MCQ Quiz

1. What action should be taken after filing a civil suit to recover loan proceeds?

a) Serve a recall notice

b) Ensure documents are properly stamped

c) File an application for the sale of hypothecated goods

d) Check to ensure the period of limitations has not expired

2. Inventory is categorised as what type of asset?

a) Tangible and fixed

b) Tangible and current

c) Intangible and fixed

d) Intangible and current

3. What is the typical loan-to-value ratio for companies with lower levels of financial risk or high levels of available equity finance?

a) 60%

b) 80%

c) 50%

d) 30%

4. What would be most impacted if a dominant employer makes a significant number of its staff redundant?

a) Availability of skilled workers

b) Supply of goods and services

c) Lobbying power with local authorities

d) The level of competition in the industry

5. Which type of credit risk measurement is used to calculate a percentage probability of default for a specific firm?

a) Absolute

b) Implied

c) Ordinal

d) Ranking

6. What is one advantage of using a national credit rating scale instead of a global credit rating scale?

a) It allows for better peer comparisons

b) Fewer companies are eligible to be rated

c) There is a natural cap on the global ratings

d) It allows comparisons across different countries

7. What is the most favourable scenario for a buyer in the supplier market?

a) Unchanging supplier market

b) Frequent entry of new suppliers

c) Exclusive relationship with a large supplier

d) Presence of a few highly specialised suppliers

8. Based on these information: current secured INR 35,000 and current unsecured INR 20,000; non-current secured INR 75,000 and non-current unsecured INR 60,000, what is this company’s total amount of subordinated debt outstanding?

a) INR 55,000

b) INR 80,000

c) INR 1,10,000

d) INR 1,35,000

9. What effect does the number of a company’s trade receivable days have on its cash flow?

a) Number of trade receivable days does not affect cash flow

b) Stable trade receivable days results in increased cash flow

c) A decrease in trade receivable days results in increased cash flow

d) An increase in trade receivable days results in increased cash flow

10. What external factors outside of a business’s control can affect its liquidity levels?

a) Credit and lending policy

b) Facility and loan structure

c) Industry and business risk

d) Management and key persons’ risk

11. What can a company do to finance a project through off-balance sheet financing?

a) Liquidate fixed assets

b) Sell account receivables

c) Use cash from operations

d) Obtain a non-recourse loan

12. Which is a warning sign of cash flow manipulation using creative accounting?

a) Receivables growing faster than sales

b) Converting trade receivables into notes

c) Stretching out the life of a depreciable asset

d) Disclosure about timing of inventory purchases

13. Which type of structural mitigation is used to ensure that all intercompany transactions occur at arm’s length?

a) Collateral

b) Guarantee

c) Monitoring

d) Restrictive covenant

14. Which factor is unlikely to affect a business’s ability to penetrate a market with high entry barriers?

a) Capital available to the business

b) Level of skill of the business’s workforce

c) Uniqueness of products sold by the business

d) Government regulation affecting the business’s industry

15. Which financial trigger can be set up internally as an early signal of a borrower’s probability of default?

a) Change in profit projections

b) Change in ownership structure

c) Unexpected change in dividend policy

d) Emergence of new competitive entrants in the market

16. What is most important to assess when determining how an industry regulation will affect a company’s industry and business risk?

a) If the regulation is a Federal regulation

b) If the regulation is a proposed regulation

c) If the company’s cash flows will be affected

d) If the company is operating in a free market

17. Which source of information can likely be used to obtain details of a business’s management succession plan?

a) Credit agency reports

b) Stock exchange announcements

c) The business’s chief executive officer

d) The company’s accounts or annual reports

18. On what basis is the risk premium for a loan calculated?

a) Expected loss

b) Loss given default

c) Exposure at default

d) Probability of default

19. In which situation is the company likely to have the lowest amount of working capital?

a) Seasonal company currently in its off season for sales

b) Manufacturing company that is testing a product prior to installation

c) Accounting company that is having difficulty collecting its account receivables

d) Computer manufacturing company whose inventory is accumulating due to obsolescence

20. When determining a company’s management risk, what details should be assessed before meeting with the company’s management?

a) The competitors’ performance

b) The company’s goal planning process

c) The company’s most recent annual report

d) The economic outlook for the next couple of years

21. Which element of business planning, if not properly addressed, can have cash flow implications for a business?

a) Clear accountabilities

b) Taking prompt corrective action

c) Measurable performance targets

d) Clearly defined business goals and objectives

22. What would be considered a warning signal when monitoring stock statements for a company experiencing sales growth?

a) Late submission

b) An increase in inventory levels

c) An increase in over-aged receivables

d) A fall in the value of outstanding usance letters of credit

23. Which figure is likely to increase for a business after a seasonal peak sales period?

a) Sales

b) Inventory

c) Trade payables

d) Trade receivables

24. Which is a long-term source of working capital financing?

a) Accrued expenses

b) Customer advances

c) Term loans

d) Trade payables

25. What can be reasonably assumed when a business’s debt to tangible worth ratio is higher than 1.00?

a) Gearing is low

b) Financial risk is unfavourable

c) Creditors support assets more than the owners

d) The owners support assets more than creditors

26. How can a company’s management best minimise the impact of potential interruptions in the input supplies?

a) Obtain supplier insurance

b) Hold large stocks for all key supply inputs

c) Maintain good personal rapport with the key input suppliers

d) Ensure that there is an alternate supply source for all key inputs

27. What type of transaction usually requires a bank guarantee for 5% of the contract value?

a) Earnest deposit

b) Retention money

c) Mobilisation advance

d) Performance assurance

28. Which can occur as a result of including a group cross-default covenant in the credit agreement that involves a loan guarantor?

