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IIA CIA Exam
Certified Internal Auditor Exam (Page 14 )

Updated On: 12-Jan-2026
Page 14 of 342
PDF with 1702 Questions

A short-term bank loan will have a higher effective financing cost if it has which combination of characteristics?

  1. A 10% compensating balance and regular interest.
  2. A 10% compensating balance and discount interest.
  3. A 20% compensating balance and regular interest
  4. A 20% compensating balance and discount interest

Answer(s): D

Explanation:

The most costly combination of characteristics is a higher compensating balance and discount interest. The higher the compensating balance, the higher the portion of the loan funds that must be left on deposit with the lender. Hence, the interest paid is charged on a smaller amount of funds available to be used by the borrower, and the effective cost is higher. Also, discount interest is deducted from the loan funds in advance, resulting in a further increase in the effective financing cost.



An entity has accounts payable of US $5 million with terms of 2% discount within 15 days, net 30 days 2115 net 30 It can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it will receive revenues to cover the payment If it borrows funds on the last day of the discount period in order to obtain the discount, its total cost will be

  1. US $51, 000 less.
  2. US $75, 500 less.
  3. US $100, 000 less.
  4. US $24, 500 more

Answer(s): B

Explanation:

The interest cost of borrowing US $4, 900, 000 $5, 000, 000 98%) to take advantage of the discount is US $24, 500 [$4, 900, 000 x 12% 15 - 360)], and the total cost will be US $4, 924, 500. The total cost if the discount is not taken will be 5, 000, 000, a difference of US $75, 500.



An entity obtaining short-term financing with trade credit will pay a higher percentage financing cost, everything else being equal, when the

  1. Discount percentage is lower.
  2. Items purchased have a higher price.
  3. Items purchased have a lower price.
  4. Supplier offers a longer discount period.

Answer(s): D

Explanation:

If the discount period is longer, the days of extra credit obtained by forgoing the discount are fewer. Assuming other factors are constant, the result is that the cost of trade credit, that is, the cost of not taking the discount, is greater_



The correct equation for calculating the approximate percentage cost, on an annual basis, of not taking trade discounts is

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

The first term of the formula represents the periodic cost of the trade discount, calculated as the cost per unit of trade credit discount %) divided by the funds made available by not taking the discount 100 - discount %). The second term represents the number of times per year this cost is incurred. The multiple of these terms is the approximate annual percentage cost of not taking the trade discount. A precise formula would incorporate the effects of compounding when calculating the annual cost.



An entity has made the decision to finance next year's capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be the

  1. Before-tax cost of new-debt financing.
  2. After-tax cost of new-debt financing.
  3. Cost of equity financing.
  4. Weighted-average cost of capital.

Answer(s): D

Explanation:

A weighted average of the costs of all financing sources should be used, with the weights determined by the usual financing proportions. The terms of any financing raised at the time of initiating a particular project do not represent the cost of capital for the entity. When an entity achieves its optimal capital structure, the weighted-average cost of capital is minimized. The cost of capital is a composite, or weighted average, of all financing sources in their usual proportions. The cost of capital should also be calculated on an after-tax basis.



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