl
et o useawi ret ransf
er
xl
vii
i. Af irm hasdai lycashr eceiptsof$100, 000andcol lect i
ont imeof2day s.A i nsteadoft heDTC?Assumea360- dayy ear .(M) CMA12941- 17
bankhasof fer edt odecr easet hecollect
iont i
meont hef i
r m’sdeposi tsbyt wo a.I twoul dnev erbeeconomi callyfeasible. c. Anyamountgr eatert han
day sforamont hlyfeeof$500.I fmoneymar ketr at
esar eexpect edt oav erage $173.
6%dur ingt hey ear,thenetannual benefi
tloss)f r
om hav ingt hisser vi
cei s(M) b.$125, 000orabov e. d.Anyamountgr eaterthan$62, 500
a.$3, 000 c. $0
b.$12, 000 d.$6, 000 CMA06961- 12 l i
i
i.BestComput ersbel i
evest hatitscol lect i
oncost scoul dber educedt hrough
modi ficat ionofcol l
ectionpr ocedur es.Thi sact ioni sexpect edt or esul tina
xl
ix. Af i
rm has dai ly cash r ecei pt s of$200, 000.A l engt heni ngoft heav er
agecol l
ecti
onper iodf r
om 28day st o34day s;howev er,
commer cialbankhasof f
eredt or educethecol l
ectiont imeby3day s.Thebank t herewi l
lbenochangei nuncol l
ectibleaccount s.Thecompany 'sbudget edcr edi
t
requiresamont hl
yf eeof$4, 000forpr ovi
dingt hi
sser vi
ce.I fmoneymar ketrates sal esf ort hecomi ngy earar e$27, 000,000,andshor t-termi nt erestr atesar e
willav erage12% dur ingt hey ear,theaddi t
ionalannuali ncome( loss)ofhav i
ng expect edt oav erage8%.Tomaket hechangesi ncol lectionpr ocedur escost
theser v i
cei s( M) benef i
ci al, t
hemi nimum sav i
ngsi ncollectioncost s( usinga360- dayy ear )forthe
A.$( 24, 000) . C.$66, 240. comi ngy earwoul dhav etobe( M)
B.$24, 000. D.$68, 000. CMA06831- 7 A.$30, 000. C.$180, 000.
B.$360, 000. D.$36, 000. CMA12921- 20
l
. Af ir
m hasdai lycashr eceiptsof$300, 000.Acommer ci albankhasof f
eredt o
reducet hecol lecti
ont i
meby2day s.Thebankr equi resamont hl
yf eeof$3, 000li
v.BestComput ersbel i
evest hatitscol lect i
oncost scoul dber educedt hrough
forprov i
di ngt hisser vice.Ifthemoneymar ketr ateswi llav erage11%dur i
ngt he modi ficat ionofcol l
ectionpr ocedur es.Thi sact ioni sexpect edt or esul tina
CMAEXAMI NATI ONQUESTI ONS Page11of11
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

l
engtheningoftheav er
agecol lect
ionperiodf r
om 30t o35day s;howev er,there
wil
lbenochangei nuncollect
ibleaccounts,orint otalcreditsales.Furt
her mor e,
thevari
ablecostrat
iois60%, theoppor t
unit
ycostofal ongercollecti
onper i
odi s
assumedt obenegl i
gible,thecompany 'sbudget edcr editsalesf orthecomi ng Ifb =f ixedcostpert ransact ion
yearare$45,000,
000,andt herequiredrateofr et
ur nis6%.Toj ustif
ychangesi n i= i nt erestrateonmar ketablesecur iti
es
coll
ecti
onprocedures,themi nimum annualr eductionofcost s( usinga360- day t=t ot aldemandf orcashov eraper i
odoft ime
yearandignori
ngtaxes)mustbe( M) Thisf ormul ai samodi ficationoft heeconomi corderquant i
ty( EOQ)f ormul a
A.$375, 000 C.$125, 000 used f ori nv entory management . Assume t hatthe f i
xed costofsel l
ing
B.$37, 500 D.$22, 500 Gleim mar ketabl esecur i
tiesi s$10pert ransact i
onandt heinterestr ateofmar ket able
securiti
esi s6% pery ear . The companyest i
matest hati twi l
lmake cash
CheckingAccount s payment sof$12, 000 ov eraone- mont h period. Whati st heav er
agecash
l
v.Kempl ei sanewl yest ablishedjanitori
alf ir
m, andt heowneri sdeci di
ngwhatt pe bal
y ance( roundedt ot henear estdol lar)?(E)
ofchecki ngaccountt oopen.Kempl ei spl anningt okeepa$500mi nimum a.$ 1,
0 0 0 c . $3,464
balancei nt heaccountf oremer genciesandpl anst owr i
teroughl y80checksper b.$ 2,
0 0 0 d .$ 6,928 CMA06961- 10
mont h.Thebankchar ges$10permont hpl usa$0. 10percheckchar gef ora
standardbusi nesschecki ngaccountwi thnomi nimum bal ance. Kempl ealso47.Mot tCo.hasat otalannualcashr equirementofP9, 075,
000whi char etobepai d
hast heopt i
onofapr emi um businesschecki ngaccountt hatr equi
resa$2, 500 uni formly .Mot thast heoppor tunitytoi nvestthemoneyat24%perannum.The
mi ni
mum bal ancebuthasnomont hlyf eesorpercheckchar ges.I fKempl e’s comp a nys pen ds,o nt h ea verage, P4 0f oreverycashconv er si
ont omarket able
costoff undsi s10%, whi chaccountshoul dKempl echoose? secu r
iti
e s.
a.St andar daccount , becauset hesav ingsi s$34pery ear. Whati st heopt imum av eragecashbal ance?
b.Pr emi um account , becauset hesav ingsi s$34pery ear. a.P 60,0 0 0 c. P45, 000
c. Standar daccount , becauset hesav ingsi s$16pery ear. b.P55, 000 d.P27, 500 Pol Bobadilla
d.Pr emi um account , becauset hesav ingsi s$16pery ear. CMA06971- 20
MARKETABLESECURI TIES
Economi cConv ersionQuant ity(ECQ) Cur
rentP r
ice
Opti
mum Conv ersionSi ze l
vi
i. Assumi nga360dayy ear,thecur r
entpr i
ceofi t
s$100U. S.Treasurybi l
ldue
47.GearI nc..hasat otalannual cashrequirementofP9, 075,000whi charetobepai d i n180day sona6%di scountbasi si s(E)
uniformly .Gearhast heoppor t
unit
yt oi nvestt hemoneyat24%perannum.The a.$ 97.0 0 c. $100. 00
companyspends,ont heav er
age,P40f orev erycashconv ersi
ont omar ketable b.$ 94.0 0 d .$ 93 .
00 CMA06941- 26
securiti
es.
Whati st heopt imal cashconv ersi
onsi ze? l
vi
ii
. Hendr ix,Inc.i si nter estedi npur chasinga$100U. S.Tr easurybi l
landwas
a.P60, 000 c. P55, 000 presentedwi t
ht hef ollowi ngopt i
ons:
b.P45, 000 d.P72, 500 PolBobadill
a DueDat e DiscountRat e
Option1 180day s 6%
AverageCashBal ance Option2 360day s 3.5%
l
vi.Acompanyusest hefol l
owi ngformul aindet er miningitsopt imal l
evelofcash. Option3 120day s 8%
Option4 240day s 4.5%
IfHendr ixwi shest obuyt heTr easur ybillatthelowestpurchasi ngpr i
ce,whi ch
CMAEXAMI NATI ONQUESTI ONS Page12of12
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

opt
ionshoul
dbechosen,
assumi
nga360-
dayyear
?(M) whaty
iel
dwoul
dacor porati
onrequir
eonaninv
estmenti
nf l
oat
ing-
ratepr
efer
red
A.Option1. C.Opti
on3. st
ock?Assumethedefaultr
iskisthesameasforcommerci
alpaper.
B.Option2. D.Opti
on4. Gl
eim A.15.2% C.7.
3%
B.10.0% D.6.
6% B&M
Annuall
yCompoundedRateofRetur
n
4.Thedi scountona91-
Treasur
ybi
lli
s5.
2%.Whati
stheannual
l
ycompounded 19.Iftheshort
-t
erm commercialpaperratei
s6%andt hecor
poratetaxrat
eis35%,
rat
eofreturn? whaty i
eldwouldacorporati
onrequireonaninv
estmenti
nf l
oati
ng-r
atepref
err
ed
A.4. 8% C.5.4% stock?Assumet hedefaultr
iskisthesameasf orcommerci
alpaper.
B.5. 2% B&M A.6. 0% C.9.2%
B.39% D.4.4% B&M
5.Thedi scountona91- Treasurybi l
lis5.65%.Whati st heannuallycompounded
rateofret urn? 20.Iftheshor t
-t
er m commer cialpaperr atei s8%andt hecor poratetaxr ateis35%,
A.5. 2% C.5. 6% whaty iel
dwoul dacor porationr equireonani nvestmenti nf l
oati
ng- ratepreferr
ed
B.5. 9% D.5. 5% B&M stock?Assumet hedef aultriski sthesameasf orcommer ci
alpaper .
A.5. 8% C.4. 6%
6.Thedi scountona91- Treasurybi l
lis4.83%.Whati st heannuallycompounded B.5. 3% D.4. 4% B&M
rateofret urn?
A.4. 83% D.5. 13% RECEI VABLESMANAGEMENT
B.4. 78% E.5. 0% Account sRecei vableBal ance
C.1. 22% B&M *. JBJCompany ’
saccountbal anceatJune30,1987f oraccountr ecei vablesand
relatedal l
owancesf ordoubt f ulaccount swer eP600, 000andP3, 000r espectivel
y .
Economi cConv ersi
onQuant i
ty Agi ng ofaccount sr eceivabl eindicated thatP48, 000 oft he June 30,1987
Quest ions98and99ar ebasedont hefoll
owi nginf
ormat i
on. Glei
m recei v
ablemaybeuncol l
ect i
bl e.Netr eali
zablev al
ueofaccount sr eceivablewer e:
Snobi z,Inc.has$2mi lli
oni nvestedi nTr easurybil
lsy iel
ding8% perannum;t hi
s ( E)
i
nv estmentwi llsati
sfyt
hef i
rm'sneedf orfundsdur i
ngthecomi ngyear. a.P597, 000 c. P539,000
b.P552, 000 d.noneoft hese RPCPA1087
l
ix.Ifi tcosts$50t osellthesebi l
ls,regar
dl essoftheamount ,howmuchshoul dbe
withdrawnatat i
me?( E) l
xi.TheI rwinCor porati
onhas$3mi l
li
onpery eari ncr editsales.Thecompany 's
A.$50, 000 C.$250, 000 av erageday 'ssal esout standi ngi s40day s.Assumi nga360- dayy ear,whati s
B.$100, 000 D.$500, 000 Irwin'sav er
ageamountofaccount sreceivableoutst anding?( E)
A.$500, 000 C.$250, 000
l
x.I fSnobi z,I nc.needs$167, 000amont h,how frequent l
yshouldt heCFOsellof
f B.$333, 333 D.$75, 000 Gleim
Treasurybi l
l
s?( M)
A.Aboutev er
y3day s. C.Aboutev ery15day s. 49.Acompanyhassal esof$1, 800, 000( 70%ar ecr edit),agr osspr ofitrati
oof55%,
B.Aboutev er
y9day s. D.Aboutev ery18day s. anaccount sr eceivableturnov erof12t imes,andani nv entoryturnov erof4t imes.
Theav erageaccount srecei v
abl ebalancei s
YieldonFl oat ing-r
atePrefer
redSt ock a.$202, 500 c. $315,000
18.Ift heshor t-ter
m commer cialpaperr at
ei s10%andt hecor por
atetaxrat
eis35%, b.$247, 500 d.$450, 000( $105,000) L&H
CMAEXAMI
NATI
ONQUESTI
ONS Page13of13
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

P900,
000. Fortypercentofthecustomerspayon thetenth dayand take
*. Ten Q’ sI nc.has an i nvent oryconv ersion per iod of60 day s,a r eceivabledi
scount
s,theother60per
centpay,
onaver
age,45day
saft
erthei
rpurchases.
conv er si
onper i
odof35day s, andapay mentcy cleof26day s.I fit
ssal esf ortheWhatistheaver
ageamountofrecei
vabl
es?
periodj ustendedamount edt oP972, 000,whati st hei nvest menti naccount sA.P70,000 C.P77,200
receivabl e?( Assume360day say ear .
)( E) B.P77,500 D.P67,500 Pol Bobadi
ll
a
a.P85, 200 c. P94, 500
b.P72, 450 d.P79, 600 RPCPA0595 l xvi. Af irm aver ages$4, 000i nsal esperdayandi spaidonanav erage,within30
daysoft hesal e.Af tert heyr eceiv et heiri nvoice,55% oft hecust omerspayi n
l
xii
.Fort heFl esherCompany ,theav erageageofaccount sr ecei vableis48day s,the cashwhi lether emai ning45% paybycr edi tcar d. Appr oximat elyhow much
averageageofaccount spay ablei s32day s,andt heav erageageofi nv entoryis woul dthecompanyhav ei naccount sr eceiv ableoni tsbalancesheetonagi ven
59day s.Assumea360- dayy ear .IfMcI ntyre'sannualsal esar e$2,050, 200, what dat e?(M)
i
st hef ir
m' sinv estmentinaccount sr ecei vabl e?( E) a.$4,000 c. $48, 000
A.$96, 000 C.$182, 240 b.$120, 000 d.$54, 000 CMA12941- 22
B.$336, 005 D.$273, 360 Gleim
*. Si mbaCor p.,whosegr osssal esamount edt oP1, 200,000sol dont er msof3/ 10,
l
xii
i. Fort heFr atzieCompany ,theav erageageofaccount srecei vablei s48day s, net30.Thecol lect
ionsmanagerest imat edt hat30%oft hecust omer spayont he
theav erageageofaccount spay abl eis32day s, andtheav erageageofi nventory 10t hdayandt akedi scount s; 40%ont he30t hday ;andther emai ning30%pay ,
on
i
s60day s.Assumea360- dayy ear .IfFr atzie'sannualsal esar e$2,870, 280, what t heaverage,40day saf tert hepur chase.I fmanagementwoul dt oughenoni ts
i
st hef ir
m' sinv estmentinaccount sr ecei vabl e?( E) coll
ect
ionpol icyandr equi r
et hatal lnon- discountcust omer spayont he30t hday ,
A.$127, 567 C.$478, 381 howmuchwoul dbet her ecei vablesbal ance?( M)
B.$382, 704 D.$637, 839 Gleim a.P60, 000 c. P70, 000
b.P80, 000 d.Zer o RPCPA0595
l
xiv. Thecompanysel ls10,
000uni t
satauni tsel lingpr iceof66annual ly.Assume
l
xvi
i
thatt heav eragecol l
ecti
onper iodi s25day s.Af tert hecr editpol icyi swel l .Rut hCompanycur rent lyhas$1, 000, 000i naccount sr eceivable.I tsday ssal es
establ ished,whati stheexpect edav er ageaccount sr ecei v
abl ebal ancef ort he out st
anding( DSO)i s48day s. Thecompanywant st or educei tsDSO t ot he
companyatanymomenti nt i
me, assumi nga365- dayy ear?( E) i
ndustryav er
ageof32day sbypr essur ingmor eofi t
scust omer st opayt heirbill
s
A.684. 93 C.27, 123. 30 on ti
me. The company ’sCFO est i
mat est hati ft hispol i
cyi sadopt ed t he
B.1, 808. 22 D.45, 205. 48 CIA0594I V-36 company ’
sav eragesal eswi l
lf allby10per cent.Assumi ngt hatt hecompany
adoptsthischangeandsucceedsi nreduci ngi t
sDSOt o32day sanddoesl ose
l
xv. JacksonDi str
ibutorssel lst or etailst or esoncr edi tt ermsof2/ 10,net /
30. 10per centofi t
ssales, whatwi l
lbet hel evelofaccount srecei v
abl ef oll
owingt he
Dailysal esav erage150uni tsatapr i
ceof$300each.Assumi ngt hatal lsales change?Assumea360- dayy ear.( M)
areoncr editand60%ofcust omer st aket hedi scountandpayonday10whi e a.$600,
l 000 d.$900, 000
ther estoft hecust omerspayonday30. TheamountofJackson’ saccount b.$666, 667 e. $966, 667
receivabl ei s( D) c. $750,000 Bri
gham
a.$1, 350,000. c. $900, 000.
b.$990, 000. d.$810, 000. CMA12951- 6 Day sReceivable
lxvii
i. Anor ganizationof fersitscust omer scr edittermsof5/ 10net20.One- thir
dof
95.Collect ri
teCompanysel lsont erms3/ 10,net30.Tot alsal esf ort hey earar e t hecustomer st aket hecashdi scountandt her emainingcust omer spayonday
CMAEXAMI
NATI
ONQUESTI
ONS Page14of14
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

20.Onav erage,20uni t
sar esol dperday ,pr i
cedat$10, 000each.Ther ateof
salesi suni formt hroughoutt hey ear.Usinga360- dayy ear,theor ganizati
onhasQuest ions48and49ar ebasedont hef ollowi ngi nf ormation.CI A0594I V-35&36
day ssal esout standi ng,tot henear estf ul
lday ,of Acompanysel ls10,000skat eboar dsay earat$66each.Al lsalesar eoncr edit,wi
th
A.13day s. C.17day s. termsof3/ 10,net30,t hati s,a3% di scounti fpay menti smadewi t
hin10day s;
B.15day s. D.20day s. CIA1195I V-7 ot herwi sef ullpay menti sdueatt heendof30day s.Onehal foft hecust omer sare
expect edt ot akeadv antageoft hedi scountandpayonday10.Theot herhal fare
*. HakunaI nc.sel lsont ermsof3/ 10,net30day s.Gr osssal esfort hey earar eexpect edt opayonday30.Sal esar eexpect edt obeuni f
ormt hroughoutt hey earfor
P2,400, 000andt hecol lecti
onsdepar t
mentest imat est hat30%oft hecust omer sbotht ypesofcust omer s.
payont he10t hdayandt akedi scount s;40% payont he30t hday ;andt he
remai ning30%pay ,ont heav erage,40day saf tert hepur chase.Assumi ng360l xxi. Acompanysel ls10, 000skat eboar dsay earat$66each.Al lsalesar eon
day spery ear ,whati st heav eragecol l
ecti
onper iod.( M) cr edit,witht ermsof3/ 10, net30, whi chmeanst hreepercentdi scounti fpay ment
a.40day s. c. 20day s ismadewi t
hin10day s; otherwi sef ullpay menti sdueatt heendof30day s.One
b.15day s. d.27day s. RPCPA0595 hal foft hecust omer sar eexpect edt ot akeadv ant ageoft hedi scountandpayon
day10.Theot herhal far eexpect edt opayonday30.Sal esar eexpect edt obe
l
xix. Cl auson, I
nc.gr ant scredi tter msof1/ 15, net30andpr ojectsgr osssalesf or uni formt hroughoutt hey earf orbot ht ypesofcust omers.Whati st heexpect ed
nex ty earof$2, 000,000. The cr editmanagerest i
mat es t hat40% oft heir av eragecol lecti
onper i
odf ort hecompany ?
customer spayont hedi scountdat e,40%ont henetduedat e,and20%pay15 A.10day s. C.20day s.
day saf tert henetduedat e.Assumi nguni f
orm sal esanda360- dayy ear,whati s B.15day s. D.30day s.
thepr oject edday s’salesout standi ngr oundedt ot henear estwhol eday ?(M)
a.20day s. c. 27day s. l
xxii. Assumet hattheav eragecol lectionper iodi s25day s.Af t
ert hecr editpoli
cy
b.24day s. d.30day s. CMA06971- 9 iswel lest abli
shed,whati st heexpect edav erageaccount srecei vablebal ancefor
thecompanyatanypoi nti nt i
me, assumi nga365- dayyear ?(E)
Carr
y i
ngCostonAccount sRecei vable A.$684. 93 C.$27, 123. 30
94.TheTempoCompanyhasani nvent oryconv ersionper i
odof60day s, areceivable B.$1, 808. 22 D.$45, 205. 48
conv ersionper i
odof30day s,andapay ablepay mentper iodof45day s.The
Tempo’ sv ariabl
ecosti s60%andannualf ixedcost sofP600, 000.Thecur rentCollectionEf ficiency
costofcapi talforTempoi s12%. 28.Af i
rm hasannual salesof$365mi ll
ion.Cur rent ly
,customer st akeanav erageof
IfTempo’ sannualsal esar eP3, 375,000andal lsal esar eoncr edit,whati st he 60day st opay .Ifthecol lectionper i
odcanbeper manent lyreducedbyoneday
fi
rm’ scar ry i
ngcostonaccount sr eceivabl
e, using360day sy ear? andt hecostofcapi tal is10%, whati st hei ncr easei ncompanyv alue?
A.P281, 250 C.P20, 250 A.Zer o C.$500, 000
B.P168, 750 D.P56, 250 Pol Bobadill
a B.$100, 000 D.$1mi ll
i
on B&M

Day
sRecei v
able&Av erageAccountsRecei
vableBal
ance AgingofAccountsReceivabl
e
l
xx.
SixtypercentofBaco' sannualsalesof$900,000isoncr edi
t.I
fitsyear-
endQuestions160&161ar ebasedonthefol
lowingi
nfor
mat i
on. Git
man
receiv
ablesturnov
eris4.5,whatist
heav er
agecoll
ect
ionper
iodandtheyear-
endAbr eakdownofTeffan,I
nc.'
soutst
andi
ngaccountsrecei
vabledat
edJune30,2003
receiv
ables,r
espectiv
ely(assumea365-dayyear
)?(M) ont hebasisofthemont hinwhichthecredi
tsal
ewasi nit
ial
lymadefollows.The
A.81day sand$120, 000. C.73day sand$108,
000. fi
rm extends30daycreditt
erms.
B.73day sand$120, 000. D.81day sand$200,
000. Gl
eim Mont hofCredi
tSale AccountsRecei
vable
CMAEXAMI
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MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

June, 2003 $410,000 requir

ingpay mentuntiltheret ai
lsell
i
ngseasonbegi ns.Sal esoccurasf oll
ows:
May, 2003 340,
000 DateofSal e Quant i
tySold
Apri
l,2003 270,
000 September1 300units
March, 2003 200,
000 October1 100units
February,2003orbef
ore 100,
000 November1 100units
Total $1,
320,
000 December1 150units
Januar y1 50unit
s
160. Accountsr ecei
vabl
eover90day
stotal  Eachuni thasasel l
ingpr i
ceof$10, regar
dlessoft hedat eofsal e.
A.$200,000. C.$300, 000.  Thet ermsofsalear e2/ 10net30, Januar
y1dat i
ng.
B.$470,000. D.$100, 000.  Al lsalesareoncr edit.
 Al lcustomerstaket hedi scountandabi debyt heter msoft hedi scountpol
i
cy.
161. Anev aluationofthefi
rm'scol
l
ecti
oneffortsbasedont heagi
ngschedul
e Al lcustomerstakeadv antageoft henewseasonal datingpoli
cy .
woul
dsuggest  Thepeaksel li
ngseasonf orall
cust omersismi d-
Nov embert olateDecember.
A.poorcreditmanagement. C.super iorcredi
tmanagement.
B.sati
sfactorycredi
tmanagement
. D.ov erzealouscoll
ect
ionef
for
ts. lxxi
ii
. For t
he sel
li
ng
fi
rm,whichoft hefoll
owingisnotanexpect
edadv ant ageofi nit
iati
ngseasonal
CustomerDef aul
t dati
ng? CIA1194I V-
29
29.Thedef aultr
ateofDemurrageAssociates'new cust
omershasbeenr unningat A.Reducedst oragecosts. C.Attract
ivecr editt
er msf orcustomer
s.
10%.Theav eragesal
eforeachnew cust omeramountsto$800,generatinga B.Reducedcr editcost
s. D.Reduced uncer tainty about sal es
profi
tof$100anda40%chanceofar epeatordernexty
ear.Thedefaultrateon vol
ume.
repeatordersisonl
y2%.I ftheint
erestr atei
s9%,whati st
heexpect edpr of
it
from eachnewcustomer? lxxi
v. Forsalesaftertheini
ti
ati
onoftheseasonaldat ingpol icyonSept ember1,
A.$88. 70 D.$43. 25 tot
alcol
lecti
onsonorbef or
eJanuary11wil
lbe
B.$47. 75 E.$50. 83 A.$0 C.$6,860
C.$101. 00 B&M B.$6,370 D.$7,000 CIA1194I V-
30
30.Thedefaultr
ateofDon'snewcust omershasbeenrunningat20%.TheaverageChangei nCreditTerms
sal
eforeachnewcust omeramount st
o$500,generat
ingaprofi
tof$200andaPr i
meRat e
30%chanceofar epeatordernextyear
.Thedefaul
trateonrepeator
dersi
sonlyl
xxv. Thehi ghcostofshor t-
termf inancinghasr ecentl
ycausedacompanyt o
5%. Ifthei nt
erestrat
ei s6%,whati stheexpected pr
ofi
tf r
om eachnew r eevaluat
et hetermsofcr edititextendstoitscustomer s.Thecurr
entpoli
cyis
cust
omer ? 1/10,net60.Ifcust omerscanbor rowatt hepri
mer ate,atwhatpri
mer atemust
A.$152.50 C.$275.
00 the companychange i tst erms ofcr editin orderto av oi
d an undesi
rabl
e
B.$149.53 D.$100.
00 B&M extensioninit
scollecti
onofr ecei
vables?(E)
A.2% C.7%
SeasonalDati
ng B.5% D.8% Gl
eim
Questions10and11ar ebasedont hefol
lowi
nginfor
mat i
on.CIA1194I V-
29&30
Effect
iveSeptember1,acompanyi ni
ti
atesseasonaldati
ngasacomponentofi ts
creditpoli
cy,all
owing wholesal
e customersto make pur chases ear
ly butnot
CMAEXAMI
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ONQUESTI
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MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Ef
fectonAccount sRecei vabl eBal ance expect edi ncr easei nt heav erageaccount sr ecei vabl ebal anceof( M)
l
xxvi. Af irm sel lsont er msof2/ 10net60.I tsel l
s1, 000uni tsperdayatauni tprice a.$540, 000 c. $900, 000
of$10.On60% ofsal es,cust omer st aket hecashdi scount .Ont her emai ning b.$2, 700, 000 d.$1, 620, 000 CMA12921- 21
40%ofsal es,cust omer spay ,onav erage,i n70day s.Whatwoul dbet hei mpact
ont hebal anceofaccount sr ecei vabl ei fthef i
rmi nitiat
esamor eaggr essi ve48.RealCompany ’sbudget edsal esf ort hecomi ngy earar eP50, 000, 000ofwhi ch
coll
ectionpol icyandi sabl etor educet heav er agepay mentper iodt o60day sfor 75% ar eexpect edt obecr editsal esatt ermsofn/ 30. Realest imat est hata
those cust omer s nott aking t he cash di scount ?( Assume sal es l evels ar e pr oposedr el
axat ionofcr edi tst andar dswi lli ncreasecr editsal esby20% and
unaffectedbyt hechangei npol i
cy .)(E) increaset heav eragecol l
ect ionper iodf r
om 30day st o40day s.Basedona360-
A.Decr easeby$4, 000. C.Decr easeby$240, 000. dayy ear,t hepr oposed r el axat i
on ofcr editst andar dswi l
li ncr easeav erage
B.Decr easeby$40, 000. D.Decr easeby$280, 000.CI A1196I V-44 account sr eceivabl ebalanceby :(E)
a.P1, 200, 000 c. P1, 875, 000
l
xxvii
.Acompanypl anst ot ighteni tscr edi tpoli
cy .Thenewpol i
cywi lldecr easet he b.P3, 125, 000 d.P5, 000, 000 Pol Bobadi lla
averagenumberofday sf orcol lect i
onf rom 75t o50day sandwi llreducet he
rati
oofcr edi tsalest ot otalr ev enuef r
om 70%t o60%.Thecompanyest imat esl
xxi x. Fl ynCompany 'sbudget edsal esf ort hecomi ngy earar eexpect edt obe
thatpr oject ed sal es wi llbe 5% l ess i fthe pr oposed new cr editpol icyi s $50, 000, 000, ofwhi ch75%ar eexpect edt obecr edi tsalesatt ermsofn/ 30.Fl yn
i
mpl ement ed.I fpr oject edsal esf ort hecomi ngy earar e$50mi l
li
on,cal culate est imat est hatapr oposedr elaxat i
onofcr edi tst andar dswi lli ncr easecr edi t
thedol l
aramountofaccount sr ecei vabl eofthi spr oposedchangei ncredi tpol i
cy . sal esby25%andi ncreaset heav eragecol l
ect ionper i
odf rom 20day sto30day s.
Assumea360- dayy ear .(M) Basedona360- dayy ear ,thepr oposedr elaxat ionofcr editst andar dswi llr
esul tin
a.$3, 817, 445decr ease. c. $3, 333, 334decr ease. anexpect edi ncreasei nt heav erageaccount sr ecei vablebal anceof( M)
b.$6, 500, 000decr ease. d.$18, 749,778i ncrease.CMA12941- 24 A.$520, 840 C.$2, 083, 340
B.$1, 822, 930 D.$3, 906, 270 Gleim
*. PrestCor p.pl anst ot ight eni t
scr edi tpol icy.Bel owi sthesummar yofchanges:
OLD NEW *. Numer o1Co. ’sbudget edsal esf ort hecomi ngy earar eP96mi ll
ion, ofwhi ch80%
Averagenumberofday scol lect i
on 75 50 areexpect edt obecr edi tsal esatt ermsofn/ 30.Thecompanyest imat est hata
Rati
oofcr editsal est ot otal sales 70% 60% p r
op ose dr e l
a xati
o no f cred it stan da r
d sw o uldi nc re asec red i
t sa lesb y3 0 %a nd
Projectedsal esf ort hecomi ngy eari sP100mi l
li
onandi tisest i
mat edt hatt he increa set hea veragec oll
e ctionp erio df orm 30d a ys t
o4 5d ays.B as edo na3 6 0-
newpol i
cywi llresulti na5%l ossi ft henewpol icyi si mplement ed.Assumi nga d ayye ar,th ep ro posedr elax ationo f credit sta nd ard sw ouldr esu ltt oa ni nc rea se
360-dayy ear,whati st heef fectoft henewpol i
cyonaccount sr eceivable?( M) inaccount sr ecei vablebal anceof( M)
a.Decr easeofP13mi ll
ion. c. Decr easeofP5mi l
li
on. a .P 6 ,
88 0 ,
0 00 c. P2, 880, 000
b.Nochange. d.Decr easeofP6. 67mi lli
on.RPCPA b .P 1 ,
92 0 ,
0 00 d.P 6,08 0,000 RPCPA0595
0596 l
xxx
.CannonCompanyhasenj oy edar api dinc reas ei ns alesi nrec enty ear s ,foll
owi nga
l
xxvii
i.Dar tmoorCompany ’sbudget edsal esf ort hecomi ngy earar e$40, 500, 000, of dec isiont os ellonc redit. Howev er,thef ir
m hasnot icedar ec enti nc r
eas ei ni ts
which80%ar eexpect edt obecr edi tsal esatt ermsofn/ 30.Dar tmoorest imat es coll
e cti
onp e r
iod.L astye ar,to tals alesw ere$ 1mi l
lion ,and$ 2 50,00 0o f t
h eses a le s
thatapr oposedr elaxat i
onofcr edi tst andardswi llincr easecr editsal esby20% w er
eo nc re di
t.D uri
n gth ey e ar,thea cc oun tsr ec ei
v ab l
ea cc ount a ve raged$ 4 1,
0 9 6.
andi ncreaset heav er agecol lect ionper iodf rom 30day sto40day s.Basedona Iti
s ex pecte dt hats al
es w il
linc reas e i
n th efo rt
h co mi ng ye arby 50 p erc en t
,a nd, wh ile
360 dayy ear ,the pr oposed r el axat i
on ofcr editst andardswi llresul ti n an c reditsaless houl dc ontinuet obet hes amepr opor tionoft otalsal es ,itisex pec ted
thatt heday ss alesout s tandi ngwi llals oi nc r
eas eby50per cent .I ft her es ulting
CMAEXAMI
NATI
ONQUESTI
ONS Page17of17
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

i
nc reas ei nac c ountsrec ei
vabl emus tbef inanc edex ternal
l
y ,how muc hex ternal B.$9, 943. D.$152, 778. Gi tman
fundi ngwi llCannonneed?As sumea365- dayy ear.
a. $41, 096 d.$106, 471 Expect edDiscount sTaken
b.$51, 370 e. $92, 466 *. TheLi beralSal esCo.budget edsal esf ort hecomi ngy earar eP30mi ll
i
onof
c. $47, 359 Bri
gham which80%ar eexpect edt obeoncr edit.Thecompanywant stochangei tscredit
termsf r
om n/ 30t o2/ 10,n/30.I fthenewcr editt er
msar eadopt ed, t
hecompany
NewAccount sRecei vableBal ance esti
mat est hatcashdi scount swoul dbet akenon40%oft hecr editsal esandt he
l
xxx
i
.RuthCompanycur rentl
yhas$1, 000,000i naccount sr ecei
vable. I t
sday ssal es newuncol l
ectibleamountwoul dbeunchanged.Theadopt i
onoft henewcr edit
outst anding( DSO)i s50day s.Thecompanywant st oreduceitsDSOt othei ndust ry t ermswoul dresul tinexpect eddiscountav ailedofi nt hecomi ngy earof( E)
aver ageof32day sbypr essur ingmor eofi tscust omerst opayt heirbil
lsont ime. a.P600, 000 c. P480, 000
Thecompany ’sCFOest imat est hatifthispol i
cyi sadopt edthecompany ’
sav erage b.P288, 000 d.P192, 000 RPCPA0596
saleswi llfallby10per cent.Assumi ngt hatt hecompanyadopt sthischangeand
succeedsi nr educingi t
sDSOt o32day sanddoesl ose10per centofi t
ssal es, whatlxxxii
.Pr icePubl ishingi sconsi deri
ngachangei nit screditt ermsf rom n/ 30t o2/ 10,
willbet hel ev elofaccount sr eceivablef ol
lowingt hechange? Assumea365- day n/ 30.Thecompany ’
sbudget edsal esf ort hecomi ngy earar e$24, 000, 000,of
year . which90% ar eexpect edt obemadeoncr edit.I ft henew cr editt ermsar e
a. $576, 000 d.$900, 000 adopted,Pr iceest imat esthatdiscount swi l
lbet akenon50%oft hecr editsales;
b.$633, 333 e. $966, 667 howev er,uncol l
ect ibl
eaccount swi llbeunchanged.Thenew cr edi tt ermswi l
l
c. $750, 000 Brigham resul
tinexpect eddi scount stakeni nthecomi ngy earof( M)
a.$216, 000 c. $240, 000
I
ncr ement alInvest menti nAccount sRecei vable b.$432, 000 d.$480, 000 CMA12921- 19
*. Sl i
pper sMar thassal esofP3mi l
li
on.I tscr editper i
odandav eragecol lection
periodar ebot h30day sand1% ofi tssal esendasbaddebt s. Thegener al
lxxxii
i.Cat f
urPubl ishingi sconsi deri
ngachangei nitscr edittermsf r
om n/ 20to
manageri ntendst oextendt hecr editper i
odt o45day swhi chwi lli
ncreasesal es 3/ 10,n/20.Thecompany '
sbudget edsal esf ort hecomi ngy earar e$20, 000,000,
byP300, 000.Howev er,baddebt slossesont hei ncrementalsal eswoul dbe3%. ofwhi ch80% ar eexpect edt obemadeoncr edit
.I fthenew cr edi tt ermsar e
Cost sofpr oduct sandr elatedexpensesamountt o40%excl usiveofthecostof adopt ed,Cat f
urmanagementest imat est hatdi scount swi l
lbet akenon60%of
carry ingr ecei vablesof15%andbaddebt sexpenses.Assumi ng360day say ear, t hecredi tsales;howev er,uncollectibleaccount swi llbeunchanged.Thenew
thechangei npol icywoul dr esulttoi ncrement alinvestmenti nreceivablesof( M) cr edi
ttermswi ll r
esultinexpect eddi scount st akeni nthecomi ngy earof( M)
a.P24, 704. c. P701, 573. A.$288, 000 C.$360, 000
b.P65, 000. d.P9, 750. RPCPA1095 B.$480, 000 D.$600, 000 Glei
m