a) The guarantor is protected if the borrower defaults

b) The borrower is protected if the guarantor defaults

c) Allows action if the borrower and guarantor default

d) Allows action against the borrower if the guarantor defaults

29. Which risk driver refers to the average time it takes a business to collect its sales in cash?

a) Sales growth

b) Gross margin

c) Accounts payable days

d) Accounts receivable days

30. Which factor is not considered when determining the impact of evolving external regulations on a borrower’s financial performance?

a) Impact on local competition

b) Impact on other businesses

c) Cost of maintaining compliance

d) Financial impact for non-compliance

31. Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?

a) Electric utility

b) Food retailing

c) Home construction

d) Financial services consulting

32. Which type of business operation adds value to a tangible product or natural resource?

a) Corporation

b) Manufacturer

c) Retailer

d) Wholesaler

33. What regulatory issues could a bank that has a large number of problem loans encounter?

a) Run on deposits

b) Insolvency charges

c) Loss of good employees

d) Loss of control of the bank

34. What is a characteristic of a good business plan?

a) Setting measurable goals

b) Setting business objectives

c) Being reactive to changing demand

d) Defining who is accountable to the plan

35. For how many days can an account remain continuously in excess of the sanctioned limit before it is considered out of order?

a) 30

b) 60

c) 90

d) 120

36. Special Mention Accounts were introduced as a new asset category between which two categories?

a) Doubtful and Loss

b) Standard and Doubtful

c) Sub-standard and Doubtful

d) Standard and Sub-standard

37. What process for addressing non-performing assets is timely, transparent and outside of legal proceedings?

a) Joint lenders’ forum

b) Strategic debt restructuring

c) Corporate debt restructuring

d) Scheme for sustainable structuring of stressed assets

38. Which statement is correct regarding the effect of a business’s management structure on its performance and cash flow?

a) Informal business structures tend to result in weaker business performance

b) A structure that is too centralised can result in poor management decisions

c) Decentralisation of decision-making tends to result in weaker performance

d) A structure with assigned responsibilities is unnecessary

39. What information does using the gearing ratio provide?

a) Current assets to current liabilities

b) Net worth compared to total assets

c) How much cash is available to cover payments

d) The relative amount of funding by owners and creditors

40. In which industry would you typically expect to see a higher percentage of selling, general and administrative expenses?

a) Manufacturing

b) Retail

c) Service

d) Wholesale

41. What is the primary reason for reviewing external information when assessing a company’s credit quality?

a) To evaluate any adverse press coverage of the company

b) To assess the company’s vulnerability to natural disasters

c) To review any gradual economic changes affecting the company’s industry

d) To evaluate developments that may create opportunities or risks for the company

42. How is a fixed asset recorded on a company’s balance sheet at the time of its acquisition?

a) As a debit to the fixed asset account using the cost of the asset

b) As a credit to the fixed asset account using the cost of the asset

c) As a debit to the fixed asset account using the market value of the asset

d) As a credit to the fixed asset account using the market value of the asset

43. What is free cash flow?

a) Net cash available after depreciation and amortisation

b) Net cash generated from sales without associated costs

c) Net cash before interest, taxes, depreciation and amortisation

d) Net cash remaining after spending to maintain or expand assets

44. What type of non-fund-based lending facility would a buyer of goods and services use to guarantee a one-time payment?

a) Export credit

b) Letter of credit

c) Overdraft

d) Term loan

45. During which implementation phase of deal structure is counsel instructed on documentation and covenant definition issues?

a) Design

b) Drawdown

c) Monitoring

d) Negotiation

46. What is drawing power?

a) The approved fund-based working capital limit to finance a company’s inventory and receivables

b) The value of eligible inventory and receivables detailed in a company’s latest stock statement that can be drawn against

c) A company’s credit limit based on the value of eligible items multiplied by the agreed margin

d) The lower of the approved working capital limit and the lending value calculated based on the stock statement

47. Which statement is correct regarding the effect of a debit or credit on the particular type of financial account?

a) A credit to an asset account increases it

b) A debit to a liability account decreases it

c) A debit to a revenue account increases it

d) A credit to an equity account decreases it

48. In what type of feasibility assessment is a project’s maximum debt to equity ratio reviewed?

a) Cost of project

b) Economic viability

c) Means of finance

d) Technical viability

49. What describes the primary reason(s) that companies need sound corporate governance?

a) To formulate appropriate business strategy

b) To identify business activities that are not being run efficiently

c) To ensure that senior management is appropriately compensated

d) To ensure there is adequate oversight and to prevent excessive risk-taking

50. Which factor increases the riskiness of a borrower’s industry?

a) Reduced regulation

b) Lack of competition

c) Longer and stable life cycle

d) Shorter and frequent life cycle

51. Which industry factor increases the need for a company to compete for a high volume of sales to remain profitable?

a) High fixed costs

b) Few competitors

c) High switching costs

d) Rapid demand growth

52. Which describes the absolute priority rule with respect to payments made to creditors at default?

a) Subordinated debt is paid before insolvency-related costs

b) Available funds are paid first to the lowest ranked class until the borrower’s obligations are fully satisfied

c) Available funds are paid first to the highest ranked class until the borrower’s obligations are fully satisfied

d) Distributions to each ranked class are paid out proportionately based on its percentage in the company's capital structure

53. Company A had outstanding trade payable for an average of 44 days in Fiscal Year-End (FYE) 1 and 41 days in FYE 2. Company B had outstanding trade payable for an average of 52 days in FYE 1 and 55 days in FYE 2. Which of Company A or Company B is most likely to borrow funds, and why?

