RMA Credit Risk Certification Practice Exam

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• A company ends year 1 with accounts receivable of $126,000 and ends year 2 with accounts receivable of $117,000. Sales in year 2 were $895,000. How much cash was collected from sales in year 2?
• What is the primary purpose of projections in this context?
• Using COGS of 10,948 and Inventory of 2,742, what is the Inventory Turnover?
• What is the standard DSCR benchmark mentioned?
• What minimum ratio do lenders typically require for personal cash flow to debt service?
• Which of the following is a source of operating cash flow?
• In reviewing an accounts receivable schedule for a new working capital request, if 60% of receivables are concentrated in two accounts, which factor is most important to assess the ongoing collectibility and collateral value?
• Which statement best describes cash inflows sources in the material?
• Which statement correctly distinguishes SFAS Direct and UCA Direct financing formats?
• Pretax profit margin is defined as what?
• Selling stock is categorized under which cash flow?
• The quick ratio is defined as which formula?
• What is the correct definition of the operating profit margin?
• Which statement is true about the use of short-term debt in working capital management?
• What is the typical undrawn period for the clean-down provision?
• A loss on the sale of equipment has what effect on cash flow from operating activities?
• Annual projections help measure key credit indicators such as which of the following?
• Jane Doe is a 43% owner of Trek & Trek LLC who wants to purchase 8% of the outstanding shares. To borrow $750,000, which term/condition is most likely required by the bank?
• Which expression defines net working capital ratio as described?
• Which item is not provided in the investing section of a UCA cash flow statement?
• Which sector is described as having high cash percentages due to retainers and upfront billing, with lower accounts receivable and fixed asset needs?
• Which statement summarizes income earned and dividends paid and links the income statement to the balance sheet?
• Which of the following is the second step for income statement account values?
• A clean-down provision specifies that the working capital or overdraft facility must be undrawn for a specified number of consecutive days (usually between five to ten) in each financial year.
• In computer-assisted generation, best case, worst case, and most likely scenarios enable what?
• An increase in Accounts Receivable generally has what effect on cash flow from operating activities under the indirect method?
• What is the purpose of audited financial statements?
• What are the two primary debt service coverage measures discussed in the framework?
• How is the Total Liabilities to Tangible Net Worth ratio calculated?
• Installment, term, or mortgage loans are primarily used for what purpose?
• Which statement about Profit‑Based Debt Service Coverage Measures is true?
• What is the maximum debt to net worth ratio generally considered acceptable?
• Which category would include issuing stock?
• Cash From Investing shows cash raised by selling business assets.
• Which statement about the SFAS Direct and UCA Direct formats is true?
• Which option is NOT a use of cash according to the Uses of Cash list?
• Which item is a typical capital expenditure?
• Which ratio is most appropriate to determine the debt service coverage (DSC) for a dental center with a permanent working capital revolver used to finance receivables but remaining at 3 million?
• Under the indirect method, an increase in Income Taxes Payable during the period has what effect on the cash flow from operating activities?
• Which cash flow method begins the operating section with net income?
• A UCA cash flow is considered correctly constructed if which of the following occurs?
• Retailers are described as carrying much inventory and generating revenue from inventory and accounts receivable, leading to lower fixed asset percentages. Which sector is this description about?
• Increasing long-term debt is categorized under which cash flow?
• Which cash flow category shows cash raised by selling business assets?
• For manufacturers, Days in A/P = A/P / Purchases x 365. If AP = 700,000 and Purchases = 8,000,000, what is Days in A/P?
• Which item is NOT listed as a demand on cash flow in the material?
• Which Altman Z-score range is interpreted as not looking good (not clearly bankrupt but with risk)?
• What does sustainable growth measure?
• Which DSCR is least suited for inclusion in a loan covenant package?
• Which statement best describes the effect of liability structure?
• In common sizing, which financial statement items are typically expressed as a percentage of total assets?
• Days in Inventory is calculated as 365 divided by Inventory Turnover. If turnover is 3.9927, what is the Days in Inventory?
• A cash flow covenant describes a retailer expanding stores rapidly with profitability taking three years to mature. What is most likely to be required to ensure debt repayment from cash flow?
• What does the cash-to-cash cycle measure?
• Which equation expresses the balance sheet relationship?
• In budgeting or forecasting, what is the starting point to analyze first?
• What cash coverage range is recommended for conservative cash management?
• Which option best describes converting an accrual-based financial statement to a cash-basis statement?
• Which statement correctly matches the type of loan with its typical use?
• A gain on the sale of equipment has what effect on cash flow from operating activities?
• Annual projections help identify which type of financing needs?