144. Af ir
mi sconsideri
ngrel
axingcredi
tstandards,whichwi l
lresultinannualPret
axCostofCar ryi
ngAdditi
onalInvestmenti nReceiv
ables
salesi ncreasi
ngf r
om $1.5mi l
li
onto$1.75mi ll
ion,thecostofannualsal es*. Mr.S.Mar tassumedt hepresidencyofRi chesCorp.Hei nstitut
ednew poli
cies
i
ncr easingf r
om $1,000,
000to$1, 125,
000,andt heav eragecol l
ectionperiod andwi threspecttocr
editpoli
cy,belowi sasummar yofrelevantinfor
mation:
i
ncr easingfrom 40to55days.Thebaddebtl ossisexpectedt oincreasefrom 1 OldCr editPolicy NewCr edi
t
percentofsal es to 1.
5 percentofsales. The f ir
m' sr equir
ed r et
urn on Policy
i
nv estment sis20percent.Thef i
rm'
scostofmar gi
nalinvestmenti naccounts Sal
es P1,
800, 000 P1,
980, 000
receivableis(D) Average col
l
ection 30day s 36day s
A.$5, 556. C.$12,153. peri
od
CMAEXAMI NATIONQUESTIONS Page18of18
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Thecompanyr equir
esar ateofr et
urnof10%andav ari
ablecostr ati
oof60%. A.$23, 000 C.$6, 000
Usinga360- dayy ear,thepr e-taxcostofcar ryi
ngtheaddi ti
onalinvestmentin B.$16, 000 D.$7, 000 Gitman
receivabl esundert henewpol icywoul dbe( M)
a.P4, 800 c. P3,
000 31.Terry
'sPlaceiscur rentl
yexper i
encingabaddebtr ati
oof4%.Ter r
yi sconv inced
b.P2, 880 d.P4,080 RPCPA1096 that
,withloosercr editcontr
ols,thisrati
owi l
li
ncreaseto8%; howev er,she
expectssalest oincreaseby10%asar esul
t.Thecostofgoodssol dis80%of
l
xxxiv.Thef ollowi
ngi nformationr egardi
ngachangei ncreditpoli
cywasassembl ed t hesell
ingprice.Per$100ofcur rentsales,whatisTerry
'sexpectedpr ofitunder
byt heWi lsonWaxCompany .Thecompanyhasar equir
edr ateofreturnof11% t heproposedcr editstandards?
andav ariablecostr atioof50%.Theoppor tuni
tycostofal ongercol l
ecton A.$26.
i 0 C.$13. 2
periodi sassumedt obenegl igible. B.$15. 4 D.$25. 6 B&M
Ol dCredi
tPoli
cy NewCr editPoli
cy
Sal es $4,
600,000 $4,960,000 32.Tom'sToy siscur rentl
yexper i
encingabaddebtr ati
oof6%.Tom i sconv inced
Av er age coll
ect i
on 30day s 35day s that
,withtightercreditcontrol
s,hecanr educethi
sratioto2%; howev er,he
per iod expectssalest odropby8%asar esult
.Thecostofgoodssol dis75%oft he
Thepr etaxcostofcar ryingtheaddi t
ionali
nvestmentinreceivabl
es,assumi nga sell
i
n gpri
ce .P er$10 0of curr
ent sal
e s,whatisTom's expect
edp rofi
t und erthe
360- dayy ear,i
s( M) proposedc reditstandards?
A.$5, 439 C.$13,778 A.$15. 2 D.$27. 0
B.$10, 878 D.$98,890 Glei
m B.$23. 0 E.$21. 2
C.$19. 0 B&M
l
xxxv.Thef oll
owingi
nfor
mat i
onregardingachangei ncreditpoli
cywasassembl ed
bytheWi lsonWaxCompany .Thecompanyhasar equir
edr ateofret nof10%33.Toni
ur '
sCat eringiscurrentl
yexperiencingabaddebtr at
ioof5%.Toni i
s
andav ariabl
ecostr
ati
oof60%. convincedt hat,
w i
thloo sercr
ed i
tcon trol
s,thi
s r
atiowil
lincr
easeto10%;
Ol
dCr editPoli
cy NewCr editPol
icy howev er,sheexpect ssalestoincreaseby20%asar esult
.Thecostofgoods
soldis90%oft heselli
ngpr i
ce.Per$100ofcur r
entsales,whati
sToni'
s
Sal
es $3,600,000 $3,960,000
expectedpr ofi
tundert heproposedcr editstandards?
Average coll
ecti
on 30day s 36day s
A.$0 C.$10
peri
od
B.$12 D.$5 B&M
Thepretaxcostofcarryi
ngtheaddi t
ionalinvest
mentinreceivables,
usinga360-
dayyear,wouldbe(M) l
xxxvi.Acompanywi t
h$4. 8mi l
li
oni ncr edi
tsalespery earplanstorel
axitscredi
t
A.$5,760. C.$8,160. standards,pr oj
ecting thatthiswi llincrease credi
tsalesby$720, 000. The
B.$9,600. D.$960. CMA12891- 16 averagecol l
ectionperiodfornewcust omersisexpectedt obe75day s,andthe
paymentbehav
ioroft
heexist
ingcustomer si
snotexpectedt
ochange.Variabl
e
Eff
ectonBef oreTaxProf i
t(Loss) costsare80% ofsales. Thef i
rm’soppor tunit
ycostis20% befor
et axes.
138. A f ir
m i sanalyzing ar el
axati
on ofcr edi
tst andardsthatisexpected to Assuminga360-dayyear
,whati sthecompany ’
spr
ofi
t(l
oss)ontheplanned
i
ncreasesales10per cent.Thef ir
mi scurrent
lyselli
ng400unitsatanav er
age changeincr
edi
tter
ms?(M)
sal
epr i
ceperunitof$575,andt hevariabl
ecostperuni tis$400atthecurrent a.$0 c. $144,000
sal
esv olume.Theav er
agecostperuni ti
s$425.Whati stheaddit
ionalprofi
t b.$28,800 d.$120, 000 CMA06961-13
contr
ibuti
onfrom salesifcredi
tstandardsarerelaxed?(E)
CMAEXAMI
NATI
ONQUESTI
ONS Page19of19
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

*. TheSal esDi rectorofCanCanCo.suggest st hatcer taincredittermsbemodi fied.

lxxxv i
ii.Par kisonCompanycani ncr easeannualsal esby$150, 000i fitsel l
st oanew,
Heest i
mat esthef ollowingef fect s: riski ergr oupofcust omer s.Theuncol l
ect i
bleaccount sexpensei sexpect edt obe
 Sal eswi l
lincreasebyatl east20%. 16%ofsal es, andcol lectioncost swi llbe4%.Thecompany 'smanuf act uri
ngand
 Account sr eceivablet urnov erwi llber educedt o8t i
mesf r
om t hepr esent sel l
ingexpensesar e75%ofsal es,andi t
sef fect ivet axr at eis38%.I fPar ki
son
turnov erof10t imes. accept sthi soppor t
unity,itsaf t
er-taxi ncomewi llincreaseby( M)
 Baddebt s, nowat1%ofsal eswi l
lincreaset o1. 5%. A.$2, 850 C.$7, 500
Salesbef orethepr oposedchangesi satP900, 000.Var i
abl ecostr atioi s55% B.$4, 650 D.$8, 370 Glei
m
anddesi redr ateofr eturnis20%.Fi xedexpensesamountt oP150, 000.
Shoul dt hecompanyal l
owt her ev isi
onofi tscr editterms?( M) *. Cr estCo.hast heoppor tunitytoi ncr easeannualsal esbyP1mi l
li
onbysel l
ingt o
a.Yes, becausei ncomewi llincr easebyP64, 800( P68,850) . newr iskiercust omer s.I thasbeenest i
mat edt hatuncol lect ibl
eex penseswoul d
b.Yes, becausel osseswi l
lber educedbyP78, 800. be15%andcol lecti
oncost s5%.Themanuf act ur i
ngandsel l
ingcost sar e70%of
c. No, becausei ncomewi l
lber educedbyP13, 000. sal esandcor por atetaxi s35%.I fi tpur suest hisoppor tuni ty,theaf tert axpr ofi
t
d.No, becausel osseswi l
lincr easebyP28, 000. RPCPA0594 wi l
l (M)
a.I ncr easebyP35, 000. c. I ncreasebyP65, 000.
Ef
fectonAf terTaxPr ofit(
Loss) b.I ncr easebyP97, 500. d.Remai nt hesame. RPCPA0596
*. Wast i
ng Resour ce Co.has annualcr edi tsal es ofP4 mi l
lion. I ts av er age
coll
ect ionper i
odi s40day sandbaddebt sar e5% ofsal es. Thecr edi tandRet urnonEqui ty
lx
xxi
x
coll
ect ionmanageri sconsider i
ngi nsti
tutingast r
ictercollecti
onpol i
cy ,wher eby . DaggyCor por ati
onhast hef ol
lowi ngsi mpl ifiedbal ancesheet :
baddebt swoul dber educedt o2% oft ot alsal es,andt heav eragecol lect i
on Cash $25, 000 Cur rentl i
abili
ties $200, 000
periodwoul df allto30day s.Howev er,sal eswoul dalsof allbyanest imat ed Invent or ies 190, 000
P500, 000annual ly. Var i
ablecost sare60% ofsal esandt hecostofcar ryi
ng Account sr eceivable 125, 000 Long- term debt 300, 000
receivabl esi s12%. Assumi ngat axr at eof35% and360day say ear ,the Netf i
x edasset s 360, 000 Commonequi ty 200, 000
i
ncr ement alchangei nt hepr of i
t abil
ityoft hecompanyi fst r
icterpolicywoul dbe Tot al asset s $700, 000 Tot al claims $700, 000
i
mpl ement edwoul dbe( D) Thecompanyhasbeenadv i
sedt hatt heircr edi tpol icyi st oogener ousandt hat
a.Zer oast heposi ti
veandnegat i
veef f
ect sof fseteachot her. theyshoul dr educet heirday ssalesout standi ngt o36day s( assumea365- day
b.Ar educt i
oni nneti ncomebyP70, 000. year ).Thei ncr easeincashr esulti
ngf r
om t hedecr easeinaccount sr eceivablewi ll
c. Ar educt i
oni nneti ncomebyP38, 350. beusedt or educet hecompany ’
sl ong- term debt .Thei nt erestr ateonl ong- t
erm
d.Ar educt i
oni nneti ncomebyP35, 400. RPCPA0597 debti s10per centandt hecompany ’st axr atei s30per cent .Thet i
ght ercredit
pol icyi sex pect edt oreducet hecompany ’
ssal est o$730, 000andr esultinEBI Tof
l
xxxvii
.LawsonCompanyhast heoppor tunit
yt oi ncreaseannualsal es$100, 000by $70, 000.Whati sthecompany ’
sex pect edROEaf terthechangei ncr editpol i
cy?
sell
ingt oanewgr oupofcust omer s.Basedonsal es,theuncol lecti
bleex pense a. 14. 88% d.18. 38%
i
s expect ed to be 15% and col l
ecti
on cost s wi l
lbe 5%. The company s b.16.
’ 63% e. 16. 25%
manuf act uri
ngandsel l
ingexpensesar e70%ofsal es,andt heef fectiv
et axr ate c. 15. 86% ROE
i
s40%.I fLawsonaccept st hisoppor t
uni t
y ,thecompany ’
saf tertaxpr of itwi l
l
i
ncr easeby( M) Cr editPol i
cyOpt i
ons
a.$4, 000. c. $10, 000. xc.Af i
r m cur rentlysel l
s$500, 000annual lywi th3%baddebtl osses.Twoal t
ernat i
ve
b.$6, 000. d.$9, 000. CMA12901- 30 pol iciesar eav ail
able.Pol icyAwoul di ncreasesal esby$500, 000,butbaddebt
lossesonaddi t
ionalsal eswoul dbe8%.Pol i
cyBwoul di ncreasesal esbyan
CMAEXAMI NATI ONQUESTI ONS Page20of20
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addi t
ional $120, 000ov erPol i
cyAandbaddebtl ossesont headdi tional $120, 00020per cent .
ofsal eswoul dbe15%.Theav er agecol lectionper iodwi llr emai nat60day s( 6
turnspery ear )nomat t
ert hedeci sionmade.Thepr of i
tmar ginwi llbe20% of 140. Whati st he f i
rm's addi tionalpr ofitcont r i
buti
on f rom sal es undert he
sal esandnoot herexpenseswi lli ncrease.Assumeanoppor tuni t
ycostof20%. pr oposedr el axationofcr edi tst andards?( E)
Whatshoul dt hef irm do?( M) A.$2, 250 C.$9, 000
A.Makenopol icychange. B.$6, 750 D.$69, 000
B.Changet oonl yPol icyA.
C.Changet oPol icyB( meansal sot akingPol icyAf i
rst ). 141. Whati st hecostofmar ginalinvest ment si naccount sr eceiv
abl eunderthe
D.Al lpoliciesl eadt ot hesamet ot al f
irm prof it,thusal lpol iciesar eequal .Gleim proposedpl an?( M)
A.$1, 817 C.$1, 733
Compr ehensi ve B.$1, 867 D.$1, 617
Quest i
ons96&97ar ebasedont hef ol lowingi nfor mat i
on. Pol Bobadi lla
Smar t,Inc.i sconsi deringchangi ngi tscr editt er
msf rom 2/ 15, net30, to3/ 10, net30142. Whati st hecostofmar ginal baddebt sundert heproposedpl an?( E)
i
nor dert ospeedupcol lections.Atpr esent ,40%ofSmar t’scust omer st aket he2% A.$383 C.$3, 315
discount .Undert henew t erms,di scountcust omer sar eexpect edt or iset o50%. B.$765 D.$5, 100
Regar dlessoft hecr edi tterms,hal foft hecust omer swhodonott aket hedi scount
areexpect edt opayont ime,wher east her emai nderwi l
lpay10day sl ate. The143. Whati st henetr esultofi mpl ement ingt hepr oposedpl an?(M)
changedoesnoti nvolv ear elaxat ionofcr edi tstandar ds;t heref or ebaddebtl osses A.+$3, 952 C.+$2, 083
arenotexpect edt or iseabov et hei rpr esent2%l ev el.Howev er ,themor egener ous B. $3, 868 D. $2, 083
cashdi scountt ermsar eexpect edt oi ncreasesal esf r
om P2mi l
liont oP2. 6mi lli
on
pery ear .Smar t’sv ariablecostr atioi s75%,t hei nterestr ateonf undsi nv estedi nQuest ions165t hr u170ar ebasedont hef ollowingi nformation. Gi
tman
account sreceiv abl eis9%, andt hef i
rm’ sincomet axr atei s40%. DizzyAni mat ors, Inc.currentlymakesal lsal esoncr editandof fer
snocashdi scount.
Thef irmi sconsi deringa3per centcashdi scountf orpaymentwi thin10day s.The
96.Thei ncr ement alcar r
y i
ngcostonr eceivabl eis( M) fi
rm' scur rentav eragecol lectionper i
odi s90day s,salesar e400f ilmspery ear,
A.P843. 75 C.P8, 889 selli
ngpr icei s$25, 000perf il
m,v ari
ablecostperf il
mi s$18, 750perf i
l
m,andt he
B.P643. 75 D.P6, 667 averagecostperf i
lmi s$21, 000.Thef i
rm expect st hatthechangei ncr edi
tterms
willresulti nami norincreasei nsal esof10f il
mspery ear ,that75per centofthe
97.Thei ncr ement alaftert axpr ofitfrom t hechangei ncr edi tter msi s(D) saleswi lltaket hedi scount,andt heav eragecol lect i
onper iodwi lldropt o30day s.
A.P68, 493 C.P65, 640 Thef irm'sbaddebtexpensei sexpect edt obecomenegl igibleundert heproposed
B.60, 615 D.P57, 615 plan.Thebaddebtexpensei scur rentl
y0. 5percentofsal es.Thef i
rm'srequi
red
returnonequal riskinvestment si s20per cent .
Quest i
ons140t hru143ar ebasedont hef ollowingi nf ormat ion. Gitman
Caren' sCanoesi sconsi der i
ngr elaxingi tscr editst andar dst oencour agemor esal es.165. Whati st hef ir
m'smar gi nalpr ofi
tcont ri
butionf rom salesundert heproposed
Asar esul t,salesar eexpect edt oi ncr ease15per centf r om 300canoespery eart o pl anofi nitiatingt hecashdi scount ?
345canoespery ear .Theav eragecol lectionper iodi sexpect edt oincr easet o40 A.$22, 500 C.$62, 500
daysf rom 30day sandbaddebt sar eexpect edtodoubl et hecur r
ent1per centl ev el. B.$40, 000 D.$100, 000
Thepr icepercanoei s$850,t hev ariabl ecostpercanoei s$650andt heav erage
costperuni tatt he300uni tlevel is$700.Thef irm' sr equi redr et urnoni nvest menti s166. Whati st hemar ginali nv estmenti naccount sr ecei
v ableundert heproposed
CMAEXAMI NATI ONQUESTI ONS Page21of21
MANAGEMENTADVI
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NGCAPI
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NANCE

pl
an? chargeof15%.Whatpr oceeds(
roundedtothenear
estdoll
ar)wil
lthef i
rm
A.$1,234,
375 C.$1,
567,
300 receiv
efrom t
hefi
nancecompanyattheti
mea$100,
000accountduei
n60day s
B.$1,382,
500 D.$1,
841,
570 i
sf actor
ed?(M)
A.$92, 600 C.$90,
285
167. Whati st hecostofmar gi
nali nv estmenti naccount sr eceivabl
eundert he B.$96, 135 D.$85,
000 Gl
eim
proposedpl an?
A.$313, 460 C.$246, 875 xci
i
i. Af irmt hatof tenfactorsitsaccount sr eceivablehasanagr eementwi t
hit s
B.$276, 500 D.$368, 314 fi
nancecompanyt hatrequir
est hefirmt omai ntaina6%r eserveandchar ges1%
commi ssionont heamountofr eceivables.Thenetpr oceedswoul dbef urt
her
168. Whatar et hesavingsofmar ginal baddebt sundert hepr oposedpl an? reducedbyanannuali nterestchargeof10%ont hemoni esadv anced.Assumi ng
A.$500, 000 C.$10, 000 a360- dayy ear ,
whatamountofcash( roundedt ot henearestdol lar)willt
hef ir
m
B.$50, 000 D.$5, 000 receivef r
om t hef i
nancecompanyatt het imea$100, 000accountt hatisduei n
90day si stur nedov ertothef i
nancecompany ?(M)
169. Whati sthecostoft hemar ginalcashdi scount ? A.$93, 000 C.$83, 700
A.$768, 750 C.$307, 500 B.$90, 000 D.$90, 675 CMA06941- 29
B.$300, 000 D.$230, 625
xci
v. Af irm of tenfactorsitsaccount sr eceivable.Thef i
nancecompanyr equires
170. Whati sthenetr esultofincreasingt hecashdi scount? an8%r eser v eandchar gesa1. 5%commi ssionont heamountoft her eceivable.
A.+$33, 750 C.+$128, 750 Ther emai ningamountt obeadv ancedi sfur t
herr educedbyanannuali nter
est
B. $33, 750 D. $58, 750 char geof16%.Whatpr oceeds( r
oundedt ot henear estdol lar)wi llthef ir
m
receivef r
om t hef i
nancecompanyatt het imea$110, 000accountt hatisduei n
Factori
ng 60day si stur nedov ertothef i
nancecompany ?(M)
Annual CostofFi nancing A.$81, 950. C.$96, 895.
xci.
Acompanyent ersintoanagr eementwi thaf i
rmt hatwi l
lf actorthecompany ’
s B.$83, 630. D.$99, 550. CMA06831- 13
account sr ecei v
able.Thef actoragr eest obuyt hecompany ’srecei
vables,whi ch
average$100, 000permont handhav eanav eragecol l
ecti
onper i
odof30day s.
xcv
. Gat sby ,I nc.isgoi ngt o beginf actor i
ngi tsaccount sr eceivableandhas
Thef actorwi lladvanceupt o80%oft hef acev alueofr ecei vabl
esatanannual col l
ect edi nf ormat i
onont hefollowingf ourfinancecompani es:
rateof10%andchar geaf eeof2%onal lrecei vablespur chased.Thecont roll
er Required Commi ssions Annual
oft hecompanyest imat esthatt hecompanywoul dsav e$18, 000incol lecti
on Reserves I
nterestChar ge
expenses ov ert he year . Fees and i nter estar e notdeduct ed in adv ance. CompanyA 6% 1.4% 15%
Assumi nga360- dayy ear,whatist heannual costoff i
nancing?( M) CompanyB 7% 1.2% 12%
a.10. 0% c. 14. 0% CompanyC 5% 1.7% 20%
b.12. 0% d.17. 5% CMA06961- 30 CompanyD 8% 1.0% 5%
Whi chcompanywi llgi
v eGatsbyt hehi ghestpr oceedsf rom a$100, 000account
Proceeds duei n60day s?Assumea360- dayy ear.(D)
xcii
. Af ir
m of tenf actorsitsaccount sr eceiv able.I tsfinancecompanyr equiresa A.CompanyA. C.CompanyC.
6% r eserv eandchar gesa1. 4% commi ssionont heamountoft hereceivables. B.CompanyB. D.CompanyD. Gleim
Ther emai ni
ngamountt obeadv ancedi sf urtherr educedbyanannuali nterest
CMAEXAMI
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MANAGEMENTADVI
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NANCE

B.$1, 389. 74 D.$1, 510. 26

Discount i
ngofNot esRecei vabl e
*. OnSept ember15, 19x7, LTW Cor porationaccept edf rom acust omeraP100, 000, SHORT- TERM CREDI T
90-day ,20%i nterest -
bear ingnot edatedt hesameday .OnOct ober15, 19x7, LTWTr adeCr edit
discount edt henot eatt heWest ernBankat23% di scount.Thecust omerpai dCashDi scount
thenot eatmat ur i
ty .Basedona360- dayy ear ,whatamountshoul dLTW r epor t*. Oncashdi scount s,alloft hefoll
owi ngst atement sdonotappl yexcept( E)
asneti nt erestr ev enuef r
om t henot et ransact ion?1( D) a.I faf irm buy sP10, 000ofgoodsont ermsof1/ 10,net30andpay swi thinthe
a.P975 c. P5, 000. di scountper i
od, theamountpai dwoul dbeP9, 000.
b.P20, 000. d.P4, 025. RPCPA1097 b.Thecostofnott akingacashdi scounti sal way shi ghert hant hecostofa
bankl oan.
Compr ehensi v e c. Wi tht radet ermsof2/ 15,net60, i
ft hedi scounti stakent hebuy err ecei ve45
Quest i
ons204t hrough206ar ebasedont hef ol
lowi ngi nformation. Gleim day sofcr edit. RPCPA0597
Flesher ,I nc. '
scr edi tmanagerst udi edt hebi ll
-pay inghabi tsofi t
scust omer sand d.Thecostofnott akingt hediscounti shi gherf ortermsof2/ 10, net60t hanf or
foundt hat90% oft hem wer epr ompt .Sheal sodi scov eredt hat22% oft hesl ow 2/ 10, net30.
payer sand5%oft hepr omptonessubsequent lydef aulted.Thecompanyhas3, 000
account soni t sbooks, noneofwhi chhasy etdef aul ted. FreeTr adeCr edi t
xci
x
.Phil
lipsGl assCompanybuy sonter msof2/ 15, net30.I tdoesnott akedi scount s,
xcvi. Cal cul atet he t otalnumberofexpect ed def ault
s,assumi ng no r epeat andi tt y pical l
ypay s30day saftert hei nvoicedat e.Netpur chasesamountt o
busi nessi sont hehor izon.( M) $720, 000pery ear.Onav er age,howmuch“ fr
ee”t radecr editdoesPhi l
li
psr ecei
v e
A.795 C.135 duri
ngt hey ear ?(Assumea360- dayy ear .
)(E)
B.201 D.66 a.$30, 000 d.$60, 000
b.$40, 000 e. $70, 000
xcvii. Gi venav erager evenuesf rom sal esof$1, 200andt hecostofsal esof$1, 100, c. $50, 000 Brigham
whati st heav erageexpect edpr ofi
torl ossfr om ext endi ngcreditt
oslowpay er s?
(M) Non- fr
eeTr adeCr edit
A.$100pr ofit. C.$220l oss. *. Bachoy&Co.buy sont erms2/ 10, net30, butgener all
ydoesnotpayunt il40day s
B.$164l oss. D.$264l oss. aft
ert hei nv oicedat e.I tspur chasest otalP2, 160,000pery ear .Assumi ng360
daysay ear ,theamountof“ non-free”t radecr editusedbyt hecompanyont he
xcviii
.Gi venr evenuesf r
om sal esof$1, 200andt hecostofsal esof$1, 100,what av erageeachy earis( M)
woul dt heav eragel ev elofr ev enuest hatmakesi twor thwhiletoex t
endcr editt o a.P180, 000 c. P60, 000
slowpay er s?(M) b.P240, 000 d.P120, 000 RPCPA0595
A.$1, 364. 00 C.$1, 410. 26
c. Phr ankl inPhar msI nc.pur chasesmer chandi sef rom acompanyt hatgi vessal es
1
ter
mso f 2 /1 5, net4 0. Phrankli
nP harmsh asg rossp u rchaseso f$800 ,
00 0p er
Page: 21 year.Whati st hemaxi mum amountofcost lyt r
adecr editPhr ankli
ncoul dget ,
P100, 000x20%x90/ 360)=P5, 000
assumi ngt heyabi debyt hesuppl i
er scr editterms?( Assumea360- dayy ear .
)(M)
P105, 000x23%x60/ 360)= 4, 025
Neti nterestr evenue 975 a.$87, 111. 20 c. $54, 444. 50
b.$32, 666. 70 d.$52, 266. 67 Brigham
CMAEXAMI
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ONQUESTI
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NGCAPI
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NANCE