a) Company A due to reduced cash flow

b) Company B due to reduced cash flow

c) Company A due to increased cash flow

d) Company B due to increased cash flow

54. What will have the biggest effect on the risk premium when pricing a loan?

a) The term of the loan

b) The bank’s growth strategy

c) The expected loss of the loan

d) The expected return on equity

55. What must a lender do to assess the effect of a company’s capital expenditures on its cash flow?

a) Use accumulated depreciation to estimate net cash flow

b) Determine asset value and compare to expected revenues

c) Review increased capital assets and evaluate serviceability

d) Understand the purpose of spending and changes in cash flow

56. What effect would a decrease in a business’s sales growth during a recession have on cash flow?

a) Long-term decrease

b) Long-term increase

c) Short-term decrease

d) Remains consistent

57. Which factor can make it difficult to project a business’s financial performance based on historic trends?

a) Past operating results

b) Management’s future plans

c) Economic and competitive environments

d) Minimum rate for the lender’s return on assets

58. In which scenario would customer concentration cause significant cash flow risk for a business?

a) The business sells clothing to individual consumers

b) The business distributes flour to most bakeries in the region

c) The business supplies specialised parts to the largest auto maker

d) The business provides cleaning services to schools, offices, and residential buildings

59. What is the primary function of stock statements in the administration of fund-based working capital limits?

a) To calculate drawing power

b) To provide evidence that can be used in legal proceedings

c) To provide monthly movement in the level and quality of inventory and receivables

d) To indicate the aging profile of inventory and receivables for calculation of the eligible items

60. What type of opinion does an auditor provide when it disagrees with the information and/or conclusions in a company’s financial report?

a) Adverse

b) Strong

c) Qualified

d) Unqualified

61. According to the Indian Companies Act, within what period of the creation of a security charge must it be registered, including the maximum permitted period of condonable delay?

a) 30 days

b) 300 days

c) 1 year

d) 5 years

62. What is the primary purpose of calculating drawing power in a funds-based working capital facility?

a) To determine the amount the customer can draw on

b) To ensure that bank funds are not tied up in obsolete stocks

c) To ensure that drawings are being used to fund current assets

d) To check that the value of eligible assets is at least equal to the approved credit limit

63. Which type of security can be used in a pledge charge?

a) Building

b) Finished goods

c) Heavy equipment

d) Life insurance contract

64. What information in a credit agency report can help a bank assess a company’s management integrity?

a) Opinion about the company management

b) Information about the financial performance

c) How freely the management shares information

d) Details on covenant compliance for the bank loans

65. What is one benefit of cash accounting?

a) It provides a cash-flow-based statement of profit and loss

b) It records cash and non-cash components of a transaction

c) It records all transactions of a particular accounting period

d) It gives a complete view of the financial status of a business

66. Why does a special purpose vehicle expose a lender to more risk than conventional financing?

a) The loan has no security guaranteed

b) The sponsor has no established track record

c) The sponsor is the only party liable for the loan

d) The loan is repaid only from the project’s cash flows

67. Which action might a company take when it is in the cash concern stage of financial distress?

a) Selling vital assets

b) Cancelling bonuses

c) Laying off key employees

d) Eliminating management positions

68. What is a way to conduct an inventory check when verifying the entire inventory is not feasible?

a) Conduct an ABC analysis

b) Review work in progress records

c) Review Central Excise taxation records

d) Check for boards indicating which assets are charged to the bank

69. At which stage of a business’s life cycle is it considered the most risky for credit approval?

a) Start-up

b) Adolescence

c) Growth

d) Maturity

70. What previous management action is likely to raise doubt about management integrity and whether to enter into a credit relationship with a business?

a) Tax planning

b) Making tweaks to reported accounts to mask a declining financial performance

c) Marginally increasing the dividend payout ratio compared to the previous financial year

d) Making changes to the board of directors and audit committee to increase the proportion of independent directors

71. Which party enforces a bank guarantee in the event of default?

a) Applicant

b) Beneficiary

c) Government

d) Guarantor

72. What is the primary source of cash flow used in calculating debt repayment capacity?

a) Sale of an asset

b) Peripheral rental fees

c) Extraordinary income

d) Cash generated from operations

73. What is meant by the term “excess borrowings” under the Tandon Committee approach to lending?

a) The amount borrowed exceeds current liabilities

b) The liquidity level exceeds the minimum required

c) The maximum permissible bank borrowings exceed current assets

d) The minimum required net working capital exceeds the actual amount

74. What is the primary purpose of the loan pricing process?

a) To assess the probability of loss in the event of default

b) To calculate the profitability of the loan transaction for the bank

c) To determine appropriate interest rate and fees in line with the risk assumed

d) To support the lender’s position in the negotiation process with the borrower

75. Which method of inventory valuation maximises a company’s net income during periods of inflation?

a) Average cost

b) First-in, first-out

c) Last-in, first-out

d) Weighted average

76. Which action by a borrower’s management team could have an adverse effect on its cash flow and ability to meet its obligations?

a) Adopting a conservative business planning strategy

b) Setting business plan objectives that are overly aggressive

c) Increasing the rate of depreciation resulting in reduced net income

d) Disclosing confidential information to other stakeholders on a need-to-know basis