• Which inventory valuation method can understate probable profit in a rising price environment?
• What is the most likely cause of a financing requirement for a company whose cash after debt amortization is positive?
• Which statements show each separate company and intracompany transactions eliminated in consolidation?
• Which balance sheet feature most directly informs potential future borrowing needs?
• Modified cash basis statements combine which methods?
• Which auditor opinion indicates no material exceptions and reliable data?
• What is the stated purpose of a clean-up provision?
• What does the Free Cash Flow model measure for investors?
• Which action would most directly protect debt repayment from cash flow by limiting expansion rather than altering other financing measures?
• Which cash flow methodology was developed by the banking industry to focus on a company's ability to service debt from internal sources?
• On the income statement, how should 'other income & expense' be treated?
• What is a capital expenditure?
• Which type of cash flow incorporates the profit component of changes in retained earnings on an indirect statement?
• When projecting interest expense, what information should you identify?
• R & S provides ballast used in railroad industry. The company has long term contracts with key railroad corporations. The nature of the contracts is take-and-pay which requires the railroad to purchase its stone but does not guarantee a quantity. Which of the following is the greatest risk to the sustainability & quality of R & S ongoing cash flow?
• Which of the following provides the most critical information to forecast demand for a high fashion jeans retailer?
• Which profitability margins are most important for analysts to examine?
• Which method records revenues when cash is collected and expenses when paid?
• Asset turnover, as described, is calculated as Net Sales divided by which asset measure?
• Which depreciation methods are commonly used in financial reporting?
• Additional paid-in capital is the amount recorded when:
• When costs are continuously falling, which cost-flow assumption minimizes income tax expense?
• Which categories are used to classify cash flows in the cash flow statement?
• In a direct method cash flow statement, which of the following would be treated as a source of cash?
• Which formula correctly calculates average days in the cash cycle?
• How is Free Cash Flow defined?
• Accounts receivable turnover is Net Sales divided by which figure?
• The Debt Service Principal and Interest Coverage Ratio uses which numerator?
• The current ratio is calculated as which of the following?
• Why is it important to determine whether cash flow demands are one‑time events or recurring?
• Which opinion letter indicates no material departures from GAAP?
• Which of the following questions is included in the UCA cash flow format's four key questions?
• How is tangible net worth defined?
• Which sequence correctly reflects the seven steps to complete the annual projection?
• Which of the following is NOT listed as a limitation?
• Which item is identified as a cause of long-term borrowing in the company's analysis?
• Which statement describes the nature of financing cash flow?
• Given sales of 19,442 and variable expenses of 13,730, the contribution margin is 5,712. If fixed expenses are 3,133, what is the breakeven point in sales dollars?
• Which statement about cash flow presentation is correct?
• What is the most significant limitation of using profit-based debt service coverage measures?
• Which items are examples of intangible assets?
• A company projects sales will increase by 7%. If current year sales are 17,100,000, what is the projected amount?
• Which statement is true about debt service coverage (DSC) calculations involving revolvers?
• What is the cash-equivalent form of the profit-based interest coverage ratio?
• What is a clear benefit of Profit‑Based Debt Service Coverage Measures?
• Which statement best describes the Interest Coverage from Operating Cash Ratio?
• If gross profit is 8,494 and sales are 19,442, the gross profit margin is approximately?
• What does a Net Fixed Assets to Tangible Net Worth ratio greater than 1 imply?
• In a simplified cash flow model, which items are subtracted from net cash after operations to compute cash flow?
• Which item is typically excluded from operating income because it is non-recurring?
• Which of the following is a key consideration in determining repayment schedule for a new long-term debt?
• Which category do liquidity, leverage, and debt service belong to?
• Which statement most closely links income to changes in retained earnings by showing how the ending balance was derived?
• In the seven-step process, which step involves reviewing projected net cash income after debt amortization to verify sufficient cash to service both new and existing debt?
• Term loans are typically used for long-term financing to address decreases in net worth; they can be used for owner stake purchases; they are secured by assets.
• Which ratio is described as cash flow coverage and uses EBITDA?
• Which accrual accounting principles may under or over state the cash impact of a business transaction?
• Which of the following is a leverage ratio measure?
• If a company has a contribution margin, what happens to the breakeven revenue point when the CM increases?
• What best describes the debt service coverage ratio (DSCR)?
• In the company life cycle, which stage requires large capital for product development and marketing and typically relies on funds from owners?
• A company with fixed charge coverage of 0.68 is likely to have difficulty paying which obligation?
• Which statement characterizes preferred stock?
• A net fixed asset to tangible net worth ratio of 1.34 indicates what financing mix?
• If last year's sales were 30,501 and this year's sales 28,577, what is the percent decrease?