ci
v.Whenacompanyof ferscr edittermsof3/ 10,net30,t heannuali nt
erestcost
Account sPay ableBal ance basedona360- dayy eari s( E)
ci
. Yourf irm buy soncr edi ttermsof2/ 10,net45,andi tal wayspay sonDay45.I f A.36. 7% C.37. 1%
youcal culatet hatt hi
spol i
cyef f
ect i
vel
ycost sy ourf ir
m $157, 500eachy ear ,what B.24. 5% D.55. 6% Glei
m
i
st hef ir
m’sav erageaccount spay abl
ebal ance?( M)
a.$1, 234,000 d.$625, 000 cv.Ifafirm'scr edittermsr equi repay mentwi t
hi n45day sbutal l
owadi scountof2%
b.$75, 000 e. $750, 000 i
fpai dwi thin15day s( usinga360- dayy ear),theappr oximat ecostorbenef itof
c. $157, 500 Br i
gham thetradecr edi tt
ermsi s( E)
A.2%. C.48%.
Annual Nomi nal Rate B.16%. D.24%. CMA06921- 23
19.Thecostofgi vi
ngupacashdi scountundert het ermsofsal e1/ 10net60
(assumea360dayy ear )i s(E) *.I faf i
rm pur chasesr aw mat eri
alsf rom i tssuppl ierson a2/ 10,n/ 60 cash
A.7. 2percent . C.14. 7per cent. discountbasi s,theequi valentannuali nterestr at
e( usinga360- dayy ear)of
B.6. 1percent . D.12. 2per cent. Gi tman foregoingt hecashdi scountandmaki ngpay mentont he60t hdayi s( E)
a.36. 7% c. 73. 5%
20.Thecostofgi vingupacashdi scountundert het ermsofsal e5/ 20net120 b.14. 7% d.12. 2% RPCPA0596
(assumea360dayy ear )i s(E)
A.15per cent . C.15. 8per cent. cvi
.Ifaf irm pur chasesr aw mat erial
sf rom i t
ssuppl ierona2/ 10,net40,cash
B.18. 9per cent. D.20per cent. Gi tman discountbasi s,theequi valentannuali nterestr at
e( usinga360- dayy ear)of
forgoingthecashdi scountandmaki ngpay mentont he40t hdayi s( E)
ci
i
.Yourcompanyhasbeenof feredcr edittermsoni tspur chasesof4/ 30,net90. A.2% C.24. 49%
Whatwi llbet henomi nalcostoft r
adecr editify ourcompanypay sont he35t h B.18. 36% D.36. 72% Glei
m
dayaf terreceiv i
ngt hei nvoice?( E)
a. 30% d. 87% cvi
i. Usi nga360- dayy ear ,
whati stheoppor tunitycosttoabuy erofnotaccept ing
b.300% e. 156% terms3/ 10, net45?( E)
c. 3% Br i
gham A.55. 67% C.22. 27%
B.31. 81% D.101. 73%CMA06941- 20, 12941- 18
22.I facompanypur chasesmer chandiseont ermsof2/ 10,n/30,thecashdi scount
avail
abl eisequi v alentt owhatannualnomi nalrat eofi nter
est(assumi nga360- *. Mami mi li
,Inc.pur chasedani tem oncr edi twi thtermsof3/ 10,n/45.Basedona
dayy ear)? 360-dayy ear ,thecompany ’sannuali nterestcostoff oregoingthecashdi scount
a.2% c. 36% andmaki ngpay mentont hel astdayoft hecr editperi
odi s(E)
b.24% d.72% K,W &W a.24. 00% c. 24. 74%
b.31. 81% d.30. 86% RPCPA1095, 1096
ciii
.Whenacompanyof f erscr editt ermsof2/ 10,net30,t heannualint erestcost,
basedona360- dayy ear ,is(E) cvi
ii
. Ri char dsonSuppl yhasa$100i nvoicewi thpay mentt ermsof2/ 10,net60.
A.24. 0%. C.36. 0%. Richardsoncanei thert aket hedi scountorpl acethef undsi namoneymar ket
B.35. 3%. D.36. 7%. CMA06911- 6,06971- 8 accountpay ing6%i nterest .Usinga360- dayy ear,Ri
char dson'scostofnott aking
thecashdi scounti s(M)
CMAEXAMI NATI ONQUESTI ONS Page24of24
MANAGEMENTADVI
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A.12.
2%. C.6.
4%. 12%i nordert otakeanycashdi scount s.Whi choneoft hef ollowingwoul dbe
B.8.
7%. D.6.
2%. CMA06871- 28 themostat tr
act i
veforMaCor p.(Assume360day say ear .)( M)
a.Pur chasef rom CoreCo. ,payi n15day sandbor rowanymoneyneededf rom
cix.
Whatef fectivei nt
erestrat ei schar gedt oapur chaserr eceivi
ngt ermsof5/ 10, net thebank.
60i fthepur chaserf ail
st ot aket hedi scountandpay si n60day s?(E) b.Pur chasef rom CoreCo.payi n30day sandbor rowanymoneyneededf rom
A.30. 64% C.38. 40% thebank.
B.36. 60% D.45. 39% Gleim c. Purchasef rom ErnstInc.,payi n60day sandbor rowanymoneyneededf rom
thebank.
cx
.Di xieTour sI nc.buy sont ermsof2/ 15,net30.I tdoesnott akedi scounts,andi t d.Pur chasef rom DougCor p.andpayi n30day s. RPCPA0595
typicall
ypay s35day saf t
ert hei nvoicedat e.Netpur chasesamountt o$720, 000
pery ear .Whati sthenomi nalcostofi tsnon- fr
eet radecr edi
t?(E) *. Software Cent er,Inc.’
s new cont r
ol l
er i sr ev i
ewi ng t he company ’
s cash
a.17. 2% d.36. 7% management .Bel ow arer elevanti nformat ionr egardi ngt r
adecr edit
sf rom the
b.23. 6% e. 50. 6% suppli
ersoft hecompany :
c. 26. 1% Bri
gham Suppli
ers AverageMont hlyPur chases Cr edi tTer ms
cx
i
TechCo. P 100, 000 Net30
.Af irmi sof fer edtradecr editter msof3/ 15,net45.Thef ir
m doesnott aket he Comput ech 300,000 2/ 10, n/30
discount ,andi tpaysaf t
er67day s.Whati st henomi nalannualcostofnott aking Compuwor ks 1,000,000 5/ 10, n/120
thedi scount ?( E) So-wares 600,000 3/ 10, n/45
a.21. 41% d.23. 48% Thecompanyusesa360- dayy ear .Assumet hatal loft hesuppl i
erscansuppl y
b.22. 07% e. 24. 52% anyandal lofther equir
ement sofSof twar eandcanpr ov ideunl imitedcredi
tline
c. 22. 95% Bri
gham tothecompanyandt hatthecompanycanhav eonl yonesuppl i
er.Wi thacostof
bankborrowi ngof18%perannum, whichsuppl iershoul dSof twar echoose?( D)
*. Theof f
icial t
er msofpur chasesofUTang&Co.ar e2/ 10,net30butgener all
yt he a.Compuwor ksduet othel ongestcr editterm of120day s.
companydoesnotpayunt i
l40day saf terthei nvoicedat e.Itspur chasest ot al b.Comput echduet ocostoft r
adecr edi tof36. 7%.
P3,600, 000pery ear.Assumi ng360day say ear,theappr oximat ecostoft he c. Compuwor ksduet othehi ghestt r
adedi scountat5%.
“non- f
reet radecr editamount sto( M) d.TechCo.duet onodiscountpol i
cy . RPCPA1096
a.18. 36% c. 21. 90%
b.24. 50% d.19. 40% RPCPA1095 Ef fectiv
eAnnual Rate
7.Supposey oupur chasegoodsont ermsof2/ 10,net50.Taki ngcompoundi ng
46.Ifaf i
rm pur chasesr aw mat erialsfrom i tssuppl ierona3/ 10,n/ 50t erm,t he i nto account ,whatannualr ateofi nt erestisi mpliedbyt hecashdi scount?
appr oximat e annuali nter estr ate( usi ng 360- dayy ear)ofgi vi
ng up a cash ( Assume a year has365d a ys.)
discountandmaki ngpay mentont he60th dayi s A.2% C.102%
a. 22. 27.per cent c. 18. 37per cent B.20% D.18% B&M
b.27. 84per cent d.14. 69per cent Pol Bobadi ll
a
6.Supposey oupur chasegoodsont ermsof5/ 10,net30.Taki ngcompoundi ng
*. Threesuppl ier sofMaCor p.of ferdifferentcr editter ms.Cor eCo.of fer
st ermsof i nto account ,whatannualr ateofi nt erestisi mpliedbyt hecashdi scount?
1½/ 15, net30.DougCor p.of ferster msof1/ 10, net30.Er nstI nc.offerst erms ( Assumeay earhas365day s.)
of2/ 10, net60.MaCor p.woul dhav et obor rowf rom abankatanannualr ateof
CMAEXAMI NATI ONQUESTI ONS Page25of25
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

A.155% C.91% dri

nkanddi ne.Thecustomerpay saf eebasedont heamountoft i
mespentsi gned
B.5% D.255% B&M on tot he comput er. The store also sells books,tee-shir
ts,and comput er
accessori
es.Cy berAgepayi
ngallofisbi ll
sont hel astdayoft hepay mentperiod,
5.Supposi
ngyoupurchasegoodsonter
msof10/20,net60.Taki
ngcompoundi
ngthusforf
eiti
ngallsuppli
erdiscounts. Shownbel ow aredat aonCy berAge’
st wo
i
ntoaccount
,whatannualr
ateofi
nter
esti
simpl
iedbythecashdiscount
? majorvendors,i
ncludi
ngaver
agemont hl ypurchasesandcr edi
tterms.
(Assumeayearhas365days.) Vendor Aver
ageMont hl yPurchases CreditTerms
A.91% C.250% Webmast er $25,000 2/10,net30
B.139% D.162% B&M Softi
dee 50,000 5/10,net90
cx
ii
.Supposet hecr edittermsof feredt oy ourf i
rm byy oursuppl i
er sar e2/ 10,net30cx i
v. Assumi nga360- dayy earandt heCy berAgecont i
nuespay i
ngont helastday
days.Outofconv enience,yourf i
r mi snott akingdi scounts,buti spay i
ngaf ter20 oft hecr edi tperiod,t hecompany ’
swei ghted-aver
ageannuali nterestr at
eon
days,inst eadofwai t
inguntilDay30.Youpoi ntoutt hatt henomi nalcostofnot t r
adecr edit(i
gnor i
ngt heef fectsofcompoundi ng)ont heset wov endor sis(D)
taki
ngt hedi scountandpay ingonDay30i sar ound37per cent .Butsi ncey our a.27. 0% c. 28.0%
fi
rmi snott akingdi scountsandi spay i
ngonDay20, whati st heef fectiveannual b.25. 2% d.30. 2%
costofy ourf i
rm’scur rentpractice, usinga360- dayy ear?(M)
a. 36. 7% d. 43. 6% cx v. Shoul dCy berAgeuset radecr edi tandcont inuepayingatt heendoft hecredit
b.105. 4% e. 106. 9% period?( D)
c. 73. 4% Brigham a.Yes, i
fthecostofal ternativ
eshor t
-t
ermf inancingisless.
b.Yes,i ft hef i
rm’ swei ghted-av eragecostofcapi t
alisequalt oitswei ghted-
47.I faf i
rm pur chasesr aw mat eri
al sf r
om i t
ssuppl iersona2/ 10,n/ 50t erm,the av eragecostoft radecr edit.
equivalentannualef fecti
veinter est( using360- dayy ear)ofcont inuousl ygivi
ng c. No, i
fthecostofal t ernativelong- termf i
nanci ngi
sgr eater
.
upacashdi scountandmaki ngpay mentont he50thdayi s d.Yes, i
fthecostofal ternativ
eshor t
-t
ermf inancingisgreater.
A.14%. C.12. 29%
B.19. 94% D.14. 69% Pol Bobadi ll
a BANKLOANS
cx
ii
i
PrincipalAmount
.HayesHy permar ketpur chases$5mi ll
ioningoodsov era1-y earper i
odf rom i
tsDiscount edLoan
solesuppl i
er.Thesuppl i
erofferst radecr editundert hef oll
owi ngt erms:2/ 15netcxv
i
.PicardOr char dsrequi resa$100, 000annuall oani nordertopayl abor erstotend
45.IfHay eschoosest opayont imebutnott ot aket hedi scount ,whati sthe andhar vesti tsf rui
tcr op.Pi car dbor r
owsonadi scounti nterestbasi sata
averagel ev eloft hecompany ’
saccount spay able,andwhati st heef f
ectivecost nomi nalannualr ateof11per cent .IfPicardmustact uallyreceive$100, 000net
ofitstradecr edit
?( Assumea360- dayy ear.
)( M) proceedst of inancei tscr op, t
henwhatmustbet hef
acev alueoft henot e?(E)
a.$208, 333;17.81% d.$625, 000; 17.54% a.$111, 000 d.$89, 000
b.$416, 667;17.54% e. $625,000; 27.43% b.$100, 000 e. $108, 840
c. $416, 667;27.43% Brigham c. $112, 360 Br i
gham

WeightedAverageAnnualNomi nalInt
erestRate cxv
ii
.Viki
ngFar mshar v
estscropsinroughl
y90-daycy
clesbasedona360- dayyear.
Questi
ons112and113ar ebasedont hef ol
lowi
ngsituat
ion.CMA12961- 10&11 Thef i
rmr eceiv
espaymentf r
om itsharv
estssometi
meaf t
ershi
pment .Duein
CyberAge Outlet
,a relat
ively new store,is a caféthatoffer
s customer
st he par tt
ot hefir
m’srapi
dgrowth,i
thasbeenborrowi
ngtofi
nancei
tsharvestsusi
ng
opportuni
tyt
obr owsetheinternetorplaycomputergamesatt hei
rtabl
eswhil
ethey
CMAEXAMI NATIONQUESTI ONS Page26of26
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

90-daybanknotesonwhi
chthefi
rm pays12per centdi
scounti
nter
est.I
fthefi
rm borr
owerwit
htheuseof<ListA>i
finterestischar
gedona<ListB>basis.(E)
requir
es$60,000inpr
oceedsfr
om eachnot e,whatmustbet hefacev al
ueof CIA 0595 I
V- A. B. C. D.
eachnot e?(
E) 50
a.$61, 856 d.$68, 182 Li
stA $18,000 $20,000 $20,
000 $22,000
b.$67, 531 e. $67,423 Li
stB Si
mpl e Simpl e Di
scount Discount
c. $60,000 Bri
gham
Annual Nomi nalRateofAdd- onLoan
I
nterestonLoanwi thCompensat i
ngBal ance cxi
x
.CoverallCarpetsInc.ispl anningt obor r
ow $12, 000f rom thebank.Thebank
*
. TheMani l
aCommer cialBankandBankRapCor p.signedal oanagr eement of f
ersthechoi ceofa12per centdiscountinterestloanora10. 19percentadd-
on,
subjecttothefoll
owingterms: 1-y
eari nst
allmentloan,pay ablein4 equalquar terl
ypay ments.Whati sthe
a.St atedinter
estrateof18%onaone- yearloan; and approximate(nominal)rateofinterestont he10.19per centadd-onloan?(E)
b.15%compensat ingnon-i
nterestbeari
ngchecki ngaccountbalancetobe a. 5. 10% d.20. 38%
maintai
nedbyBankRapwi thManilaCommer cial
Bank. b.10. 19% e. 30.57%
Thenetpr oceedsoft heloanwasP1mi ll
ion.Thepr i
ncipalamountoftheloans c. 12. 00% Bri
gham
was( M)
a.P1, 176,471 c. P1,492,537 Quest i
ons1&2ar ebasedont hef oll
owi nginf
ormat ion. Bri
gham
b.P1, 000,000 d.P1, 219,512.RPCPA0595adapt ed Youhav ejusttakenoutal oanf or$75, 000.Thest ated( si
mple)inter
estrateonthi
s
loani s10per cent,andt hebankr equir
esy out omai ntai
nacompensat i
ngbalance
Di
scountedLoanwi thCompensatingBalance equalt o15per centofthei ni
ti
alfaceamountoft heloan.Youcurrent
lyhave$20,000
*. TheMani l
aCommer cialBankandBankRapCor p.signedal oanagr eementiny ourcheckingaccount ,andy ouplantomai ntainthi
sbalance.Theloani sanadd-
subj
ecttothefoll
owingterms: oni nstal
l
mentl oant hatyouwi l
lrepayin12equalmont hlyinst
all
ments,beginni
ngat
a.Statedinter
estrateof18%onaone- yeardi
scount edl
oan;and theendoft hefir
stmont h.
b.15%compensat ingnon-i
nterestbeari
ngchecki ngaccountbalancetobe
maintai
nedbyBankRapwi thManilaCommer ci
alBank. cxx
.Howl argeareyourmont hl
ypay ments?(E)
Thenetproceedsoft heloanwasP1mi ll
ion.Thepr i
nci
palamountoft heloans a.$6, 250 d.$5, 250
was(M) b.$7, 000 e. $6,875
a.P1,176,471 c. P1,492,
537 c. $7,500
b.P1,000,000 d.P1, 219,
512. RPCPA0595
cxxi
.Whatisthenominalannual
add-oni
nterestr
ateonthisl
oan?
Annual I
nterestRat eofOne- y
earLoan a.10.00% d.20.00%( E)
LI
BOR- basedI nterestRate b.16.47% e. 24.
00%
29.Theint erestrateonal oanissetat"1%overLI
BOR.
"Ift
heLI
BORr
atei
s5%t
hen c. 18.
83%
theinterestrateont heloanis:(E)
A.5% C.6% Ef
fecti
veInt
erestRateofaSimpleI
nter
estwithCompensati
ngBalance
B.4% D.7% B&M cx
xii.Ifaf i
rm borr
ows$500,000at10%andi srequi
redtomaintai
n$50,
000asa
mini
mum compensat
ingbal
anceatt
hebank,whati
stheef
fect
ivei
nter
estr
ate
Si
mpleI
nter
est onthel
oan?(
E)
cx
vii
i Aoneyear
,$20,
000l
oanwi
tha10%nomi
nal
int
erestr
atepr
ovi
dest
he
CMAEXAMI
NATI
ONQUESTI
ONS Page27of27
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

A.10.
0% C.9.
1%
B.11.
1% D.12.
2% CMA12941-
2328.Thebankof f
ersyouat er
ml oanat11% oncondi ti
onthatyoumai ntai
na20%
compensatingbalance.Whati stheeffecti
verat
eofinter
est?
27.Thebankof f
ersyouat ermloanat10% oncondi t
ionthatyoumai ntai
na10% A.13. 8% C.9.7%
compensat i
ngbalance.Whatistheeff
ectiv
er ateofinter
est? B.11.0% D.8.8% B&M
A.9.0% C.13. 7%
B.10.0% D.11. 1% B&M cxxvi
.TheDi xonCor porat
ionhasanout standi
ng1y earbankloanof$300, 000ata
tot
alinter
estr ateof8%. I n addi
tion,Dixon i
sr equi
red to maintaina20%
36.A bank lends a f i
rm $500,000 forone y earat8 per centand r equi
res compensat ingbalancei nitscheckingaccount,Assumi ngthecompanywoul d
compensat i
ngbalancesof10percentofthefacev alueoftheloan.Theef f
ect
ive nor mall
ymai ntai
nzerobalanceinitscheckingaccount,t
heeffecti
veinterestr
ate
annual
interestrat
eassociat
edwiththi
sloanis ontheloanis(E)
A.8.9per cent. C.7. 2per cent. a.6.4% c. 20.
0%
B.8per cent. D.7. 0per cent. Git
man b.8.0% d.10.0% CMA12951- 10

cxxi
ii
.FDRCor por
ationneeds$5mi ll
ion,andt hecompany '
sbankhasof feredto*. TheHI JCompanyhasanout standingbankl oanofP400, 000atani nterestr ate
make a l oan at10% annual l
y ,pr ovided t he company mai ntains a 15% of12%.Thecompanyi sr equiredt omai ntai
na20%compensat ingbal ancei nits
compensat i
ngbalance.Whati stheef fectivecostoft heloan?( E) checkingaccount .Whati stheef f
ectiveinterestcostoft heloan? Assumet hat
A.10% C.16. 67% thecompanywoul dnotnor mall
ymai ntainthisaver ageamount ?(E)
B.11. 76% D.17. 65% Glei
m A.8%. C.12%
B.15%. D.10% RPCPA1001
cxxi
v.OnJanuar y1,Scot tCor porationr eceiveda$300, 000l i
neofcr editatan
i
nterestrateof12%f r
om Mai nSt reetBankanddr ewdownt heenti
reamountonEf f
ectiveInterestRat eofa Si mpl eI nterestwi thI nterest-
earning Compensat ing
February1.Thelineofcr editagreementr equi r
esthatanamountequalt o15%of Balance
the loan be deposited into a compensat ing balance account.Whati st he21.OnJanuar y1,2001,Ol i
nCompanybor r
ows$2, 000,000f rom Nat ionalBankat
eff
ect i
veannualcostofcr editforthisloanar rangement ?( E) 12%annuali nterest.Inaddi ti
on, Olinisrequi r
edt okeepacompensat orybalance
A.11. 00% C.12. 94% of$200, 000ondeposi tatNat ionalBankwhi chwi l
learni nterestat4%. The
B.12. 00% D.14. 12% CMASampQ1- 7 effect
iveinterestthatOl inpay soni t
s$2, 000,000l oani s
a.10. 0%. c. 12.0%.
cxxv. HagarCompany ’
s bank r equires a compensat ing balance of20% on a b.11. 6%. d.12. 8%. K, W &W
$100,000loan.Ift hestatedinterestont heloani s7%, whati stheeffectivecost
oftheloan?(E) cxxvii
.Acompanyobt ainedashor t-term bankl oanof$250, 000atanannuali nterest
a.5. 83% c. 8. 40% rateof6%.Asacondi tionoft hel oan,t hecompanyi srequiredt omai ntai
na
b.7. 00% d.8. 75% CMA06971- 19 compensat ing bal anceof$50, 000 i ni tschecki ng account . Thecompany ’
s
checkingaccountear nsinterestatanannualr ateof2%.Or dinaril
y,thecompany
26.Thebankof fer
sy ouat erml oanat8% oncondi t
iont haty oumai ntaina20% mai nt
ainsabal anceof$25, 000i nitschecki ngaccountf ortransactionpur poses.
compensat i
ngbalance.Whati st heef fecti
ver ateofinterest
? Whati stheef fecti
v eint
er estrateoft hel oan?( D)
A.6. 4% C.18. 0% a.6. 44% c. 5.80%
B.10. 0% D.8. 0% B&M b.7. 00% d.6. 66% CMA06961- 11,06971- 19
CMAEXAMI NATIONQUESTI ONS Page28of28
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

cxxxii
.Ifacompanybor r
ows$30, 000f r
om abankf oroney earatast atedannual
cxxvii
i
.Acompanyobt ainedashor t-term bankl oanof$500, 000atanannuali nt erest i nterestrateof11%,buti nterestispr epaid( adi scount edl oan),thenwhati st he
rateof8%.Asacondi tionoft hel oan,thecompanyi sr equiredt omai nt ai
na ef fectiveannual i
nterestrate?( E)
compensat ing bal ance of$100, 000 i ni t
schecki ng account . The checki ng A.9. 64% C.12. 36%
accountear ns i nterestatan annualr at e of3%. Or dinar i
ly,the company B.10. 00% D.11. 00% Gl ei
m
mai ntainsabal anceof$50, 000i ni tsaccountf ortransactionpur poses.Whati s
theef fecti
vei nterestr ateoft hel oan?( D) 42.A f i
rm ar r
angesadi scountl oanata12per centi nter
estr ate,andbor rows
a.7. 77% c. 9.25% $100, 000foroney ear.Thest atedinterestrat eis_ ____andt heef fecti
v ei nterest
b.8. 22% d.8. 56% CMA06941- 21 ratei s_____
.
A.12. 00%; 12.00% C.12. 00%; 13.
64%
*. BalandSubasobt ainedashor t-t
erm bankl oanf orP1mi l
li
onatanannual B.13. 64%; 12.
00% D.12. 00%; 10.
71% Gi tman
interestof12%.Asacondi ti
onoft heloan,thecompanyi sr equi r
edt omai ntaina
compensat ingbal anceofP200, 000i nitssav i
ngsaccountwhi chear nsi nterestat Eff
ectiveAnnual PercentageRat eonaDi scount edRat ewi thCompensat i
ngBal ance
anannualr at eof6%.Thecompanywoul dot herwisemai nt ai
nonl yP100, 000i ncxxxii
i.Anent erpri
sebor r
owsf undsf rom itsbankf oraone- y earper iod.Thebank
thesav i
ngsaccountf ortransact i
onalpur poses.Theef fectivecostoft hel oani s char gesinterestatanomi nalr at
eof15%perannum,onadi scountbasi s,and
(D) requi r
esa10%compensat i
ngbal ance.Theef fectiveannuali nterestr at eont he
a.13. 20% c. 12% loani s
b.12. 67% d.13. 5% RPCPA1095 A.16. 67% C.20. 00%
B.17. 65% D.25. 00% CIA1195I V-52
Ef
fectiveI nter
estRat eofDi scount
cxxi
x.El anCor por ationi sconsi deringbor rowing$100, 000f r
om abankf or1y earat cxxxiv.TheAl tmaneCor porati
onwasr ecentlyquot edt ermsonacommer cialbank
ast atedi nter estr ateof9%.Whati stheef fectiveinter
estr atet oEl ani ft his l oanof7% di scount edinterestwi tha20% compensat ingbal ance.Thet erm of
bor r
owi ngisi nt hef orm ofadi scount ednot e?(E) thel oani s1y ear.Theef fectivecostofbor rowi ngi s( r
oundedt ot henear est
A.8. 10% C.9. 81% hundr edth)(M)
B.9. 00% D.9. 89% CMA12951- 11 A.8. 75%. C.7. 53%.
B.9. 41%. D.9. 59%. CMA12891- 21
cxxx. Acompanyhasj ustbor rowed$2mi ll
ionf rom abank.Thest atedr at eof
interesti s10%.I ft hel oani sdi scountedandi sr epayabl ei noney ear ,t he*. CashyCo.gotar ecentquot eonacommer cialbankl oanof16%di scount edr ate
effectiverateont hel oani sappr oxi mately(E) witha20% compensat i
ngbal ance. Thet erm oft hel oani soney ear . The
A.8. 89% C.10. 00% effectivecostofbor rowingi s(M)
B.9. 09% D.11. 11% Gleim a.19. 05% c. 22. 85%
b.20. 00% d.25. 00% RPCPA0596
cxxxi.Ci ncyCor p.isbor r
owi ng$1mi lli
onat10%f oray earonadi scountbasi swi th
abank.Howmuchi nf undsar eav ail
ableforuseandwhati st heef fecti
v ecostof cxxxv.TheFl esherCor porati
onwasr ecent l
yquot edt er
msonacommer cialbank
interest?(E) loanof6% di scount edinterestwi tha22% compensat ingbal ance.Thet erm of
A.$1, 000,000; 10. 0% C.$900, 000;10.0% thel oani s1y ear.Theef fectivecostofbor rowi ngi s( r
oundedt ot henear est
B.$1, 000,000; 11. 1% D.$900, 000;11.1% Gleim hundr edth)(M)
A.6. 00% C.7. 69%
CMAEXAMI NATI ONQUESTI ONS Page29of29
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

B.6.
38% D.8.
33% Gl
eim Effect i
v eI nterestRat eofaDi scount edRat ewithTr ansact ionCost
cx xxix.Cor bin,Inc.can i ssue 3- mont h commer cialpaperwi t
haf ace v alue of
34.Abankl endsaf i
rm $1,000, 000f oroney earat12per centonadi scount edbasi s $1, 000, 000 f or$980, 000.Tr ansact ion cost s wi llbe $1, 200.The ef f
ect i
ve
andr equirescompensat i
ngbal ancesof10per centoft hefacev alueoft hel oan. annual izedper cent agecostoft hef i
nanci ng, basedona360- dayy ear ,willbe( D)
Theef fectiveannual i
nterestr at
eassoci atedwi ththisl oanis A.8. 48%. C.8. 00%.
A.12per cent. C.13. 6per cent . B.8. 66%. D.2. 00%. CMA12901- 28
B.13. 3per cent. D.15. 4per cent . Gi
tman
cx l
.Randy ,Inc.cani ssue3- mont hcommer cialpaperwi thaf acev alueof$1, 500, 000
Annual InterestRat eofLessThanOneYearLoan for$1, 450,000.Tr ansact ion cost s wi l
lbe $1, 500.The ef fect ive annual ized
Eff
ectiveAnnual InterestRateonMont hl yPay ment per cent agecostoft hefinanci ng, basedona360- dayy ear ,
wi l
l be( D)
cxxxvi.Whati st heef fecti
veannuali nter estr ateona9%APRaut omobi leloant hat A. 3. 45% C.14. 22%
hasmont hlypay ments?( M) B.3. 56% D.13. 79% Gl ei
m
A.9% C.9. 81%
B.9. 38% D.10. 94% Gleim Effect i
v eI nterestRat eofaDi scountwi t
hCompensat i
ngBal ance
124. By eCompanybor rowsf rom abankacer tainl oanatast ateddi scountr ateof
cxxxvii
.Acr editcardaccountt hatchar gesi nterestatt her ateof1. 25% permont h 12%perannum.Thebankr equi r
es10%ofl oanascompensat ingbal ancei nits
woul dhav eanannual lycompoundedr ateofandanAPRof( M) new checki ngaccount . Thel oani spay abl eatt heendof6mont hs. The
A.16. 08%; 15% C.12. 68%; 15% ef f
ect ivei nt
er estr ateoft hisl oani s
B.14. 55%; 16.08% D.15%; 14. 55% Gleim A.28. 21% C.27. 27%
B.14. 29% D.15. 38% Pol Bobadi ll
a
Eff
ectiveI nterestRat eofa Si mpl eI nter estwi t
hI nterest-ear
ning Compensat ing
Balance Rev olvingCr edi
t
cxxxvii
i. OnJul y1,2001,Di chterCompanyobt ai
neda$2, 000, 000180- dayEffect i
v eRat eofSi mpl eInterestwi t
hI nterestandFee
cxl
i
bankl oanatanannualr ateof12%. Thel oanagr eementr equi resDi chtert o .I nlandOi lar r
angeda$10, 000, 000r ev olvi
ngcr editagr eementwi thagr oupof
mai ntain a $400, 000 compensat ing bal ance i ni t
s checki ng accountatt he smal lbanks.Thef irm paidanannualcommi t mentf eeofone- hal fofoneper cent
lendingbank.Di chterwoul dot her wi semai nt ainabal anceofonl y$200, 000i n oft heunusedbal anceoft hel oancommi t
ment .Ont heusedpor tionoft hel oan,
thisaccount . Thechecki ngaccountear nsi nter estatanannualr eof6%. I
at nlandpai d1.5per centabov epr imef orthef undsact uall
ybor rowedonanannual ,
Basedona360- dayy ear,theef fect i
v ei nterestr ateont heborrowi ngi s(D) simpl ei nterestbasi s.Thepr imer atewasat9per centf ort hey ear .IfI nland
a.12%. c. 13. 33%. bor rowed$6, 000, 000i mmedi atelyaf tertheagr eementwassi gnedandr epaidt he
b.12. 67% d.13. 5% AICPA0587I -
32 loanatt heendofoney ear ,whatwast het otaldol larcostoft hel oanagr eement
foroney ear?(E)
Eff
ectiveI nterestRat eofaDi scount a.$560, 000 d.$900, 000
44.Af ir
m hasal ineofcr editandbor rows$25, 000at9per centi
nter estf or180day s b.$650, 000 e. $675, 000
orhal fay ear.Whati st heef f
ectiv er at eofi nterestont hi
sloani fthei nterestis c. $540, 000 Bri
gham
paidi nadv ance?
A.4. 7per cent C.9. 9per cent Effect i
v eRat eofSi mpl eInterestwi t
hCompensat i
ngBal anceRequi rement
B.9. 4per cent D.10. 3per cent Gi
tman cx l
ii
. JWDav i
s.com hasar ev olvingcr editagr eementwi t
habank.JWDav i
s.com
canbor row upt o$2mi l
lionat10% i nterestandi sr equiredt okeepa15%
CMAEXAMI
NATI
ONQUESTI
ONS Page30of30
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CES WORKI
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compensat ingbal anceonal lbor r

owedf unds.Ift hef irm borr
ows$1. 2mi lli
onf or ( Assumea360dayy ear.)(E)
theent irey ear,whati stheef f
ect i
vecostofbor rowi ng?( M) A.$10, 000 C.$3, 333
A.10. 00% C.11. 76% B.$30, 000 D.$1, 000 Gitman
B.11. 11% D.13. 33% Gleim
Commer cial Paper
Int
erestPay ment Annual Inter estRat e
23.Iftheint erestrateonal ineofcr editis12%pery ear,whati sthequar t
erlyinterest54.Af irmi ssued$2mi lli
onwor t
hofcommer cialpapert hathasa90daymat urity
pay mentonal oanof$10mi ll
ion? andsel lsf or$1, 900,000.Theannuali nterestrateont hei ssueofcommer cial
A.$1, 200, 000 C.$400, 000 paperi s( E)
B.$300, 000 D.Noneoft heabov e B&M A.5per cent . C.17per cent .
B.10per cent . D.21per cent . Gitman
cxl
ii
i. Thet r
easur yanal ystforGar t
hManuf acturinghasest i
mat edt hecashf lows
forthef irsthalfofnexty ear(i
gnor inganyshor t
-term bor rowings)asf ollows: Mat ur
ityVal ue
Cash( milli
ons) 55.Af irm hasdi rectlyplacedani ssueofcommer ci
alpapert hathasamat uri
tyof60
Infl
ows Out fl
ows day s. Thei ssuesol df or$980,000andhasanannuali nterestr ateof12. 24
Januar y $2 $1 p ercen t
. T he value ofthe comme rci
alpaper atma turi
ty i
s (
E )
Februar y 2 4 A.$19, 992. C.$999, 992.
Mar ch 2 5 B.$980, 000. D.$960, 008. Gitman
April 2 3
May 4 2 FI
NANCI NGALTERNATI VES
June 5 3 Diff
e r
e ntT ra de C reditOp t
ions
Gar t
hhasal i
neofcr editofupt o$4mi lli
ononwhi chi tpaysinter estmont hlyata cxli
v. Me r
k le, I
n c.h asat empor aryneedforfunds.Managementi st ryi
ngt odeci de
rateof1%oft heamountl oaned.Gar thisexpect edtohav eacashbal anceof$2 bet weennott akingdi scountsf r
om oneoft heirt hreebi ggestsuppl iers,ora
milli
ononJanuar y1andnoamountut i
li
zedoni tslineofcr edit ,approximat ely 1 4.75% pe r ann um r
en ew abl
ed i
scountloa nfrom itsb ankf or 3mo nths.The
howmuchwi llGarthpayi ninterestduringthef irsthal fofthey ear ?(M) s uppliers 'terms area sfo l
l
o ws:
a.Zer o c. $80, 000 For tCo. 1/10,net30
b.$61, 000 d.$132, 000 CMA06971- 15 RileyManuf acturi
ngCo. 2/15,net60
Shad, Inc. 3/15,net90
Int
erestPay ment U sing a 3 60 -
d ayy ear,t he cheapestso urce ofshor t
-term f inancing i nt hi
s
43.XYZCor por ati
onbor rowed$100, 000f orsixmont hsf rom thebank.Ther atei s si tuationi s(D)
pri
mepl us2per cent.Thepr i
mer atewas8. 5per centatt hebegi nningoft hel oan A.Thebank. C.Ri leyManuf acturi
ngCo.
andchangedt o9per centaftert womont hs.Thi swast heonl ychange.How B.For tCo. D.Shad, Inc. CMA12831- 25
muchi nt er estmustXYZcor porationpay ?(M)
A.$2, 476 C.$18, 212 TradeCr edi tv s.BankLoan
B.$5, 417 D.$21, 500 Gitman Poi ntofI ndi fference
. ABCCompanyf inancesal lofit
sseasonalinventoryneedsf rom t hel ocalbankat
45.A firm ar rangedf ora120daybankl oanatanannualr ateofi nterestof10 anef fect ivei nterestcostof9%.Thef i
rm’ssuppl ierpr omisest oext endt rade
percent .I ftheloani sfor$100, 000, howmuchi nterestindol l
arswi ll
thef i
rm pay ? cr editont ermst hatwi l
lmat chthe9%bankcr editr ate.Whatt ermswoul dthe
CMAEXAMI NATI ONQUESTI ONS Page31of31
MANAGEMENTADVI
SORYSERVI
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NGCAPI
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NANCE

