Why do management positions need to be properly staffed?

To prevent position overload and provide depth while minimising overhead expense.

To reduce the strain on working capital by controlling payroll expenses.

To ensure that no employees leave for the competition.

To ensure liquidity and solvency remain within lending guidelines.

Why is it useful to track and analyse a company’s operating expense percentage over a period of years?

It reflects management’s ability to control expenses under varying conditions over time.

It is the most critical indicator of a company’s ability to meet its obligations.

Operating expenses always represent the biggest draw on a company’s cash flow.

More than any other indicator, operating expense levels give us crucial insight into management integrity.

What typically provides an early warning to a lender that a borrower's performance is falling short of projections?

Interviews with borrower's customers.

Researching borrower's competition.

Why is the size and movement of the gross margin (gross profit/net sales) a good indicator of a business's financial health and credit risk?

It is a dependable predictor of the business's future profitability.

It reflects management's ability to increase company expenses while remaining profitable.

It is a dependable predictor of a business's competitive position in the marketplace.

It reflects management's ability to grow sales while remaining profitable.

What is the value of establishing a range of possible projected financial outcomes of a borrower?

It provides an analytically useful set of parameters within which borrower performance is likely to fall.

It guarantees borrower repayment of the anticipated loan.

It ensures that projected cash flows will be accurate.

It makes it easy to adjust parameters to reach pre-determined results.

Which of the following statements is correct?

The cash required to support inventory (stock) increases on a relative basis if inventory (stock) turnover slows.

The cash required to support inventory (stock) increases on a relative basis if inventory (stock) turnover accelerates.

The cash required to support inventory (stock) decreases on a relative basis if inventory (stock) turnover slows.

The more quickly inventory (stock) is sold, the more funds are needed to support inventory (stock).

Which projected scenarios would likely absorb the most cash flow?

High sales growth, decreasing trade payables days and increasing trade receivables and inventory (stock) days.

Low sales growth, decreasing trade payables days and increasing trade receivables and inventory (stock) days.

High sales growth, increasing trade payables days and decreasing trade receivables and inventory (stock) days.

Minimal sales growth, increasing trade creditor days and decreasing trade receivable and inventory (stock) days.

What is typically considered an adequate interest coverage ratio?

Varies based on the business's industry.

Identify the greatest borrowing need of a service provider in a period of sustained economic growth.

Finance trade receivables until they are collected in cash

Finance a change in the business's ownership.

Finance inventory (stock) until products are sold.

Finance trade payables until they are paid in cash.

What event is most likely to decrease inventory (stock) days?

Automation of the inventory control process.

A new sales manager has been hired by the company, and she promises to double sales within one year. How should forecast assumptions be changed?

Claims are not enough. Past performance, the realism of plans, and the external environment and market must be reviewed.

The experience of a seasoned manager is priceless. Forecast assumptions are to be improved with no delay.

While past performance, the realism of plans, and the external environment must be reviewed, such claims are usually reliable; assumptions can be changed accordingly.

Such claims, based on past performance and ambitious future plans, are just what drive a company ahead. Previous assumptions can be improved accordingly.

What is the calculation for sales growth?

(Recent Period Sales - Prior Period Sales) / Prior Period Sales

(Prior Period Sales - Recent Period Sales) / Prior Period Sales

(Prior Period Sales - Recent Period Sales) / Recent Period Sales

(Recent Period Sales - Prior Period Sales) / Recent Period Sales

What does a company's current ratio show?

Whether current assets, if converted to cash, will cover short-term liabilities in the next operating period.

Whether trade receivables and inventory (stock) will cover trade payables in the next operating period.

Whether fixed assets exceeded current assets in the most recent operating period.

Whether current liabilities will cover short-term assets in the next operating period.

How are projections most useful?

Establishing a range of likely outcomes and determining if "most likely case" results are acceptable.

Pinpointing a company's future performance.

Helping the lender work through a variety of forecast scenarios quickly.

Establishing a range of likely outcomes and determining if the "worst case" results are acceptable.

In a UCA cash flow statement, if a business has a cash deficit after repaying debt as scheduled, what does it likely indicate?

It will require additional financing to pay for fixed asset purchases.

It will have eliminated its potential for going out of business in the short run.

It will not require additional financing to pay for fixed asset purchases.

Its financing requirement for the period will be less than that deficit.

What happens to a borrower's supporting financing needs and financial risk when inventory (stock) is sold more quickly?

Expenses and inventory (stock) just build up until further notice.

The borrower's supporting financing needs increase while financial risk decreases

What is the formula for free cash flow?

Net income (NPAT) + amortisation and depreciation - change in working capital - capital

Net sales + amortisation and depreciation - change in working capital - capital expenditures.

Net income (NPAT) - amortisation and depreciation + change in working capital + capital expenditures.

Net sales - amortisation and depreciation + change in working capital + capital expenditures.

Sales growth is a particularly useful starting point for assessing which component of a business's overall risk profile?

Market (industry and business) risk

Why can sensitivity analysis be a useful part of the projection process?

It helps identify the degree to which critical risk drivers can vary before forecasts fall outside the range of acceptable outcomes.

It allows the analyst to utilise intuition to set key variables at the right levels.

