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NACM CMC practice questions

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Question 1Business Credit and Financial Management Fundamentals

Which financial statement is the primary source for determining a customer's operating cash flow before financing activities?

  1. The sales forecast
  2. The balance sheet
  3. The statement of cash flows Correct answer.
  4. The retained earnings statement

Explanation

The statement of cash flows classifies receipts and payments into operating, investing, and financing activities, so it directly reports cash generated by operations. The balance sheet shows balances at a point in time rather than period flows, and the retained earnings statement tracks accumulated earnings, not cash movement.

Question 2Business Credit and Financial Management Fundamentals

A credit analyst is assessing short-term liquidity using the quick ratio. Which item is properly excluded from the numerator?

  1. Short-term marketable securities
  2. Inventory Correct answer.
  3. Cash equivalents
  4. Trade receivables

Explanation

The quick ratio removes inventory because inventory must first be sold and converted to receivables before it becomes cash, making it the least liquid current asset. Cash equivalents, receivables, and marketable securities are already cash or expected to convert quickly.

Question 3Business Credit and Financial Management Fundamentals

A company reports net sales of $4,000,000 and average accounts receivable of $500,000. What is its accounts receivable turnover?

  1. 2.0 times
  2. 8.0 times Correct answer.
  3. 4.5 times
  4. 0.125 times

Explanation

Receivable turnover equals net credit sales divided by average receivables, so $4,000,000 divided by $500,000 yields 8.0 times. This measures how many times the receivable balance is collected during the period, and a higher result generally indicates faster collection.

Question 4Business Credit and Financial Management Fundamentals

In trade credit terminology, what does the term '2/10 net 30' mean?

  1. A 10% discount applies if paid within 2 days, with the balance due in 30 days
  2. A 2% discount is available if paid within 10 days, otherwise the full amount is due in 30 days Correct answer.
  3. The buyer may return 2 of every 10 units within 30 days
  4. Interest of 2% per month accrues after 10 days until paid at day 30

Explanation

The notation states the discount percentage first, then the discount period, then the net due date. So a buyer taking 2/10 net 30 may deduct 2% by paying within 10 days or must remit the full invoice amount by day 30.

Question 5Business Credit and Financial Management Fundamentals

Which document typically provides the strongest independent evidence that goods were shipped and received by a buyer?

  1. A signed delivery receipt or bill of lading Correct answer.
  2. The internal price list
  3. The customer's verbal confirmation
  4. The salesperson's order notes

Explanation

A signed delivery receipt or bill of lading is contemporaneous third-party or carrier evidence that goods left the seller and reached the buyer, which supports both the invoice and any subsequent collection claim. Internal notes and verbal confirmations are weaker because they are created by interested parties or are undocumented.

Question 6Business Credit and Financial Management Fundamentals

A credit department is setting a credit limit for a new customer. Which approach best reflects the matching principle of credit exposure to repayment capacity?

  1. Set the limit at the full amount of the customer's most recent annual revenue
  2. Set the limit at the industry average regardless of the customer's size
  3. Base the limit on a multiple of the customer's demonstrated monthly purchases and verified ability to pay Correct answer.
  4. Set the limit equal to the largest order the sales team expects to receive

Explanation

A sound credit limit aligns the exposure the seller is willing to carry with the buyer's verified cash-generating capacity and normal order pattern. Tying the limit to sales expectations or unrelated benchmarks ignores the customer's ability to pay and increases bad-debt risk.

Question 7Business Credit and Financial Management Fundamentals

Which ratio best measures how efficiently a company uses its total assets to generate sales?

  1. Debt-to-equity ratio
  2. Gross profit margin
  3. Total asset turnover Correct answer.
  4. Current ratio

Explanation

Total asset turnover divides net sales by average total assets and shows revenue generated per dollar of assets employed. It is an activity ratio, whereas margin, leverage, and liquidity ratios measure profitability, capital structure, and short-term solvency respectively.

Question 8Business Credit and Financial Management Fundamentals

What is the primary purpose of a credit application in a commercial credit file?