suppl
i
erhavet
ooff
er(
appr
oxi
mat
ely
)? Quickbowpay sin30day s.I t
snetpur chasesar e$11, 760perday ,usinga360-
a.2/10,n/
60. c. 2/
10,
n/90. dayy ear .Thei nter estr ateont henot espay abl eis10per centandt hef ir
m’ stax
b.2/10,n/
100. d.3/10,
n/60. RPCPA1001 ratei s40per cent .Ift hef irmi mpl ement st hepl an,whati st heexpect edchange
i
nQui ckbow’ sneti ncome?( VD)
Cr edi tTer mv s.Si mpl eInt erest a.- $23, 520 d.+$37, 728
cx lv. Acompanyhasaccount spay abl eof$5mi llionwi tht er
msof2% di scount b.- $32, 160 e. +$62, 880
wi t
hin15day s,net30day s(2/ 15net30) .Itcanbor r
owf undsf rom abankatan c. + $23 ,520 Br i
gham
annualr at eof12%,ori tcanwai tunt ilt he30t hdaywheni twi l
lr ecei verevenues
tocov ert hepay ment .Ifitbor rowsf undsont hel astdayoft hedi scountper i
odi nDel
ay edPay mentt oSuppl ierorDi scount edI nt erest
ordert oobt ai nthedi scount ,it
st otal costwi l
lbe( M) *. BudiCor p.i ntendst oacqui reanew equi pmentt oincr easei tscapaci t
y.I tis
A.$51, 000l ess. C.$100, 000l ess. estimat edt ocostP2. 4mi ll
ion.Abankl oancanf i
nancet heacqui siti
onatt en
B.$75, 500l ess. D.$24, 500mor e. CIA1192I V-54 (10%)per centdi scount edi nterest . Al ternat i
v ely,thecompanymayj ustdel ay
pay mentt oitssuppl iers.Pr esent l
y,t hecompanybuy sundert ermsof2/ 10,net
cx lvi.
Acor porat i
oni scur r entlyexper i
enci ngcash- f
lowpr obl emsandhasdet ermined 40,butmanagementbel ievespay mentcoul dbedel ay ed30addi t
ionalday s,
thati tisinneedofshor t-
term cr edit.Itcanei t
herusei t
st r adecr edi ton$100, 000 wi thoutpenal ty;thati spay mentcoul dbemadei n70day s.Assumi ng360day sa
ofaccount spay ablewi t
ht ermsof1/ 10,net30ora30- daynot ewi tha20% y ear, thecompanyshoul d( M)
annualsi mpl einterestr ate.Whi chi st hebestal ter nativ
e, andwhati si t
sef f
ective a.Bor rowsi ncei tischeaperby1. 13%t handel ay i
ngpay mentt osuppliers.
rateofi nterest( roundedt oawhol eper cent ageandusi nga360- dayy ear)
?( D) b.Bor rowsi ncei tischeaperby2. 5%t handel ayingpay mentt osuppli
er s.
CIA1188I V-54 c. Del aypay ment st osuppl i
erssi ncei twoul dcost12%asagai nstbankl oanof
A.Thet radecr edit
.I tsef fecti
v erat eis10%. C. The not e. I ts ef f
ective 10%.
ratei s17%. d.Del aypay mentt osuppl ierssincei tdoesnotcostany thing. RPCPA0597
B.Thet radecr edit
.I tsef fecti
v erat eis20%. D. The not e. I ts ef f
ective
ratei s20%. *. Meal sEt c.hasbeenv erysuccessf ul.I ti st henewestf ast foodout letatt he
Greenbel tar eaofMakat if eaturingor di nar yFi li
pinof oodpackedwi thbanana
cx lvii
.Ev ery15day sacompanyr ecei ves$10, 000wor thofr aw mat erialsfrom its l eav es.Af tersi xmont hsofoper at i
ons,i tneedst oexpand.Theowner ,Mr .K.
suppl iers.Thecr editt ermsf ort hesepur chasesar e2/ 10, net30, andpay menti s Engest imat est hatP2. 4mi lli
onwi llber equi redt oputupanot herout l
eti nt he
madeont he30t hdayaf tereachdel i
v er y.Thus,t hecompanyi sconsi dernga1- Or
i tigasar ea.
yearbankl oanf or$9, 800( 98% oft hei nv oiceamount ).I ftheef fectiveannual Fi nanci ngwasof feredbyaf r
iendl ybankerat10per centdi scountedi nt erest.
i
nt erestr at eont hi
sl oani s12%, whatwi llbet henetdol l
arsav i
ngsov erthey ear Al ternat ively,Mr .Engi st hinkingofj ustdel ay i
ngpay mentt oi tssuppli
er s.Al lhis
bybor rowi ngandt hent akingt hedi scountont hemat erials?( D) salesar eoncashbasi s.Thecompanypur chasesundert er msof2/ 10,net40
A.$3, 624 C.$4, 800 butMr .Engbel iev est hathecoul ddel aypay ment sbyanot her30day swi thout
B.$1, 176 D.$1, 224 Gleim anypr obl em.Thi smeanspay mentcoul dbemadei n70day s.Assumi ng360
day say ear ,Meal sEt c.shoul doptf or( M)
cx
lvii
i
. Qui ckbow Companycur rent l
yuses maxi mum t r
ade cr edi tbynott aking a.Bankl oansi ncei tscostof11. 11% i scheapert hant hecostofdel ay i
ng
discount soni t
spur chases.Qui ckbow i sconsi der ingbor rowingf rom itsbank, pay ment sof12. 24% RPCPA0597
using not espay able,i n or dert ot ake t rade di scount s. The f irm want st o b.Del ayingpay ment ssi ncei thasnocostcompar edt ot he10% di scount ed
det ermi net heef f
ectoft hispol i
cychangeoni tsneti ncome.Thest andar d banki nterest.
i
ndust rycr editt ermsof feredbyal li tssuppl i
er sar e2/ 10,net30day s,and c. Bank l oan si nce i ts costof10% i s cheapert han t he costofdel ay i
ng
CMAEXAMI NATI ONQUESTI ONS Page32of32
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pay ment sof12%. averageamountofunusedf unds. CIA1186I V-43

d.Del ay ingpay ment ssi ncei tscosti sonl y2% compar edto10% di scounted
banki nter est . Questions158t hrough160ar ebasedont hef ollowi nginf ormat ion. Gl ei
m
MortonCompanyneedst opayasuppl i
er'
si nvoi ceof$60, 000andwant stot akea
CreditTermv s.Loanwi thCompensat i
onBal anceRequi rement cashdi scountof2/ 10, net40.Thef ir
m canbor r
owt hemoneyf or30day sat11%per
Quest i
ons137and138ar ebasedont hefoll
owi ngi nformation. CMA06871- 29&30 annum wi tha9%compensat i
ngbal ance.Assumea360- dayy ear .
Mor t
onCompanyneedst opayasuppl i
er'
si nv oi
ceof$50, 000andwant st ot akea
cashdi scountof2/ 10,net40.Thef ir
m canbor rowt hemoneyf or30day sat12%per cl
ii
.The amountMor t
on Companymustbor row t o payt he suppl ierwi thi
nt he
annum pl usa10%compensat ingbal ance. discountper iodandcov erthecompensat ingbal ancei s(M)
A.$60, 000 C.$64, 615
cxli
x. TheamountMor tonCompanymustbor row t opayt hesupplierwi thinthe B.$65, 934 D.$58, 800
discountper iodandcov erthecompensat i
ngbal ancei s(M)
A.$55, 000. C.$55, 556. cl
ii
i. Assumi ng Mor ton Companybor rowst he moneyon t he l
astdayoft he
B.$55, 056. D.$54, 444. discountper iodandr epay sit30day slater,theef f
ect i
vei nterestrat eont hel oan
is(M)
cl
.Assumi ngMor tonCompanybor r
owst hemoneyont hel astdayoft hedi scount A.11% C.12. 09%
per i
odandr epay si
t30day slater,theeff
ect ivei nterestrateont heloani s( M) B.10% D.9. 90%
A.12. 00%. C.13. 20%.
B.13. 33%. D.13. 48%. cl
iv. I fMor tonf ailst ot aket hediscountandpay sont he40t hday ,whatef f
ect i
ve
rateofannual interesti sitpayingthev endor ?( M)
cl
i.Acompanywi llrecei vecashf rom salesi n1y earthatcanbeusedt opayf or A.2% C.24. 49%
mat erial s.Thesuppl ierwi l
lal l
ow pay menti n1y ear.Ift hecompanypay sthe B.24% D.36. 73%
suppl i
eri mmedi ately,itwi l
lr eceivea20% di scountof ft he$100,000pur chase
price,buti tmustbor rowt hef ullamount .Abankhasof fer edthecompanyt eeDi
hr f
ferentBankLoanOpt i
ons
alternat ives: SimpleI nt
erestv s.Di scount
1.A1- yearl oanat18%wi t
hnoot herfees, 19.Tor ai
semoneyf orwor ki
ngcapi tal
,TheBi ggerDonuti sconsi deringaone- year
2.A1- y earl oanat15% wi ththepr ovisiont hatitmai ntains20% ofwhat ever l oanf r
om t hePhi l
trustBank.Twoal t
ernativesar eav ail
able;
amounti tbor r
owsasnoni nterest-
bear ingcompensat ingbalancesov erthe Al ternati
v e1:aP70, 000, 15%not eissuedatf acev alue.
li
feoft hel oan, or Alternati
v e2:aP70, 000, non-i
nterestbearingnot ediscount edat15%.
3.Aguar ant eedl ineofcr editof$100, 000at17% wi tht heprovisi
ont hatthe Thecompanypl anst obor r
ow onNov ember1,1993andt heaccount i
ngper i
od
bankwi llcol l
ecta1% f eeont heav er ageamountofunusedf unds. The f oll
owst hecal endar .
companyexpect st obor rownoot herfunds.Thecompanywoul dachi evethe I fyouar easkedbyt heChi efExecuti
v eOf ficeront hepr eferableal t
ernativet o
lowestcostoff inancingby( M) take,assumi ngwhat ev erdiff
erencei smat er i
alinamountandbasedony our
A.Al lowi ngt hesuppl iertof i
nancet hemat erialsandmaki ngpay mentatt heend knowl edgeofaccount ingfornot es,whatadv i
seshoul dy ougi vet heCEOofThe
of1y ear . BiggerDonut ?(M)
B.Accept ingt he1- yearloanat18%wi thnoot herpr ovi
sions. a.al t
ernat ive1 c. al ternati
ve2
C.Accept ingt he1- yearloanat15%wi tht hecompensat i
ngbal ancepr ovi
sions. b.ei t
heral ternat ive d.Bot halternatives
D.Accept ingt heguar anteedl ineofcr edi tat17% wi t
ht hefeerequi r
edont he
CMAEXAMI NATI ONQUESTI ONS Page33of33
MANAGEMENTADVI
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NGCAPI
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Di
scount twopay mentopti
onsf orthemer chandise.Thef i
rstopt i
onisBobwi l
lpayRoger
cl
v.Fonzeisconsi
deringborr
owing$100,000f r
om abankfor1y ear .Thisbor rowing $20,
000i nalumpsum 1y earfrom thedat eofpur chase.Thesecondopt i
onis
i
sint hef
orm ofadiscountednote,
andhewant st
heeffecti
vei nterestratetobe Bobwi l
lpayRoger$750ev ery2weeksf or1y ear,start
ing2weeksaf tert
hedate
between11% and12%.Whi chofthef ol
lowingbank(
s)coul dFonzechoose,i f ofpurchase(atotalof26bi -weeklypayment s)
.IfRoger '
srelevantdi
scountrat
e
Bank1hasast atedint
erestrat
eof9%, Bank2hasast atedinterestr ateof9.5%, i
s0.5%perbi -
weeklyperiod,whichoptionshouldRogeraccept ?(M)
Bank3hasast atedint
erestrat
eof10%, andBank4hasast atedi nterestrat
eof A.Bi-weeklypayments,ast heyhaveahi gherpresentv al
ueby$675.
10.
5%?( M) B.Eitherone,si
ncetheyhav et
hesamepr esentv al
ue.
A.Bank2onl y. C.Ei t
herBank1orBank3. C.Thel umpsum pay ment ,asithasahi gherpresentvalueby$500.
B.Bank3onl y. D.Ei t
herBank3orBank4. Gl
eim D.Thel umpsum pay ment ,asithasahi gherpresentvalueby$1,750.Gleim

SimpleInt erestwi thCompensat i

onBal ance Factori
ngv s.Di f
fer entBankLoanTer ms
clv
i. HagarCompanyi spl anningonpur chasi ngal argerwar ehousenexty ear.
Questions139t hrough142ar ebasedont hef oll
owi nginf
or mat
ion.CMA 1296 1- 14
Hagarhas cont acted f ourbanks and r eceived information aboutl oans of to17
$100, 000.Bank1r equi resacompensat ingbal anceof20% andhasast atedTheFr ameSuppl yCompanyhasj ustacqui redal argeaccountandneedst oincrease
interestr ateof7%.Bank2r equir
esacompensat ingbalanceof15%andhasai tswor kingcapi t
alby$100, 000.Thecont rolleroft hecompanyhasi denti
fiedthe
statedi nterestr ateof8%.Bank3r equiresacompensat ingbal anceof18%andf oursour cesoff undsgi venbel ow.
hasast at edinterestr at eof7. 5%.Bank4r equiresacompensat ingbalanceof0%A.Payaf actort obuyt hecompany ’sr ecei vables,whi chav erage$125, 000per
andhasast atedi nterestr ateof9%.Thebankwi ththelowestef fecti
veloancost mont handhav eanav eragecollecti
onper iodof30day s.Thef actorwilladvance
is(M) upt o80%oft hef acev alueofreceivabl esat10%andchar geaf eeof2%onal l
A.Bank1. C.Bank3. recei vables pur chased. The cont rollerest imat es thatthe f i
rm woul d save
B.Bank2. D.Bank4. Gleim $24, 000i ncol l
ect ionexpensesov ert hey ear.Assumet hef eeandi nterestare
notdeduct iblei nadv ance.
Questions87and88ar ebasedont hefollowi ngi nformat i
on. Gleim B.Bor row $110, 000f r
om abankat12% i nterest . A 9% compensat i
ngbal ance
Burgers&Bur gers'bank( Bank1)hasof f
eredt olendt hef i
rm $5mi l
li
onatanannual woul dber equi red.
rat
eof12%,pr ov i
dedt hecompanymai ntainsacompensat ingbal anceof25% i sC.I ssue$110, 000of6- mont hcommer cialpapert onet$100, 000. (New paper
maintained.Howev er ,acompet itorbank( Bank2)of fer
eda$5mi l
li
onl oanat15% woul dbei ssuedev ery6mont hs.)
annuallywi tha10%compensat ingbalance. D.Bor row $125, 000f rom abankonadi scountbasi sat20%.Nocompensat ing
clv
ii
. Whi chbankof ferst hebet terdeal,expr essedonanannual basis?(M) balancewoul dber equired.
A.Bank1i sbet terby. 7%. C.Bank2i sbet t
erby. 7%. Assumea360- dayy eari nallofyourcalculat ions.
B.Bank1i sbet terby3. 0%. D.Bank2i sbet t
erby2. 0%.
clx.
ThecostofAl ter nati
v eAi s(M)
clv
ii
i. Whi chwoul dbet hebet t
erdeali fthecompanyusual lykeepsanav erageof a.10. 0% c. 13. 2%
$500, 000ondeposi t?(M) b.12. 0% d.16. 0%
A.Bank1by0. 9%. C.Bank2by1. 0%.
B.Bank1by3. 0%. D.Bank2by0. 9%. clxi
. ThecostofAl t
ernativeBi s(M)
a.9. 0% c. 13. 2%
LumpSum Pay mentv s.Inst all
mentPay ment b.12. 0% d.21. 0%
cli
x. RogerRet ailersel ls$20, 000ofmer chandi set oBobBuy er.Bobof f
er sRoger
CMAEXAMI NATI ONQUESTI ONS Page34of34
MANAGEMENTADVI
SORYSERVI
CES WORKI
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cl
xi
i. ThecostofAl
ter
nat
iveCi
s(M)
a.9.
1% c. 16.
2% Paidsal ar
ies (
10,000) D N
b.10.
0% d.20.0% Accruedsal aries( 3,500) N I
Wor ki
ng capi tal, end of 80,500
cl
xi
ii. ThecostofAl
ter
nat
iveDi
s(M) January
a.20.0% c. 40.
0% *N=noef fect;I=i ncrease; D=decr ease
b.25.0% d.50.0% Answer( B)isincor rectbecause78, 500i gnorestheconsumedsuppl i
es, t
hecash
purchaseofof fi
ceequi pment,andt heaccruedsalari
es.Howev er,i
tincorr
ectl
y
consider
st hesuppl iespur chasedonaccountandt her epaymentoft heshort-
ANSWEREXPLANATI
ONS term bankl oan.Answer( C)i sincor r
ectbecause50, 500doesnoti ncludethe
servi
cesper formedonaccount .Answer( D)isincor
rectbecause47, 500omi t
s
i
. REQUI RED:Theef fectonnetwor kingcapi t
alofani ncr easei ncur r
entasset s the servi
ces per formed on accountand accr ued salar
ies butincludes t
he
andadecr easei ncur rentl iabil
it
ies. repaymentofshor t-ter
ml oan.
DISCUSSI ON:( D)Wor kingcapi talist heexcessofcur rentasset sov ercur r
ent
l
iabi
li
ties.Ani ncreasei ncur r
entasset soradecr easei ncur r
entl i
abili
ti
eswi ll
i
v.Answer( C)i scor r
ect .Networ kingcapi talequalscur rentasset s( cash,account s
i
ncreasewor kingcapi t al.Thus,networ ki
ngcapi talincr easedby$170( $120+ r eceivable,i nv entories f orthis company )mi nus cur rentl iabil
iti
es (account s
$50) pay able,not espay abl e,accr uedwages) .From Januar y1t oJune30,t henet
wor kingcapi t
al i
ncreasedby$1, 000, 000{ [
($4+$4+$10)-( $3+$3+$2) ]-[($3+
i
i. Answer( D)i scor rect .Wor ki
ngcapi talist heexcessofcur rentasset sov er $5+$8)-( $2+$4+$1) ]
}.
curr
entl i
abili
ties.Ani ncr easeincur rentasset soradecr easei ncur r
entl i
abil
iti
es Answer( A)i si ncorrectbecauseadecr easeof$1, 000,000r esultsf r
om omi t
ti
ng
i
ncreaseswor kingcapi tal.Thus,networ kingcapi t
alincr easedby$190( $130+ i nv entories.Answer( B)i sincor rectbecauset hedi f
ferencebet weenal lasset s
$60). andal ll
iabi l
it
iesst ay edt hesame.Answer( D)isi ncorrectbecauseani ncrease
Answer( A)isi ncorrectbecauset hedecr easei ncur r entliabil
iti
esi ncreases of$2, 000,000r esultsf rom omi tti
ngaccr uedwages.
workingcapi tal.Answer( B)i si
ncorrectbecausenetwor kingcapi t
alincreasedby
$190.Answer( C)isincor rectbecausenetwor ki
ngcapi tal i
ncreasedby$190. v . Answer( C)i scor rect.Gi vent hatcur rentliabil
iti
esar e$200mi l
l
ionandt he
currentr atio( currentasset s÷cur rentliabi
li
ti
es)i s1. 70,currentasset smustbe
i
ii
.Answer( A)iscor r
ect .Wor kingcapitalistheexcessoft ot alcurrentasset s(CA) $340mi llion( $200mi ll
ionx1. 70).IfXamountofcommer cialpaperi si ssued,
overtotalcurrentl i
abi l
ities( CL).Thus, workingcapitalatt heendofJanuar y therebyi ncr easingbot hcur rentasset sandcur rentliabil
it
iesbyX,andt henew
equals80,500comput edasf ol
lows: currentr atioi st hecont ract
ualmi nimum of1. 40t o1,t hemaxi mum amountof
CA* CL* commer ci alpapert hatcanbei ssuedi s$150mi l
lion.
Beginningwor kingcapi tal 70,000 ($340+X)cur rentasset s÷( $200+X)cur r
entliabi
lit
ies=1. 4
Performed ser vi
ces on 30,000 I N $340+X=1. 4($200+X)
account $340+X=280+1. 4X
Purchased suppl ies on -0- I I $340=$280+. 4X
account $6 0= .
4X
Consumedsuppl i
es (4,000) D N X=$150
Purchasedof ficeequi pment (2,000) D N Answer( A)i si ncorrectbecause$80mi ll
i
onr esul t
si nacur r
entr ati
oof1. 50.
Paidshor t-
term bankl oan -0- D D Answer( B)i sincor rectbecause$370mi l
li
onr esultsinacur r
entr ati
oof1. 25.
CMAEXAMI NATI ONQUESTI ONS Page35of35
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Answer(
D)i
sincor
rectbecause$280mi
l
li
onr
esul
tsi
nacur
rentr
ati
oof1.
29. Witht henumber sprovided,wecanseet hatIkenBerr
yFarmshasacur r
ent
rati
oof1. 67(CA/CL=$5/ $3=1.67)
.I fnotespay abl
earegoingt
oberaisedto
vi.Answer( B)i scor rect.Ifcur rentl i
abiliti
esar e$250mi l
li
onandt hecur r
entr at i
o buyi nventori
es,bot
ht henumer at
orandt hedenominatoroftherati
owi l
l
(currentasset s/cur rentliabil
iti
es)i s1. 75,cur rentasset smustbe$437. 5mi ll
ion i
ncrease.Wecani ncreasecurr
entl
iabil
it
ies$1mi l
li
onbef
orethecur
rentrat
io
($250 x1. 75).Hence,i fX amountofcommer cialpaperi si ssued,ther eby reaches1. 5.
increasingbot hcur rentasset sandcur rentl iabil
itiesbyX,t henew cur r
entr at i
o
(whichcannotbel esst han1. 5)is$125mi l
lion.
($437.5+X) /($250+X)=1. 5
$437. 5+X=1. 5($250+X)
$437. 5+X=$375+1. 5X
$437. 5=$375+. 5X
$62. 5=. 5X
X=$125
Answer( A)i si ncor rectbecause$375mi ll
ioni st hemi nimum amountofcur rent
asset srequi redt okeept hecur rentrat i
oatt hef loorl evelof1. 5.Answer( C)i s
incorrectbecause$562. 5mi ll
ioni st hesum oft heexi stingcur rentassetsand
$125mi l
lion. Answer( D)isi ncor rectbecause$437. 5mi ll
ioni stheexi stingix.REQUI RED: The max i
mum di vidends consi stentwi th a speci fi
ed mi ni
mum
amountofcur rentasset s. currentrati
o.
DISCUSSI ON: ( B)Bef oret hedi v idend,t otalcur rentasset sequal$2, 050,
000
vii
.Answer( B)i scor rect.Ifcur rentl i
abiliti
esar e$200mi l
li
onandt hecur r
entr at o (
i $455,000cash+$900, 000r eceiv ables+$650, 000i nvent or
y+$45, 000pr epaid
(currentasset s÷cur rentl i
abili
ties)is2. 2,cur rentasset smustbe$440mi ll
ion assets).C urr
ent l
iabi
lities tota l$9 00,000( $2 85,
0 00a cc ruedliabil
it
ies+$ 550,
0 00
(2.2x$200mi lli
on) .IfX amountofcommer cialpaperi si ssuedt of inance account spayable+$65, 000cur rentpor t
ionofl ong- term debt )
.Thepay mentof
inventory( currentasset s),ther ebyi ncreasi ngbot hcur r
entasset sandcur rent thec ashd i
videndw i
ll no tc ha ngec urrent l
iabil
iti
es ,soac ur
ren trati
oo f2t o1
li
abili
tiesbyX,t hel ev elofcur rentasset satwhi cht henew cur rentrati
owi lbe r
l equi
rest hatcur r
entasset sbemai ntai
nedatami nimum of$1, 800,000( 2x
2.0is$480mi l
lion( $440mi ll
ion+$40mi l
li
onofcommer cialpaper )
. $900,000). Thus,cashcandecr easeby$250, 000( $2,050,000– $1, 800,
000).
($440+X)÷( $200+X)=2. 0 Themaxi mum pershar er atei s$2. 50( $250, 000÷100, 000shar es).
$440+X =2( $200+X) Answer( A)isincorrectbecause$2. 05f ai
lst oincludepr epaidasset s(prepai
d
$440+X =$400+2X expens es)asc urr
ent as se t
s . Ans w er (
C )i
s incorrec tbe cause $3.35f ai
lsto
$440=$400+X i
ncludet hecurrentpor tionofl ong- term debtasacur rentl i
abil
it
y .Answer( D)is
X =$40 i
ncorrectbecause$3. 80f ai
lst oconsi derpr epaidasset sasacur rentassetand
Answer( A)i si ncor r
ectbecause$20mi l
lioni gnor est hei ncr easei ncur rent t hecur r
entporti
onofl ong- term debtasacur r
entliabili
ty.
asset s.Thi sanswerwoul d be appr opriatei fnoncur r
entasset s were bei ng
financed.Answer( C)isi ncorrectbecause$240mi l
li
oni stheamountofwor kingx. REQUI RED:Theef f
ectofpl antexpansi ononwor kingcapi t
al.
capitalbot hbef or eandaf t
ert hei ssuanceofcommer ci
alpaper .Answer( D)i s DI SCUSSI ON:( B) Wor kingcapi tali sdef inedascur rentasset smi nuscurrent
incorrectbecause$180mi ll
ioni sanonsenseanswer . l
iabil
it
ies.Wor kingcapi tal i
scal cul atedasf oll
ows:
Cur r
ent Proposal
v
ii
i
. Cur r
entr atioandi nventory Answer :bDi f
f:EN Cash $ 100, 000 $ 120, 000
CMAEXAMI NATI ONQUESTI ONS Page36of36
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Account sr eceiv able 400,000 500,000 Account srecei vable 400,000 550,000
Inv
ent ory 380,000 480,000 Inventor y 360,000 420,000
Market ablesecur it
ies 200,000 200,000 Mar ketabl esecur i
ti
es 180,000 180,000
Total currentasset s $1,
080,000 $1,
280,000 Total cur r
entasset s $1,060,000 $1,290,000
Account spay abl e $ 350,000 $ 430,000 Account spay able (360,000) (450,000)
Mor tgage pay able – 175,000 325,000 Mor tgagepay able-cur r
ent (160,000) (310,000)
curr
ent Total currentl iabil
it
ies $520, 000 $760, 000
Total currentliabili
ties $ 525,000 $ 755,000 Wor kingcapi tal $540, 000 $530, 000
Wor kingcapi tal $ 555,000 $ 525,000 Workingcapi taldecr easesby$10, 000f rom t hecur r
ent$540,000t o$530, 000
Workingcapi talwoul ddecr easefrom thecurr
ent$555,000to$525,000underthe underthepr oposal .Answer( A)isincorrectbecause$240, 000ist hei ncr
easein
pr
oposal ,adecl ineof$30, 000. curr
entl iabil
iti
es.Answer( C)isincorrectbecause$230, 000i st hepr oposed
Answer( A)i si ncor rectbecausewor ki
ngcapitalwoulddecreaseby$30, 000. i
ncreasei n cur rentasset s.Answer( D)i si ncorrectbecause$10, 000 isthe
Answers( C)and( D)ar eincorrectbecauseworkingcapit
alwoulddecrease decreasei nwor kingcapi tal
.
xi
i
i
xi
.Answer( C)iscor rect.Wor kingcapitalisdefi
nedascur rentassetsmi nuscurrent .A mat uri
tymat chingpol icyi mpliesthatf ixedasset sandper manentcur rent
l
iabi
li
ties.Thewor ki
ngcapi talf
oreachpossi bili
tyiscalculat
edasf oll
ows: asset sar ef i
nancedwi thlong- t
erm sour ces.Thus,sincet hemi nimum bal ance
Current Proposal thatt otalasset sappr oachi s$320,000,and$260, 000oft hatbalancei sf ixed
Cash $100,000 $110,000 as sets,pe rman en tcurrent assetse qual $60,000.Thel i
ke l
ylev eloflon g-
te r
m
Account sr eceivable 560,000 690,000 financingi s$320, 000.
Inventor i
es 350,000 380,000 Long- term debtf i
nancing=Per manentcashasset s+Fi xedasset s.
Mar ketabl esecur it
ies 200,000 200,000
Tot alcurrentasset s $1,210,000 $1380,000 Per manentcashasset s=Lowendoft otalassets-Fixedasset s
Lessaccountpay able 400,000 470,000 =$ 320 ,
000- $26 0,
000= $60,000.
Wor ki
ngcapi tal $810,000 $910,000
Thus,t hei mpactonwor kingcapi t
alwoul dbeani ncreaseof$100, 000(from Long- term debtf i
nancing=$60, 000+$260, 000=$320, 000.
$810,000t o$910, 000).
Answer( A)isi ncor r
ectbecausewor kingcapitalincr
easesby$100, 000.Answer xiv.
Answer( A)i scor rect.Wor kingcapi talist heexcessofcur r
entasset sov er
(B)i
si ncor rectbecause$950, 000equal sthesum oft heincreasesi nwor king cu rr
e ntli
ab i
li
ti
e s.A nincr
ea seinc urr
e ntasse t
so rad ecr
eas einc ur
rent l
i
a bi
li
t i
es
capi
talandf ixedasset s,mi nust hei ncr
easei nneti ncome. Answer( D)i s wi l
lincreasewor kingcapital.Option1maxi mizesMasonCompany '
snetwor king
i
ncorrectbecause$950, 000equal st hesum oft heincreasesinwor kingcapi tal ca pi
tal,i
n creasingi tby$17 0($12 0+$ 5 0)
.
andfixedasset s, minust hei ncreaseinnetincome. Answer( B)i sincor r
ectbecauseopt ion2i ncreasesnetwor kingcapi t
alby$150.
Answer( C)i sincor r
ectbecauseopt i
on3decr easesnetwor ki
ngcapi t
alby$160.
xi
i
.Answer( B)iscor rect.Wor kingcapitalisdefi
nedascur rentassetsminuscur rent A nsw er(D )i
s i
n co r
rectbec ause opti
on 4d ecreasesnetw or
k ingcap i
talby$25.
l
i
abi
l
iti
es.Wor
kingcapi
tal
iscal
cul
atedasf
oll
ows: xv
.
Curr
ent Pr
oposed
Const
ructsi
mpli
fi
edcomparati
vebal
ancesheetsandi
ncomestat
ement
sfor
Cash $120,000 $140,
000
ther
estr
ict
edandrel
axedpol
ici
es:
(I
nthousands)
CMAEXAMI
NATI
ONQUESTI
ONS Page37of37
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Answer(A)i sincorr
ectbecausetheageofaccount spayabl
ewasaddedi nstead
15% of Sal
es 25% of Sal
es ofdeductedi nthecomput at
ionoft hecashf l
owcy cl
e.Answer(B)i
si ncor
rect
Rest
ri
cted Rel
axed becausetheageofaccount spay ablewasnotdeduct edinthecomputati
onof
Currentassets $60 $100 thecashf l
ow cy cl
e. Answer( D)i si
ncorrectbecausetheageofaccount s
Fi
xedasset s 100 100 recei
vabl
ewasdeduct edinsteadofaddedandt heageofaccount
spayablewas
Total asset
s $160 $200 addedinsteadofdeductedint hecomputati
on.
Debt 80 100 xv
ii
i
Equity and r
etai
ned 80 100 .
earnings = + –
Total l
iabi
li
ti
esandequi
ty $160 $200
EBIT 36 36 .
Less:I nter
est(10%) (
8) (10)
EBT 28 26
=72+60-45=87day
s.
Less:Taxes( 40%) (11.2) (10.4)
Neti ncome $16. 8 $15. 6
xix.Answer( C)i
scor rect.Thecashconv ersi
oncy cleisthel engthoft i
mebet ween
payi
ngf orpur chasesandr ecei vi
ngcashf r
om t hesal eoff i
nishedgoods.I t
ROE=NI /
Equity ;$16.8/$80=0. 21;$15.6/$100=0. 156. equalstheinv entoryconv ersionper iod,plust hereceiv ablescol l
ectionperiod,
ROE( restri
ctedpol i
cy)=21. 0%. minusthepay ablesdef er
ralper iod,or75day s(58day s+32day s-15day s)
.
ROE( relaxedpol icy)=15. 6%. Answer( A)i
si ncorrectbecause11day sresultsfrom subt ract
ingt hereceiv
ables
Di f
ferencei nROEs=0. 21-0. 156=0. 054=5. 4%. col
lecti
on period. Answer( B)i sincorr
ectbecause 41 day sr esultsf r
om
xv
i.Answer( C)i scor rect .Thecash f l
ow cy cl
ebegi nswhen t hef i
rm pay sf or subt r
acti
ngt her ecei vablescol lecti
onper i
odandaddi ngt hepay ablesdeferral
mer chandisei thaspur chasedandendswhent hef ir
mr eceivescashf rom t he per i
od. Answer( D)i si ncorrectbecause90day somi tst hepay ablesdeferral
saleoft hemer chandi se.Inventoryisheldforanav erageof60day spr i
ort osal e, per i
od.
butt heav erageageofaccount spay ableis30day s.Consequently,theav er
age
ti
mebet weenout layandsal eis30day s.Receivablesarecollectedanav er ageof xx
. Factsgiven: Pay ablesdef erralperi
od=30day s;I nv=$5, 000,000;Rec.=
45day saf tersale, sot helengthoft hecashf l
owcy cleis75day s(30+45) . $2,000,000;ADS=$100, 000.
Answer( A)i sincor rectbecauset heageofpay ablesshouldbededuct edf rom
thesum oft heot heri tems.Answer( B)i
si ncorr
ectbecauset hepay ablesar enot = + –
addedt ot hei nvent or yperiod.Theyar ededuct ed. Answer( D)isi ncor rect
because105day sequal st hesum oft hei nvent
or ycycl
eandt her ecei vables .
cycle. Step1: Det ermi net heinv entoryconversi
onper i
od:
I
nvent
oryconv
ersi
onper
iod =Invent
or y/Dail
ysales
xv
ii
. REQUI RED:Thel
engthoft
hecashfl
owcy cl
e. =$5,000,000/$100,000
DISCUSSION: (C) The cash f
low cycl
e begi
ns when the f
ir
m paysf or =50day s.
merchandisei
thaspur
chasedandendswheni tr
ecei
vescashfr
om thesal
eof St
ep2: Deter
minether
ecei
v abl
escol
l
ect
ionperi
od:
themerchandi
se. Recei
vabl
escol
lect
ionperi
od =Recei vables/Dai
lysal
es
CMAEXAMI
NATI
ONQUESTI
ONS Page38of38
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

=$2,
000,000/$100,000
DSO= = =96day
s.
=20days.
St
ep3: Givendat
aandi nf
ormat
ioncal
cul
atedabove,determinethefi
rm’
s Pay
abl
esdef
err
alper
iod(
PDP)
:
cashconver
sioncycl
e:
Cashconver
sioncycl
e =50+20-30 PDP= = =25day
s.
=40days. Cashconv
ersi
oncy
cle(
CCC)
:
xx
i CCC=ICP+DSO–PDP=72+96–25=143day
s.
.
Ol
d Wi
thChange xxi
v
.
I
CP= = = 90 = = 72 Fi
rst,
calcul
ateSal es/Day=$50, 000,000/360=$138, 888.
89.
Then,cal
culatetheol dinvent
oryconv ersi
onper iod:
I
nventory/
Salesperday=$15, 000,000/$138, 888.89=108days.
+ + Then,fi
ndthenewi nventoryconversionperiod:
DSO= = = 72 = 63 $13,
000,000/$138,888.89=93. 6day s.
Wehav ecutthei nventoryconversi
onper iodby108–93. 6=14.4day
s.

