CMA Practice Questions

A company will hold cash and marketable securities to facilitate business transactions; cash is a

medium of exchange. Cash and near-cash items are also held to meet future needs, to satiety

compensating balance requirements imposed by lenders, and to provide a precautionary balance for

securely purposes. Cash is usually not held in an attempt to earn maximum returns on investment

because cash and marketable securities are not 1usually the hajjes paying investments.

When amounts to be paid or received are denominated in a foreign currency, exchange rate Fluctuations may result in exchange gains or losses. or example, if a U.S. firm has a receivable fixed in terms of units of a foreign currency, a decline in the value of that currency relative to the U.S. dollar results in a foreign exchange loss.

Vertical integration occurs upstream (backward) by acquiring suppliers or downstream (forward) by

acquiring wholesalers and retailers. An example of forward integration is clothing manufacturer’s

acquisition of a chain of clothing stores in which to sell kits products.

Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to

AM-12 is $3.00 [$300,000 + (60,000 units of AM-12 + 40,000 units of BM- 36)]. The unit cost of AM-

12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost + 60,000 units)]. Total inventory

value is $45,000 (10,000 units x $4.50), and total operating profit is $50,000 [50,000 units sold x

($5.50 unit price — $4.50 unit cost)]

Strategic planning, also called long-term planning. Covers periods from 1 to 20 years. Strategic

planning is somewhat difficult because of uncertainty about future conditions. Thus, long-range

plans are more general and exclude operational detail.

An adapter improves products and may operate in different markets or evolve into a market

challenger

Because these terms involve an annual interest cost of over 36%, a company would not offer them

unless it desperately needed cash. Also, credit terms are typically somewhat standardized within an

industry. Thus, if most companies in the industry offer similar terms. a firm will likely be forced to

match the competition or lose market share.

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.