Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 61:

  Hagar Company's bank requires a compensating balance of 20 percent on a $100,000 loan. If the stated interest on the loan is 7 percent, what is the effective cost of the loan?

  A. 7.00 percent.

  B. 8.18 percent.

  C. 8.40 percent.

  D. 8.75 percent.

  Correct Answer: D

  Choice "d" is correct. Total interest for the loan is $100,000 ?7% or $7,000. The effective amount received is $80,000 after the 20% compensating balance. The effective interest is $7,000 / $80,000 = 8.75% Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 62:

  A working capital technique that increases the payable float and, therefore, delays the outflow of cash is:

  A. Concentration banking.

  B. A draft.

  C. A lock-box system.

  D. The use of a local post office box.

  Correct Answer: B

  Choice "b" is correct. A draft is a working capital technique that increases the payable float and, therefore,

  delays the outflow of cash.

  Each of the three following choices accelerate the flow of cash and/or data:

  Choice "a" is incorrect. Concentration banking automatically channels funds from every source of the

  business into a single usable account, thus quickly identifying available funds each day, and moving them

  to accounts that have funding requirements that day, and investing the remainder in short-term, interest-

  bearing instruments until needed.

  Choice "c" is incorrect. A lock-box system is simply a central collection location that receives payment

  checks (generally, the bank where a central checking account is maintained by the firm). Choice "d" is incorrect. The use of a local post office box allows more rapid access to mail than actual delivery to a street address.

• Question 63:

  The collection of accounts receivable can be accelerated by the use of:

  A. Turnaround documents.

  B. A lockbox system.

  C. Bank drafts.

  D. Remittance advices.

  Correct Answer: B

  Choice "b" is correct. Lockboxes are systems of mailboxes, usually in many locations, where customers send payments. The company's bank checks these mailboxes frequently and immediately deposits checks received. This accelerates the collection of accounts receivable. Choice "a" is incorrect. A turnaround document is a computer output that can later be used as a source document. No relevance to A/R collections. Choice "c" is incorrect. A bank draft is a document issued by a bank to indicate that payment has been made. Choice "d" is incorrect. A bank remittance advice is a document generated by a bank to indicate that payment has been made by a customer.

• Question 64:

  Kemple Cleaning Services is a newly established janitorial firm, and the owner is deciding which type of checking account to open. Kemple is planning to keep a $500 minimum balance in the account for emergencies and plans to write an average of 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. Kemple also has the option of a premium business checking account, which requires a $2,500 minimum balance but has no monthly fees or per check charges. If Kemple's cost of funds is 10 percent, which account should Kemple choose?

  A. Standard account, since the savings is $34 per year.

  B. Premium account, since the savings is $34 per year.

  C. Standard account, since the savings is $16 per year.

  D. Premium account, since the savings is $16 per year.

  Correct Answer: D

  Choice "d" is correct. The total cost for a standard account is:

  

  Cost per year for premium is cost of the extra amount ($2,000) that Kemple must maintain in the account.

  Total per year premium (10% ?$2,000) = $200

  The premium account will save $16.

  Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 65:

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

  

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

  A. $2.05

  B. $2.50

  C. $3.35

  D. $3.80

  Correct Answer: B

  Choice "b" is correct. The current ratio is found by dividing current assets by current liabilities. Presently current assets are:

  

  Because current liabilities must be two times current liabilities, the current assets cannot go below $1,800,000. Thus current assets can go down:

  

  On a per share basis this is $250,000 / 100,000 shares or $2.50 per share. Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 66:

  The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows:

  

  Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1 percent of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

  A. $61,000

  B. $80,000

  C. $132,000

  D. $240,000

  Correct Answer: A

  Choice "a" is correct. First, determine the amount and timing of cash needs: Comments 1 Given 2 Computed balance, positive cash flows 3 Computed balance, negative cash flows 4 Borrow from LOC 5 Computed balance, negative cash flows + interest 6 Cumulative LOC Balance 7 Computed positive cash flows 8 Computed balance, positive cash flows - interest 9 Immediate pay down of LOC Choices "b", "c", and "d" are incorrect, per the above calculation.

  

• Question 67:

  Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7 percent per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for Newman?

  A. A flat fee of $125,000 per year.

  B. A fee of 0.03 percent of the amount collected.

  C. A compensating balance of $1,750,000.

  D. A fee of $0.35 per check plus 0.01 percent of the amount collected.

  Correct Answer: C

  Choice "c" is correct. The optimal proposal is that which has the lowest cost for Newman.

  

  Thus, the lowest cost is "c" at $122,500.

  Choices "a", "b", and "d" are incorrect, per the above calculations/Explanation.

• Question 68:

  The following information applies to Brandon Company.

  

  Forty percent of purchases are paid for in cash at the time of purchase, and 30 percent is paid for in each of the next two months. Purchases for the previous November and December were $150,000 per month. Payroll is 10 percent of sales in the month it occurs, and operating expenses are 20 percent of the following months sales (July sales were $220,000). Interest payments were $20,000 paid quarterly in January and April. Brandon's cash disbursements for the month of April were:

  A. $152,000

  B. $200,000

  C. $248,000

  D. $254,000

  Correct Answer: D

  Choice "d" is correct. Cash disbursements in April would include paying for purchases made in February and March. It would also include payroll expense and operating expenses. The calculation would be:

  

  Choices "a", "b", and "c" are incorrect, per above calculations.

• Question 69:

  A firm can best delay disbursements through the use of:

  A. A centralized disbursement function.

  B. Drafts.

  C. Factoring.

  D. Trade discounts.

  Correct Answer: B

  Choice "b" is correct. Paying by means of a draft (or check) allows the firm to take advantage of the float

  period. These delays cash disbursements.

  Choice "a" is incorrect. A centralized disbursement function will not necessarily delay cash disbursements.

  Choice "c" is incorrect. Factoring is the sale of accounts receivable to a factor. This has no effect on cash

  disbursements.

  Choice "d" is incorrect. Trade discounts are discounts on account receivable and do not impact cash

  disbursements.

• Question 70:

  Wyley Inc. purchases an item on credit with terms of 3/10, net 45. Based on a 360-day year, Wyley's annual interest cost of foregoing the cash discount and making payment on the last day of the credit period is:

  A. 24.00%

  B. 30.86%

  C. 31.81%

  D. 37.11%

  Correct Answer: C

  Choice "c" is correct. The formula for computing the cost of credit discounts is:

  

  Choices "a", "b", and "d" are incorrect, per the above calculation.