DP= 30day
s -30 DP -30 Then,calculat
etheol
dDSO:
CCC=132days NewCCC=105day
s Accts.Rec./Sal
esperday=$10,000,000/$138,888.
89=72days.
Then,fi
ndt henewDSO=$8, 000,000/$138,888.89=57.
6days.
ChangeinCCC=105–132=-
27days. Wehav ecutt heDSOby72–57. 6=14. 4day s.
Netchangei
s–27day
s(CCCi
s27daysshor
ter
).
Fi
nal
l
y,f
indt
het
otal
netchange=-
14.
4+(
-14.
4)–10=-
38.
8day
s.
xxi
i
. Answer( B)i scor rect
.Thecash conv ersion cycl
ei sthel ength oftime
betweentheJul y20pay mentandtheNov ember30col l
ecti
on,or133day s(11xxv.
daysinJuly,31i nAugust ,30i
nSeptember,31i nOctober,and30inNov ember ).
Answer( A)i si ncorrectbecause92 daysi st helengthoft her aw mat er
ial = + –
conversi
on cy cle.Answer( C)isincorr
ectbecause 123 day s excl
udes the
customercredi tperiod.Answer(D)isincorrectbecause153day sincludesthe .
vendor'
screditper i
od.
xx
ii
i
Forthi
sprobl
em weareonl
yint
erest
edinthechangei
ntheCCC.Wemay
. ther
efor
eignor
ethePayabl
esDeferr
alPer
iodsi
nceiti
sassumedt
oremai
n
Cal
cul
ateeachofthethr
eemaincomponent
soft
hecashconv
ersi
oncy
cle: unchanged.
I
nvent
oryConver
sionperi
od(
ICP):
I
CP= = =72day
s. Ol
dCCC(
ignor
epayabl
es)=$12,
000,
000/
$100,
000+$8,
000,
000/
$100,
000
=120+80=200day s.
Day
ssal
esout
standi
ng(
DSO)
:

CMAEXAMI
NATI
ONQUESTI
ONS Page39of39
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

NewCCC=$9,600,
000/
$90,
000+$6,
400,
000/
$90,
000 ofdepreci
ati
on and t
he $7,
000 f
oramor
ti
zat
ion shoul
d be added t
o,not
=106.
67+71.11=177.
78day
s. subt
ract
edfrom,
income.

Changei
nCCC=NewCCC–Ol dCCC xxv
iii
.REQUI RED:Theest i
matedcashf l
owf ortheperi
od.
=177.78–200 DISCUSSI ON:( D)Todet erminecashf lowf ortheperiod,allnoncashexpenses
=-
22.22days.Roundt
o22daysshor
ter
. shouldbeaddedbackt oneti ncome.Addi ngt he$5,000ofdepr eciati
onandt he
$6,000ofdi scountamor ti
zationt othe$60,000ofneti ncomepr oducesacash
xx
vi
. fl
owof$71, 000.
I
CP=360days/
($12mi
l
li
on/$1mi
l
li
on)=30day
s. Answer( A)i sincorrectbecauset hecashf l
owf ortheper i
odi sgreaterthannet
DSO=2.
0ICP=60days. i
ncomegi vennoncashexpensesi nthef or
m ofdepr eciati
onandbonddi scount
amor ti
zation.Answer( B)isincorrectbecause$66,000doesnotr eflectnoncash
Sol
veforaccountsrecei
vabl
e: expensesf ordepr eciati
on. Answer( C)isi ncor
rectbecause t he $5,000 of
DSO=60=Recei v
ableaccount
s/Sal
esperday depreciationand t he$6, 000 f oramor ti
zati
onshoul d beadded backt o,not
=(A/R)
/($12/360)=$2mill
ion. subtractedf rom, i
ncome.

Calcul
atenewI CP,changeinCCC,andnewDSOrequi
redt
omeetgoal
: xxi
x. Answer( C)iscorr
ect.Cashi nflowsf orMar chwoul dconsi stof50%ofMar ch
NewI CP=360/ ($12/0.
9)=360/13.
333=27days. creditsales(50%x$90=$45) ,pl
us30%ofFebr uarycreditsales(30%x$120=
NetchangeinICP=- 3day s. $36) ,plus20%ofJanuar ycr edi
tsal es( 20%x$100=$20) ,pluscashsalesfor
TotalchangeinCCCr equi
red=10day s. Mar chof$18.Consequent ly,t
otalcollectionsequal $119,000.
Reductioni
nDSOneeded=10–3=7day s. Answer( A)isi ncor
rectbecause$138, 000equal st hesum ofFebr uarycredi
t
NewDSOr equi
red=60–7=53day s. salesandMar chcashsal es.Answer( B)i sincorr
ectbecause$122, 000equals
50%ofJanuar ycredi
tsal es,30%ofFebr uar
ycr edi
tsales,20%ofMar chcredi
t
Solv
efornewr ecei
v abl
esl
evel
: sales,and100%ofMar chcashsal es.Answer( D)isincorrectbecause$108,000
DSO=53=[ (
A/R)/($12,
000,
000/ 360)
] i
st het otal
salesforMar ch,notthet otal cashcol l
ecti
onsf orMar ch.
A/R=53$33, 333.33=$1,766,667.
OldA/R=$2,000,000.NewA/ R=$1, 766,
667. xxx. Answer( A)iscor rect.Thef loatperi
odi sthet imebet weenwhenachecki s
Reduct
ionrequir
edi nA/R=$2,000,000-$1,
766,
667=$233,
333. writ
tenandwheni tclearst hepay or'
scheckingaccount .Checkf l
oatresult
sinan
i
nterest-
freel oant ot hepay orbecauseoft hedel aybet weenpay mentbycheck
xxv
ii. Answer( D)iscor r
ect.Todet erminecashf l
ow f ort heper i
od,allnoncash andi t
sdeduct i
onf rom t hebankaccount .Ifcheckswr i
ttenrequireonemor eday
expensesshoul dbeaddedt oincome.Addingthe$6, 000ofdepr eci
ati
onandt he to clearth an ch ecksr ece i
ved, then etfloate qu al
so ned ay'
sr eceipt
s.T he
$7,000ofdi scountamor ti
zationto$50,000ofi ncomepr oducesapr et
axcash comp any w i
llhav efreeu seo fthemo ney foroned ay.I
nt hiscase,thea mount i
s
fl
owof$63, 000.I
nterestisnotaddedbackt oincomebecausei trequi
resacash $10, 000.
payment . Answer( B)isi ncor r
ectbecauset hecompanyenj oy soneday '
snetf l
oatbecause
Answer( A)i sincorr
ectbecauset hecashf l
ow f ortheper iodisgreatert han i tscheckscl earmor esl owl ythanitsdeposi t
s.Answer( C)isincorr
ectbecause
i
ncomegi v ennoncashexpensesi ntheform ofdepr eciationandbonddi scount then etfl
o at isp o si
tive.T hec omp anyc anw r
it
ec heck s(upt o$1 0,
000)ev en
amor t
ization. Answer( B)isi ncor
rectbecause$57, 000doesnotr ef
lectt he wheni tha sn omo ney b ecau sethec hecksd onot c l
earu nt
iladay afterdeposi
ts
noncashexpensef ordepreciati
on.Answer( C)isi ncorrectbecauset he$6, 000 cl ear .Answer( D)i si ncorrectbecauset henetf loatrepresentsthedi ff
erence
CMAEXAMI NATI ONQUESTI ONS Page40of40
MANAGEMENTADVI
SORYSERVI
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bet
weenwhendeposi
tscl
earandwhendi
sbur
sement
scl
ear
. Accordingl
y,thecompanyshoulddet er
minetheopt i
malav er
agecashbal
ance
thatmi ni
mizestotalhol
dingcosts.Whet hertot
alcostsar elowerwhenthe
xxxi. Answer( A)i scor rect.Thedi fferencebet weencol lectionsandpay abl esi s averagecashbalanceishigherdependsonwhet herthecashbalancei
sbel
ow,
$5,000dai ly.Fiv eday s'wor thamount st o$25, 000off loat . at,orabovetheopti
malaveragecashbalancefort
hecompany .
Answer( B)i si ncor rectbecause$40, 000i gnor est hei mpactofpay ablesandt he
five-dayf l
oatper iod.Answer( C)i si ncor rectbecause$175, 000 i gnor est hexxxv. Answer( A)i scor rect.Theoppor t
unitycostofhol di
ngcashbal ancesf ort he
impactofr ecei vables.Answer( D)i si ncor rectbecause$200, 000i gnor est he y earequal st heav eragecashbal ancemul ti
pliedbyt heoppor tunitycostr at e,or
impactofpay ables. $2, 091. 65( $20, 916.50x10%) .
Answer( B)i si ncorrectbecause$4, 183.30r esultsi ftwi cet heav er agecash
xx
xii
.Posi tivedi sbur sementf l
oat=$15, 000( 5)=$75, 000. bal ancei susedi ncal culati
ngt heoppor tuni t
ycost .Answer( C)i si ncor r ect
Negat ivecol lect i
onsf loat=$17, 000( 3)=$51, 000. because$8, 750. 00r esul tsifhalft het otalcashr equi rementf ort hey eari sused
Netf l
oat=$75, 000-$51, 000=$24, 000. i
ncal culatingt heoppor tunitycost .Answer( D)isi ncorrectbecause$17, 500. 00
resul tsift het otal cashr equi r
edf ort hey eari susedi ncal culatingt heoppor tuni t
y
xxxiii.Answer( B)i scor rect.Theoppor tunitycostofkeepi ngacashbal ancei s cost .
calcul atedbyf indingt heamountofi ncomet hatcoul dbeear nedmi nusany
expensesnecessar yt or ecei vet hei ncome.I nt hisexampl e,t heamountofdai ly
xxxvi
.Answer( C)i scor rect .Checksar ecur rent l
yt iedupf or10½ day s( 5f or
incomet hatcoul dbeear nedi s$400( $2,000, 000x. 0002) .Thecostofi nv est i
ng mai li
ng,4f orpr ocessi ng,and1½ f orclear i
ng) .Ift hatwer er educedt o4day s,
themoney ,$50,i st hensubt ractedf rom t he$400t ocal culateanoppor tuni ty CMR' scashbal ancewoul dincreaseby$650, 000( 6½day sx$100, 000perday ).
costof$350. Answer( A)i si ncor r
ectbecauseCMR' scashbal ancewoul dincr easeby$650, 000
Answer( A)i si ncor r
ectbecause$50i stheav eraget ransact ioncostofi nv est i
ng [ (10½ day s-4day s)x$100, 000perday ].Answer( B)i si ncor rectbecause
moneyov ernight . Answer( C)i sincor rectbecauset hecostofi nvest i
ngt he $400, 000i sar rivedatbymul tiplying$100, 000perdaycol lect i
onbyt he4- day
moneyhast obesubt ract edf rom theamountofdai l
yi ncomet hatcanbeear ned pr ocessi ngandcl earingt i
mewi tht hel ockboxsy stem.The$100, 000perday
togett heoppor tunitycost .Answer( D)isi ncor rectbecause$40, 000i st her esul t col lecti
onshoul dhav ebeenmul ti
pliedbyt he6½ daydecr ease( 10½ day s-4
ofmul tiplying$2mi l
lionby0. 02( not0. 02%, whi chis0. 0002) . day s)incheckpr ocessi ngandcl ear i
ng.Answer( D)isincor rectbecauseCMR' s
cashbal ancewoul dincr easeby$650, 000[ (10½ day s-4day s)x$100, 000per
xxxiv .Answer( A)i scor rect.Oppor tunitycosti st hef or gonebenef it,thati s,t he day ].
benef i
tf rom t henextbestal ternativeuseofar esour ce.Theoppor tunit
ycostof
hol dingcashbal ancesi scal culatedbymul ti
pl y i
ngt heav er agecashbal anceby xxxvi
i.Answer( A)i scor r
ect .Checksar ecur rentlyt i
edupf or11day s( 6f ormai ling,
theoppor tunitycostr at e(ther eturnont hebestal ternat i
veuseoft hecash) .The 3f orpr ocessi ng, and2f orclearing) .Ifthatper i
odwer ereducedt o3day s,DLF' s
oppor tunitycostofhol dingcashbal ancesi shi gheri ftheav eragecashbal ancei s cashbal ancewoul dincr easeby$1, 200,000( 8day sx$150, 000perday ).
higher . Answer( B)i si ncor r
ectbecauset hedecr easei s8day s,not5.Answer( C)i s
Answer( B)i sincor rectbecause,i fot herf act or sar econst ant ,ahi gherav er age i ncor rectbecause$600, 000 repr esent sonl ya4- daysav i
ngs.Answer( D)i s
cash bal ance r equi res f ewer r eplenishi ng t ransact i
ons.Hence,t he t otal incor rectbecauset hel ockboxsy stem wi l
lr esul tinanaddi ti
onal8day sof
transact ionscost sassoci atedwi thobt ainingcashbal ancesf ortheper i
odar e sav i
ngs, not3.
lower .Answer( C)i si ncor rectbecauset heoppor t
uni tycostofhol dingahi gher
cashbal ancei shi gher .Answer( D)isi ncorrectbecauset het otalcost sofhol dingxxxvi
ii.Answer( D)i scor r
ect .Thef irstst epi nfindingt heexpect edannualsav ingsi s
cashbal ancesequalt hesum oft heoppor tuni tycost sandt ransact ionscost s. mul ti
plyingt heav eragenumberofcheckscol lecteddai l
ybyt heav er ageamount
CMAEXAMI NATI ONQUESTI ONS Page41of41
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ofeachcheck.Thi si s$100, 000( 200x$500) .The$100, 000i smul ti

pl iedbyt he Cal cul atet henetr educt ioni nA/ R:
numberofday si tsav esf ormai ling, 2.0, andpr ocessing, 0.5.Thesenumber sare Cur rentA/ R=$2, 500, 000.NewA/ Rwi th20%r educt ion:
addedt oget hert oget$250, 000[ ($100, 000x2)+( $100, 000x0. 5)]
.Thi snumber $2,500, 000-0. 20( $2, 500, 000)=$2, 000,000.
mul ti
plied byt he annuali nterestr at e wi l
lgi ve expect ed annualsav i
ngs of Netr educt i
oni nA/ R=$500, 000.
$15,000( $250, 000x0. 06) . Cal cul atet hei nter estsav ingsandnetsav ings:
Answer( A)i sincor rectbecause$250, 000hasnotbeenmul ti
pliedbyt heannual I
nt erestsav ings=$500, 000( 0.11)=$55, 000.
i
nt erestr ateof6%. Answer( B)i si ncor rectbecause$12, 000i st her esul tof Netsav i
ngs=I nt er estsav i
ngs-Annual l
ockboxcost
l
eav ingoutt hepr ocessi ngpor t
ionoft hesav i
ngs,cal cul atedas$100, 000x0. 5 =$55, 000-$15, 000=$40, 000.
(andt henl atermul tipliedby6%) .Answer( C)i sincor r
ectbecause$6, 000i sthe
resultofmul ti
pl ying200checksperdaybyt heirav er ageamount ,andt henxl
i
i.REQUI RED:Theaddi tional annual i
ncomeorl ossf rom usi ngal ockboxser v i
ce.
mul ti
plying t hist ot alof$100, 000 byt he annuali nter estr ate.Mai l
ing and DI SCUSSI ON:( B)I fdai lycashr ecei ptsar e$150, 000andt hel ockboxser v
icewi ll
processi ngt i
mesav edar et husunaccount edf orint hi
scase. speedcol lectionsbyf ourday s,t hecompanywi llhav eav ail
ableanaddi t
ional
$600, 000 ( 4 day sx$150, 000) . Ther esulti si ncreased i nterestr ev enueof
xxxi
x.Answer( C)i scor rect .Becausecol lectionswi llbeaccel eratedby3day sata $24, 000( 4% i nterestr at ex$600, 000) . Howev er ,the$2, 500mont hlyser v i
ce
rateof$300, 000perday , thecompanywi llhaveanaddi tional$900, 000t oi nvest. char gest ot al$30, 000f ort hey ear,whi chisa$6, 000netl oss( $24, 000i nterest
Atar ateof6%,t hei nt erestear nedwi llbe$54, 000pery ear.Howev er ,thebank r evenue–$30, 000mont hl yser vicechar ges).
wi l
lchar ge$24, 000( 12mont hsx$2, 000permont h)f ori tsser vi
ces.Thus,t he Answer s( A) ,and( C)ar ei ncor rectbecauseal osswoul dr esultsi ncet heser v i
ce
fi
rm wi llincreasei tsi ncomeby$30, 000( $54,000-$24, 000) . char gesexceedt headdi ti
onali nt erestr evenue.Answer( D)i sincor rectbecause
Answer( A)i sincor rectbecause( $24, 000)i gnorest headdi ti
onali nterestr ev enue t hel ossi s$6, 000,t hedi fferencebet weent he$24, 000ofaddi ti
onali nterest
from inv estingt hei ncr easedf unds.Answer( B)i sincor rectbecause$12, 000i s r evenueandt he$30, 000t ot al ser vicechar ges.
basedon2day sofaccel erat
edi nflowsr athert han3.Answer( D)i si ncor r
ect
because$54, 000i gnor est he$24, 000bankser vicechar ge. xl
i
ii
. Answer( B)i scor r ect.Thef ir
m wi llbeginear ningi nterest2. 2day s( 1.3+. 9)
earli
erwi tht hel ockboxpl an.Mul ti
pl yi
ng325dai lyaccount sby$1, 250r esult
si n
xl.REQUI RED:Thedeci sionr egar dingwhet hert ouseal ockboxsy stem andt he av eragedai l
ycol l
ect ionsof$406, 250.Thus, thegr osssav i
ngsi s$188( $406,250
amountofsav i
ngsorl oss. x2. 2x. 00021) .Thecosti s$97. 50( 325account sx$. 30).Thenetsav ingsi s
DISCUSSI ON:( C)Di vidingt he$90mi l
lionofannualsal esby360day spr oduces $90. 50perday( $188-$97. 50) .Mul tiplyi
ng250day sby$90. 50=$22, 675.
dailysal esof$250, 000.I fcollect i
ont imei sreducedby3day s, t
hen$750, 000( 3 Answer( A)i si ncor rectbecause$3, 273r esul t
sf rom i gnor i
ngt hesav ingsi n
x$250, 000)wi llbeav ailablef ori nv estment . Atan 8% r ateofr eturn,t he pr ocessi ngt ime. Answer( C)i si ncor rectbecause$23, 500i shal ft hegr oss
additional$750, 000wi llear n$60, 000annual ly. Thisi s$20, 000l esst hant he sav ings.Answer( D)i si ncor r
ectbecause$47, 000r esultsf rom ov erl
ooki ngt he
$80,000costoft hesy stem.The$20, 000l ossmeanst hecompanyshoul dnot bankchar gesof$. 30peraccount .
i
nv estmenti nt henewsy stem.
Answer( A)i si ncor r ectbecause$140, 000equal st he$80, 000costpl ust hexl
i
v. Answer( B)i scor r ect .Ifpay ment sar ecol l
ect ed2day sear li
er ,thecompany
i
nv estmentear ni ngs.Answer( B)i si ncor rectbecauset he$80, 000costshoul d canear n$120, 000( $20, 000x50pay ment sperdayx2day sx. 06)atacostof
beconsi der ed.Answer( D)isincor rectbecauset heear ningsar e$60,000. $59,125[ $50, 000+( 50pay ment sx365day sx$. 50) ]
,agai nof$60, 875.
Answer( A)i sincor rectbecause$59, 125i st heannuall ockboxcost .Answer( C)
i
si ncor rectbecause$50, 000i st heannualf ixedf ee.Answer( D)i si ncorrect
xl
i
. because$120, 000i st heannual sav i
ngswi t
houtr egar dtocost s.
CMAEXAMI NATI ONQUESTI ONS Page42of42
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NANCE

i
nterestr evenueannual l
y.The$500mont hlychar gebyt hebankwi l
lresul tinan
xl
v.REQUI RED:Theopt imal feest ruct ur ef oral ockboxsy stem. annualexpenseof$6, 000. Thus,t henetannualbenef iti s$6, 000( $12, 000-
DISCUSSI ON:( D) Mul tiplying700checkst i
mes360day sr esul tsinat ot alof $6, 000) .
252,000checkspery ear .Accor dingl y,under( A),totalannualcosti s$126, 000 Answer( A)i sincor rectbecause$3, 000mi scal cul atest heannual ser vi
cechar ge.
($0.50x252, 000) ,whi chi sl essdesi rabl ethant he$125, 000f latf eei n( B).Gi v en Answer( B)i sincor rectbecause$12, 000f ail
st odeductt heannual serv i
ce
thatt heannualcol lectionsequal$453, 600, 000( $1,800x700x360) ,( C)i sal so char gef rom thei nter estear ned.Answer( C)i si ncor rectbecause$0r esultsf rom
l
essdesi rablebecauset heannualf eewoul dbe$136, 080( .03%x$453, 600, 000) . f i
gur i
ngt heinter estear nedf oronl yoneday ,nott wo.
Thebestopt ioni st her ef oret omai nt ainacompensat i
ngbal anceof$1, 750, 000
when t hecostoff undsi s7%,r esul ti
ng i nat otalcostof$122, 500 ( 07 xxl ix. Answer( B)i scor rect.Si ncecol lectionswi l
lbespeededupbyt hreeday s,at
$1,750, 000) . ther ateof$200, 000perday ,t hecompanywi l
lhav eanaddi tional$600, 000t o
Answer( A)i si ncor r ectbecauset heannual costi s$126, 000.Answer( B)i s i
nv est.At12%, thei nt er estear nedwoul dbe$72, 000pery ear.Howev er,thebank
i
ncor rectbecauset heannual costi s$125, 000.Answer( C)isi ncor rectbecause willchar ge$48, 000( 12mont hsx$4, 000permont h)f ori tsser vices.Thus,t he
theannual costi s$136, 080. fi
rm wi llincreasei tsi ncomeby$24, 000( $72, 000-$48, 000) .
Answer( A)isi ncor r ectbecauset heser vicewi l
lgener ate$24, 000i naddi t
ional
xl
vi
. Answer( D)i scor rect .Becausecol lect ionsmadeusi ngBank4' sl ockbox annuali ncome,notl osses. Answer( C)i si ncor r
ectbecause $66, 240 i sa
servicewi llbeaccel eratedby2day satar ateof$300, 000perday ,thef i
rm wi l
l nonsensenumber .Answer( D)i sincor rectbecause$68, 000assumesanannual
haveanaddi ti
onal$600, 000t oi nvest .Atar ateof6%, thei nter estear nedwi llbe bankchar geof$4, 000.
$36,000pery ear .Howev er,thebankwi llchar ge$12, 000( 12mont hsx$1, 000per
mont h)f ori tsser vices.Thus, thef irm wi l
lgai n$24, 000( $36, 000-$12, 000) . l
. Answer( B)iscor rect .Gi vent hatcol lectionswi llbeaccel eratedby2day s,att he
Answer( A)i si ncor rectbecauseBank1wi llincr easet hef irm' si ncomebyonl y r at
eof$300, 000perday ,thecompanywi l
lhav eanaddi ti
onal$600, 000t oi nv est
.
$18,000.Answer( B)i si ncor r
ectbecauseBank2wi llincreaset hef ir
m' si ncome At11%,t heint er estear nedwi llbe$66, 000pery ear .Howev er,t hebankwi ll
byonl y$12, 000.Answer( C)i si ncor rectbecauseBank3wi llincr easet hef i
rm' s char ge$36, 000( 12mont hsx$3, 000permont h)f oritsser v
ices.Thus,t hef ir
m
i
ncomebyonl y$12, 000. willi
ncr easei tspr et axi ncomeby$30, 000( $66, 000-$36, 000) .
Answer( A)i sincor rectbecausepr ofitswi llincr easeby$30, 000.I nterestr evenue
xl
vi
i. Answer( A)i scor rect .Thef ir
stst epi ncal culati
ngt hebenef itrecei vedbya wi llexceedt hei ncr ement alcost s.Answer( C)i si ncorrectbecause$66, 000f ail
s
fi
rmf orspeedi ngupcol lectionsi st omul t iplyt heamountofdai lysal esbyt he t osubt ractt he$36, 000costoft hel ockboxsy stem.Answer( D)i si ncor rect
numberofday ssav ed.I nt hisexampl e, thatamountwoul dbe$30, 000( $15, 000x because$63, 000assumest heannual feei s$3, 000.
2).Thi snumberi st henmul tipliedbyt heannualoppor t
uni t
ycostoff unds, 8%, to
getabenef itof$2, 400. l
i. REQUI RED:Theamountaf ir
m shoul dbewi l
lingt opayannual lyf oranewcash
Answer( B)i si ncor rectbecause$1, 200i s$15, 000x8%.Answer( C)isi ncor rect managementsy st em.
because$600i s( $15, 000÷2)x8%.Answer( D)i sincor rectbecause$7, 500i s DI SCUSSI ON:( D)I fcashout flowsar e$3mi llionperday ,holdingcash2ext ra
dail
ysal es, $15, 000, dividedbyt wo. day smeanst hatav er agebal ancesshoul di ncr easeby$6mi l
lion. Ata10%
i
nterestr at
e,t he addi ti
onal$6 mi ll
ion woul d gener at ei nterestr evenue of
xl
vi
ii. REQUI RED:Thenetannual benef itorl oss. $600, 000pery ear .Thus,i fthesy stem canbeacqui r
edf or$600, 000orl ess,it
DISCUSSI ON:( D) I fcol lectiont imei s2day s,andav eragedai lyrecei ptsar e woul dbebenef icial t odoso.
$100, 000,t heav eragecashbal ancewi lli ncr easeby$200, 000i ft hebank’ s Answer( A)i si ncor rectbecause$6mi ll
ioni st hei ncr easei ncash,nott he
system i sadopt ed. Ata6% i nterestr at e,$200, 000wi llgener at e$12, 000of i nterestear nedont hataddi tionalcash. Answer( B)i si ncorrectbecause$3
CMAEXAMI NATI ONQUESTI ONS Page43of43
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SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

mill
ioni st heamountofdai l
ypayment s,nott hesav ings.Answer( C)isi ncorrect
becauset hedail
ypay ment sshouldbemul t i
pliedbyt wo, notdividedbyt wo. l
v.REQUIRED:Thechecki ngaccountthatshoul dbechosen.
DISCUSSI ON: ( D) Thest andardaccountwi llcost$10permont hplus$8i n
l
i
i.REQUI RED:Theamountatwhi chwi retr
ansf ersar epr ef
erable. checkchar ges($0.10x80checks) ,f
orat otalof$18permont hor$216pery ear
.
DISCUSSI ON:( D)Gi vena$25f eeandani nterestr at
eof0. 02% perdayf or2 Thepr emium accounthasnocheckchar ges,buti twil
lrequir
ethedeposi t
ort o
says,thebr eakevenamounti s$62, 500[ $25t r
ansf erfee+( 2x. 02% i nterest mai ntainabal anceof$2, 000mor et handesi red.Ata10% costofcapi tal,the
rat
e)]. Thus,t hei nterestearnedonat ransf erofanyamountgr eat erthan i ncrement al$2,000mi nimum depositwi llcost$200pery ear.Thus, thepremi um
$62,500woul dexceedt he$25f ee. accountshouldbesel ect
edbecausei tischeaperby$16pery ear.
Answer( A)isincorrectbecauset he$25t r
ansf erf eeiscov eredbyt heint ereston Answer( A)isincorrectbecausether elev antcostoft hemi ni
mum pr emium
$62,500f or2day s. Answer( B)i sincorrectbecause$125, 000i sr equi r
edi f accountdeposi tisbasedont he$2,000i ncrement aldeposit,
notthef ul
l$2,500.
coll
ectionsar eaccel eratedbyonl yoneday .Answer( C)isincorrectbecauset he Answer s(B)and( C)ar ei
ncorrectbecauset hesav ingsont hepremium account
i
ntereston$173f or2day sifl
esst han$0.07. i
s$16.