• What is the typical use and term for permanent working capital loans?
• Which method of preparing the cash flow statement starts with net income and adjusts for noncash items and changes in working capital?
• Which of the following off-balance-sheet items is most likely to appear in a hospital corporation's audited financial statements?
• According to the material, what is considered a good ROA (in terms of percentage)?
• Shorter days in accounts receivable improves cash flow because cash is collected sooner. Which statement best describes the effect?
• Compared with UCA-based measures, what is the primary benefit of using profit-based debt service coverage measures?
• Debt to net worth ratio is defined as (total current liabilities plus long-term debt) divided by which figure?
• How does debt service coverage ratio differ from fixed charge coverage ratio?
• What is the purpose of comparability in financial analysis?
• In the cash flow statement, an increase in any liability is shown as what?
• What is the maximum debt-to-income (DTI) for an individual guarantor?
• The Debt Service Coverage Ratio - EBITDA (Cash flow coverage) is calculated as which of the following?
• Why is it important to compare current cash outflows to historical cash flow demands?
• What is a common limitation of UCA cash flow‑based Debt Service Coverage Measures?
• Costanzo Holdings owns Costanzo 1 Operating Co. and Costanzo 2 Operating Co. The company is seeking to borrow to finance the acquisition of BBB Operating Co. What is the best vehicle to lend the funds?
• In the industry/product life cycle, which stage involves large capital needs for product development and marketing and is often funded by owners?
• Which components make up the cash cycle calculation?
• Which of the following would most likely cause negative net cash flow from operations in a growing company?
• Which statement about cash flow formats is true?
• For long-term repayment sources, which item is listed as a source of repayment?
• Profit-based debt service coverage measures have which limitation?
• What is the minimum standard for the global cash flow coverage ratio?
• In the Free Cash Flow framework, which items are considered the investments that reduce free cash flow and contribute to value?
• Given last year sales of 25,515 and this year 30,501, what is the percent increase?
• Which statement about LIFO and a rising price environment is true?
• Which asset category is most relevant when evaluating potential secondary repayment source and collateral for a loan?
• What does the cash flow statement primarily summarize?
• Which statement is true about Fixed-charge Coverage Ratio?
• A company reports operating expenses of $256,000 in year 2. Its prepaid expenses were $12,000 at end of year 1 and $11,000 at end of year 2. Its accrued expenses were $28,000 at end of year 1 and $26,000 at end of year 2. How much cash was expended for operating expenses in year 2?
• ROE is defined as:
• What are the three columns recommended on the projection sheet?
• Costs in excess of billings on the balance sheet represent what?
• Under a capital lease, who is treated as the owner for accounting purposes?
• To avoid being encumbered by debt, which approach aligns with prudent purchasing decisions?
• Which of the following is a source of operating cash flow?
• In the described framework, which financing instrument is matched with capital expenditures?
• Audited financial statements are defined as financial statements that have been examined by an independent auditor to determine whether they fair ly represent the financial condition of the business.
• Which statement best describes the relation between revenue, expenses, and net income?
• What is the formula for the Interest Coverage from Operating Cash Ratio?
• What is the correct formula for the Interest Coverage Ratio?
• What characterizes the highest quality cash flows?
• Tax basis accounting is primarily driven by tax rules and records the impact of transactions according to tax rules.
• What is the principal benefit of using cash flow-based coverage ratios?
• Which Altman Z-score range indicates danger of bankruptcy?
• Which activities are included in investing cash flows?
• What does the degree of operating leverage (DOL) measure?
• Temporary financing needs can be met with which type of facility?
• The Debt Service Principal and Interest Coverage Ratio uses Net Cash after Operations divided by which items?
• Which sector generally has the highest need for fixed assets?
• Net income or loss on the income statement is added to which account on the balance sheet?
• Billings in excess of costs is a current liability representing what?
• Consolidated financial statements present:
• In the taint rule example for A/R covenants, what treatment is used in calculating LOC availability when 3 receivables are on time and 2 are 90 days past due?
• How is working capital defined?
• Which statement about deferred tax assets is true?
• Which statement about indirect vs direct cash flow formats is true?
• In evaluating debt level for a company acquiring a competitor, which document best supports downside risk?
• Which inventory strategy maintains a constant production level throughout the year?
• Company Z is a retailer. Which financial event is most likely to be measured identically on both the accrual income statement and the cash basis income statement?
• When assessing accounts receivable quality, which factor is most important?
• Which risk would be the greatest concern for sustainability of ongoing cash flow for a company with long‑term fixed‑price contracts with the top five resellers?
• The greater the current liabilities, the greater the need for what?
