Credit Management Final

What is an individual's total net worth if he/she has currents assets of $500,000, total assets of $1,000,000, current liabilities of $200,000, and total liabilities of $750,000? a. $250,000 b. $300,000 c. $550,000 d. $2,450,000

a. $250,000

For what type of business are cash budgets primarily used? a. Businesses that are seasonal b. Businesses with very little short-term debt c. Businesses with large accounts payable d. Businesses expecting strong long-term sales growth

a. Businesses that are seasonal

In a statement of cash flows, what is the total of all transactions over the course of a fiscal year? a. Earnings before interest, taxes, depreciation, and amortization b. The change in retained earnings during the fiscal year c. the change in cash and cash equivalent during the year d. the amount of working capital at fiscal year-end.

a. Earnings before interest, taxes, depreciation, and amortization

Which question is important to evaluate cash flow for personal income beyond wages and salaries reported on a tax return? a. Is the income available for future debt service? b. Is the income taxable? c. is the Income tax-exempt? d. Can the income be verified?

a. Is the income available for future debt service?

What is the result if a business debt service is included in a global debt service coverage ratio of a business owner and business loan guarantor? a. It excludes debt service arising from amounts due from the business to the owner/guarantor b. It excludes debt service from all business controlled by the owner/guarantor c. It includes debt service arising from amounts due from the business to the owner/guarantor d. It includes rent paid by the business to the owner/guarantor, due to rent being a debt equivalent

a. It excludes debt service arising from amounts due from the business to the owner/guarantor

Which item would appear as an itemized deduction on schedule A, form 1040? a. Medical and dental expenses b. Cost of goods sold c. Moving expenses d. Student loan interest deduction

a. Medical and dental expenses

What do operating activities measure through net income and accounts receivable? a. Operating cash required for making principal payments on long-term debts b. trends in the leverage position of a business c. Efficiency and turnover(in days) ratio d. Cash generated by the current operating cycle

a. Operating cash required for making principal payments on long-term debts

In the UCA model, what must net cash after operations be in order to repay debt? a. Positive b. Negative c. Based on controlled working capital d. Greater than capital expenditures

a. Positive

Which financial records represent management's best guess as to how the business will perform in the future? a. Pro forma financial statements b. Professional financial statements c. Past financial statements d. Past sales history

a. Pro forma financial statements

For what types of loans are cash budgets primarily used to determine payment? a. Short-term loans b. Real Estate loans c. Equipment loans d. Loans from officers

a. Short-term loans

Which option identifies an advantage of the UCA model over a tradition statement of cash flows? a. The UCA model provides more information about the cash flow impact of sales, gross margin, and operating expenses. b. The UCA model adjusts net income for both interest expense and depreciation c. The UCA model more clearly shows the cash flow effects of changes in the owner's investment in the business d. The UCA model isolates the annual capital expenditures

a. The UCA model provides more information about the cash flow impact of sales, gross margin, and operating expenses.

Why is other information requested on a personal financial statement important, such as whether the individual has prepared a financial plan? a. This information can provide cross-selling opportunities. b. This information determines the debt-to-income ratio. c. This information provides insights into solvency. d. This information affects the current level of net worth.

a. This information can provide cross-selling opportunities.

Why do most bankers develop an adjusted net worth? a. To account for any inaccuracies or omissions among assets and liabilities. b. To assess personal liquidity c. To provide the loan's loan-to-value ratio d. To determine the debt-to-income ratio

a. To account for any inaccuracies or omissions among assets and liabilities.

From a regulatory perspective, what information about guarantors should be included in a global analysis? a. income and cash flow b. short-term notes payable, only c. current ratio d. net worth

a. income and cash flow

Based on the indirect method, which option correctly classifies an increase in accounts payable? a. source of cash b. use of cash c. financing activity d. investing activity

a. source of cash

What is this individual's gross personal cash flow available for debt service if an individual's personal tax returns list: $80,000 wages and salaries; Non-taxable amount or retirement distribution $4,000; Taxable amount of retirement distribution is $21,000; Net profit from a sole proprietorship is $8,000; Depreciation within the sole proprietorship is $7,000; Annual living expenses on the individual's personal finance statements are $16,000 a. $138,000 b. $120,000 c. $104,000 d, $100,000

b. $120,000 80,000 4,000 21,000 8,000 7,000 =120,000

What is the individual's debt-to-income ratio if she has current assets of $500,000; total assets of $1,000,000; current liabilities of $200,000; total liabilities of $750,000; monthly income of $8,000; and monthly debt service of $3,000? a. 7.8% b. 37.5% c. 48% d. 93.4%

b. 37.5%

How is a business debt service coverage ratio different from a consumer debt to income ratio? a. A business DSC usually is based on gross income prior to income taxes and operation expenses b. A consumer DTI usually is based on gross income prior to income taxes and living expenses. c. Target levels for a consumer DTI are generally 1.25x or higher. d. A consumer DTI generally is based on annual data.

b. A consumer DTI usually is based on gross income prior to income taxes and living expenses.