  1. To transfer ownership of the goods to the seller
  2. To replace the need for any financial statement analysis
  3. To capture the customer's legal identity, ownership, references, and requested terms Correct answer.
  4. To serve as a binding guarantee of payment by a third party

Explanation

A credit application collects identifying, ownership, banking, trade reference, and terms information that anchors the credit investigation. It is a request for credit, not a guarantee, and it supplements rather than replaces financial analysis.

Question 9Business Credit and Financial Management Fundamentals

A customer has current assets of $600,000, inventory of $200,000, and current liabilities of $300,000. What is the quick ratio?

  1. 1.33 Correct answer.
  2. 2.00
  3. 0.67
  4. 1.50

Explanation

The quick ratio equals quick assets divided by current liabilities, where quick assets are current assets less inventory: $600,000 minus $200,000 equals $400,000. Dividing $400,000 by $300,000 gives 1.33, indicating adequate coverage of near-term obligations without relying on inventory.

Question 10Business Credit and Financial Management Fundamentals

A company's days sales outstanding rises from 42 days to 61 days while sales remain flat. What is the most likely credit implication?

  1. Inventory turnover has improved
  2. The company has tightened its credit policy
  3. The company's gross margin has expanded
  4. Collections are slowing and receivable exposure is increasing Correct answer.

Explanation

Days sales outstanding measures the average time to convert receivables into cash, so a rise with flat sales signals slower collection and a larger outstanding balance. This typically reflects looser credit standards, weaker collection effort, or deteriorating customer payment behavior.

Question 11Business Credit and Financial Management Fundamentals

An analyst calculates the cost of foregoing a 2/10 net 30 discount as approximately 36.7% annually. What does this figure represent?

  1. The implied annualized cost of paying on day 30 instead of taking the discount on day 10 Correct answer.
  2. The effective tax rate on the discount received
  3. The supplier's gross profit margin on the sale
  4. The annual interest rate charged on the invoice by the supplier

Explanation

The cost of foregoing a cash discount annualizes the discount percentage over the days of credit gained by delaying payment. With 2/10 net 30, the buyer keeps funds 20 additional days at a 2% cost, which annualizes to roughly 36.7%, often exceeding the cost of short-term borrowing.

Question 12Business Credit and Financial Management Fundamentals

Which analysis technique best reveals whether a customer's deteriorating liquidity is caused by slower collections or by inventory buildup?

  1. A review of the customer's dividend history
  2. A comparison of the customer's stock price to peers
  3. Trend analysis of DSO and days inventory outstanding side by side Correct answer.
  4. A single-period current ratio calculation

Explanation

Separating receivables and inventory into their respective day-based metrics shows which working capital component is absorbing cash. A single current ratio blends both effects and cannot attribute the cause, while dividend and stock price data do not explain operating liquidity.

Question 13Business Credit and Financial Management Fundamentals

A credit manager wants to quantify how much of the receivables balance is past due. Which metric is most appropriate?

  1. The aging schedule showing balances by days past due Correct answer.
  2. The debt service coverage ratio
  3. The fixed asset turnover ratio
  4. The gross profit margin

Explanation

An aging schedule buckets open receivables by time outstanding, directly showing the share that is current versus past due. The other ratios address profitability, debt capacity, or fixed asset efficiency and do not measure receivable delinquency.

Question 14Business Credit and Financial Management Fundamentals

When a customer's financial statements are unaudited and internally prepared, how should a credit analyst treat them?

  1. Accept them as fully reliable because they follow accounting standards
  2. Use them with caution and seek corroboration such as tax returns or bank records Correct answer.
  3. Assume they overstate liabilities and understate assets in all cases
  4. Disregard them entirely because they have no analytical value

Explanation

Internally prepared statements lack independent verification, so the analyst should treat them as a starting point and corroborate key figures with tax returns, bank statements, or references. They still contain useful information but carry higher risk of error or bias.

Question 15Business Credit and Financial Management Fundamentals

A company has EBITDA of $1,200,000, total debt service of $600,000, and capital expenditures of $200,000. Using (EBITDA minus capital expenditures) divided by debt service, what is the debt service coverage ratio?

  1. 6.00
  2. 1.67 Correct answer.
  3. 2.00
  4. 0.50

Explanation

Subtracting capital expenditures from EBITDA gives $1,000,000 of cash available for debt service. Dividing that by $600,000 of debt service yields approximately 1.67, meaning cash flow covers obligations about one and two-thirds times.

