Free CMA Part 2: Financial Decision Making Test

1. How is the Acid-Test Ratio computed?

a. Current assets divided by current liabilities
b. Cash, accounts receivable, and short-term investments divided by current liabilities
c. Sales divided by inventory
d. Accounts payable divided by cost of sales and multiplied by days in accounting period

2. Which three components are used by the DuPont Model to determine return on equity?

a. Net margin, asset turnover, and return on investment
b. Net margin, asset turnover, and financial leverage
c. Cost of investment, asset turnover, and financial leverage
d. Cost of investment, asset turnover, and solvency

3. How does an organization facilitate customer payments when it sells products in multiple states?

a. Lockbox systems
b. Concentration banking
c. Electronic commerce
d. Accounts payable

4. Which type of international financing method guarantees payment at face value of the financed amount?

a. Letter of credit
b. Forfaiting
c. Banker's acceptance
d. Countertrade

5. Which variable is used when performing marginal analysis?

a. Excess manufacturing capability
b. Cost of purchasing product from outside sources
c. The business cycle of the organization
d. The opportunity cost associated with the product selection process

Answers & Explanations

1. B: Cash, accounts receivable, and short-term investments divided by current liabilities The Acid-Test, or Quick, ratio measures the ability of a business to pay its current liabilities. It is calculated by adding cash, accounts receivable, and short-term investments and then dividing the sum by the current liabilities. Other important metrics that help reveal a company's position with respect to current liabilities:

  • Current, or Cash, Ratio- measures ability to pay short-term liabilities using short-term assets, i.e., how quickly it can generate cash. Calculated by dividing current assets by current liabilities
  • Inventory turnover- determines how often inventory was replaced over a time period. Calculated by dividing sales by inventory
  • Days payable outstanding- measures the length of time a business takes to pay its accounts payable. Calculated by dividing accounts payable by cost of sales and multiplying the result by the number of days in the accounting period

2. B: Net margin, asset turnover, and financial leverage.
The DuPont Model, first used within the DuPont Corporation, is used to clarify return on equity (ROE), breaking it down into three components to reveal how a business receives (or the specific sources of) this return. The three components are:

  • Net margin- net income divided by sales
  • Asset turnover- sales divided by total assets
  • Financial leverage- total assets divided by average shareholder equity

The DuPont formula calculates ROE by first calculating the three components, then multiplying them. By separating ROE into these elements, changes in ROE can be tracked over a period of time.

3. B: Concentration banking.
Concentration banking is used to facilitate processing of customer payments when a company sells its product(s) in various states or countries. The business selects a bank in each geographic area to which customers in that area send their payments. Once funds are collected, each bank transfers the balance in the company's account to the company's main banking account. A lockbox is a box at a U. S. Post Office used to collect bill payments from customers, with those payments collected by the company's bank, then processed and deposited into the company's account. The bank also provides the company with a list of the customers who made payments and the amounts received from each customer. From this list, the company can update its accounts receivable records. . Electronic commerce (or e-commerce) is selling goods and services over the Internet.

4. C: Banker's acceptance.
A banker's acceptance is a short-term bill of exchange guaranteed by a bank. The bank guarantees that the issuer of the bill of exchange will pay the face value of the bill by the due date. If the issuer defaults on the bill, the bank pays the obligation. Letters of credit are used to guarantee that a buyer will pay for products received from a seller, and act as insurance for the buyer that the product will be received. Forfaiting is the purchase of the amount an importer owes an exporter. When these accounts receivable are purchased by the forfaiter, at a discount with cash, the importer is no longer obligated to pay the exporter, but the forfaiter. Countertrade is a nation's trading of their products for the products produced by another nation. Money is not used as a medium of exchange.

5. C: The business cycle of the organization. Marginal analysis is an economic technique that measures incremental increases and decreases in an organization's operations. It measures the effects of changes when money, material, product, labor, or other factors fluctuate by one unit. It determines how these changes affect an organization's market, production, and business cycle. A make-or-buy decision compares the feasibility of producing a product in-house versus buying it from another supplier. It would be feasible to manufacture a product if the cost is lower, or if the business has excess capacity.

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Last Updated: 03/01/2017


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