What does the dollar amount of outside net worth represent? a. Net worth outside of miscellaneous personal assets b. An individual's net worth beyond the borrowing business c. The amount of liquid assets d. Net worth less all contingent liabilities

b. An individual's net worth beyond the borrowing business

Which component of the UCA cash flow model includes dividends paid to owners? a. Cash flow from Operating Activities b. Cash flow from Financing activities c. Cash flow from Investing activities d. Changes in current assets and liabilities

b. Cash flow from Financing activities

Which item appears in the financing section of a statement of cash flows? a. Cash from current assets such as inventory. b. Dividends c. Net Income d. Sales of fixed assets

b. Dividends

When analyzing personal income, which key question should a business banker address? a. What is the trend in tax amounts due? b. Does the income provide cash to the borrower? c. What is the frequency of investment activity d. Does the applicant have clear ownership of listed assets?

b. Does the income provide cash to the borrower?

Which question can be answered from a properly prepared statement of cash flows at fiscal year end? a. How was net income generated? b. How was the need for financing created? c. What is the impact of sales growth during the next year? d. Does the business have any seasonal cash needs?

b. How was the need for financing created?

What does the UCA model assist a business banker to determine about a business? a. If dividends are a key item within financing cash flow uses of cash b. If internally generated funds can cover debt service c. If total long-term debt changed during the year d. If cash includes marketable securities and other near-cash items

b. If internally generated funds can cover debt service

Where does financing surplus ( or requirement) appear? a. In both the statement of cash flows and the UCA model b. In the UCA model, only c. In the statement of cash flows, only d. In the indirect method statement of cash flows, only

b. In the UCA model, only

Which aspect of a personal financial statement analysis includes questions such as "is it material, and verifiable?" a. Personal Information b. Income Analysis c. Asset Analysis d. Liability Analysis

b. Income Analysis

Which situation is a shortcoming of analyzing an annual forecasted financial statement? a. It does not balance to cash or short-term borrowings as a plug figure b. It does not reveal any funding needs that might arise between the start and end of the fiscal year c. It does not show the owner's equity or net worth d. It does not provide details needed for computation of various financial ratios

b. It does not reveal any funding needs that might arise between the start and end of the fiscal year

Which option correctly describes a characteristic of a global debt service coverage ratio? a. It is based on monthly income and monthly debt service. b. It is based on annual income and annual debt service c. It targets a result of 40% or higher d. it targets a result of 1.25% or higher

b. It is based on annual income and annual debt service

What is the key reason for developing a global cash flow analysis? a. it is used when a business has very little bank debt and a low leverage position. b. It is often difficult to separate business and personal assets and income. c. It can replace the UCA model d. It can eliminate the need for business projections and cash budgets.

b. It is often difficult to separate business and personal assets and income.

When preparing a cash budget, what is included in beginning cash? a. Total receipts b. Marketable securities c. Order backlogs d. Inventory purchases

b. Marketable securities

On what basis are cash budgets generally prepared? a. Weekly basis b. Monthly basis c. Quarterly basis d. Annual basis

b. Monthly basis

How should a 401(k) or retirement plan balance be classified on a personal financial statement is much younger than retirement age? a. Current asset b. Non-current asset c. Current liability d. Non-current liability

b. Non-current asset

Which item is used to verify income? a. Bank account balances b. Personal tax returns c. Brokerage listing of marketable securities d. Mortgage loan statements

b. Personal tax returns

For which entity foes a business owner automatically own 100 percent or have total control? a. LLC b. Sole proprietorship c. C corporation d. S corporation

b. Sole proprietorship

What should the applicant do if there are no contingent liabilities to report on a personal financial statement? a. The applicant should leave the section blank b. The applicant should insert "$0" or "none" in that section of the financial statement c. The applicant should disregard any representations or warranties d. The applicant should increase the amount shown for net worth

b. The applicant should insert "$0" or "none" in that section of the financial statement