It identifies how critical risk (cash) drivers can be optimised

It allows the analyst to complete the projections process more quickly

What do the business financial statements of a sole trader display as opposed to their personal financial statements (income tax forms)?

Net profit including the sole trader's personal income taxes

Net profit on its profit and loss statement that does not include business income taxes.

The salary of the sole trader in the operating expenses of the business.

Withdrawals in the operating expenses of the business.

What is usually the first step in a traditional credit decision process?

Determine whether the request fits loan policy guidelines.

Collect sufficient information to make a credit decision.

Spread the business's financial data.

How does an increase in gearing affect a business's liquidity?

Typically increases cash required to be paid to outside creditors.

Improves the ability to generate profits from normal business operations

Increases cash available to service debt.

Improves the ability to convert assets to enough cash to pay creditors

What are the three classification categories for cash receipts and payments in the statement of cash flows?

Operating activities, investing activities and financing activities.

Investing activities, operating activities and capital activities.

Investing activities, financing activities and capital activities.

Capital activities, operating activities and financing activities.

What event is most likely to reduce trade payables days?

Competition among suppliers becomes stronger

What is meant by "short-term financing gap" of the operating cycle?

The difference between the days of receivables and inventory (stock) on hand and the days of supplier credit.

The amount of time it takes a financial institution to fund a business's loan request.

The difference between the sales a business generates and the amount of cash it actually collects based on those sales

The amount of time it takes a cheque to clear allowing a depositing business access to the funds.

What is the formula for current ratio?

Current Assets / Current Liabilities

Current Liabilities / Current Assets

Current Liabilities - Current Assets

Current Assets + Current Liabilities

What analytical purpose is served by creating projections, beyond simply evaluating a business's projected cash flows?

Focusing attention on critical credit risk-related issues, whether internal or external.

Expediting the credit decision-making process.

Discovering the true motivations of borrower management.

Reassessing historical solvency.

What is EBITDA best suited to measure?

Comparative profitability between businesses and industries.

A business's operational cash flow.

Comparative return on capital between businesses and industries.

Why was the Tandon Committee initially established?

To review the then existing Indian banking system and submit recommendations to introduce credit discipline on both borrowers and bankers.

To study the Indian banking system.

To report to the Reserve Bank of India to whom Indian banks were lending money.

To make recommendations on how the Indian banking system can become more liberal

In which situation would you expect to grant a grace period?

If the capital expenditure investment requires a ramp up period until full cash flow generation and if the borrower is highly rated and where there is a DSCR cushion.

If the equipment purchased had broken down and the borrower was not able to derive benefit from it.

If the borrower was not able to meet a repayment in a particular period

Grace periods are only granted for mortgages not term loans.

Should the term loan be granted if it is not possible to validate all information about the financial feasibility of the equipment?

No, without having a full picture on the financial feasibility of the equipment, not all risks are known.

Yes, an accurate assessment may not always be possible. The approach should be to validate as much as is practically feasible, while critically examining all the components.

Yes, as the risk that the new equipment is not financially feasible sits with the borrowing company.

No, a full financial feasibility study on the equipment is always required.

How is the working capital cycle measured?

Working capital cycle (months) = (Current assets ÷ Net sales) x 12

Working capital cycle (months) = (Current assets ÷ Inventory helx 12

Working capital cycle (months) = (Current assets ÷ Sales) x 12

Working capital cycle (months) = (Current assets x Net sales) ÷ 12

Moody's Practice Test 4

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Professional Development

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100 questions

Show all answers

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

For what business is key person insurance likely most critical?

Government agency.

Small business.

Publicly traded company

University.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is the focus of management risk?

Capacity, integrity, depth and staying power.

The competitive marketplace in which the borrower operates.

Stronger than anticipated business performance.

Loan structure.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which option can mitigate work stoppages?

Liability insurance.

Alternative sources.

Dependable suppliers.

Good labour relations.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which critical skill for executives deals with the creation and maintenance of loyal, satisfied customers, dependable suppliers and dedicated employees?

Leadership.

Knowledge.

Communication.

Commitment.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What would be an unusual use for the proceeds of key person insurance?

Purchase heirs' interest in the business.

Plant expansion.

Pay off debt.

Reduce debt.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Corporate governance provides a structure to determine business objectives and a means of achieving and monitoring their outcomes.

false

I am not sure

true

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Who is considered a principal party with respect to corporate governance?

Banks.

Management.

Society at large.

Suppliers.

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Moody's Practice Test 4

For what business is key person insurance likely most critical?

What is the focus of management risk?

Which option can mitigate work stoppages?

Which critical skill for executives deals with the creation and maintenance of loyal, satisfied customers, dependable suppliers and dedicated employees?

What would be an unusual use for the proceeds of key person insurance?

Corporate governance provides a structure to determine business objectives and a means of achieving and monitoring their outcomes.

Who is considered a principal party with respect to corporate governance?

Which of the following is not one of the five management responsibilities?

Why do management positions need to be properly staffed?

Why is it useful to track and analyse a company’s operating expense percentage over a period of years?

Access all questions and much more by creating a free account

Similar Resources on Wayground

Popular Resources on Wayground

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