Question 16Business Credit and Financial Management Fundamentals

A customer requests a credit limit increase shortly after placing several orders far above its historical pattern. What is the most prudent initial response?

  1. Decline permanently because the pattern changed
  2. Approve the increase immediately to capture the additional sales volume
  3. Reduce the existing limit to zero without further review
  4. Investigate the change in order pattern and obtain updated financial information before approving Correct answer.

Explanation

A sudden order spike can signal growth, a new contract, or financial distress and possible fraud, so the analyst should understand the cause and refresh financial data before expanding exposure. Immediate approval ignores risk, while permanent decline or zeroing the limit overreacts before facts are gathered.

Question 17Business Credit and Financial Management Fundamentals

Which source of information is most useful for verifying a privately held customer's actual cash generation when audited statements are unavailable?

  1. The customer's marketing brochure
  2. A competitor's published financial statements
  3. Business tax returns and bank statements Correct answer.
  4. The customer's social media posts

Explanation

Tax returns are filed with a government authority and bank statements show actual cash movements, providing reasonably reliable corroboration of income and liquidity. Marketing materials, peer statements, and social media do not evidence the specific customer's cash generation.

Question 18Business Credit and Financial Management Fundamentals

A company's debt-to-equity ratio is 2.5 while its interest coverage ratio is 1.1. How should a trade creditor interpret this combination?

  1. The company has excess liquidity relative to its obligations
  2. The company's profitability is well protected by its equity base
  3. The company is conservatively financed and has strong debt capacity
  4. The company is highly leveraged and has little cushion to absorb an earnings decline Correct answer.

Explanation

A debt-to-equity ratio of 2.5 indicates creditors supply substantially more capital than owners, and interest coverage near 1.1 means operating earnings barely cover interest. Together they signal thin protection for creditors and high sensitivity to any drop in earnings.

Question 19Business Credit and Financial Management Fundamentals

What is the primary benefit of a letter of credit in an international trade transaction?

  1. It substitutes the creditworthiness of a bank for that of the buyer Correct answer.
  2. It transfers title to the goods to the issuing bank
  3. It eliminates all shipping and customs risk
  4. It guarantees the goods will meet quality specifications

Explanation

In a letter of credit the issuing bank commits to pay the seller upon presentation of complying documents, shifting payment risk from the buyer to the bank. It addresses payment risk, not product quality, transport hazards, or ownership transfer.

Question 20Business Credit and Financial Management Fundamentals

A credit analyst is comparing two customers with identical current ratios of 1.5. Customer A holds mostly cash and receivables while Customer B holds mostly inventory. Which conclusion is most defensible?

  1. Both customers have equal liquidity because the ratio is identical
  2. Customer A has stronger near-term liquidity despite the identical current ratio Correct answer.
  3. Neither customer can be assessed without a cash flow statement
  4. Customer B has stronger near-term liquidity because inventory is a current asset

Explanation

The composition of current assets matters because cash and receivables convert to cash more reliably than inventory. Identical current ratios can mask very different liquidity quality, and Customer A's asset mix provides better coverage of near-term obligations.

Question 21Business Credit and Financial Management Fundamentals

A company reports net income of $300,000, depreciation of $50,000, an increase in accounts receivable of $80,000, and an increase in accounts payable of $30,000. Using the indirect method, what is cash flow from operations?

  1. $220,000
  2. $300,000 Correct answer.
  3. $380,000
  4. $260,000

Explanation

Starting with net income, add back depreciation of $50,000, subtract the $80,000 receivables increase, and add the $30,000 payables increase: $300,000 plus $50,000 minus $80,000 plus $30,000 equals $300,000. Working capital growth offset the noncash add-back.

Question 22Business Credit and Financial Management Fundamentals

A customer's gross margin is stable but its operating margin has fallen sharply over three years. Which explanation is most consistent with this pattern?

  1. Raw material costs have risen faster than the company can pass them through
  2. The company has written off a large portion of its receivables
  3. The company has reduced its long-term debt
  4. Selling, general, and administrative costs have grown faster than sales Correct answer.