77. What causes market overcapacity?

a) Industry growth

b) Weak competition

c) Drop in a sales price

d) Low product demand

78. Which part of the financial statements does the Uniform Credit Analysis primarily focus on?

a) Balance Sheet

b) Cash Flow Statement

c) Income Statement

d) Net Worth Statement

79. What type of risk is the risk that credit exposure is not adequately structured?

a) Facility risk

b) Financial risk

c) Industry risk

d) Management risk

80. How is a business’s risk affected when a business environment is dominated by a few large and wealthy clients?

a) Sales and profitability increases

b) Loss of one client creates the risk of lost revenues

c) Large and steady sales minimise risk for the supplier

d) The impact is significant only if a client declares bankruptcy

81. Which is a primary purpose of adding covenants to a lending agreement?

a) To protect the lender in the event of the borrower’s bankruptcy

b) To immediately call the loan if the borrower’s credit profile deteriorates

c) To prevent a change in ownership of the borrower during the term of the agreement

d) To ensure that the borrower continues to repay the loan to maturity when a technical default occurs

82. What does the cash flow coverage ratio of a company measure?

a) The amount of cash collected after sales

b) Its profitability relative to interest expenses

c) Its ability to pay interest, debt payments, and dividends

d) The amount of cash available to cover its debt payments

83. Which factor affecting the cost of funds will lead to a surplus to the lender if positive?

a) Profit margin

b) Risk premium

c) Term of funds

d) Cost of capital

84. Which does the Reserve Bank of India consider to be an early warning signal indicator?

a) Lack of related party transactions

b) Increase in borrowings despite large cash holdings

c) Decrease in unbilled revenue year after year

d) Project costs are closely aligned with benchmark costs

85. What variable will most likely decrease as a market approaches overcapacity?

a) Loan defaults

b) Price of products

c) Loan applications

d) Availability of products

86. What role do projections play in the financial risk assessment process?

a) Confirm future ability to repay

b) Estimate cash inflows and outflows

c) Determine likelihood of future liquidity and solvency

d) Forecast minimum rate for the lender’s return on assets

87. Which factor increases the riskiness of a borrower’s industry?

a) Reduced regulation

b) Lack of competition

c) Longer and stable life cycle

d) Shorter and frequent life cycle

88. What is a common reason for companies to use creative accounting?

a) To mask poor performance

b) To increase dividends payable

c) To avoid a voluntary disclosure in the notes to accounts

d) To increase the gap between actual performance and analysts’ expectations

89. Which type of risk can arise from the way a loan is structured?

a) Group

b) Deal-specific

c) Documentation

d) Other stakeholders

90. Which factor would improve a business’s probability to obtain financing for an expansion project?

a) Strong past performance

b) Highly specialised products

c) Lack of significant competition

d) Current compliance with debt repayment

91. What is the best course of action when the assumptions used to make projections for a business do not yield the desired results?

a) Change the assumptions

b) Adjust the risk driver values

c) Accept the implications of the results

d) Dismiss the implications of the results

92. What type of transaction usually requires a bank guarantee for 5% of the contract value?

a) Earnest deposit

b) Retention money

c) Mobilisation advance

d) Performance assurance

93. According to the contingent claims model, default occurs when what variable is less than the value of a firm’s liabilities?

a) The firm’s gross profit

b) The firm’s shareholders’ equity

c) The firm’s market value of assets

d) The firm’s net book value of assets

94. What is the primary purpose of setting up internal triggers for credit risk monitoring?

a) To provide early warning signals of deteriorating credit risk

b) To identify breaches of contractually agreed upon covenants

c) To flag an issue when financial statements are ready for review

d) To replace contractual covenants for borrowers with high credit standing

95. Which management decision will most likely affect credit risk through an adverse impact on the company’s performance?

a) Limited disclosures in the annual reports

b) Increasing dividend payouts during an economic downturn

c) Replacing senior management with family members who have limited experience

d) Implementing a management compensation package focused on medium-term goals

96. Based on the working capital information provided below, which of these companies has the highest level of business risk?

Working Capital Cycle (Months)

Company A: 5, Peers’ Working Capital Cycle: 4
Company B: 2, Peers’ Working Capital Cycle: 3
Company C: 10, Peers’ Working Capital Cycle: 5
Company D: 10, Peers’ Working Capital Cycle: 10

a) Company A

b) Company B

c) Company C

d) Company D

97. When issuing a term loan, what source of information can be used to benchmark the cost of customized, non-standard equipment?

a) Suppliers’ invoices

b) Other firms in the industry

c) Information available on the internet

d) Comparisons with similar equipment

98. Which describes the primary reason(s) that companies need sound corporate governance?

a) To formulate appropriate business strategy

b) To identify business activities that are not being run efficiently

c) To ensure that senior management is appropriately compensated

d) To ensure there is adequate oversight and to prevent excessive risk-taking

99. Which typically occurs in the expansion phase of the economy?

a) Inflation increases

b) Receivables increase

c) Borrowing decreases

d) Inventories decrease

100. Which is an example of a loan covenant?

a) Personal guarantee

b) Mortgage of immovable asset

c) Hypothecation of movable asset

d) Restrictions on future borrowings

101. What action should be taken after filing a civil suit to recover loan proceeds?

a) Serve a recall notice

b) Ensure documents are properly stamped

c) File an application for the sale of hypothecated goods

d) Check to ensure the period of limitations has not expired

102. Inventory is categorised as what type of asset?

a) Tangible and fixed

b) Tangible and current

c) Intangible and fixed

d) Intangible and current

103. What is the typical loan-to-value ratio for companies with lower levels of financial risk or high levels of available equity finance?