l
ii
i
.Answer( D)iscor rect.Gi vensal esof$27, 000, 000,t heav erageamountofdai l
yl
vi
.REQUI RED:Theav eragecashbal ance.
sales mustbe $75, 000 ( $27, 000, 000/ 360 day s).The i ncr eased account s DI SCUSSI ON: TheEOQ f ori nvent or yisaf unct ionofor der ingcostperor der,
recei v
ablebal ancei st heref ore$450, 000( 6day sx$75, 000) .Wi thanaddi ti
onal i nventorydemand,andcar ryi
ngcost .I nthecashmodel ,thef i
xedcostpersal e
$450, 000ofcapi t
ali nv estedi nr ecei vabl es,t hecompany 'si nter estcostwi l
l ofsecur it
iesi sequi v alenttot heor der i
ngcost ,thedemandf orcashi ssi mi l
art o
i
ncr easeby$36, 000pery ear( 8%x$450, 000) .Thus,t hecompanymustsav eat t hedemandf ori nv ent ory,andt hei nt erestratei sef fectivel
yt hecostofcar r
yinga
l
east$36, 000pery eart oj ust i
fyt hechangei nprocedur es. dollarofcashf ort heper i
od.Subst ituti
ngi nt hef ormulay ieldsanopt imalcash
Answer( A)i si ncor rectbecause$36, 000 i st hemi nimum sav ingsr equir ed. bal anceofabout$6, 928.
Answer( B)i si ncor rectbecause$36, 000 i st hemi nimum sav ingsr equir ed. Answer( A)isi ncor rectbecause$1, 000r esultsfrom usi ng24%i nthe
Answer( C)i sincor rectbecause$36, 000i st hemi nimum sav ingsr equi r
ed. denomi nat or.Answer( B)isincor rectbecause$2, 000r esultsf rom using6%i n
thedenomi nat or.Answer( C)i sincor rectbecause$3, 464resul tsf rom usi ng2%
l
iv
.Answer( D) is cor rect .The costof car r
y i
ng r eceivables equal s av erage i nthedenomi nat or.
recei v
ablest imest hev ar i
abl ecostr at iot imest hecostofmoney .Gi vensal esof
$45, 000,000,regar dl essofwhi chcol lect ionpr ocedur esar eappl ied,t heav eragelvi
i.
REQUI RED:Thecur rentpr iceofaTr easur ybillissuedatadi scount .
dailysal esmustbe$125, 000( $45, 000, 000÷360day s).Thei ncr easei nt he DI SCUSSI ON:( A)The6%di scountr atei smul t
ipl i
edt i
mest hef aceamountof
aver ager eceivablesbal ancei sther efor e$625, 000( 5day sx$125, 000) .Givenan t heTr easur ybi llt odet erminet heamountofi nter estthel enderwi llear n.The
addi ti
onal$625, 000ofr eceiv ables, thecompany 'saddi ti
onalr equiredi nvestment i nt
er estont hi sTr easur ybil
li s$3( 6% x0. 5y ear sx$100) ;thus,t hepur chase
i
nr eceiv ables is $375, 000 ( $625, 000 x 60% v ar i
able costr at io),and t he pr i
cei s$97( $100-$3)
i
ncr ement alpr etax costoft hisi nv est menti s $22, 500 ( 6% x $375, 000) . Answer( B)i si ncor rectbecauset hei nteresti sf or180day s,notaf ullyear.
Accor dingl y
,thecol lect i
oncost smustber educedbyapr etaxmi nimum of Answer( C)isi ncor rectbecauset hepur chasepr icewi llal
way sbel esst hant he
$22, 500t oof f
sett hecostoft hei ncreasedi nvest menti nr ecei vables. facev aluewhenaTr asurybi l
lissol datadi scount . Answer( D)i sincor rect
Answer( A)i si ncor rectbecause $375, 000 i st he incr eased i nv estmenti n becauset heint er estr ateis6%pery ear .
recei v
ables.Answer( B)i si ncorr ectbecause$37, 500r esul tsf rom omi tt
ingt he
variable costr at i
of rom t he cal cul ation.Answer( C)i si ncor rectbecausel vi
ii
. Answer( B)i scor rect.Todet ermi net heamountofi nter estt hel enderwi ll
$125, 000i stheav eragedai l
ysal es. earn, t
he3. 5%di scountr ateismul t
ipliedbyt hef aceamountoft heTr easur ybi l
l
.
CMAEXAMI NATI ONQUESTI ONS Page44of44
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Thei nt
erestont hisTr easurybillis$3. 50( 3.
5% x1y earx$100) ;thus,the Answer( A)i si ncorrectbecause$500, 000i sbasedon60day soutstanding.
purchasepriceis$96. 50($100-$3. 5). Answer( C)i si ncorrectbecause$250, 000i sbasedon30day soutstanding.
Answer( A)i si ncorrectbecauseopt ion 1 hasa pur chasepr iceof$97. 00. Answer( D)isi ncorrectbecause$75, 000i sbasedondi vidi
ngsalesby40day s,
Answer( C)i si ncorrectbecauseopt ion 3 hasa pur chasepr iceof$97. 33. whi chresult
si nameani nglesssoluti
on.
Answer(D)i sincorrectbecauseopt ion4hasapur chasepriceof$97.00.
l
xi
i.
Answer( D)i
scor rect.Dividingthe$2,050,200annual salesby360day sproduces
l
i
x.Answer( A)iscor r
ect .I
tisimpor t
antt orecognizethatthi
si snothingmor ethan av er agedail
ysal esof$5, 695.Mul t
iplyi
ng$5, 695byt he48day sinreceivables
aneconomi c-
order-quantit
y( EOQ)pr oblem.Theannualdemandi s$2,000,
000, pr oducesat ot al of$273, 360.
theorderingcosti s$50peror der,andcar r
yingcostis$.08perdol l
ar.Pl
ugging Answer( A)isincor rectbecause$96, 000r esul
tsfrom assumi ngsal
esof$2, 000
theseamount sintot hestandardEOQmodel givesthefoll
owingresult. perday .Answer( B)i si ncorr
ectbecause$336, 005i sbasedont heday sof
inventoryrathert hanr eceivables.Answer( C)isincorrectbecause$182,240net s
=$50,000 theday sofpay ablesagai nsttheday sofr ecei
vables.

Thus,t hef i
rm canmi nimizei tscostbywi t
hdrawingi n$50,000l ots,or40t imeslxi
i
i. Answer( B)iscor rect .Iftheav erageageofr ecei v
ablesi s48day s,i
tmeans
pery ear. that48/ 360 oft he y ear'
s sal es ist ied up i nr eceivables.Thus,48/ 360 x
Answer( B)i si ncorrectbecauset hef i
rm wi l
lminimizeitscostswi thwi thdrawals $2, 870, 280=$382, 704.
of$50, 000eacht i
me.Answer( C)i sincor r
ectbecauset hef i
rm willmi nimizei t
s Answer( A)i si ncor rectbecause$127, 567i sbasedont he16day sdi fference
cost swi thwi thdr awal sof$50, 000eacht i
me.Answer( D)isincor r
ectbecause bet weenr eceivabl esandpay ablesr atherthan48day s.Answer( C)i sincor r
ect
thef i
rm wi l
l mi nimizei tscostswi thwithdrawalsof$50, 000eacht i
me. because$478, 381i sbasedont he60day sofi nventory.Answer( D)i sincor r
ect
because$637, 839i sbasedont he80day sofr eceivabl esaddedt opay ables
l
x.Answer( B)i scor r
ect .Itisimpor t
antt orecognizet hatthisisnothingmor ethan r athert hanj ust60day s.
aneconomi c- order-quant i
ty( EOQ)pr oblem.Theannualdemandi s$2, 000,000,
theor deringcosti s$50peror der ,andcar ryi
ngcosti s$. 08perdol lar.Plugginglxi
v. Answer( D)i scor rect.Theexpect edav erageaccount sr eceivabl ebal ance
theseamount si ntot hest andardEOQmodel gi
vest hefoll
owingresul t. equal st heav eragecol lecti
onper iodt i
mest hecr editsal esperday .Thus,t he
aver ageaccount sr ecei vablebal ancei s45,205. 48{[(10,
000uni tssol doncr editx
=$50, 000 66 pr ice)÷ 365 day s]x25 day s} .Thef oregoi ng calcul ati
on assumest hat
recei v
ablesar er ecor dedatt heirgrossamount s.
Dividing$167, 000by$50, 000i ndicatest hef i
rm shouldmake3. 34wi thdrawals
Answer( A)i si ncor rectbecause684. 93isbasedonannualcr edi tsalesof
permont h,oraboutev ery9day s.
10,000.Answer( B)i si ncor r
ectbecause1, 808. 22equal st hecr editsal esperday .
Answer( A)i si ncor r
ectbecauseonl yabout$16, 000woul dbeneededi neach3-
Answer( C)i si ncor r
ectbecause 27, 123.30 i s based on a 15- dayav erage
dayper iod,but$50, 000 i s a mor e economi calwi thdrawal
. Answer( C)is
collectionper i
od.
incorrectbecauset he$50, 000woul dr unoutbef orethenextwi thdrawal .Answer
(D)isi ncorrectbecauset he$50, 000woul dr unoutbef orethenextwi thdr awal.
lxv
.REQUI RED:Theamountofaccount sreceivablef oraf irm wi thcr edi tt
er msof
2/10, net30.
l
xi
.Answer( B)iscor r
ect .Div i
ding$3mi l
li
onofsal esby360day sr esul tsinan
DISCUSSI ON:( D)Thef i
rm hasdai lysalesof$45, 000consi sti
ngof150uni tsat
averageof$8, 333. 33perday .Mul ti
plyingtheav eragedai l
ysalesbyt he40day s
$300each.For30day s,salest otal$1,350,000.For typer centoft hesesal es,or
outstandi ngr esultsin$333, 333.
$540, 000,wi llbeuncol l
ectedbecausecust omer sdonott aket hei rdiscount s.
CMAEXAMI NATI ONQUESTI ONS Page45of45
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

The r emai ning 60%,or$810, 000,wi l

lbe pai d wi thint he di scountper iod.
Howev er ,byt heendof30day s,onl y2/ 3oft he$810, 000wi llbecol lect edl
xi
x. REQUI RED:Thepr oject edday s’ salesout st andi ng.
becauset hesal esf rom day s21t hrough30ar est illwi thint hedi scountper iod. DI SCUSSI ON:( C)Gi vent han40%ofsal eswi l
lbecol lectedont he15t hday, 40%
Ther ef ore,anaddi t
ional$270, 000( $810, 000-$540, 000)wi l
lst il
lbeuncol lect ed ont he30t hday ,and20% ont he45t hday ,t heday s’sal esout st andi ngcanbe
aftert he30t hday ,butwi llbesubj ectt o adi scount .I nt ot al ,theav erage det er minedbywei ght i
ngt hecol lect ionper iodf oreachgr oupofr ecei vablesbyi ts
receiv abl ebal ancei s$810, 000, consi stingof$540, 000onwhi chnodi scountwi ll collectionper cent age. Hence,t hepr ojectedday s’sal esout standi ngequal27
bet akenand$270, 000t hatwi l
l bepai dwi thi nthedi scountper i
od. day s[(40%x15)+( 40%x30)+20%x45) ].
Answer( A)i si ncor rectbecause60%oft hesal eswi l
lbepai df orwi thint he10- Answer( A)i sincor r
ectbecauseav er ager ecei vabl esar eout standi ngf ormuch
daydi scountper iod.Answer s( B)and( C)ar ei ncor rectbecauset hesear ebased mor et han20day s.Answer( B)i si ncor rectbecause24day sassumes40%of
onasal est ot al of$1, 500, 000f or30day sr at hert han$1, 350, 000. recei v
ablesar ecol lectedaf ter15day sand60%af ter30day s.Answer( D)is
incor r
ectbecausemor er ecei vabl esar ecol l
ect edont he15t hdayt hanont he
l
xv i. REQUI RED:Theav eragebal ancei naccount sr ecei v ablegi vent heav erage 45t hday ;thus, theav eragemustbel esst han30day s.
pay mentper i
odandsal esperday .
DISCUSSI ON:( B)I fsal sar e$4, 000perday ,andcust omer spayi n30day s,30lxx.
Answer( A)i scor rect.Cr edi tsal esamount edt o$540, 000( 60% x$900, 000).
day sofsal esar eout standi ng,or$120, 000.Whet hercust omer spaybycr edit Di viding$540, 000by4. 5pr oducesanav erager ecei vabl ebal anceof$120, 000.
cardorcash, col lectionr equires30day s. Dividing365day sbyt het ur nov erof4. 5r esul tsi nanav er agecol lectionper i
odof
Answer( A)i si ncor r
ectbecause$4, 000i sonl yoneday ’
sseal es.Answer( C)i s 81day s.
i
ncor r ectbecausei nv oicesar eout standi ngf or30day s, not12day s.Answer( D) Answer( B)isi ncor rectbecauset hecol l
ectionper iodi s81day s.Answer( C)i s
i
si ncor r
ectbecause$54, 000i sbasedont he45%ofcol l
ect i
onsv iacr edi tcar d. incor r
ectbecauset hecol l
ect ionper iodi s81day sandt heav erager eceivablesi s
tool ow.Answer( D)i si ncor rectbecausei ti ncl udescashsal esaswel lascr edit
l
xvi
i
. Account sr ecei vabl e Answer :aDi ff
: M salesi nrecei v
abl es.
Firstsol vef orcur rentannualsal esusi ngt heDSOequat i
onasf ollows:48=
$1, 000, 000/ (Sales/ 360)t of indannual salesequal to$7, 500, 000. l
xxi
. Answer( C)i scor rect.Theav eragecol lect ionper i
odi st heav eraget i
mei t
Ifsal esf allby10%,t henewsal esl ev elwi l
lbe$7, 500, 000( 0.9)=$6, 750,000. t akest or ecei
v epay mentf rom cust omer s.becauseone- halfoft hecust omer s
Agai n,usi ngt heDSOequat i
on,sol vef ort henewaccount sr eceiv abl ef i
gur e wi llpayonday10andhal fwi l
lpayonday30, theav eragecol l
ect ionper i
odi s20
asf ollows: 32=AR/ ($6,750, 000/ 360)orAR=$600, 000. day s[.5(10day s)+. 5(30day s)].
Answer( A)i si ncor rectbecause 10 day s assumes al lcust omer st ake t he
l
xv ii
i. Answer( C)i scor rect.Day s'sal esout standi ng i st heav er agecol l
ect ion di scount .Answer( B)i si ncor rectbecause 15 day s assumes hal foft he
period.Assumi ngt hatal lsalesar eoncr edi t,thatone- thirdoft hecust omer st ake cust omer spayonday30buti gnor est her emai ninghal foft hecust omer swho
adv ant ageoft he5% cashdi scountandpayonday10,andt hatt her emai ning payonday10.Answer( D)i si ncor rectbecause30day sassumesal lcustomer s
two- thirdsoft hecust omer spayonday20, theday s' salesout st andi ngi s17day s payonday30.
[(.
33x10day s)+( .
67x20day s) ].
Answer( A)i si ncor rectbecause 13 day si ncl udes onl yt he day s'sal esl
xxi
i
. Answer( D)i scor rect.Theexpect edav erageaccount sr ecei vablebal ance
outst andi ngf orcust omer st hatdonott aket hecashdi scount .Answer( B)i s equal st heav er agecol l
ect ionper iodt i
mest hecr edi tsal esperday .Thus,t he
i
ncor r ectbecause15day susesf i
veday sunt ilpay mentf ort hecust omer st hat av er ageaccount sr eceivabl ebal ancei s45, 205. 48{ [(10,000uni tssol doncr edi tx
taket hecashdi scount .Answer( D)i sincor r
ectbecause20day sequal st he20- 66 pr ice)÷ 365 day s]x25 day s} .Thef or egoi ng cal cul ation assumest hat
daycol lect i
onper i
odf orcust omer snott aki ngt hecashdi scount . recei v
ablesar er ecor dedatt hei rgr ossamount s.
CMAEXAMI NATI ONQUESTI ONS Page46of46
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Answer( A)i si ncorrectbecause684. 93i sbasedonannualcr edi tsal esof t ermspr ef erabl et ot hoseofabank.
10,000.Answer( B)i sincor rectbecause1, 808. 22equal st hecr edi tsal esperday . Answer( C)i si ncor rectbecauset hepr i
mer at emustbegr eat ert han7. 37% t o
Answer( C)i si ncor rectbecause 27, 123.30 i s based on a 15- dayav erage maket hecompany '
st er mspr eferabl et othoseofabank.
collectionper iod.
l
xxv
i. Answer( B)i scor r
ect .Thi sf irm' sdai lycr edi tsal esequal$4, 000( 40%x1, 000
l
xxi
i
i. Answer( B)i scor r
ect .Seasonaldat ing i sacr edi tpol icyunderwhi cha uni tsx$10pr i
ce) .Hence,r educi ngt heaccount sr ecei vabl ecol lect i
onper i
odby
cust omermaymakepur chasesear lybutpay menti snotdueunt ilthecust omer '
s 10day swi lldecr easet hebal anceby$40, 000( 10day sx$4, 000) .
retailselli
ngseasonbegi ns.Whenseasonaldat ingi sused,t hesel l
ingcompany Answer( A)i si ncor rectbecausea$4, 000decr easeassumesa1- dayr educt i
on.
incurshi ghercr editcost sbecausecust omer shav el ongert opay .Thus,r educed Answer( C)i si ncor r
ectbecause$240, 000 i st het otalbal anceofaccount s
creditcost sar enotanadv ant ageofseasonal dat i
ng. recei vableundert henewpol icy .Answer( D)i si ncor rectbecause$280, 000i st he
Answer( A)i si ncorrectbecauser educedst or agecost sr esul twhencust omer s t otal balanceofaccount sr ecei vabl eundert heol dpol icy .
buyear li
er.Answer( C)isi ncor rectbecauseat tr
act i
vecr edi tt ermsr esultwhen
cust omer scanbuyear li
erandnotpayunt i
lt heirsellingseasonbegi ns.Answer l
xxv
ii
.REQUI RED:Thedol larimpactonaccount sr ecei vabl eofachangei ncr edi t
(D)i si ncor rectbecause,whencust omer sbuyear l
ier,uncer taintyaboutsal es pol icy .
volumei sr educed. DISCUSSI ON:( C)I fsal esar e$50mi ll
ion, 70%ofwhi char eoncr edi t,totalcr edi t
saleswi l
l be$35mi l
lion.Ther ecei vabl est urnov erequal s4. 8t i
mespery ear( 360
l
xxi
v. Answer( C)i scor rect.Assumi ngt hatal loft hecust omer st akeadv ant ageof day s÷75- daycol lect i
onper iod) .Recei vabl est urnov erequal snetcr edi tsal es
seasonaldat i
ngandt hedi scount , thecol l
ectionsonorbef or eJanuar y11wi l
lbe di vided by av er age r eceiv ables. Accor dingl y ,av er age r ecei vabl es equal
thenumberofuni tssol d, t
imest heuni tsel l
ingpr i
ce, ti
mes1mi nust hedi scount $7, 291, 667( $35, 0000÷4. 8) .Undert henew pol icy ,sal eswi llbe$47. 5mi lli
on
per centage, or$6, 860[ (
700uni tsx$10) (1-.02) ]
. (95%x$50, 000, 000) ,andcr edi tsal eswi l
lbe$28. 5mi lli
on( 60%x$47, 500, 000) .
Answer( A)i si ncor r
ectbecauseal loft hecust omer sar etaki ngt hedi scountand Thecol l
ect ionper iodwi llber educedt o50day s,r esul tingi nat ur nov erof7. 2
willpayonorbef oreJanuar y11.Answer( B)i sincor rectbecause$6, 370does t i
mespery ear( 360÷50) . Theav erager ecei vabl esbal ancewi llt her eforebe
noti ncludet hecol l
ect i
onoft her ev enuef r
om uni tssol donJanuar y1.Answer $3, 958, 333 ( $28, 500, 000 ÷ 7. 2) ,a r educt ion of $3, 333,334 ( $7291, 667 -
(D)i sincorr ectbecause$7, 000doesnotconsi dert he2%di scount . $3,958, 333) .
Answer s( A)and( B)ar ei ncor r
ectbecauset hedecr easewi llbe$3, 333, 334.
l
xxv
. Answer( D)i scor rect.Ter msof1/ 10,net60meant hatabuy ercansav e1% Answer( D)i si ncor rectbecauser ecei vableswi l
l decr ease.
oft hepur chasepr i
cebypay ing50day sear l
y .Inessence, nott akingt hedi scount
resultsi nt hebuy er'sbor rowi ng99% oft hei nvoicepr icef or50day satat ot al
l
xxv
ii
i.REQUI RED: The expect ed i ncr ease i nt he av er age account sr ecei vable
interestchar geof1%oft hei nv oicepr ice.Becauseay earhas7. 350- dayper i
ods bal anceasar esul tofr elaxedcr edi tst andar ds.
(365÷50) ,t hecr editterms1/ 10,net60y i
el danef fectiveannual izedi nter est DI SCUSSI ON:( D)Oft he$40, 500, 000ofsal es, 80%ar eexpect edt obeoncr edit,
char geofappr oximat ely7. 37%[ (1%÷99%)x7. 3].Ifthepr imer atewer ehi gher a t otalof$32, 400, 000. Av erage dai ly cr editsal es ar et her efor e $90, 000
than7. 37%, thebuy erwoul dpr efert obor r
owf r
om t hev endor( i
.e.,notpaywi thin ( $32, 400,000÷360) .I f30day sofsal esar eout standi ngatanyonet ime,t he
thedi scountper iod)r athert hanf rom abank.Consequent ly,an8% pr i
mer at e av er agebal ancei naccount sr ecei vabl eis$2, 700, 000.I fcr edi
tsal esi ncr easeby
coul dcauset hev endor '
sr eceivabl est oi ncrease. 20%, theaf or ement ioned$90, 000av erageofdai l
ysal eswi l
l i
ncr easet o$108, 000
Answer( A)i si ncorrectbecauset hepr imer at emustbegr eat ert han7. 37% t o ( 120% x$90, 000) . Foranav er agecol l
ect i
onper iodof40day s,t heav er age
maket hecompany '
st ermspr efer abl et othoseofabank.Answer( B)i si ncor rect account sr ecei vabl ebal ancewi llbe$4, 320, 000( 40x$108, 000) . Hence,t he
becauset hepr imer atemustbegr eat ert han7. 37% t omaket hecompany '
s expect edincr easei nt hebal ancei s$1, 620, 000( $4, 320, 000-$2, 700, 000) .
CMAEXAMI NATI ONQUESTI ONS Page47of47
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Answer( A)i
si ncor
rectbecause$540,000wouldhav ebeent heincr
easeifthe discount,discount
s wi l
lbe t aken on sales of$10, 800,
000. The expected
average bal
ance outst
anding remains at30 days ofsales. Answer( B)is discountwil
l be$216,000(2$of$10, 800,
000) .
i
ncor r
ectbecause $2,700,000i stheav er
ageamounti naccountsr ecei
vabl
e Answer( B)i
si ncor
rectbecause$432, 000woul dhav ebeenthedi
scountonallof
beforeanychangei ncreditterms.Answer( C)isincor
rectbecause$900,000 thecreditsales.Answer( C)isincorr
ectbecauseonl y90%ofthesalesareon
wouldhav ebeent heincreasebasedsol el
yont heincr
easednumberofday s credit
;$240,000woul dbecor r
ectonlyifacashdi scountwer
eall
owedoncash
outstandi
ng,assumingnoincreasei
nsales. salesaswel lascreditsales.Answer( D)i sincorr
ectbecause$480,
00isbased
ont heassumpt i
onthatallsaleswillbediscounted.
l
xxi x. Answer( B)i scor rect.Oft he$50, 000,000ofsal es, 75%ar eexpect edt obeon
credit,at otalof$37, 500, 000.Av eragedai lycr editsal esar et herefore$104, 167l
xxxii
i.Answer( A)i scor rect .I f80% oft he$20, 000, 000ofsal esar eoncr edi t
,
($37,500, 000÷360day s).I ftheav er agecol l
ectionper iodi s20day s, t
heav erage $16, 000,000ofsal eswi llbesubj ectt ot hedi scount .Ifdi scount sar et akenon
balancei naccount sr ecei v ablei s$2, 083, 340( 20x$104, 167).Ifcr editsales 60% ofcr editsales,t he expect ed di scountwi llbe $288, 000 [ 3% x( 60% x
increase by 25%,av erage dai ly sal es wi l
li ncrease t o $130, 209 ( 125% x $16, 000,000) ].
$104, 167) .Foranav eragecol lectionper i
odof30day s,theav erageaccount s Answer( B)i sincorrectbecause$480, 000i st hepot entialdiscountonal lcr edit
receivabl ebal ancewi llbe$3, 906,270( 30x$130, 209) .Hence,t heexpect ed sal es.Answer( C)i sincor rectbecause$360, 000assumesal lsal esar eoncr edit
increasei nt hebal ancei s$1, 822, 930( $3,906, 270-$2, 083,340) . andt hat60%ofdi scount sar etaken.Answer( D)isi ncor r
ectbecause$600, 000
Answer( A)i sincor rectbecause$520, 840i sbasedona20- daycol lectionper i
od assumesal l
salesar eoncr edi tandt hat100%oft hedi scount sar et aken.
anda25%i ncr easei ncr edi tsal es.Answer( C)i si ncorrectbecause$2, 083,340
istheav erageaccount sr ecei vablebal ancebef oreanychangei ncr editterms.l
xxxiv.Answer( A)i s cor rect.The costofcar rying r eceivables equal s av erage
Answer( D)i sincor rectbecause$3, 906,270i st heav erageaccount sr eceiv
able r ecei vablest i
mest hev ariabl ecostr ati
ot i
mest hecostofmoney .Undert heol d
balancegi v ent hechangei ncr edi tterms. policy ,av eragedai lysal esar e$12, 778( $4,600,000÷360day s) .Gi vena30- day
aver agecol l
ectionper i
od,t heav erager eceivablesbal ancei s$383, 340( $12, 778
l
xxx
. Account sr eceivabl eincr easeAnswer :bDi f
f:MR x30day s).Undert henewpol i
cy,av eragedai lysal esar e$13, 778( $4,960, 000÷
DSO=$41, 096/ ($250, 000/ 365)=60day s. 360day s), andt heav erager eceiv ablesbal ancei s$482, 230( $13, 778x35day s).
NewA/ R=[ ($250, 000) (1.5) /
(365) ]
(60)(1.5)=$92, 466. Hence,t heav er
agebal ancei s$98, 890hi gherundert henewpol icy .Becauset he
Hence, i
ncreasei nr ecei v ables=$92, 466-$41, 096=$51, 370. company 'si ncrement al( var i
able) cost s are 50% of sal es,t he addi ti
onal
i
nv est menti s$49, 445( 50% x$98, 890) .Thei nterestr ate,orr equi redr ateof
l
xxx
i
. Account sr eceivabl e Answer :aDi f
f :
MR return,i s11%.Thus,t hei ncrement alpr etaxcar ry i
ngcosti s$5, 439( 11% x
Firstsol v ef orcur rentannualsal esusi ngt heDSOequat ionasf oll
ows:50= $49, 445) .
$1,000, 000/ (Sales/ 365)t of i
ndannual salesequal to$7,300, 000. Answer( B)i si ncorrectbecause$10, 878f ai
lst oadj ustf ort hepr oportionof
I
fsal esf allby10%,t henew sal esl evelwi l
lbe$7, 300,000( 0.9)=$6, 570,
000. i ncr ement alcost sincludedi nt headdi ti
onalr eceivabl es.Answer( C)i sincor rect
Agai n, usingt heDSOequat i
on, sol vefort henewaccount sr eceivablefigureas because$13, 778i st heav er agedai l
ysal esundert henewpol icy .Answer( D)i s
follows:32=AR/ ($6,570, 000/ 365)orAR=$576, 000. i
ncor r
ectbecause$98, 890i st heamountoft headdi tional r
ecei v abl es.