Explanation

Gross margin reflects the spread between sales and cost of goods sold, so its stability indicates production costs are controlled. A declining operating margin with stable gross margin points to rising operating expenses such as SG&A rather than cost of goods sold or financing changes.

Question 23Business Credit and Financial Management Fundamentals

A seller ships goods on consignment to a distributor. From a credit risk perspective, why must the seller treat this arrangement carefully?

  1. Title transfers immediately, eliminating the seller's exposure
  2. Payment depends on the distributor's resale of the goods, so the seller bears inventory and collection risk until sale Correct answer.
  3. The distributor is legally obligated to pay on the invoice date regardless of resale
  4. Consignment goods are excluded from the seller's inventory and require no monitoring

Explanation

In a consignment the seller retains title until the distributor sells the goods, so the seller's recovery depends on the distributor's ability to resell and remit proceeds. This concentrates risk on the distributor's market access and financial health rather than creating a simple receivable at shipment.

Question 24Business Credit and Financial Management Fundamentals

An analyst observes that a customer's cash conversion cycle has lengthened from 35 days to 70 days while sales are unchanged. Which combination best explains the change?

  1. Longer days payable outstanding and unchanged inventory
  2. Shorter days sales outstanding and longer days payable outstanding
  3. Shorter days inventory outstanding and shorter days sales outstanding
  4. Longer days sales outstanding and longer days inventory outstanding Correct answer.

Explanation

The cash conversion cycle equals days inventory outstanding plus days sales outstanding minus days payable outstanding. With sales flat, a doubling of the cycle is most plausibly driven by slower collection and slower inventory turnover, both of which increase the days cash is tied up.

Question 25Business Credit and Financial Management Fundamentals

A credit manager is deciding whether to extend open-account terms or require a standby letter of credit for a customer with strong sales but a leveraged balance sheet. Which consideration is most decisive?

  1. The customer's stated preference for payment method
  2. The length of the customer's relationship with its own suppliers
  3. The number of employees in the customer's accounts payable department
  4. The probability and cost of default relative to the profit margin on the expected sales Correct answer.

Explanation

The decision should weigh expected credit loss, including probability of default and the cost of mitigation, against the margin earned on the sales. Preferences, supplier relationships, and staffing levels do not quantify the risk-adjusted return of granting unsecured terms.

Question 26Business Credit and Financial Management Fundamentals

A credit analyst is reviewing a customer's balance sheet and notes that the company has a high proportion of accounts receivable relative to its total assets. Which financial statement analysis technique would best help the analyst assess the collectability of these receivables?

  1. Common-size analysis of the balance sheet
  2. Trend analysis of the receivables turnover ratio Correct answer.
  3. Horizontal analysis of total assets
  4. Vertical analysis of the income statement

Explanation

Trend analysis of the receivables turnover ratio focuses specifically on how quickly receivables are collected over time, which directly indicates collectability. Other techniques like horizontal or vertical analysis provide broader structural insights but do not isolate receivables collection efficiency.

Question 27Business Credit and Financial Management Fundamentals

Which of the following best describes the purpose of the aging of accounts receivable schedule in credit management?

  1. To determine the credit limit for new customers
  2. To calculate the average collection period for the company
  3. To estimate the allowance for doubtful accounts based on the age of receivables Correct answer.
  4. To evaluate the effectiveness of the company's credit policy

Explanation

The aging schedule categorizes receivables by how long they have been outstanding, which helps estimate the portion that may be uncollectible and thus the allowance for doubtful accounts. It is not primarily used for calculating average collection period or setting credit limits.

Question 28Business Credit and Financial Management Fundamentals

A company has a current ratio of 2.0 and a quick ratio of 0.8. What does this difference primarily indicate about the company's liquidity?

  1. The company has a high level of inventory relative to its current liabilities Correct answer.
  2. The company is highly leveraged
  3. The company has excessive cash reserves
  4. The company has a strong ability to pay short-term debts

Explanation

A current ratio of 2.0 suggests good liquidity, but a quick ratio of 0.8 indicates that excluding inventory, liquidity is weaker. This gap typically means inventory constitutes a large portion of current assets, which may not be easily convertible to cash.