a) 60%

b) 80%

c) 50%

d) 30%

104. What would be most impacted if a dominant employer makes a significant number of its staff redundant?

a) Availability of skilled workers

b) Supply of goods and services

c) Lobbying power with local authorities

d) The level of competition in the industry

105. Which type of credit risk measurement is used to calculate a percentage probability of default for a specific firm?

a) Absolute

b) Implied

c) Ordinal

d) Ranking

106. What is one advantage of using a national credit rating scale instead of a global credit rating scale?

a) It allows for better peer comparisons

b) Fewer companies are eligible to be rated

c) There is a natural cap on the global ratings

d) It allows comparisons across different countries

107. What is the most favourable scenario for a buyer in the supplier market?

a) Unchanging supplier market

b) Frequent entry of new suppliers

c) Exclusive relationship with a large supplier

d) Presence of a few highly specialised suppliers

108. Based on these information: current secured INR 35,000 and current unsecured INR 20,000; non-current secured INR 75,000 and non-current unsecured INR 60,000, what is this company’s total amount of subordinated debt outstanding?

a) INR 55,000

b) INR 80,000

c) INR 110,000

d) INR 135,000

109. What effect does the number of a company’s trade receivable days have on its cash flow?

a) Number of trade receivable days does not affect cash flow

b) Stable trade receivable days results in increased cash flow

c) A decrease in trade receivable days results in increased cash flow

d) An increase in trade receivable days results in increased cash flow

110. What external factors outside of a business’s control can affect its liquidity levels?

a) Credit and lending policy

b) Facility and loan structure

c) Industry and business risk

d) Management and key persons’ risk

111. What can a company do to finance a project through off-balance sheet financing?

a) Liquidate fixed assets

b) Sell account receivables

c) Use cash from operations

d) Obtain a non-recourse loan

112. Which is a warning sign of cash flow manipulation using creative accounting?

a) Receivables growing faster than sales

b) Converting trade receivables into notes

c) Stretching out the life of a depreciable asset

d) Disclosure about timing of inventory purchases

113. Which type of structural mitigation is used to ensure that all intercompany transactions occur at arm’s length?

a) Collateral

b) Guarantee

c) Monitoring

d) Restrictive covenant

114. Which factor is unlikely to affect a business’s ability to penetrate a market with high entry barriers?

a) Capital available to the business

b) Level of skill of the business’s workforce

c) Uniqueness of products sold by the business

d) Government regulation affecting the business’s industry

115. Which financial trigger can be set up internally as an early signal of a borrower’s probability of default?

a) Change in profit projections

b) Change in ownership structure

c) Unexpected change in dividend policy

d) Emergence of new competitive entrants in the market

116. What is most important to assess when determining how an industry regulation will affect a company’s industry and business risk?

a) If the regulation is a Federal regulation

b) If the regulation is a proposed regulation

c) If the company’s cash flows will be affected

d) If the company is operating in a free market

117. Which source of information can likely be used to obtain details of a business’s management succession plan?

a) Credit agency reports

b) Stock exchange announcements

c) The business’s chief executive officer

d) The company’s accounts or annual reports

118. On what basis is the risk premium for a loan calculated?

a) Expected loss

b) Loss given default

c) Exposure at default

d) Probability of default

119. In which situation is the company likely to have the lowest amount of working capital?

a) Seasonal company currently in its off season for sales

b) Manufacturing company that is testing a product prior to installation

c) Accounting company that is having difficulty collecting its account receivables

d) Computer manufacturing company whose inventory is accumulating due to obsolescence

120. When determining a company’s management risk, what details should be assessed before meeting with the company’s management?

a) The competitors’ performance

b) The company’s goal planning process

c) The company’s most recent annual report

d) The economic outlook for the next couple of years

121. Which element of business planning, if not properly addressed, has cash flow implications for a business?

a) Clear accountabilities

b) Taking prompt corrective action

c) Measurable performance targets

d) Clearly defined business goals and objectives

122. What would be considered a warning signal when monitoring stock statements for a company experiencing sales growth?

a) Late submission

b) An increase in inventory levels

c) An increase in over-aged receivables

d) A fall in the value of outstanding usance letters of credit

123. Which figure is likely to increase for a business after a seasonal peak sales period?

a) Sales

b) Inventory

c) Trade payables

d) Trade receivables

124. Which is a long-term source of working capital financing?

a) Accrued expenses

b) Customer advances

c) Term loans

d) Trade payables

125. What can be reasonably assumed when a business’s debt to tangible worth ratio is higher than 1.00?

a) Gearing is low

b) Financial risk is unfavourable

c) Creditors support assets more than the owners

d) The owners support assets more than creditors

126. How can a company’s management best minimise the impact of potential interruptions in the input supplies?

a) Obtain supplier insurance

b) Hold large stocks for all key supply inputs

c) Maintain good personal rapport with the key input suppliers

d) Ensure that there is an alternate supply source for all key inputs

127. What type of transaction usually requires a bank guarantee for 5% of the contract value?

a) Earnest deposit

b) Retention money

c) Mobilisation advance

d) Performance assurance

128. Which can occur as a result of including a group cross-default covenant in the credit agreement that involves a loan guarantor?

a) The guarantor is protected if the borrower defaults

b) The borrower is protected if the guarantor defaults

c) Allows action if the borrower and guarantor default

d) Allows action against the borrower if the guarantor defaults

129. Which risk driver refers to the average time it takes a business to collect its sales in cash?

a) Sales growth

b) Gross margin

c) Accounts payable days

d) Accounts receivable days

130. Which factor is not considered when determining the impact of evolving external regulations on a borrower’s financial performance?

a) Impact on local competition

b) Impact on other businesses

c) Cost of maintaining compliance

d) Financial impact for non-compliance

131. Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?