Which situation is a correct approach to determine capital expenditures? a. The change in accumulated depreciation b. The change in net fixed assets, adjusted by depreciation expense c. The changed in gross fixed assets, plus the ending balance of accumulated depreciation d. The change from LIFO to FIFO inventory

b. The change in net fixed assets, adjusted by depreciation expense

Which item can cause a difference between AGI on a personal tax return and actual cash flow from an individual? a. Forms of income that are not exempt from taxes b. Types of income that can be deferred c. Deductions that involve cash expenditures d. Income and deductions passed through from C corporations

b. Types of income that can be deferred

Which option identifies a key use of personal tax returns in personal financial analysis? a. Details on asset values b. Verification of income c. Development of monthly debt service d. Information about credit history

b. Verification of income

When developing a personal cash flow, what should a business banker determine for a sale of assets that generates capital gains (or losses)? a. How the gain (or loss) affects AGI b. Whether such a transaction will be recurring c. Whether the gain should be verifies by a schedule K-1 d. The cost basis of the asset

b. Whether such a transaction will be recurring

What is the benefit of using an abbreviated cash flow report? a. it summarizes current and non-current assets b. a lender can determine how cash profits were used or cash losses were financed by the business c. it reveals key trends happening in the industry d. A lender can determine the proper collateral for a loan

b. a lender can determine how cash profits were used or cash losses were financed by the business

In a direct method statement of cash flows, what phrase is used in reference to cash expenditures for acquiring materials and making payments to trade creditors? a. cash for operating expenses b. cash paid to suppliers c. cash collected from sales d. cost of goods sold

b. cash paid to suppliers

Which item relates to whether the applicant can generate enough cash to pay personal living expenses and other obligations as they come due? a. leverage b. liquidity c. marketability d. solvency

b. liquidity

In the UCA model, what is an increase in inventory? a. source of cash b. use of cash c. financing activity d. investing activity

b. use of cash

What is an applicant's outside net worth if she is fully guaranteeing a $50,000 loan to a business that she owns, and the business is valued at $200,000 on her personal financial statement? Also her personal financial statement lists total assets of $2,000,000 and total liabilities of $1,500,000. a. $500,000 b. $450,000 c. $300,000 d. $150,000

c. $300,000

Which situation represents a guarantor's contingent claim within a global analysis? a. a real estate project with strong DSC and strong overall financial condition b. Any real estate project the guarantor owns c. A real estate project with weak DSC and weak overall financial condition. d. A minority ownership position in businesses or real estate projects

c. A real estate project with weak DSC and weak overall financial condition.

Which statement best describes how lenders tend to look at loan repayment? a. evaluation is based on collateral b. Long-term profitability is analyzed c. Cash (and cash only) repays loans d. Ratios are compared to industry benchmarks

c. Cash (and cash only) repays loans

What is the first amount listed in a cash budget? a. Expected sales b. Accounts receivable c. Cash on hand d. Accounts payable

c. Cash on hand

Which option identifies amounts an individual is not directly liable for but may need to pay in the near future based on events that may or may not be within the individuals control? a. Current liabilities b. Non-current liabilities c. Contingent liabilities d. Subordinated debt

c. Contingent liabilities

Which situation is a common adjustment to a personal liability in order to develop adjusted net worth? a. properties held in names other than that of the applicant b. Amounts due from relatives, friends, and privately held companies c. Debt shown on other sources of financial information, but not on the personal balance sheet. d. Personal property values not supported bu an appraisal and or independent valuation

c. Debt shown on other sources of financial information, but not on the personal balance sheet.

Which ratio is calculated to determine if personal debt service levels are excessive? a. Debt-to-assets ratio b.Debt-to-equity ratio c. Debt-to-income ratio d. Debt-to-worth ratio

c. Debt-to-income ratio

If a company purchased equipment for business use, where should the amount spent to acquire it appear in a properly prepared statement of cash flows? a. Administrative activities b. Financing activities c. investing activities d. operating activities

c. Investing activities

Which item is included in liquid assets on a personal balance sheet? a. Personal residence b. Non-marketable securities c. Marketable securities d. Accounts and notes payable

c. Marketable securities

When calculating debt service coverage, what is the appropriate personal cash flow or income measure for a business owner? a. Adjusted gross income (AGI) b. Gross personal cash flow available for debt service c. Net personal cash flow available for debt service d. Wages and salaries only

c. Net personal cash flow available for debt service

Which basis is usually the best to consider when judging the reasonableness of projection assumptions? a. Forecasted sales b. Economic policies c. Past performance d. Management successful plans

c. Past performance

Which factor contributes to negative cash after operation on the statement of cash flow? a. Dividends b. Taxes c. Sales growth d. High Leverage

c. Sales growth

Which example is a typical personal financial statement representation or warranty? a. The contingent liabilities are listed. b. The lending bank may not make lending inquiries c. The information is true and correct. d. The applicant is not obligated to provide updates.

c. The information is true and correct.