Question 29Business Credit and Financial Management Fundamentals

When evaluating a customer's financial statements, a credit analyst notices that the company's days payable outstanding (DPO) has increased significantly over the past year. What is the most likely implication for the customer's credit risk?

  1. The customer may be delaying payments to suppliers, potentially signaling cash flow problems Correct answer.
  2. The customer has improved its cash conversion cycle
  3. The customer is taking advantage of early payment discounts
  4. The customer has increased its inventory turnover

Explanation

An increasing DPO often indicates that a company is stretching out payments to suppliers, which could be a sign of liquidity strain. While it might improve cash flow temporarily, it can also strain supplier relationships and signal deteriorating creditworthiness.

Question 30Business Credit and Financial Management Fundamentals

Which of the following is a primary reason for a credit manager to review a customer's cash flow statement?

  1. To assess the customer's ability to generate cash to meet its obligations Correct answer.
  2. To calculate the customer's return on equity
  3. To determine the customer's profitability
  4. To evaluate the customer's inventory management

Explanation

The cash flow statement provides insights into how a company generates and uses cash, which is crucial for assessing its ability to repay debts. Profitability is better measured by the income statement, and inventory management by turnover ratios.

Question 31Business Credit and Financial Management Fundamentals

A credit analyst is comparing two companies in the same industry. Company A has a debt-to-equity ratio of 1.5, while Company B has a debt-to-equity ratio of 0.8. Which statement is most accurate regarding their financial risk?

  1. Company A has a stronger equity position and therefore lower risk
  2. Company A is more leveraged and thus poses higher financial risk to creditors Correct answer.
  3. Both companies have similar financial risk because they are in the same industry
  4. Company B is more leveraged and thus poses higher financial risk to creditors

Explanation

A higher debt-to-equity ratio indicates greater reliance on debt financing, which increases financial risk. Company A's ratio of 1.5 means it uses more debt relative to equity than Company B, making it riskier for creditors.

Question 32Business Credit and Financial Management Fundamentals

In credit analysis, the term 'working capital' is best defined as:

  1. Current assets minus current liabilities Correct answer.
  2. Cash plus accounts receivable
  3. Inventory plus accounts payable
  4. Total assets minus total liabilities

Explanation

Working capital is calculated as current assets minus current liabilities and measures a company's short-term liquidity. It represents the funds available for day-to-day operations.

Question 33Business Credit and Financial Management Fundamentals

A credit manager is assessing a customer's ability to meet its debt obligations. The customer's interest coverage ratio has declined from 5.0 to 2.5 over the past two years. What does this trend most likely indicate?

  1. The customer's earnings are declining relative to its interest expenses, increasing credit risk Correct answer.
  2. The customer's profitability has improved
  3. The customer is generating more cash flow to cover interest
  4. The customer has reduced its debt load

Explanation

A declining interest coverage ratio means that the company's earnings before interest and taxes (EBIT) are shrinking relative to its interest expenses, which may signal deteriorating financial health and higher credit risk.

Question 34Business Credit and Financial Management Fundamentals

Which of the following documents is most critical for a credit manager to obtain when establishing a credit limit for a new commercial customer?

  1. The customer's marketing brochure
  2. The customer's office lease agreement
  3. The customer's financial statements Correct answer.
  4. The customer's employee handbook

Explanation

Financial statements provide essential information about a customer's financial health, profitability, and liquidity, which are fundamental for setting an appropriate credit limit. Other documents are not directly relevant to creditworthiness.

Question 35Business Credit and Financial Management Fundamentals

A credit analyst is evaluating a customer's inventory turnover ratio, which has decreased from 8 times to 4 times over the past year. What is the most likely implication for the customer's credit risk?

  1. The customer is selling inventory more quickly, improving liquidity
  2. The customer has reduced its inventory levels, freeing up cash
  3. The customer's sales have increased significantly
  4. The customer may be holding excess inventory, which could strain liquidity Correct answer.

Explanation

A declining inventory turnover ratio suggests that inventory is sitting longer before being sold, which can tie up cash and increase holding costs, potentially weakening liquidity and increasing credit risk.