a) Electric utility

b) Food retailing

c) Home construction

d) Financial services consulting

132. Which type of business operation adds value to a tangible product or natural resource?

a) Corporation

b) Manufacturer

c) Retailer

d) Wholesaler

133. What regulatory issues could a bank that has a large number of problem loans encounter?

a) Run on deposits

b) Insolvency charges

c) Loss of good employees

d) Loss of control of the bank

134. What is a characteristic of a good business plan?

a) Setting measurable goals

b) Setting business objectives

c) Being reactive to changing demand

d) Defining who is accountable to the plan

135. For how many days can an account remain continuously in excess of the sanctioned limit before it is considered out of order?

a) 30

b) 60

c) 90

d) 120

136. Special Mention Accounts were introduced as a new asset category between which two categories?

a) Doubtful and Loss

b) Standard and Doubtful

c) Sub-standard and Doubtful

d) Standard and Sub-standard

137. What process for addressing non-performing assets is timely, transparent and outside of legal proceedings?

a) Joint lenders’ forum

b) Strategic debt restructuring

c) Corporate debt restructuring

d) Scheme for sustainable structuring of stressed assets

138. What information does using the gearing ratio provide?

a) Current assets to current liabilities

b) Net worth compared to total assets

c) How much cash is available to cover payments

d) The relative amount of funding provided by owners and creditors

139. In which industry would you typically expect to see a higher percentage of selling, general and administrative expenses?

a) Manufacturing

b) Retail

c) Service

d) Wholesale

140. What is the primary reason for reviewing external information when assessing a company’s credit quality?

a) To evaluate any adverse press coverage of the company

b) To assess the company’s vulnerability to natural disasters

c) To review any gradual economic changes that may affect the company’s industry

d) To evaluate what developments may create opportunities for the company or adversely affect its performance

141. How is a fixed asset recorded on a company’s balance sheet at the time of its acquisition?

a) As a debit to the fixed asset account using the cost of the asset

b) As a credit to the fixed asset account using the cost of the asset

c) As a debit to the fixed asset account using the market value of the asset

d) As a credit to the fixed asset account using the market value of the asset

142. What is free cash flow?

a) Net cash available after depreciation and amortisation

b) Net cash generated from sales without associated costs

c) Net cash before interest, taxes, depreciation and amortisation

d) Net cash remaining after spending to maintain or expand assets

143. What type of non-fund-based lending facility would a buyer of goods and services use to guarantee a one-time payment?

a) Export credit

b) Letter of credit

c) Overdraft

d) Term loan

144. During which implementation phase of deal structure is counsel instructed on documentation and covenant definition issues?

a) Design

b) Drawdown

c) Monitoring

d) Negotiation

145. What is drawing power?

a) The approved fund-based working capital limit to finance a company’s inventory and receivables

b) The value of eligible inventory and receivables detailed in a company’s latest stock statement that can be drawn against

c) A company’s credit limit based on the value of eligible items from its latest stock statement multiplied by the agreed margin

d) The lower of a company’s approved fund-based working capital limit and the lending value calculated based on its latest stock statement and usance letters of credit issued

146. Which statement is correct regarding the effect of a debit or credit on the particular type of financial account?

a) A credit to an asset account increases it

b) A debit to a liability account decreases it

c) A debit to a revenue account increases it

d) A credit to an equity account decreases it

147. In what type of feasibility assessment is a project’s maximum debt to equity ratio reviewed?

a) Cost of project

b) Economic viability

c) Means of finance

d) Technical viability

148. What describes the primary reason(s) that companies need sound corporate governance?

a) To formulate appropriate business strategy

b) To identify business activities that are not being run efficiently

c) To ensure that senior management is appropriately compensated

d) To ensure there is adequate oversight and to prevent excessive risk-taking

149. Which factor increases the riskiness of a borrower’s industry?

a) Reduced regulation

b) Lack of competition

c) Shorter and frequent life cycle

d) Longer and stable life cycle

150. Which industry factor increases the need for a company to compete for a high volume of sales to remain profitable?

a) High fixed costs

b) Few competitors

c) High switching costs

d) Rapid demand growth

151. Which describes the absolute priority rule with respect to payments made to creditors at default?

a) Subordinated debt is paid before insolvency-related costs

b) Available funds are paid first to the lowest ranked class until the borrower’s obligations are fully satisfied

c) Available funds are paid first to the highest ranked class until the borrower’s obligations are fully satisfied

d) Distributions to each ranked class are paid out proportionately based on its percentage in the company's capital structure

152. Company A had outstanding trade payables for an average of 44 days in Fiscal Year-End (FYE) 1 and 41 days in FYE 2. Company B had outstanding trade payables for an average of 52 days in FYE 1 and 55 days in FYE 2. Which company is most likely to borrow funds, and why?

a) Company A due to reduced cash flow

b) Company B due to reduced cash flow

c) Company A due to increased cash flow

d) Company B due to increased cash flow

153. What will have the biggest effect on the risk premium when pricing a loan?

a) The term of the loan

b) The bank’s growth strategy

c) The expected loss of the loan

d) The expected return on equity

154. What must a lender do to assess the effect of a company’s capital expenditures on its cash flow?

a) Use accumulated depreciation to estimate net cash flow

b) Determine asset value and compare to expected revenues

c) Review increased capital assets and evaluate serviceability

d) Understand the purpose of spending and changes in cash flow

155. What effect would a decrease in a business’s sales growth during a recession have on cash flow?

a) Long-term decrease

b) Long-term increase

c) Short-term decrease

d) Remains consistent

156. Which factor can make it difficult to project a business’s financial performance based on historic trends?

a) Past operating results

b) Management’s future plans

c) Economic and competitive environments

d) Minimum rate for the lender’s return on assets

157. In which scenario would customer concentration cause significant cash flow risk for a business?

a) The business sells clothing to individual consumers

b) The business distributes flour to most bakeries in the region

c) The business supplies specialised parts to the largest auto maker

d) The business provides cleaning services to schools, offices and residential buildings