• A profitable growing company shows negative net cash flow from operations on its direct cash flow statement, has invested in PPE, and shows an increase in short-term debt but no long-term debt. Which statement best describes this scenario?
• Which of the following is NOT listed as a benefit of preparing annual projections?
• Which event is most likely to have a larger impact on the UCA cash flow than on accrual profit?
• The EBITDA to Principal and Interest Coverage Ratio is computed as which of the following?
• When reviewing a cash flow statement, what is a primary objective?
• Which item would be included in Cash From Investing?
• When costs are rising, which cost-flow assumption results in the lowest reported profit?
• In a rising price environment, if a company uses LIFO for inventory accounting, what is the typical effect on current period COGS and reported profit?
• In balance sheet projections, which asset is typically assumed to remain the same unless management indicates differently?
• Among personal liquidity components, which has 75 percent credit toward liquidity?
• Which type of cash flow is most affected by a significant one-time cash outlay for equipment that is not financed?
• From year 1 to year 2, prepaid expenses declined by 1,000. How does this affect year 2 cash flow?
• In an indirect cash flow statement, which items will be considered in arriving at net cash provided by operating activities?
• What accounting method uses the matching principle and provides a more accurate measure of profit?
• Which cash flow methodology focuses on a company's ability to service debt from internal sources?
• To assess revenue quality, which question is most relevant?
• What is a key difference of the Interest Coverage ratio as a debt service measure?
• Which expression correctly defines the Fixed-charge Coverage Ratio?
• In the UCA direct cash flow format, where is the profit component of changes in retained earnings measured?
• When analyzing cost of goods sold trends, what metric is most informative?
• What is the formula for working capital turnover?
• Which item is typically found in the notes to financial statements to assess refinancing risk?
• Which formula computes Days in Accounts Receivable?
• What do separate or parent-only financial statements present?
• A clean-up provision prevents a borrower from over-relying on the bank. Which statement best describes its requirement?
• Using the provided figures, the DOL is calculated as (Sales - Variable costs) / Profit. If Sales 19,442, Variable costs 13,730, and Profit 2,579, what is the DOL?
• Which depreciation methods are listed in the material?
• Which four areas are identified as the key drivers for annual projections?
• What is a financial projection?
• Which category encompasses activities such as increasing long-term debt and issuing stock?
• The cash flow statement performs all of the following EXCEPT...
• Which industries typically have shorter cash cycles and can operate with negative working capital?
• What is a key benefit of UCA cash flow‑based Debt Service Coverage Measures?
• What determines the repayment term of a long-term loan?
• If the debt to net worth ratio increases, what is the likely implication?
• Temporary borrowing needs require repayment sources; which description is accurate?
• How is the operating expense ratio calculated?
• In an operating lease, how is the lease typically reflected on the lessee's balance sheet?
• What does a higher working capital turnover ratio imply about the liquidity cushion?
• The Debt to Equity Ratio is calculated as total liabilities divided by total equity. What does this ratio primarily measure?
• What is a defining limitation of Profit‑Based Debt Service Coverage Measures?
• Which long-term asset category is not usually a material source of repayment?
• How should subordinated debt be treated when adjusting debt to tangible net worth?
• Cash From Operations is defined as the cash collected from sales revenue after payments for costs of goods, taxes, interest on loans and other expenses are subtracted. Which choice best matches this definition?
• Which borrowing cause typically requires long-term financing?
• The cash cycle is calculated as A/R days + Days in Inventory - Days in A/P. Which of the following represents the cash cycle?
• Which statement correctly describes the ratio Total Liabilities to Tangible Net Worth?
• Which use is financed with a 5‑year term loan according to the sources and uses framework?
• In the business life cycle, which stage is characterized by company growth and a need for funds to support sales growth and working capital to finance capital expenditures?
• Which concept best represents a source of operating cash flow?
• Proceeds from the sale of equipment are reported in which section of the cash flow statement?
• Net profit margin is defined as what?
• What does UCA cash flow‑based Debt Service Coverage Measure isolate?
• In spreading financial statements, where should overdrafts be reported?
• Annual projections typically do not support which type of analysis due to their nature?
• Which item is listed as a source of cash inflows?
• Which statement about sustainable growth is true?
• Which statement best describes financing cash flow?
• Which formula defines return on assets (ROA) as a productivity measure?
• Which factor is most critical to evaluating management's capacity to be successful with an acquisition?
• Which item is the most typical investing cash outflow?
• Which value is included in the numerator of the UCA based debt service principal and interest coverage ratio?
• If a company with positive debt amortization has a financing requirement equal to 80% of its capital expenditures, what is the most likely interpretation?