Question 36Business Credit and Financial Management Fundamentals

When a credit manager performs a trend analysis of a customer's financial ratios over five years, what is the primary benefit?

  1. To identify deteriorating or improving financial patterns that may affect creditworthiness Correct answer.
  2. To compare the customer's performance to industry averages
  3. To determine the customer's market share
  4. To calculate the customer's tax liability

Explanation

Trend analysis examines a company's financial ratios over time to spot patterns, such as improving or deteriorating liquidity, profitability, or solvency. This helps credit managers anticipate future credit risk.

Question 37Business Credit and Financial Management Fundamentals

A company's return on equity (ROE) is 15%, and its return on assets (ROA) is 10%. Which of the following is true?

  1. The company's profit margin is 50%
  2. The company has no debt
  3. The company uses financial leverage to enhance returns to shareholders Correct answer.
  4. The company's asset turnover is 1.5

Explanation

ROE being higher than ROA indicates that the company is using debt (financial leverage) to magnify returns to equity holders. Without leverage, ROE would equal ROA.

Question 38Business Credit and Financial Management Fundamentals

In the context of business credit, what does a 'lien' on a customer's assets signify for a trade creditor?

  1. A form of credit insurance
  2. A legal claim against the assets that may prioritize other creditors in case of default Correct answer.
  3. A discount offered for early payment
  4. A guarantee of payment from a third party

Explanation

A lien gives a creditor a legal right to seize assets if a debt is not paid. If a customer's assets are already subject to a lien, a trade creditor may have a lower priority claim in bankruptcy, increasing risk.

Question 39Business Credit and Financial Management Fundamentals

A credit analyst is assessing the quality of a customer's earnings. Which of the following would most likely indicate lower earnings quality?

  1. A large portion of net income comes from non-recurring gains Correct answer.
  2. The company has a low debt-to-equity ratio
  3. The company consistently generates cash flow from operations that exceeds net income
  4. The company has a high gross profit margin

Explanation

Earnings quality is considered lower when net income is boosted by one-time events or accounting adjustments rather than sustainable operations. Non-recurring gains are not likely to persist, making future earnings less predictable.

Question 40Business Credit and Financial Management Fundamentals

Which of the following best explains why a credit manager might use the '5 Cs of Credit' framework?

  1. To determine the appropriate interest rate for a loan
  2. To assess the customer's marketing strategy
  3. To systematically evaluate a customer's creditworthiness across multiple dimensions Correct answer.
  4. To calculate the exact credit limit for a customer

Explanation

The 5 Cs of Credit (Character, Capacity, Capital, Collateral, Conditions) provide a structured approach to assess a borrower's credit risk from various angles. It is a qualitative and quantitative framework, not a precise calculation tool.

Question 41Credit Policy, Investigation, and Risk Assessment

A credit manager is drafting the written credit policy for a mid-sized distributor. Which element most directly establishes the authority limit for approving a new customer account?

  1. The standard collection call script
  2. The schedule of credit approval authority by dollar tier Correct answer.
  3. The monthly aging report distribution list
  4. The company's mission and values statement

Explanation

A credit policy must define who may approve credit at each exposure level, so an authority schedule by dollar tier is the controlling element. Mission statements, aging distribution lists, and call scripts support operations but do not delegate approval authority.

Question 42Credit Policy, Investigation, and Risk Assessment

Which document is the primary source a credit analyst uses to verify a prospect's legal existence, ownership structure, and registered jurisdiction?

  1. The customer's purchase order
  2. The Dun & Bradstreet payment profile
  3. The trade reference summary
  4. The articles of incorporation or equivalent registration filing Correct answer.

Explanation

Formation documents filed with the registrar establish legal existence, entity type, and jurisdiction of organization. Trade references and payment profiles describe behavior, and a purchase order only evidences an order.

Question 43Credit Policy, Investigation, and Risk Assessment

A company's credit policy states that credit terms are net 30 with a 2% discount for payment within 10 days. A customer pays on day 25. What amount is due?