158. What is the primary function of stock statements in the administration of fund-based working capital limits?

a) To calculate drawing power

b) To provide evidence that can be used in legal proceedings

c) To provide monthly movement in the level and quality of inventory and receivables

d) To indicate the aging profile of inventory and receivables for calculation of the eligible items

159. What type of opinion does an auditor provide when it disagrees with the information and/or conclusions in a company’s financial report?

a) Adverse

b) Strong

c) Qualified

d) Unqualified

160. According to the Indian Companies Act, within what period of the creation of a security charge must it be registered, including the maximum permitted period of condonable delay?

a) 30 days

b) 300 days

c) 1 year

d) 5 years

161. What is the primary purpose of calculating drawing power in a funds-based working capital facility?

a) To determine the amount the customer can draw on

b) To ensure that bank funds are not tied up in obsolete stocks

c) To ensure that drawings are being used to fund current assets

d) To check that the value of eligible assets is at least equal to the approved credit limit

162. Which type of security can be used in a pledge charge?

a) Building

b) Finished goods

c) Heavy equipment

d) Life insurance contract

163. What information in a credit agency report can help a bank assess a company’s management integrity?

a) Opinion about the company management

b) Information about the financial performance

c) How freely the management shares information

d) Details on covenant compliance for the bank loans

164. What is one benefit of cash accounting?

a) It provides a cash-flow-based statement of profit and loss

b) It records cash and non-cash components of a transaction

c) It records all transactions of a particular accounting period

d) It gives a complete view of the financial status of a business

165. Why does a special purpose vehicle expose a lender to more risk than conventional financing?

a) The loan has no security guaranteed

b) The sponsor has no established track record

c) The sponsor is the only party liable for the loan

d) The loan is repaid only from the project’s cash flows

166. Which action might a company take when it is in the cash concern stage of financial distress?

a) Selling vital assets

b) Cancelling bonuses

c) Laying off key employees

d) Eliminating management positions

167. What is a way to conduct an inventory check when verifying the entire inventory is not feasible?

a) Conduct an ABC analysis

b) Review work in progress records

c) Review Central Excise taxation records

d) Check for boards indicating which assets are charged to the bank

168. At which stage of a business’s life cycle is it considered the most risky for credit approval?

a) Start-up

b) Adolescence

c) Growth

d) Maturity

169. What previous management action is likely to raise doubt about management integrity and whether to enter into a credit relationship with a business?

a) Tax planning

b) Making tweaks to reported accounts to mask a declining financial performance

c) Marginally increasing the dividend payout ratio compared to the previous financial year

d) Making changes to the board of directors and audit committee to increase the proportion of independent directors

170. Which party enforces a bank guarantee in the event of default?

a) Applicant

b) Beneficiary

c) Government

d) Guarantor

171. What is the primary source of cash flow used in calculating debt repayment capacity?

a) Sale of an asset

b) Peripheral rental fees

c) Extraordinary income

d) Cash generated from operations

172. What is meant by the term “excess borrowings” under the Tandon Committee approach to lending?

a) The amount borrowed exceeds current liabilities

b) The liquidity level exceeds the minimum required

c) The maximum permissible bank borrowings exceed current assets

d) The minimum required net working capital exceeds the actual amount

173. What is the primary purpose of the loan pricing process?

a) To assess the probability of loss in the event of default

b) To calculate the profitability of the loan transaction for the bank

c) To determine appropriate interest rate and fees in line with the risk assumed

d) To support the lender’s position in the negotiation process with the borrower

174. Which method of inventory valuation maximises a company’s net income during periods of inflation?

a) Average cost

b) First-in, first-out (FIFO)

c) Last-in, first-out (LIFO)

d) Weighted average

175. Which action by a borrower’s management team could have an adverse effect on its cash flow and ability to meet its obligations?

a) Adopting a conservative business planning strategy

b) Setting business plan objectives that are overly aggressive

c) Increasing the rate of depreciation resulting in reduced net income

d) Disclosing confidential information to other stakeholders on a need-to-know basis

176. What causes market overcapacity?

a) Industry growth

b) Weak competition

c) Drop in a sales price

d) Low product demand

177. Which part of the financial statements does the Uniform Credit Analysis primarily focus on?

a) Balance Sheet

b) Cash Flow Statement

c) Income Statement

d) Net Worth Statement

178. What type of risk is the risk that credit exposure is not adequately structured?

a) Facility risk

b) Financial risk

c) Industry risk

d) Management risk

179. How is a business’s risk affected when a business environment is dominated by a few large and wealthy clients?

a) Sales and profitability increases

b) Loss of one client creates the risk of lost revenues

c) Large and steady sales minimise risk for the supplier

d) The impact is significant only if a client declares bankruptcy

180. Which is a primary purpose of adding covenants to a lending agreement?

a) To protect the lender in the event of the borrower’s bankruptcy

b) To immediately call the loan if the borrower’s credit profile deteriorates

c) To prevent a change in ownership of the borrower during the term of the agreement

d) To ensure that the borrower continues to repay the loan to maturity when a technical default occurs