l
xxxii
.REQUI RED:Theexpecteddiscountstakeni
nthecomingyearifa2%discountl
xxxv.Answer( A)i scorr
ect
.Thef i
rstst
epi st
odeter
minetheaveragei nvest
mentin
i
sallowedforear
lypayment. r
eceivabl
esundereachpol icy.Undert heoldpoli
cy,aver
agedai lysalesare
DISCUSSION:(A)If90%oft he$24,000,
000ofsalesar
eoncr edit
,$21,
600,000 $10, 000( $3,600,000/
360day s).Giv
ena30- dayaveragecollect
ionper i
od,the
ofsaleswil
lbesubjectt
ot hediscount.If50%ofthecr
editcustomerst
aket he av er
ager eceivablesbal
ancei s$300,000($10,
000x30day s).Undert henew
CMAEXAMI NATIONQUESTIONS Page48of48
MANAGEMENTADVI
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NGCAPI
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policy,av eragedai lysalesar e$11, 000( $3,960,000/ 360day s),andt heav erage
recei v
abl esbalancei s$396, 000( $11, 000x36day s).Hence, t
heav er agebal ancel
xxxvi
ii
.Answer( B)is cor rect
.The company '
s manuf acturi
ng and sel l
i
ng costs
i
s$96, 000hi gherundert henew pol i
cy.Becauset hecompany '
si ncrement al exclusi v
eofbad debt sequal75% ofsal es.Hence,t hegr ossprofitont he
(variable)cost sar e60% ofsal es,t heext r
ai nvestmenti sonl y$57, 600( 60% x $150, 000i ncreaseinsal eswillbe$37, 500( 25%x$150, 000).Assumi ng$24,000
$96, 000) .The i nt erestr ate,orr equi r
ed r ate ofr etur
n,i s 10%.Thus,t he ( 16%x$150, 000)ofbaddebt sand$6, 000( 4%x$150, 000)ofcol l
ect
ionexpense,
i
ncr ement alcarryingcosti s$5, 760( 10%x$57, 600). t
hei ncreasei npr et
axi ncomewi llbe$7, 500( $37,500-$30, 000).Consequently
,
Answer( B)isi ncor rectbecause$9, 600equal sthe10% r equiredr ateofr eturn af ter-t
axi ncomewi l
lincreaseby$4, 650[$7,500-( 38%x$7, 500)].
ti
mes t he $96, 000 di fferenti
albet ween t he av erage receivables bal ances. Answer( A)i si ncorrectbecause $2, 850 i s based on a 62% t ax r at
e,the
Answer( C)isincor rectbecauset hedi f
ferentialbetweent heav erager ecei
vables compl ementoft heact ualtaxrate.Answer( C)isincorrectbecause$7, 500isthe
balancesi s$96, 000,not$136, 000. Answer( D)i si ncorrectbecause $960 pr etaxi ncome.Answer( D)isincorrectbecause$8, 370omi tscoll
ectioncosts
assumesa10%v ariablecostr ati
o. f
rom thecal culati
on.
lx
xxi
x
l
xxxvi.REQUI RED: Theannualbenef itorl ossr esul ti
ngf r
om achangei ncr edit . Cr editpol i
cyandROEAnswer : cDi ff:MR
ter
ms. Uset heDSOf ormul atocal cul ateaccount sreceivableundert henewpol icyas
DISCUSSI ON: Thei ncr ement alsal eswi llpr oduceani ncreased cont ri
but i
on 36=AR/ ($730, 000/ 365)orAR=$72, 000.Thus, $125, 000-$72, 000=$53, 000
mar ginof$144, 000( 20%x$720, 000) .Howev er,thatamountmustbeof fsetby ist hecashf reedupbyr educi ngDSOt o36day s.Ret iri
ng$53, 000ofl ong- t
erm
thecostoff undsi nv estedi nreceivables.Thev ar i
ablecost sassoci atedwi ththe debtl eav es$247, 000i nl ong- term debt .Givena10% i nterestr ate,interest
i
ncr ement alsal esar e$576, 000( 80%of$720, 000) .Gi vena75- daycr editperiod, ex pensei snow $247, 000( 0.1)=$24, 700. Thus,EBT =EBI T -I nter
est=
theav eragei nv estmenti nreceivablesequal s$120, 000( $576,000x( 75÷360) . $70, 000-$24, 700=$45, 300.Neti ncomei s$45,300( 1-0. 3)=$31, 710.Thus,
Accor dingly,t
hecostoft heinvestmenti naddi ti
onalr eceivablesi s$24, 000( 20% ROE=$31, 710/ $200, 000=15. 86%.
oppor tunitycostx$120, 000) ,andt henetbenef itoft hepl annedchangei ncr edit
ter
msi s$120, 000( $144, 000-$24, 000) . xc.Answer( C)iscor rect .Thispr obl em canbesol vedusi ngi ncrement alanal ysis.
Answer( A)isincor rectbecauset hecompanybenef i
tsfrom t hechangei ncr edit Sincei ncr ement alpr ofit
swi l
lbe20% ofsal es,andbaddebtexpense( theonl y
ter
ms.Answer( B)isi ncor r
ectbecause$28, 800r esultsf r
om mul ti
plyi
ngt he increment alexpense)wi llbel esst han20%,t henbot hopt ionswi l
lincrease
cont r
ibutionmar gi
nbyt he20%i nterestrate.Answer( C)isi ncorrectbecause prof its.
$144,000ov erlookst hecost scr eatedbyhav ingf undsi nvest edinrecei vabl
esf or Answer( A)i si ncor rectbecause,underbot hnewpol icies,thei ncrement alcost s
75day s, willbel esst hani ncrement alr ev enues.Thus,pr ofit
swi llbei ncreasedunder
eitherPol icyAorB.Answer( B)i si ncor rectbecauset he15%i ncr easei ncostwi l
l
l
xxxvii
.REQUI RED:Thei ncr easei nafter-taxprofitasar esultofani ncreasei nsales. bel esst hant he20%pr ofitmar gi n.Answer( D)isi ncor rectbecauseal lpolicies
DISCUSSI ON:( B)Thecompany ’
smanuf act uringandsel lingcost sexcl usiveof wi ll resulti ndifferentpr ofitlev els.
baddebt sequal70% ofbaddebt s. Hence,t hegr osspr ofitont he$100, 000
i
ncr easei nsal eswi l
lbe$30, 000( 30% x$100, 000) .Assumi ng$15, 000ofbadxci .REQUI RED: The annualper cent age costoff i
nanci ng undera f actoring
debt sand$5, 000ofcol lecti
onexpense,t hei ncr easei npr etaxincomewi l
lbe agr eement .
$10,000( $30,000-$20, 000). Consequent ly,af ter0taxi ncomewi llincreaseby DI SCUSSI ON:( D)I nanav eragemont h,thecompanywi l
lreceive$80, 000att he
$6,000[ $10,000–( 40%x$10, 000). timet her ecei vablesar esentt ot hef actor.Ov eray ear ’stime, theinter estont his
Answer s( A)
,(C)and( D)ar eincorrectbecauseaf ter-
taxi ncomewi l
lincreaseby av erageadv anceof$80, 000woul dbe$8, 000at10% i nterest.I naddi ti
on,t he
$6,000. fact orwi l
lchar gea2% f act orf ee,or$24, 000( $100, 000x12x0. 02)ov ert he
CMAEXAMI NATIONQUESTI ONS Page49of49
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cour seofay ear .Howev er,this$24, 000f eeisof fsetbyt he$18, 000sav ingsi n att her ateof16%annual lyisal sot obewi thheld.For60day st hati nterestwoul d
collectionexpenses, pr oduci nganetout layofonl y$6, 000.Addi ngt he$6, 000t o amountt oappr oximat ely$2, 655( assumi nga360- dayy ear).Thepr oceedst obe
the$8, 000ofi nterestpr oducesanannualnetcostof$14, 000. Di v i
dingt he gi vent othesel l
erequal $96, 895( $99,550-$2, 655) .
$14, 000costbyt he$80, 000ofadv ancedf undsr esul tsinacostof17. 5%. Answer( A)isincor r
ectbecause$81, 950equal s$99, 550mi nus16%of$110, 000.
Answer( A)i sincor rectbecause10%ov erlookst hef actorf ee.Answer( B)is Answer( B)isi ncorrectbecause$83, 630i sanonsenseanswer .Answer( D)is
i
ncor r
ectbecause12%ov erlookst hef actt hatt he2%f eer ecur sev er ymont h. i
ncor rectbecause$99, 550equal st heamountr eceivedbyt hef ir
m pl ust he
Answer( C)i sincor rectbecause14%mi scal culat
est hefact orf eeandt he i
nt erestchar ge.
sav i
ngsf rom reducedcol l
ect i
oncost s.
xcv
. Answer( A)i scor rect.CompanyAwi l
lwi thhold$6, 000( 6%x$100, 000)asa
xci
i
. Answer( C)i scor rect .Thef act orwi llwi t
hhold$6, 000( 6%x$100, 000)asa r eser veagai nstr etur nsand al l
owancesand $1, 400 ( 1.4% x$100, 000)asa
reser veagai nstr et urnsand al lowancesand $1, 400 ( 1.4% x$100, 000)asa commi ssion.Ther emai ni ng$92, 600wi l
lber educedbyi nt erestatt her ateof
commi ssi on.Ther emai ni ng$92, 600wi l
lber educedbyi nt erestatt her ateof 15% annual l
y.Thei nterestchar gewi l
lbe$2, 315,assumi ng a360- dayy ear
15% annual l
y.Thei nt erestchar geshoul dbe$2, 315,assumi nga360- dayy ear [ ($92, 600x. 15)÷( 60- daypay mentper i
od÷360day s)]
.Thepr oceedst obe
[($92,600x. 15)÷( 60- daypay mentper iod÷360day s) ]
.Thepr oceedst obe r ecei vedbyGat sbyequal $90,285( $92, 600-$2, 315) .
recei v
edbyt hesel l
erequal $90, 285( $92, 600-$2, 315) . Answer( B)i si ncorrectbecauseCompanyB wi l
lpr oducepr oceedsofonl y
Answer( A)isi ncor rectbecause$92, 600i gnoresi nterest.Answer( B)isi ncor rect $89, 964.Answer( C)i si ncor r
ectbecauseCompanyCwi llpr oducepr oceedsof
because$96, 135f ailst odeductt he6%r eser ve.Answer( D)i si ncor r
ectbecause onl y$90, 190.Answer( D)i sincor r
ectbecauseCompanyDwi llproducepr oceeds
$85, 000assumest hatt heonl yamountwi t
hhel di saf ully ear '
si nt ereston ofonl y$90,241.
$100, 000.
xcv
i. Answer( B)i scorrect .Wi th3,000account s,2,700( 90%)woul dbecat egor i
zed
xci
i
i. Answer( D)i scor rect. Thecal culationoft hecasht hatt hecompanywi ll aspr omptpay ingand300assl owpay i
ng.Mul ti
ply i
ng22%t imest he300sl ow-
i
ni t
iall
yr eceivef rom f act oring$100, 000i nr eceivablesi sasf ollows: pay ingaccount sr esultsi n66def aults.Mul tiplyi
ng5% t i
mest he2, 700pr ompt-
Amountofr ecei vabl es $100, 000 pay ingaccount sresul tsinanaddi tional 135def aults,forat otal of201.
Mi nus6%r eser ve (6,000) Answer( A)isi ncorrectbecause795uses22%onal laccount s,notj ust300of
Mi nus1%f actorf ee (1,000) the m.A nswe r(C) isi nco rr
ec tbec aus e1 35i so nlyt hed ef
a u l
tso nt hepr ompt-
Amountaccr uingt ot hecompany $93, 000 pa yinga ccounts.A n sw er (D) i
si ncorre ctbec au se6 6i so nly thed efau l
tso nthe
Mi nus:10%x( 90/ 360)x$93, 000 (2,325) slow- pay i
ngaccount s.
Casht ober ecei ved $90, 675
Answer( A)i si ncor rectbecauset heamountr ecei vedi sal sor educedbyt hexcv
ii. Answer( B)i scorrect .Thef irm will earn$100ofgr osspr ofit($1, 200-$1, 100)
i
nt erestchar ged. Answer( B)i si ncor rectbecause$90, 000assumest heonl y from eachc ustome r w hop aysb u tw i
ll l
ose$ 1,100o ne achd efa ult.Th ein come
deduct ioni sf or10%i nter estf or360day s.Answer( C)isi ncor rectbecauset he sta t
e me nt f
or t
h e3 00s low -
pay cus tome rs wo ulda p pear asfo ll
o w s:
i
nt erestchar gedwi ll bef or90day s, notaf ullyear. Sales(300x1, 200) $360, 000
CGS( 300x1, 100) 330, 000
xci
v. Answer( C)i scor rect .Thef act orwi llhol dout$8, 800( 8%x$110, 000)asa Grosspr ofit 30,000
reser ve agai nstr et ur ns and al lowances and $1, 650 ( 1.5% x110, 000)as a -Baddebtexpense( 66x1, 200) (79,200)
commi ssi on.Thatl eav es$99, 550t obeadv ancedt ot hesel l
er.Howev er ,i
nt erest Netloss $( 49,200)

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c
Div
iding$49,
200byt he300accountsproducesanav eragelossof$164. . Phrankli
n’snetpurchasesare$800, 000x( 1-0. 02)=$784, 000.Purchasesper
Answer( A)isincorrectbecause$100i sthepot entialprofi
tifthereareno dayar e $784,000/360 = $2,
177.78.Tot altrade cr
editi s 40 x $2,
177.78 =
default
s.Answer( C)i si
ncorr
ectbecause$220i st heactualaveragelossper $87,111.20.Fr
eet r
adecrediti
s15x$2, 177.78=$32, 666.70.Thus,costlytr
ade
badaccountbutdoesnotconsi dert
he$100pr of
itf r
om the78% whodopay . credit
,assumingdiscountsaretaken,is$87,111.20-$32,666.70=$54,444.50.I
f
Answer( D)i
sincor
rectbecause$264isthewrit
e-of
famountf oreachbaddebt. di
scount sarenott aken,thenthemaxi mum amountofcost l
ytradecr edi
tis
$87,111.20.
xcv i
ii
.Answer( C)iscor rect.Thiscanbesol vedal gebr aicallywi thxbei ngaverage
revenue:
300x-$330, 000-66x=0 ci
. Appr oximat eper cent agecost=  =0. 2099=21%.
234x=$330, 000
x=1410. 26
Account spay abl e= =$750, 000.
Ifav erager ev enueswer eatleast$1, 410.26, thei ncomest atementwoul dappear
asf ollows: ci
i
.Nomi nalpercentagecost= =3. 00=300%.
Sal es( 300@ $1, 410.26) $423, 078.00
CGS 330,000.00
Gr osspr of i
t 93,078.00 ciii
.Answer( D)i scor r
ect .Assumet hatt hegr ossamountofani nvoicei s$1,000.
Baddebtexpense( 66x$1,410. 26) 93,077.16 Wi t
ha2%di scount ,thebuy erwi l
lpayonl y$980ont het enthday .Thus, thesell
er
Neti ncome $.84 i
sf orgoi
ng$20t or ecei vepay ment20day ssoonert hanwoul dot herwisebe
Alternat i
v ely,anot herwayofaddr essi ngthepr oblem i st odet erminet heamount r equired.The20- dayi nterestr atei s. 0204( $20/ $980) .Thenumberof20- day
ofgr osspr of i
tt hatwi l
lhavet obegener at edbyt he234pay i
ngcust omer st o per iodsi nay eari s18( 360/20) .Ift hei nter
estr atei s2. 04% f oreach20- day
cov ert he$1, 100l ossoneachof66def aul ti
ngcust omer s.Mul ti
plyi
ng66x per iod,theannuali nt erestr ate( roundedt ot henear estt enth)i s36. 7% (18x
$1,100pr oducesal ossof$72, 600.Di vi
dingt he$72, 600l ossbyt he234pay ing 2. 04%) .
cust omer sr esul tsin$310. 26ofgr osspr ofitt hatmustbegener atedf r
om ev ery Answer( A)isi ncor r
ectbecauset heannuali nterestcosti s36.7%.Answer( B)is
pay i
ngcust omerj ustt obreakev en.Addi ngt he$1, 100costt ot he$310. 26 i ncor rectbecauset heannuali nterestcosti s36. 7%. Answer( C)i si ncorr
ect
producesar ev enueof$1, 410.26. becauset heannual inter estcosti s36. 7%.
Answer( A)i si ncor rectbecausei ncreasingt her evenuebyt heamountoft he
aver agel ossperaccounti si nsuf f
icientbecauset headdi tional$164wi llbeci v.Answer( D)i scor r
ect .Assumet hatt hegr ossamountofani nvoicei s$1,000.
collectedf rom onl y234cust omer s,notal l300.Answer( B)i si ncorrectbecause Gi vena3%di scount ,thebuy erwi llpay$970ont het enthday .Thus,t hesel l
eris
apr i
ceof$1, 389. 74wi l
lsti
llresulti nanov erallloss.Answer( D)i sincorrect f orgoing $30 t or ecei vepay ment20 day ssoonert han woul d other wisebe
becauset he$310. 26gr osspr of
itisaddedt ocost , notr evenue. required.The20- dayi nterestr ate( rounded)i s3. 09%( $30÷$970) .Thenumber
of20- dayper iodsi nay earis18( 360÷20) .Ifthei nterestrateis3. 09%f oreach
xci
x
.Dailypur chases= =$2, 000. 20 -
d aype ri
od, t
he ann ua li
n ter
es trate (rounded )i
s 5 5.6%( 18x 3.09).
Answer( A)i sincor rectbecause36. 7%assumest ermsof2/ 10,net30.Answer
Freet r
adecr edi t=$2, 00015=$30, 000. (B)i sincorrectbecause24. 5% assumest ermsof2/ 10,net40.Answer( C)is
i
ncor rectbecause37. 1%assumest ermsof3/ 10, net40.

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cv
.Answer( D)i scor r ect .Assumet hatani nvoi cei sduei n45day s.Howev er,thecv i
ii
. Answer( B)i scor r
ect .Thecompanywi lliniti
allyl ose$2bynott akingt he
selleral l
owsa2%cashdi scounti fthei nv oicei spai dwi thin15day s.Gi venear l
y di scount .Thi samounti spar t
iallyof fsetbyi nterestear nedon$98f or50day sof
pay ment , thesel lerwi l
lreceivet heirmoneyatl east30day s( 45-15)soonert han $. 817.Thus,t henetcosti s$1. 183( $2. 00-$. 817) .Sincea360- dayy earhas7. 2
thecont ractr equi r es.Howev er ,thesel l
eri sef fect iv
elypay ing2%oft hei nv oice f i
fty-dayper iods, t
het ot al annual izedcosti s$8. 52( 7.
2x$1. 183) .Thel ossr ateis
pricet or ecei vet hemoney30day sear l
y .Theappr oximat eannuali nterestcosti s about8. 7%( $8. 52/ $98) .
24%becausea360- dayy earcont ains12per iodsof30day seach. Answer( A)i si ncor rectbecauset hecostofnott akingt hecashdi scounti s8.7%.
Answer( A)i si ncor rectbecause t he 2% sav ings i sf or30 day s onl y;t he Thecompanywi l
li nitiallyl ose$2bynott akingt hedi scount .Thi samounti s
annual izedi nt erestr atepai df orr eceivingt hemoneyear l
yi sabout24%.Answer par tiall
yof fsetbyi nt erestear nedon$98f or50day sof$. 817.Thus, t
henetcost
(B)i sincor rectbecause16%assumesei ghtdi scountper i
odsof45day seachi n i s$1. 183( $2. 00-$. 817) .Becausea360- dayy earhas7. 2per iodsof50day s
ay earr athert han12. Answer( C)isi ncor rectbecause48% assumes15- day each,t het ot alannual izedcosti s$8. 52( 7.2x$1. 183) .Thel ossr atei sabout
discountper iods. 8.7% ( $8.52/ $98) .Answer( C)i si ncor rectbecauset hecostofnott akingt he
cashdi scounti s8. 7%.Thecompanywi llinitial
lyl ose$2bynott aki ngt he
cv
i.Answer( C)i scor rect .Thebuy ercoul dsat isfyt he$100obl igationbypay ing$98 di scount .Thi samounti spar t
iallyof fsetbyi nterestear nedon$98f or50day sof
ont he10t hday .Bychoosi ngt owai tunt i
lt he40t hday ,thebuy erisef fect i
v el
y $. 817.Thus,t henetcosti s$1. 183( $2.00-$. 817) .Becausea360- dayy earhas
pay inga$2i nt er estchar gef ort heuseof$98f or30day s( 40- daycr edi tper i
od- 7. 2per iodsof50day seach, t
het ot alannual izedcosti s$8. 52( 7.2x$1. 183) .The
10- daydi scountper iod).Thei nt erestr ateonwhati sessent iall
ya30- dayl oani s l ossr atei sabout8. 7%( $8.52/ $98) .Answer( D)i sincor rectbecauset hecostof
2.04081% ( $2÷$98) .Ext rapol atingt his30- dayr atet oay ear l
yr atei nv olves nott akingt hecashdi scounti s8. 7%.Thecompanywi l
li nit
iall
yl ose$2bynot
mul tipl
y i
ngbyt henumberofper iodsinay ear .Thus,t heef fect iveannualr ateis t akingt hedi scount .Thi samounti spar ti
all
yof fsetbyi nt erestear nedon$98f or
about24. 49%[ 2.04081%x( 360÷30day s)]. 50day sof$. 817.Thus, thenetcosti s$1. 183( $2.00-$. 817) .Becausea360- day
Answer( A)i si ncor rectbecause2%i st hedi scountr ate.Answer( B)i si ncor rect y earhas7. 2per iodsof50day seach,t het otalannual izedcosti s$8. 52( 7.
2x
because18. 36% i sbasedont he40- daycr edi tper i
od.Answer( D)i si ncor rect $1. 183) .Thel ossr at ei sabout8. 7%( $8.52/ $98) .
because36. 72%i sbasedona20- daycr edi tper i
od.
cix.Answer( C)i scor rect .Assumea$1, 000i nv oice.Thedi scountwoul dbe$50, and
cv
ii
. Answer( B)i scor r
ect.Pay ment sshoul dbemadewi t
hindi scountper i
odsi f t hecust omerwoul dhav et opay$950.Thus,t hecust omeri spay i
ng$50f orthe
ther eturni smor et hant hef i
rm' scostofcapi tal.Wi tht ermsof3/ 10,net45,t he ext endeduseof$950- -ar ateof5. 26%f or50day s.Ext r
apol atingt hi
st oaf ul
l
buy erisear ninga3%sav ingsf orpay ingont het ent hday ,or35day sear liert han y eari nvol v
esmul tiplyingbyt henumberof50- dayper iodsi nay ear,whi chi s7.3
woul dot her wi seber equi r
ed.Forexampl e,ona$1, 000i nvoice,t hepay ment ( 365÷50) .Thus, 5.26%x7. 3per i
odsgi v
esanannual r ateof38. 4%.
woul dbeonl y$970.The$30sav ingsiscompar ablet oi nterestear nedona$970 Answer( A)i si ncor rectbecause30. 64% ist her esul tofassumi ngt heuseof
l
oant ot hev endor( thepay menti snotduef oranot her35day s).Thei nt erestr ate $1, 000f or60day s.Answer( B)i si ncorrectbecause36. 60% i st her esultof
ont hishy pot het icall oani s3. 09278% ( $30/ $970) .Thatr eturni sfora35- day assumi ngt heuseof$1, 000i nst eadof$950.Answer( D)i sincor rectbecause
per i
od.Annual i
zingt her eturnr equi resdet ermi ni ngt henumberof35- dayper iods 45. 39%i st her esultofusi ngt hewr ongnumberofday s.
i
nay ear.Mul t
iply ingt her eturnf or35day st imest heper i
odsi nay earr esul tsin
anannual rat eofr etur nofabout31. 81%[ 3.09278%x( 360day s/35day s) ]. cx
.Nomi nal per cent agecost= x =36. 7%.
Answer( A)i si ncor rectbecause55. 67% i sbasedont ermsof3/ 10,net30.
Answer( C)i si ncor rectbecause22. 27% i sbasedonanear ningper iodof50
day s.Answer( D)i si ncorrectbecauset hedi scounti s3%, not9%. cxi
.Nomi nal per cent agecost= x =21. 41%.

CMAEXAMI
NATI
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previousquest i
on)toobt aintr
adecredi tandpayatt heendoft hecreditperi
od.
Thispol i
cyshoul dbecont i
nuediftr
adecr editistheonl ysourceoff i
nancing,
orif
cxi
i
.Cal
cul
atet
henomi
nalper
cent
age,
whi
chi
sthenomi
nalannualcost
: othersour cesar eavail
ableonlyatahigherr ate.
Nomi
nal
cost=  =0.
0204 36=0.
7344=73.
44%. Answer( A)i sincorr
ectbecauset hecompanyshoul dcont i
nuet hecurrent
practiceunlessal t
ernati
veshor t
-t
ermf inancingisav ail
ableatal owerrate.
Cal
cul
atetheef f
ecti
veannualr
ate(EAR)
: Answer( B)i sincorr
ectbecauset hewei ghted-averagecostofcapi tali
susuallya
Numeri
calsoluti
on: concer nincapi t
albudgetingandi snotasi mpor t
anti nthedecisionprocessas
36
EAR=(1.0204) -1.
0=2.0689-1.0=106.89% 106.
9%. themar ginal costofcapital.Answer(C)i sincorrectbecauset hecompany
shouldmai ntai
nitscurrentpracti
ceifthecostofal t
ernati
velong- t
ermf i
nanci
ng
Fi
nancial
cal
cul
atorsol
uti
on:(
EAR) i
shi gher.
I
nputs:P/YR=36;NOM%=73. 44.Out
put
:EFF%=106.
89% 106.
9%.
cxv
i
cxi
i
i .Facev
alue=
.Thecompanypay severy45day sor360/
45=8t imesperyear
.Thus,t
heaver
age
account
spayabl
ear e$5,000,000/
8=$625,000.Theef
fect
ivecostoft
radecr
edi
t
= = =$112,
359.
55 $112,
360.
canbefoundasfollows:
360/
30
EAR=( 1+2/98) -1=1. 2743-1=0.2743=27.43%.
cxv
ii
.Conv erttheannual r atet oaper i
odi crate(quarterly
)inthedenomi natorofthe
cx
iv. REQUI RED:Thewei ght ed-av erageannuali nterestr ate.
DI SCUSSI ON:I ft he f acev aluefor mula:
companypay sWebMast erwi thin10day s,itwi l
lsav e$500( 2% x$25, 000) .
Thus,t hecompanyi sef f
ect ivelypay i
ng$500t oretain$24, 500( $25,000-$500) Facev al
ue=
for20 day s( 30 – 10) . The annual i
zed i nter
estr ate on t hisbor rowing i s
36. 7346%[ ($500÷$24, 500)x( 360day s÷20day s)].Si milar
ly ,thecompanyi s, i
n = = =$61, 855.67 $61,856.
eff ect,pay i
ngSof t
idee$2, 500( 5%x$50, 000)t ohold$47, 500( $50,000-$2, 500)
for80day s( 90– 10) . Theannual i
zedr ateont hisbor rowi ngi s23. 6842%cx vi
ii
.Answer( B)i scor rect.Si
mpl ei nteresti
schar gedont heamountact uall
ypai d
[($2,500÷$47, 500)x( 360day s÷80day s)
].Thewei ght ed-av erageoft heset wo tot heb orrow e r
.If interest i
sc ha rgedo nas imp l
eb asi
s,thefull$20,
00 0fa ce
ratesbasedonav eragemont hlypur chasesi s28.0%.{ [
36.7346% x( $25,000÷ v alueoft hel oani smadeav ail
ablet ot heborrower .
$75, 000) ]+ [ 23. 6842% x( $50, 000 ÷ $75, 000)
]}. Thi scal cul at
ion,howev er, A nsw er(A)is incorre ctb ecause i
n teresti
s chargedo nadi scountbasiswheni tis
under st atest het ruecostofnott akingthedi scountbecausei tdoesnotconsi der ded uctedfro m t
he fa ce val
ue bo r
ro w ed.An swer (C)i
s incorr
ectbecause i
nterest
theef f ectsofcompoundi ng. cha rgedo nad isco un t basi
sr es ul
tsi nad edu ct
ionf r
o m thefacev al
u e.T he
Answer( A)isi ncor rectbecause27. 0%i sbasedongr osspur chases.Answer( C) bor rowerdoesnotr ecei vethef ullfacev alueoft heloan.Answer( D)isincorrect
i
si ncor r
ectbecause29. 3%i sanunwei ghted( simple)av eragebasedongr oss becausei nter estischar ged onanadd- onbasi swhent hef aceval
ueoft heloan
pur chases.Answer( D)i sincor rectbecause30. 2%i sanunwei ght edav erageof i
n i
tial
lye quals the bo r
r oweda mo u nt pl
us t
h enomi nalint
e r
estcharge.
thet woi nterestr ates. cxi
x
.Total t
ober epaid=$12, 000(1.1019)=$13, 222.80.
I
nterest=$13, 222. 80-$12, 000=$1, 222.80.
cx
v. REQUI RED:Thet ruest at ementaboutt hedeci si
ont ouset radecr editandpay
att heendoft hecr editper iod. Appr oximater at
eAdd-on= =0.2038=20. 38%.
DI SCUSSI ON:( D)Thecompanyi scur rentl
ypay inganannualr ateof28%( see
CMAEXAMI NATI ONQUESTI ONS Page53of53
MANAGEMENTADVI
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cxx
.Themont
hlypay
ment
swoul
dbe: cx
xv . REQUI RED:Theef fect i
v ecostofal oanwhenacompensat ingbal ancei s
Mont hlypay ment= =$6, 875. requ i
red.
DISCUSSI ON:I nterestont hel oani s$7, 000( 7% x$100, 000). Gi v ent hatt he
borrowerhast omai nt aina20%compensat ingbal ance, only$80, 000[ $100, 000–
cxxi (20%x$100, 000) ]isav ailablef oruse.Thus,t hecompanyi spay ing$7, 000f or
. Appr oximat er at e= =20%.
theuseof$80, 000i nf undsatanef fect i
vecostof8. 75%( $7,000÷$80, 000) .
Answer( A)isincor rectbecauset hebor rowerhasaccesst oless, notmor e, than
cx xii. Answer( B)i scor rect.At10%,t hei nt erestona$500, 000l oani s$50, 000per the face amo un tof the lo an. An sw er (B) i
s incorrect be ca use the effe cti
ve ratei s
year .Howev er ,the$500, 000l oani sef fectivelyr educedt o$450, 000ofusabl e high erthan the con t
rac t rate as a r
e sulto fthe co mp e nsa ti
n gb alanc e
funds byt he compensat i
ng bal ance r equi rement .Thus,t he bor r owerpay s r equirement .Answer( C)isi ncor r
ectbecause8. 40%i s120%oft hecont ractr ate.
$50, 000 of i nterest f or a $450, 000 l oan,an ef fective r ate of 11. 1%
($50, 000/ $450, 000) . cx
xv i
.REQUI RED: The ef f
ect i
vei nterestr ate giv en a compensat i
ng bal ance
Answer( A)i si ncor r
ectbecause10%i st henomi nalrat e.Answer( C)i sincor rect requ i
reme nt.
because9. 1% equal s$50, 000 di vi
ded by$550, 000.Answer( D)i si ncor rect DI SCUSSI ON:( D)Ther equi r
ementt omai ntainacompensat ingbal anceof20%
because12. 2%equal s$55, 000di videdby$450, 000. oft he$300, 000l oanmeanst hatt hebor rowerhasef fect i
veuseofonl y80%of
thel oanor$240, 000.The8%i nterestr at eappl i
edt oa$300, 000l onr equiresan
cx xiii
.Answer( B)i scor rect .Thecompensat ingbal ancei s$750, 000,whi chcomes ann ual i
nterest ex pen ditureo f$ 24 ,
00 0.I nt ur
n ,p aying$ 2 4,
0 00f o r t
h eu seof
from t hepr oductof$5, 000, 000and0. 15.Thei nterestchar gedi s$5, 000,000x $24 0 ,
000in di
ca tes an e ffectiveinte r
e st r
a t
e o f10% .
0.1=$500, 000.Thus,t heamountoff undsav ai
lablef orusei s$4, 250, 000.The Answer( A)isincor rectbecausehav ingonl y80%oft hebor rowedf undsav ailable
costoft hel oani sthei nt erestcostof$500, 000di vi
dedbyt heef fectiveamount meanst heef fectiver atewi llbegr eat ert hant he8%cont ractr ate.Answer( B)i s
ofmoneyav ail
abl eforuse:Ef fecti
veCost=$500, 000÷$4, 250,000=0. 1176= i ncor rectbecause8%i st henomi nal r
at e.Answer( C)i si ncor r
ectbecause20%i s
11.76%. the pe r
cen t
a ge ofthe re q uir
e dc omp ens ati
n gb alance .
Answer( A)i si ncor r
ectbecauset heef fect i
vecostoft heloani snotequalt ot he
annualr ateofi nterest .Answer( C)i si ncorrectbecause16. 67%i st her esultof cx
xv i
i.REQUI RED:Theef fect i
v einterestr at eonal oant hatr equi r
esacompensat ing
dividingt hecompensat ingbal anceby$4, 500, 000( amountofi nterestchar ged bala nceo f$25 ,
0 00a b ov e the comp any ’
s no rma lwo rkingb alanc e.
mi nust hei nterest )
.Answer( D)i si ncor rectbecause17. 65% i st her esultof DI SCUSSI ON:The $50, 000 compensat i
ng bal ance r equirementi s par tiall
y
dividingt hecompensat ingbal anceby$4, 250, 000( whi chist hei nt
er estmi nust he satisfied by t
h e comp a ny’s p racti
c e ofma i
n t
ain i
ng a $2 5,
00 0 b al
an ce for
compensat ingbal ance) . trans act
ionp u rpos es.T hus ,on l
y$ 25 ,
0 00o fthel o anw i
lln ot bea vail
a blef or
currentuse,l eav i
ng$225, 000oft hel oanusabl e.At6% i nterest,the$250, 000
cx xiv.Answer( D)i scor rect .Annuali nter esti s$36, 000( $300, 000x12%) ,andt he l
o anw ouldr eq ui
rea ni n terest pa yme nt of $15 ,
00 0p e r year. Th i
si sp artiall
y
amountav ailablei s$255, 000[ $300, 000-( 15%x$300, 000)].Thus,t heef f
ective of fsetbyt he2% i nterestear nedont he$25, 000i ncr ement albal ance,or$500.
i
nt erestr atei s14. 12%( $36, 000÷$255, 000) . Sub tracti
ngt he$ 5 00i n teres tearn edf rom the$ 1 5,000o f ex pens er esultsi nnet
Answer( A)i si ncorrectbecause11. 00% i st henomi nalr atef or11mont hs. i
n t
e reste xpens eo f $1 4,50 0f or t
h eu s eo f $22 5,
0 00i nf und s.D ivid i
ng$ 14 ,
500
Answer( B)i si ncor rectbecause12. 00%i st henomi nalr ateofi nterest .Answer by $2 25,
0 00p rodu ces a ne f
fective interes trateo f6 .
4 4% .
(C)i sincor rectbecause12. 94%equal s$33, 000( 11mont hsofi nterest )di vded Answer(
i B)isincor rectbecause7. 00%f ailstoconsi dert hatt he$25, 000cur rent l
y
by$255, 000. beingmai ntai
nedcount stowar dthecompensat i
ngbal ancer equirement .
CMAEXAMI NATI ONQUESTI ONS Page54of54
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
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Answer(C)isi
ncorrectbecause5.8%fail
stoconsidert
hecompensati
ngbal
ance avail
able,r
esult
inginanef fecti
vei nt
erestrat
egr eat
erthanthecontractr
ate.
requir
ement.Answer(D)isincorr
ectbecause6.66%fai
lst
oconsidert
heint
erest Answer( C)isincor
rectbecause10% i st hecont
ractrat
e.Theeffect
iverat
ei s
earnedontheincr
ement albal
ancebeingcarr
ied. higherbecausetheful
l$2mi ll
i
onf aceamountoft henotewil
lnotbeavail
abl
eto
theborrower.
cx
xv i
ii.REQUI RED: Theef fectiv ei nter estr at eonal oangi venacompensat i
ng
balancer equi rement . cx
xxi .Answer( D)i scor r
ect .Whenanot ei sdi scount ed,t hei nter
esti sdeduct ed
DISCUSSI ON: ( D) Oft he$500, 000bor rowed,t hedebt orhast heuseofonl y f rom t hefaceoft henot eandi snev errecei vedbyt hebor rower.Ata10%i nter est
$450, 000. Thecompensat ingbal ancepr ov isionr equi resami nimum bal nace r ate,t he int erestwi llbe $100, 000,meani ng t he bor rowerwi llreceive onl y
thati s$50, 000gr eat ert hant hebal ancet hecompanyusual l
ymai ntains.At8% $900, 000.A costof$100, 000on$900, 000ofav ai l
ablef undsr esultsi nan
on$500, 000l oan, theannuali nterestexpensei s$40, 000.Howev er,thisamount ef fectiverat eof11. 1%.
i
sr educedbyt hei nter estear nedont heext ra$50, 000i nt hechecki ngaccount . Answer( A)i si ncor rectbecauseonl y$900, 000i sav ailablef oruse.Answer( B)i s
At3%,t heext ra$50, 000ear ns$1, 500pery ear . Thus,t henetexpensei s i ncor r
ectbecauseonl y$900, 000i sav ailablef oruse.Answer( C)i sincor rect
$38, 500.Theef fectivei nterestr at eis8. 555%( $38, 500÷$450, 000) . becauset heef fectiv erat eis11. 1%.
Answer( A)i si ncor rectbecauset heef fect iv ei nt erestr atemustexceedt he8%
cont r actr at ebecausenotal loft hebor rowedf undsar eav ai labl efort hedebt or’scx
xxi i
.Answer( C)i scor rect.Underadi scount edl oan,t hei nterestissubt r
act ed
use.Answer( B)i si ncor rectbecause8. 22% assumesi ncr ement alear ningson f rom t hefaceoft henot et odet ermi net hepr oceeds.Thus,ona$30, 000not eat
thechecki ngaccountof$3, 000.Answer( C)i si ncor rectbecause9. 25%i sbased 11%,t hepr oceedswoul dbeonl y$26, 700.Di v idingt he$3, 300ofi nterestbyt he
ont heassumpt iont hatt hecompanyor dinar ilymai nt ainsazer obal ance. $26, 700pr oceedsr esul tsinanef fectiver ateof12. 36%.
Answer( A)i sincor rectbecauset heef fectiver ateonadi scountednot ewi llbe
cx
xix.Answer( D)i scor rect .Appl yi
ngt he9%i nter estr at et oa$100, 000l oanr esul ts hi ghert hant hecont ractr ate.Answer( B)i sincor rectbecause10%r esul t
sf rom
i
ni nt er estexpenseof$9, 000.I fthel oani spr ocessedi nt hef or m ofadi scount ed addi ngthei nt erestt ot hef aceoft henot einst eadofdeduct ingit.Answer( D)i s
not e,t hei nt er estwi llbededuct edf rom t hepr oceedsoft hel oan.Thus,t he i ncor r
ectbecause11%i sthecont ractr ate, nott heef fectiverate.
$9,000ofi nt er estwi l
lbededuct edf rom t he$100, 000not e,r esulti
ngi nl oan
proceedsof$91, 000.Thebor roweri spay i
ng$9, 000f oral oanof$91, 000,cx
xxi i
i.Answer( C)i s cor rect.Di scounti nteresti s subt racted beforet he l oan
resul tingi nanef fect iveint erestr ateof9. 89%. proceedsar epai dt ot hebor rower .Acompensat ingbal ancei sanamountt hat
Answer( A)i si ncor rectbecauset hel esseramountoff undsav ailableona t hebor r
owermustkeepondeposi twitht hel ender .Theef f
ectiveannuali nter est
discount ednot emeanst heef fectiver atewi llbehi ghert hant hecont ractr ate. r atei si ncr eased by bot ht he di scounti nter estar rangementand by t he
Answer( B)i si ncor rectbecause9%i st henomi nalr at e( discountr ate).Answer compensat i
ngbal ancer equir
ement .Theef fect iver ateequal sthenomi nalr at e
(C)i si ncor rectbecause9. 81%equal st henomi nal r
at emul ti
pl iedby9%. dividendbyonemi nust hesum oft henomi nalr at eandt hecompensat ing
balanceper cent age, or20%[ .
15÷( 1.0-. 15-. 10) ].
cx
xx. Answer( D)i scor rect.I ft hel oani sdi scount ed,t hebor rowerr ecei vest he Answer( A)i si ncor rectbecause16. 67%doesnotadj ustf orthediscounti nter est
faceamountmi nust hepr epai di nterest .Thus, thebor rowerwi llreceivepr oceeds ar rangement .Answer( B)isi ncorrectbecause17. 65% doesnotadj ustf ort he
of$1, 800, 000[ $2, 000, 000-( 10% x$2, 000, 000) ].Theef fect iv einterestr atei s compensat i
ngbal ancer equir
ement .Answer( D)i si ncor rectbecause25. 00% i s
11. 11%( $200, 000÷$1, 800, 000) . thesum oft henomi nal rat
eandt hecompensat ingbal anceper centage.
Answer( A)i si ncor rectbecauset hepr epay mentofi nterestr educest hef unds
avai labl e,r esul tingi nanef fectivei nt erestr ategr eat ert hant hecont ractr ate.cx
xxi v.Answer( D)i scor rect .Assumi nga$1, 000l oan, thei nterestat7%f or1y eari s
Answer( B)i si ncor rectbecauset hepr epay mentofi nterestr educest hef unds $70.Hence,t hepr oceedsoft hel oanar e$930( $1,000-$70) .Also,20%oft he
CMAEXAMI NATI ONQUESTI ONS Page55of55
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SORYSERVI
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NGCAPI
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note,or$200,cannotbeusedbyt heborrowerbecauseoft hecompensating DI SCUSSI ON:( B)Theef fect ivei nterestr at eont he180- daybor r
owi ngisequalt o
balance requi
rement.Consequently,onl
y $730 i
s avail
ableforuse by t he the neti nter estcostdi vided by t he netav ailable proceeds of$1, 800,000
borrower.Payi
ng$70i nter
estfort
heuseof$730givesaninter
estrat
eof$9.59% ($2, 000,000l oan–$200, 000i ncr easei nt hecompensat ionbal ance) .Thenet
($70/$730). inter estcosti sequalt ot hegr ossi nter estcostmi nust hei ncrement alinterest
Answer( A)isincor
rectbecause8.75%equals$70divi
dedby$800.Answer( B) rev enue. Thegr ossi nt erestcosti s$120, 000[ $2,000,000x12% x( 6 12) ]
.
i
si ncorr
ectbecause9. 41%equals$70div
idedby$744.Answer( C)isi
ncorrect Becauset hei ncrement alint erestr ev enuei s$6, 000[ $200,000x6%x( 6 12) ]
,
because7. 53%equals$70divi
dedby$930. theneti nter estcosti f$114, 000( $120, 000–$6, 000) .Thesi x-
mont heffective
inter estrat ei sther efor e6. 33%( $114, 000 $1, 800,000).Theannualef fective
cx
xxv .Answer( D)iscor rect.Assumi nga$1, 000l oan, t
hei nterestat6%f or1y eari s i nter estrat ei s12.67%( 6.33%x2) .
$60.Hence,t hepr oceedsoft hel oanwi thdiscounted( paid-in-advance)i nterest Answer( A)i si ncorrectbecause12%i st heannualr ate.Answer s(C)and( D)ar e
are$940( $1,000-$60) .Also,22%oft henot e,or$220,cannotbeusedbyt he i ncor rectbecauset hei nt erestr evenuef rom t hechecki ng accountmustbe
bor r
owerbecauseoft hecompensat ingbal ancer equirement .Consequent ly,onl y i ncludedi nt hecal cul ations.
$720i sav ail
ablef oruse.Pay ing$60i nterestfort heuseof$720r esultsinan
effectivecostofbor rowi ngof8. 33%( $60÷$720) . cx xxix.Answer( B)iscor rect.Thet ot alcostt ot hecompanywi llbe$21, 200( $20,000
Answer( A)i sincor r
ectbecause6%i st hecont r
actr ate.Answer( B)isi ncorrect di scount+$1, 200oft ransact ioncost s),andt henetamountav ail
ablewi l
lbe
because 6. 38% does notconsi dert he compensat ing bal ance r equi r
ement . $978, 800.The annual i
zed amountoft he cost si s $84, 800 ( 4 x $21, 200).
Answer( C)i si ncorrectbecause7. 69% assumest hei nteresti snotpai di n Accor dingly, theannual inter estcostwi llbe8. 66%( $84,800/$978, 800).
adv ance. Answer( A)i sincor rectbecauset heannuali nter estcostwi l
lbe8. 66%.Answer
(C)i sincor rectbecauset heannuali nt er estcostwi llbe8. 66%.Answer( D)i s
cx
xxv i.Answer( B)i scor r
ect.An amount -of-
onet abl ecan beused t of i
nd t he i ncor rectbecauset heannual inter estcostwi llbe8. 66%.
effectiveratewhent heAPRi sknown.Anannualr at
eof9%i sequi valentto. 75%
permont h.Usi ngt he. 75%col umn, theaccumul atedint erestf actoris.093806, orcx l
.Answer( C)i scor rect .Thet ot alcostt ot hecompanywi llbe$51, 500( 50,000
9.38%f ort hey ear. discount+1, 500oft ransact ioncost s),andt henetamountav ail
ablewi llbe
Answer( A)i sincor r
ectbecause9%i st heAPR.Answer( C)i si ncorrectbecause $1, 448,500.Theannual izedamountoft hecost si s$206, 000( 4x$51, 500).
9.81%i st oohi gh.Answer( D)isi ncor rectbecause10. 94%i sanonsenseanswer . Accor dingly, theannual inter estcostwi llbe14. 22%( $206,000÷$1, 448,500) .
Answer( A)i sincorrectbecause3. 45%i gnor est het ransactioncost sandf ail
st o
cx
xxv ii
.Answer( A)i scor r
ect.Theannualper centager atei seasyt o comput e: annual i
ze t he per cent age.Answer( B)i si ncor rectbecause 3. 56% f ail
st o
mul ti
plyt he 1. 25% mont hlyr atet imes 12 mont hs t o ar r
ive at15%.The annual i
ze t he r esul t. Answer( D)i si ncor rectbecause 13. 79% i gnores t he
compoundedr atewoul dbesl i
ght l
yhi gher .Thus,gi vent heal ter
natives,answer t ransact ioncost s.
(A)i stheonl yaccept ablealternativewher ethecompoundedr ateisgr eaterthan
the15% APR.Tochecky oursol ution,l ookatan" Amountof1"t ablef or12
per i
odsat1. 25%.Theaccumul atedi nter estis.16075, or16. 8%. cxl
i
.I nter estrat eonbor rowedf unds=0. 09+0. 015=10. 5%.
Answer( B)i sincor rectbecausei thasbot hamount swr ong.Answer( C)i s Costofunusedpor tion:$4, 000, 000 0. 005=$20, 000
i
ncor rectbecauset hecompounded r atewi l
lbegr eatert han t he15% APR. Costofusedpor t
ion: $6, 000, 000 0. 105=630, 000
Answer( D)isi ncorrectbecausei tsubst itutestheAPRf orthecompoundedr ate. Tot alcostofl oanagr eement $650, 000
cx l
ii
. Answer( C)iscor rect.At10%i nter est ,theannualexpensewoul dbe$120, 000
cx
xxv ii
i. REQUI RED:Theef f
ect i
v eint erestrateont hebor rowi ng.
CMAEXAMI NATI ONQUESTI ONS Page56of56
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