  1. The invoice amount less 2%, because payment arrived within 30 days
  2. The full invoice amount, because the discount window closed on day 10 Correct answer.
  3. The invoice amount less 1%, as a prorated discount
  4. The invoice amount plus a 2% late charge

Explanation

Under 2/10 net 30, the discount is earned only if payment is received by day 10. Payment on day 25 is within the net period, so the full invoice is due with no discount and no penalty.

Question 44Credit Policy, Investigation, and Risk Assessment

In a credit investigation, what is the purpose of obtaining a bank reference?

  1. To verify the applicant's account relationship, balance range, and loan history Correct answer.
  2. To establish the applicant's ownership and corporate jurisdiction
  3. To confirm the applicant's average days beyond terms on trade accounts
  4. To measure the applicant's market share in its industry

Explanation

Bank references confirm that an account exists and typically disclose balance ranges, average balances, and loan repayment history. They do not report trade payment behavior, ownership records, or competitive position.

Question 45Credit Policy, Investigation, and Risk Assessment

Which financial ratio best indicates a customer's ability to meet short-term obligations from liquid resources?

  1. Inventory turnover
  2. Debt-to-equity ratio
  3. Gross margin percentage
  4. Current ratio Correct answer.

Explanation

The current ratio compares current assets with current liabilities and is a standard liquidity measure. Debt-to-equity addresses leverage, gross margin addresses profitability, and inventory turnover addresses operating efficiency.

Question 46Credit Policy, Investigation, and Risk Assessment

A credit policy requires that any account exceeding its approved credit limit be placed on hold pending review. A sales representative asks to release an order that exceeds the limit by 40%. What is the policy-compliant first step?

  1. Release the order and notify credit afterward
  2. Escalate to the credit authority designated for that exposure tier Correct answer.
  3. Cancel the customer's account permanently
  4. Split the shipment across two invoices to stay under the limit

Explanation

When an order breaches the approved limit, the policy routes the decision to the person holding authority for that exposure level. Releasing first, splitting invoices to evade controls, or closing the account all bypass the intended governance.

Question 47Credit Policy, Investigation, and Risk Assessment

What distinguishes a credit report from a credit score in commercial credit assessment?

  1. A report is issued by the customer; a score is issued by the supplier
  2. A report applies only to consumers; a score applies only to businesses
  3. A report is legally binding; a score is advisory only
  4. A report is a narrative and data history; a score is a numeric summary derived from data Correct answer.

Explanation

A commercial credit report presents detailed history such as payment records, suits, liens, and financial data, while a score condenses that data into a comparative number. Both are third-party analytical tools, and neither is issued by the customer or supplier.

Question 48Credit Policy, Investigation, and Risk Assessment

A credit department segments customers by risk class and assigns monitoring frequency accordingly. Which practice reflects sound policy design?

  1. Reviewing higher-risk and higher-exposure accounts more frequently Correct answer.
  2. Reviewing accounts only when a sales representative requests it
  3. Reviewing all accounts annually regardless of exposure
  4. Reviewing only accounts that are already past due

Explanation

Risk-based monitoring concentrates review resources where potential loss is greatest, tying frequency to both risk grade and exposure size. Uniform annual review, reactive-only review, or review on request leaves high-risk exposure under-watched.

Question 49Credit Policy, Investigation, and Risk Assessment

A credit analyst is reviewing a private company that provides no audited statements. Which combination of sources best compensates for the missing audited financials?

  1. The company website and social media presence
  2. Trade references, bank references, and internally prepared statements Correct answer.
  3. Industry average ratios alone
  4. The applicant's verbal assurance of strong liquidity

Explanation

When audited statements are unavailable, corroborating evidence from trade and bank references plus the applicant's own statements gives the analyst behavioral and financial data to assess risk. A website, verbal assurances, or industry averages alone cannot substitute for entity-specific evidence.

Question 50Credit Policy, Investigation, and Risk Assessment

A customer's balance sheet shows current assets of $800,000, inventory of $300,000, and current liabilities of $400,000. What is the quick ratio?

  1. 1.25 Correct answer.
  2. 2.00
  3. 1.33
  4. 0.75

Explanation

The quick ratio excludes inventory: ($800,000 − $300,000) ÷ $400,000 = 1.25. Including inventory would give the current ratio of 2.00, which overstates immediate liquidity for a firm holding substantial stock.