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Free CMA Exam Braindumps (page: 196)

Page 196 of 336
PDF with 1336 Questions
View Related Case Study

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

  1. Concentration banking.
  2. A draft.
  3. Electronic Data Interchange (EDI).
  4. A lockbox system.

Answer(s): B

Explanation:

Payment by draft, a three-party instrument in which the drawer orders the drawer to pay money to the payee, is a means of slowing cash outflows. A check is the most common type of draft. Check float arises from the delay between expenditure and the clearing of the check through the banking system.



View Related Case Study

Assume that each day company writes and receives checks totaling $10,000. If it takes 5 days for the checks to clear and be deducted from the company's account, and only 4 days for the deposits to clear, what is the float?

  1. $10,000
  2. R$0
  3. $(10,000)
  4. $50,000

Answer(s): A

Explanation:

The float period is the time between when a check is written and when it clears the payer's checking account. Check float results in an interest-free loan to the pay or because of the delay between payment by check and its deduction from the bank account. If checks written require one more day to clear than checks received, the net float equals one dais receipts. The company will have free use of the money for one day. In this case, the amount is $10,000.



View Related Case Study

A compensating balance

  1. Compensates a financial institution for services rendered by providing it with deposits of funds.
  2. Is used to compensate for possible losses on a marketable securities portfolio.
  3. Is a level of inventory held to compensate for variations in usage rate and lead time?
  4. Is the amount of prepaid interest on a loan?

Answer(s): A

Explanation:

Banks sometimes require a borrower to keep a certain percentage of the face amount of a loan in a no interest-bearing checking account. This requirement raises the effective rate of interest paid by the borrower. This greater rate compensates a bank for services provided and results in greater profit ability for the financial institution. Funds kept as a compensating balance can often be withdrawn if a certain average balance is maintained.



View Related Case Study

A company uses the following formula in determining its optimal level of cash.

Where: B=fixed cost per transaction
T= total demand for cash over a period of time
I=interest rate on marketable securities
This formula is a modification of the economic order quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction and the interest rate on marketable securities is 6% per year. The company estimates that it will make cash payments of $12000 over a one-month period. What is the average cash balance (rounded to the nearest dollar)?

  1. $1,000
  2. $2,000
  3. $3,464
  4. $6,928

Answer(s): C

Explanation:

The EOQ for inventory is a function of ordering cost per order, inventory demand, and carrying cost. In the cash model, the fixed cost per sale of securities is equivalent to the ordering cost, the demand for cash is similar to the demand for inventory, and the interest rate is effectively the cost of carrying a dollar of cash for the period. Substituting in the formula yields optimal cash balance of about $6,928. Thus, the average cash balance is $3,464 ($6,928 + 2).



Page 196 of 336



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