For what reason is interest expense not deducted from income to create a personal cash flow available for debt service? a. To avoid double counting with interest expense as part of business debt service. b. To recognize that interest expense is a noncash expense, similar to depreciation c. To avoid double counting with interest expense as a part of personal debt service

c. To avoid double counting with interest expense as a part of personal debt service

What level of cash does every business need to operate? a. a 30-day supply b. an amount sufficient to pay accounts payable c. a minimum amount that is sufficient to maintain the current operating cycle d. at least $10,000

c. a minimum amount that is sufficient to maintain the current operating cycle

Which Statement identifies one of the key differences between the direct method and the indirect method of the statement of cash flows? a. the indirect method begins with net sales b. the direct method begins with gross sales. c. the indirect method begins with net income d. the direct method shows a larger amount for cash from operating activities.

c. the indirect method begins with net income

When determining cash flow from financing activities, what is a key difference between the UCA model and the traditional statement of cash flows? a. the placement of interest expense b. the start with net income and then adding back depreciation and interest expense. c. the placement of current maturities of long-term debt d. the inclusion of the change in short-term notes payable

c. the placement of current maturities of long-term debt

What is the individual's adjusted net worth if his personal financial statement lists total assets of $2,000,000 and total liab. of $500,000? Also assets include a 5% ownership in a real estate venture valued at $100,000; marketable securities of $40,000; cash surrender value of life insurance of $20,000 that is pledged against a policy loan; and a residence purchased one year ago and valued at $80,000 higher that the purchase price. a. $1,500,000 b. $1,400,000 c. $1,380,000 d. $1,300,000

d. $1,300,000 1,500,000 - 100,000 real estate - 20,000 life insurance - 80,000 residence _______________________ $ 1,300,000

What is the individual's unsecured debt ratio if her personal financial statement shows the following selected information: annual income of $90,000; cash of $4,000; total assets of $200,000; unsecured debt of $29,700; and total liabilities of $150,000? a. 2% b. 15% c. 20% d. 33%

d. 33%

Which option identifies amounts a borrower is not directly obligated to repay, but may need to repay in the future based on events the borrower may not control? a. Subordinated debts b. Notes payable c. Accumulated depreciation d. Contingent liabilities

d. Contingent liabilities

In which part of the cash flow statement section should a quarterly tax payment appear? a. Discretionary activities section b. Financing activities section c. Investing activities section d. Operating activities section

d. Operating activities section

When preparing a financial statement projection, what is usually the first item forecasted? a. Cost of goods sold b. Operating expenses c. Cash level d. Sales

d. Sales

On which tax return form or schedule is the balance sheet reported for businesses such as C corporations, partnerships, LLCs, and S corporations? a. Form 4562 b. Form 8940 c. Schedule K d. Schedule L

d. Schedule L

Why is it difficult to create a single format for global cash flow analysis? a. All business owners must always fully guarantee the debts and obligations of the businesses. b. Businesses are required to distribute to their owners all earnings each fiscal year. c. Pass-through entities pay income taxes at the entity level. d. There are differences between types of business ownerships and how cash moves between business and owners.

d. There are differences between types of business ownerships and how cash moves between business and owners.

Why does unsecured debt represent more risk to an individual that secured debt? a. Unsecured debt typically has a lower interest rate b. Secured debt payments do not affect the debt-to-income c. Secured debt always involves liquid assets as collateral and reduces liquidity. d. Unsecured debt lacks collateral as a secondary source of repayment

d. Unsecured debt lacks collateral as a secondary source of repayment

For which income line item on a personal tax return is a W-2 a key form of verification? a. Capital gains b. Dividend Income c. Interest Income d. Wages and salaries

d. Wages and salaries

Which situation is key cash flow consideration for distributions from retirement accounts? a. the type of asset that was sold b. using the taxable amount, only c. using the non-taxable amount, only d. Whether the amount is a rollover

d. Whether the amount is a rollover (Whether the account is transferred from one intermediary to another or to the account holder)