onal oanof$1. 2mi l

li
on.Howev er,becauseoft he15% compensating-bal
ance i
nt erestwoul dbe16. 326%( $2/ $98x8per iods) .TheShadl oanwoul dbef or$97
requir
ement,$180,000oft hefundscannotbeused.Ther efor
e,usablefundsare atacostof$3.Thel oanwoul dbef or75day s( 90-15) .Giv en4. 8interestper i
ods
only$1,020,
000.Di v
idingthe$120, 000ofi nterestbythe$1,020,000r
esultsi
nan i
nay ear( 360/ 75) ,t
heannuali nter estr atewoul dbe14. 845%( $3/$97x4. 8).The
effect
iverat
eof11. 76%. bankl oanwasquot edat14. 75% onadi scountbasi s.Ona$100not e,t he
Answer( A)isincorrectbecause10%i sthecont ractrat
e,nottheeffecti
verat
e. bor r
owerwoul d onl yr eceive $85. 25,gi v ing an i nterestr ate of 17. 302%
Answer ( B) i
si ncor rect because 11. 11% r esult
sf rom assumi ng a 10% ($14. 75/ $85. 25) .Thus,notpay ingShad,I nc. '
si nv oicesont i
mewoul dbet he
compensat i
ngbal ance. Answer( D)isi ncorrectbecause13. 33% r
esultsfr
om l
owestcostsour ceofcapi tal,atacostof14. 845%.
assumi nga$300,000compensat ingbalancei nsteadof$180,000. Answer( A)i sincor rectbecauset heact ualannualper cent ager atebasedon
forgoi ngShad' sdi scounti s14. 845%.Thi si slowert hant her at eont hebankl oan
cx
li
ii. REQUI RED:Thei nterestexpensef orsixmont hs. (17.302% becausei tisadi scountl oan) ,ort hecostoff or goi ngt hedi scount s
DISCUSSI ON: The sum oft he begi nni
ng bal ance and i nflowsexceedst he al l
owedbyFor tCo.( 18.182%)andRi leyCo.( 16.326%) .Answer( B)isi ncorrect
outfl
owsf orthef ir
st2mont hs.Att heendofMar ch,howev er,Gar thmustuse becauset heact ualannualper cent ager atebasedonf orgoi ngShad' sdi scounti s
$2,000,
000 ofi tsl ineofcr edit($2, 000,000 begi nning balance+ $6, 000,000 14. 845%.Thi si sl owert hant her at eont hebankl oan( 17. 302%becausei tisa
i
nflows-$100, 000, 000out fl
ows) . Thus,i nt erestf orApr ilis$20, 000 (1% x di scountl oan),ort he costoff or goi ng t he di scount s al lowed byFor tCo.
$2,000,
000) .Thenetcashout f
low f orApr il(ignoringshor t-t
er m bor rowi ngs)is ( 18.182%)andRi leyCo.( 16.326%) .Answer( C)i si ncor r
ectbecauset heact ual
$1,000,
000ofanaddi t
ional$1, 000, 000oft hel i
neofcr edi t). Howev er,the annualper centager atebasedonf orgoi ngShad' sdi scounti s14. 845%.Thi si s
$20,000ofi nt
erestf orApr ilmustal sobepai d, sot heamountoft hel i
neofcr edi
t l owert hant her at eont hebankl oan( 17. 302%becausei ti sadi scountl oan) ,or
usedinMayi s$3, 020, 000( $2,000,000+$1, 000, 000+$20, 000) .I nterestf orMay t hecostoff orgoi ngt hedi scount sal lowedbyFor tCo.( 18. 182%)andRi leyCo.
i
st herefore$30, 200( 1% x$3, 020,000) .Gi vent henetcashi nf l
ow f orMayof ( 16.326%) .
$2,000,
000( againi gnor ingshor t-
term bor rowi ngs)andt hebor rowi ngof$30, 200
topayt hei nterestf orMay ,theamountoft hel i
neofcr edi tusedi nJunei scx
lv. Answer( B)i scor rect.Thei nter estcostofbor rowi ng$4, 900,000( 98% x
$1,050,
200.I nter esti nJunei s$10, 502( 1% x$1, 050,200),andt otali nt
erestis $5, 000, 000)t ot akeadv ant ageoft hedi scounti s$24, 500[ $4,900, 000x12%x( 15
$60,702( $20,
000+$30, 200+$10, 502) . Consequent l
y,thecl osestansweri s ÷360) ], andt het otalcostwi l
lbe$4, 924, 500.Thet otalcosti ft hedi scounti snot
$61,000. takenwi llbe$5, 000, 000, adi f
fer enceof$75, 500.
Answer( A)isincor rectbecausei nterestmustbepai dmont hlywhent hecr edit Answer( A)i si ncor r
ectbecause$51, 000l essi sbasedona30- daybor r
owi ng
l
ineisusedi nApr il,May , andJune.Answer s( C)and( D)areincor r
ectbecause per i
od.Answer( C)i sincor rectbecause$100, 000l essdoesnotconsi dert he
thecompanywoul dr epayt hecreditlineatt heendofmont hswi thaposi t
ive i
nt erestpai d.Answer( D)i sincor r ectbecause$24, 500mor er ef l
ectsinterestpai d
cashf l
ow. buti gnor est hedi scount edpr ice.

cx
li
v . Answer( D)i scorrect.The firststep isto det er
mi ne t he actualannual cx
lvi
. Answer( B)i s correct.The cor porat
ion can obtaintr ade creditf or20
percentageinterestrat
ef oreachoft hef ouroptions.Assumi nga$100i nv oice, additi
onalday sbynotpay ing withi
nt hediscountper i
od.I nstead ofpay i
ng
theFortCompanydi scountrepresentsint
erestof$1onal oanof$99f or20day s $99, 000tosat i
sfyitsobl i
gationwithin10days,itcanpay$100, 000att heendof
(30-daycreditper i
od -10- daydi scountper i
od).The annuali nterestr atei s 30day s.Thecor porati
onwi llthusincur$1,
000i nint
eresttohol dthe$99, 000for
18.1818%[ (
360/ 20)peri
odsx( $1/$99)].TheRi l
eyCompanydi scountr epr esents t he20day s.Becausea360- dayyearhas18suchper i
ods,t heinterestrat
ei s
ani nt
erestchargeof$2onal oanof$98;i .
e.,bynotpay ingont he15t hday ,the appr oximately18. 18% [($1,000 ÷ $99,000)x 18] .Howev er ,ifcompoundi ng
companywi l
lhav et heuseof$98f or45day s( 60-
daycr editper i
od-15- day ef fect
sareconsi dered,therat eishigher
.Theef f
ecti
ver at
e,takingcompoundi ng
discountperiod).Thenumberofper i
odsi nay earwoul dbe8( 360/ 45).The i ntoconsiderat
ion,isfoundusi ngt
hef ol
l
owingformula:
CMAEXAMI NATIONQUESTI ONS Page57of57
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

Take Don’ tTake

Discount s Discounts
(Borrow (
UseMax.Tr ade
Answer( A)isi ncorr
ectbecauset hetradecredi
trat ei
s18.18% or19. 83% N/ P) Cdt) Dif
ference
dependingont hemet hodofcalcul
ati
on. Answers( C)and(D)ar
ei ncorrect Accountspayable $117,600 $352,800 -$235,200
because the note has an eff
ect
iverate,i
ncl
uding compoundi
ng ef
fects,of Notespayable(10%) 235,200 - +235, 200
21.94%.Thefoll
owingist hecal
cul
ati
on: Total
currentl
iab. $352,800 $352,800 $ 0

II
.Parti
alincomest atement
EBIT & di scounts $140,
000 $140,
000 $ 0
l
ost
cx l
vii.Answer( A)i scor r
ect .Thecompanywi l
lsav e$200( 2%x$10, 000)ev ery15 Less:Interest -
23,
520 0 +23,520
day s.Ther ear e2415- dayper i
odsi na360- dayy ear.Thus,thegr osssav i
ngswi l
l Discount slost 0 -86,400 -
86,400
be$4, 800.Thei nterestexpenseona$9, 800l oanat12%i s$1,176.Deduct ingthe EBT 116,
480 53,600 +62,880
$1,176i nt erestexpensef rom the$4, 800ofdi scountsresult
si nanetsav i
ngsof Less:Taxes( at 46,
592 21,440 +25,152
$3,624. 40%)
Answer( B)i si ncorrectbecause$1, 176i st heamountoft hei nterestexpense. Netincome $69,
888 $32, 160 $37, 728
Answer( C)i sincorrectbecause$4, 800i st hegr osssav i
ngsbef orededuct ionof
interest.Answer( D)i si ncorrectbecause$1, 224i sbasedononl y$2,400of
cx
li
x. Answer( D)i scorr
ect.Thecompanywi l
lneed$49, 000( 98%x$50, 000)topay
discount s, i
nst eadof$4, 800.
offtheinvoice.Inadditi
on,itwil
lneedacompensat i
ngbal anceequalt o10%of
cxl
vi
ii theloan.Thi scanbewr it
teninequationf orm as:Loan=$49, 000+( .1)
Loan.
. Cal cul ateA/ Pwithandwi thoutt akingdi scount s: Thus,theloanamountneededi s$54,444( $49,
000/ .
9).
A/PNodiscount=$11, 760x30day s=$352, 800. Answer( A)isi ncorr
ectbecause$55,000i s110%oft heinv oice.Answer( B)is
A/PDiscount=$11, 760x10day s=$117, 600. i
ncor r
ectbecause$55, 056 isanonsensenumber . Answer( C)i si ncorr
ect
because$55, 556assumesnocashdi scount .
Cal cul
atef i
nanci ngamounti nnot espay ableandi nter
estcost.Thef ir
m willneed
tobor rowt hedi ffer
encei nnotespay able. cl
.Answer( B)iscor r
ect.Thecompanywi llneed$49, 000( 98%x$50, 000)topayof f
$352, 800-$117, 600=$235, 200. theinvoi
ce.I nadditi
on,itwil
lneedacompensat ingbal anceequalt o10%oft he
Theaddi tional i
nterestcosti s$235, 200x0. 10=$23, 520. l
oan.Thus,t hel oanamountneededi s$54, 444( $49,
000/ .9).
Thei nter
estat12%
annuall
yona30- dayl oanof$54, 444i s$544. 44( $54, 444x12% x30/ 360).
Cal
cul
atetot
alpurchasesanddi
scountsl
ost: Howev er,t
hecompanyhasaccesst oonly$49, 000.Thus, theinterestexpenseon
Totalpur
chases=360day sx12,000gr
osspurchases=$4,
320,
000. usablefundsisatanannual rat
eof13.33%( 12mont hsx$544. 44/$49,000).
Discount
slost=$4,320,
000x0.02=$86,400. Answer( A)isincorrectbecause12.00%assumest hatt hecompanyhasaccess
toloanfundsof$54, 444.Answer(C)isi ncor r
ectbecause$54, 444,not$55,000,
Constructcompar
ati
vefi
nanci
alst
atement
s: i
st heamountoft hel oan,andtheannuali nterestexpenseshoul dbedi vi
dedby
I. Par t
ialbal
ance $49,000ofusabl efunds,not$50,000.Answer( D)isi ncor r
ectbecause$54, 444,
sheet: not$55, 056,ist he amountoft he loan used t o det ermine annuali nt
erest
CMAEXAMI
NATI
ONQUESTI
ONS Page58of58
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

expense. $60,
000.Answer(
D)i
sincor
rectbecause36.
73% assumesa20-
daydi
scount
peri
od.
cl
i
.Answer( D)i scor rect .Ift hecompanychoosest hel ineofcr edi t,itwi l
lpay17%
i
ntereston$80, 000( $100, 000-$20, 000di scount )and1%ont he$20, 000unusedcl v.Answer( D)i scor rect.Ifthel oani spr ocessedi nthef orm ofadi scount ednot e,
portion,at otalof$13, 800.Theef fect i
vei nterestr atewoul dt husbe17. 25% t hei nt erestwi llbededuct edf r
om t hepr oceedsoft hel oan.Thus,ont he10%
($13,800÷$80, 000) . l
oan, the$10, 000ofi nterestwi llbededuct edf r
om t he$100, 000not e, resul ti
ngi n
Answer( A)i si ncor rectbecausei ft hecompanyf orgoest hecashdi scount ,its l oanpr oceedsof$90, 000.Thebor roweri spay ing$10, 000f oral oanof$90, 000,
effectiver atei s25% ( $20, 000÷$80, 000i mmedi at ecashpr ice) .Answer( B)i s r esul ti
ngi nanef f
ect iveinter estr at
eof11. 11%.Ont he10. 5%l oan, the$10, 500of
i
ncor rectbecausean18% ef fectiver ateexceedst hatont hel ineofcr edit
. i nter estwi llbe deduct ed f rom t he $100, 000 not e,resul ting in pr oceeds of
Answer( C)i si ncor r ectbecauset heef fecti
v er atewoul dbe18. 75% [ (15% x $89, 500.Thebor roweri spay i
ng$10, 500f oral oanof$89, 500,r esul tingi nan
$100, 000)÷$80, 000av ailablefunds] . effect iveinter estr ateof11. 73%.
Answer( A)i si ncor r
ectbecauseBank2hasanef f
ectivei nterestr at eof10. 49%.
cl
i
i.Answer( C)i scor rect.Thecompanywi llneed$58, 800( 98%x$60, 000)t opayt he Answer( B)i si ncor rectbecauseBank4 al so hasanef fect i
vei nt erestr at e
i
nv oice.I naddi tion,itwi llneedacompensat i
ngbal anceequalt o9%oft hel oan. bet ween11%and12%.Answer( C)isi ncor r
ectbecauseBank1hasanef fect i
v e
Theequat ioni s Loan=$58, 800+. 09Loan.Thus,t hel oanamountneededi s i nter estr ateof9. 89%.
$64,615( $58, 800÷. 91) .
Answer( A)i si ncor rectbecause$60, 000i st hei nv oiceamount .Answer( B)i scl
vi
. Answer( A)i scor rect.Theef f
ectivecostofal oani sf oundbydi v i
dingt he
i
ncor rectbecause$65, 934assumest heamountpai dt ot hesuppl i
eri s$60, 000. i nter estont hel oanbyt heamountav ail
abl ef oruse.Ther efore,t hei nt erest
Answer( D)i sincor r
ectbecause$58, 800i st heamountt obepai dt ot hesuppl i
er. char gedbyBank1i s$7, 000( 7% x$100, 000) .Givent hatt hebor rowerhast o
mai nt ain a 20% compensat i
ng bal ance,onl y $80, 000 [ $100, 000 -( 20% x
cl
i
ii
. Answer( C)i scor rect .Thei nter estat11% annual l
yona30- dayl oanof $100, 000) ]isav ail
abl eforuse.Thus, thecompanyi spay ing$7, 000f ort heuseof
$64,615i s$592. 30[ $64, 615x11% x( 30÷360) ].Howev er,t hecompanyhas $80, 000i nf undsatanef fect ivecostof8. 75%( $7,000÷$80, 000) .
accesst oonl y$58, 800.Thei nterestexpenseonusabl efundsi st her eforeatan Answer( B)i si ncor rectbecauseBank2of fersanef fect i
vel oancostof9. 41%.
annual rateof12. 09%[ 12mont hsx( $592. 30÷$58, 800) ]
. Answer( C)i si ncor rectbecauseBank3of fersanef fect i
vel oancostof9. 15%.
Answer( A)i si ncor rectbecause11%i st hecont ractr ateofi nt erest .Answer( B) Answer( D)i si ncor rectbecauseBank4of fersanef f
ect i
vel oancostof9. 00%.
i
si ncor rectbecauset heef f
ect i
ver at ei sgr eatert hant hecont ractr ate.The
usabl ef undsar el esst hant hef aceamountoft henot e.Answer( D)i si ncorrectcl
vi
i. Answer( A)i s cor r
ect .Si nce Bank1 has a 25% compensat ing bal ance
becauset heef fect i
ver at eisgr eat ert hant hecont ractr ate.Theusabl ef undsar e r equi rement ,t heamountofav ail
ablef undsi s$3, 750, 000( 75% x$5mi l
li
on) .
l
esst hant hef aceamountoft henot e. Interestat12% i s$600, 000.Di vi
ding $600, 000 by$3, 750, 000 r esul t
si n an
effect iverat eof16. 0%.ForBank2, thei nteresti s$750, 000.Di v i
ding$750, 000i n
cl
i
v. Answer( C)i s cor rect.Byf ail
ing t ot ake t he di scount ,t he companyi s i nter estby$4. 5mi l
li
onofav ailablefundsr esul tsinanef fect i
ver at eof16. 7%.
essent iall
ybor rowi ng $58, 800 f or30 day s.Thus,ata costof$1, 200,t he Thus, ther ateont hel oanf rom Bank1i s0. 7%l esst hant her ateont hel oanf rom
companyacqui rest heuseof$58, 800,r esulti
ngi nar ateof2. 04081%( $1,200÷ Bank2.
$58,800)f or30day s.Assumi nga360- dayy ear ,theef fectiv eannualr atei s Answer( B)i si ncor rectbecause3% i st hedi fferencei nt het wocont ractr at es,
24.489%[ 2.04081%x( 360day s÷30day s)]. nott heef fectiv er ates.Answer( C)i sincor r
ectbecauset heef fect iver at ef or
Answer( A)i si ncor rectbecause2% i st hedi scountr atefora30- dayper i
od. Bank1i slowert hanf orBank2.Answer( D)i sincorrectbecauset heef fect i
v e
Answer( B)i si ncor rectbecause24% assumest hatt heav ailabl ef undsequal r atef orBank1i sl owert hanf orBank2.
CMAEXAMI NATI ONQUESTI ONS Page59of59
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

cl
vi
ii. Answer( A)iscor rect.Ift
hef i
rm planstohav e$500, 000ondeposi tinany
case,t he Bank 1 l oan wi l
lr equi r
e only $750,000 mor et o mai nt
aint he
compensat ingbalance,meani ngt hat$4,250,
000oft hel oanwi l
lbeav ail
ablefor
use.Dividi
ng$600, 000by$4, 250,000r esult
sinanef fectiverateof14. 1%.Allof
theloanf r
om Bank2woul dbeav ail
able,r
esult
inginanef fecti
verateequal tothe
15%cont ractrate.
Answer( B)i sincorrectbecause3% i sthediffer
encei ncont r
actrates,nott he
eff
ectiverates.Answer( C)isi
ncor rectbecauseBank1hasal oweref f
ectiverate.
Answer( D)i si
ncorrectbecauseBank1hasal oweref fect
iverate. Bycompar i
ngthepresentval
uesoftheoptions($17,
568;$18,243)
,Rogershould
choosethesecondopt ionofbi-
weeklypayments,asthepresentval
uei shi
gher
cl
i
x. Answer( A)iscor r
ect .Tomakeacapi t
albudgetdeci si
on,thepr esentv ues by$675.
al
ofthei nfl
owsmustbedet er
mi nedandcompar edt oseewhi chist hegr er Answer(
eat B)isincorr
ectbecauset hetwoopt ionswi l
lhavedi ff
erentpresent
val
ue.Thel umpsum pay mentisaone- t
imepay mentatasetdat eataspeci fed v
i alues.Answer( C)isincorr
ectbecausethebi weeklypaymentshav eahi gher
i
nterestrate.Thefor mulat odetermi nethepresentvalueoft helumpsum i s presentv al
ue.Answer( D)isincor
rectbecauset hebiweekl
ypay ment shavea
higherpresentval
ue.

cl
x.REQUI RED:Theannual percentagecostoff actori
ngr eceivabl es.
Wherei=interestrat
e,.005,andn=numberofper i
ods,26bi-weeklyper
iods.The DI SCUSSI ON:( D) Thef actorwi lladvance$100, 000( 80% of$125, 000) .Thi s
computati
onoft hepresentvalueofthel
umpsum isasf ol
l
ows: amounti st heav er
agebal anceout standingthroughoutt hey ear .Thus,annual
i
nter estwi l
lbe$10, 000( 10%x$100, 000).Inaddi t
ion,t hecompanywi llpayan
annual f
eeof$30, 000( 2%x$125, 000permont hx12mont hs) ,sot hetot alannual
netcosti s$16, 000( $10,000+$30, 000-$24, 000sav i
ngs) .Hence,t heannual
costi s16%( $16,000÷$100, 000) .
Answer( A)isincor rectbecause10%i stheint
erestr ateont heamountadv anced.
Answer( B)isincor rectbecause12%i sthesum oft hei nter estr ateandt hef ee
Thepresentvalueofthebi-weeklypaymentscanbecalcul
atedusingtheformula perc entage. Ans w er(C) i
s i
ncorrectb ecause13 .
2%i s t
he co sto fO pti
on B.
fort
hepresentv al
ueofanor dinar
yannuit
y,asthei
nter
estcompoundsbi -weekly
.
Theformulais: cl
xi
. REQUI RED:Theannualper centagecostofbor rowi ngwi thacompensat i
ng
balancer equi r
ement .
DISCUSSI ON:( C) Ev ent hought hecompanywi llbor row $110, 000,itwi llhave
useofonl y$100, 100becausea9%compensat ingbal ance,or$9, 900,mustbe
Wherei=interestrat
e,.005,andn=numberofper i
ods,26bi-weeklyper
iods.The mai ntainedatal ltimes.Consequent l
y ,t
heeffecti
veannuali nterestratei s13. 2%
computati
onoft hepresentvalueofthebi
-weekl
ypaymentsisasf oll
ows: [(
12%x$110, 000)÷$100, 000].
Answer( A)isincor rectbecause9%i st hecompensat ingbal ancer equi
rement .
Answer( B)isincor rectbecause12%i sthecontractr ate.Answer( D)isi ncor r
ect
because21%i st hesum oft hecont r
actr at
eandt hecompensat ingbal ance
CMAEXAMI
NATI
ONQUESTI
ONS Page60of60
MANAGEMENTADVI
SORYSERVI
CES WORKI
NGCAPI
TALFI
NANCE

r
equi
rement
.

cl
xi
i. REQUI RED:Theannual per centagecostofi ssui
ngcommer ci
alpaper.
DISCUSSI ON: ( D) Byi ssuing commer cialpaper,the companywi llreceive
$100,000andr epay$110,000ev er
ysixmont hs.Thus,fortheuseof$100, 000i n
funds,thecompanypay s$10,000i ninteresteachsix -
mont hper i
odorat otalof
$20,000pery ear. Theannualper centager ateistherefore20% ( $20,000 ÷
$100,000).
Answer( A)isincorr
ectbecause9. 1%i sthe6- monthratebasedont heface
amountoft hepaper .Answer( B)isincorrectbecause10%i st herateforsix
mont hs.Answer( C)isi
ncorrectbecause18. 2%isbasedont hefaceamountof
thecommer ci
alpaper.

cl
xi
ii. REQUIRED:Theannual percentagecostofadiscount
ednot e.
DISCUSSION:( B) Thecompanywi llrecei
ve$100,000(80% x$125, 000)atan
annualcostof$25,
000) ,
sotheannual i
nterestr
atei
s25%( $25,000÷$100, 000).
Answer(A)isincor
rectbecausetheef f
ectiv
eratemustexceedt hecontr
actrate
of20%.Answer( C)isincor
rectbecause40%assumesnodi scountanda6-
monthloanterm.Answer( D)isincorr
ectbecause50%assumesa6- mont hloan
ter
m.

CMAEXAMI
NATI
ONQUESTI
ONS Page61of61