181. What does the cash flow coverage ratio of a company measure?

a) The amount of cash collected after sales

b) Its profitability relative to interest expenses

c) Its ability to pay interest, debt payments, and dividends

d) The amount of cash available to cover its debt payments

182. Which factor affecting the cost of funds will lead to a surplus to the lender if positive?

a) Profit margin

b) Risk premium

c) Term of funds

d) Cost of capital

183. Which does the Reserve Bank of India consider to be an early warning signal indicator?

a) Lack of related party transactions

b) Decrease in unbilled revenue year after year

c) Increase in borrowings despite large cash holdings

d) Project costs are closely aligned with benchmark costs

184. What variable will most likely decrease as a market approaches overcapacity?

a) Loan defaults

b) Price of products

c) Loan applications

d) Availability of products

185. What role do projections play in the financial risk assessment process?

a) Confirm future ability to repay

b) Estimate cash inflows and outflows

c) Determine likelihood of future liquidity and solvency

d) Forecast minimum rate for the lender’s return on assets

186. Which factor increases the riskiness of a borrower’s industry?

a) Reduced regulation

b) Lack of competition

c) Longer and stable life cycle

d) Shorter and frequent life cycle

187. What is a common reason for companies to use creative accounting?

a) To mask poor performance

b) To increase dividends payable

c) To avoid a voluntary disclosure in the notes to accounts

d) To increase the gap between actual performance and analysts’ expectations

188. Which type of risk can arise from the way a loan is structured?

a) Group

b) Deal-specific

c) Documentation

d) Other stakeholders

189. Which factor would improve a business’s probability to obtain financing for an expansion project?

a) Strong past performance

b) Highly specialised products

c) Lack of significant competition

d) Current compliance with debt repayment

190. What is the best course of action when the assumptions used to make projections for a business do not yield the desired results?

a) Change the assumptions

b) Adjust the risk driver values

c) Accept the implications of the results

d) Dismiss the implications of the results

191. What type of transaction usually requires a bank guarantee for 5% of the contract value?

a) Earnest deposit

b) Retention money

c) Mobilisation advance

d) Performance assurance

192. According to the contingent claims model, default occurs when what variable is less than the value of a firm’s liabilities?

a) The firm’s gross profit

b) The firm’s shareholders’ equity

c) The firm’s market value of assets

d) The firm’s net book value of assets

193. What is the primary purpose of setting up internal triggers for credit risk monitoring?

a) To provide early warning signals of deteriorating credit risk

b) To identify breaches of contractually agreed upon covenants

c) To flag an issue when financial statements are ready for review

d) To replace contractual covenants for borrowers with high credit standing

194. Which management decision will most likely affect credit risk through an adverse impact on the company’s performance?

a) Limited disclosures in the annual reports

b) Increasing dividend payouts during an economic downturn

c) Replacing senior management with family members who have limited experience

d) Implementing a management compensation package focused on medium-term goals

195. Based on the working capital information provided below, which of these companies has the highest level of business risk?

Company | Working Capital Cycle (Months) | Peers’ Working Capital Cycle (Months)

A | 5 | 4

B | 2 | 3

C | 10 | 5

D | 10 | 10

a) Company A

b) Company B

c) Company C

d) Company D

196. When issuing a term loan, what source of information can be used to benchmark the cost of customized, non-standard equipment?

a) Suppliers’ invoices

b) Other firms in the industry

c) Information available on the internet

d) Comparisons with similar equipment

197. Which typically occurs in the expansion phase of the economy?

a) Inflation increases

b) Receivables increase

c) Borrowing decreases

d) Inventories decrease

198. Which is an example of a loan covenant?

a) Personal guarantee

b) Mortgage of immovable asset

c) Hypothecation of movable asset

d) Restrictions on future borrowings

199. What is the primary purpose of setting a loan’s interest rate?

a) To meet the borrower’s expectations

b) To increase competition in the market

c) To compensate the lender for the risk assumed

d) To ensure timely repayment of the loan

200. What is the result when a company’s working capital turnover ratio increases?

a) Improved liquidity

b) Increased operational efficiency

c) Decreased profitability

d) Higher debt burden

201. Which factor is most likely to reduce a borrower’s credit risk?

a) Strong management team

b) Declining profit margins

c) High debt-to-equity ratio

d) Weak governance structure

202. Which financial metric is used to assess a company’s ability to cover interest payments?

a) Operating margin

b) Interest coverage ratio

c) Quick ratio

d) Return on equity

203. What type of covenant requires the borrower to maintain certain financial ratios?

a) Negative covenant

b) Affirmative covenant

c) Financial covenant

d) Restrictive covenant

204. What action should a company take to reduce its trade receivable days?

a) Increase inventory levels

b) Extend credit terms

c) Delay supplier payments

d) Improve collection efficiency

205. What is the primary purpose of a cash flow statement?

a) To assess liquidity and solvency

b) To evaluate profitability

c) To measure asset turnover

d) To determine equity value

206. Which type of company is most likely to rely on short-term financing for operations?

a) Real estate developer

b) Software company

c) Retail business

d) Pharmaceutical manufacturer

207. What type of opinion does an auditor provide when financial statements are free from material misstatements?

a) Adverse

b) Unqualified

c) Qualified

d) Disclaimer

208. Which factor can indicate potential financial distress in a company?

a) High liquidity ratios

b) Increasing net income

c) Low levels of debt

d) Decreasing interest coverage ratio

209. What is a common reason for businesses to use factoring services?

a) To improve cash flow

b) To reduce operating expenses

c) To increase profitability

d) To diversify revenue streams

210. What type of financial analysis focuses on evaluating the ability of a borrower to generate sufficient cash flow to repay a loan?

a) Profitability analysis

b) Liquidity analysis

c) Cash flow analysis

d) Solvency analysis

211. Which financial metric is most useful for assessing a company's operating performance?

a) Current ratio

b) Operating margin

c) Debt-to-equity ratio

d) Return on assets

212. What is the primary purpose of a restrictive covenant in a lending agreement?

a) To limit borrower activities that may increase risk

b) To guarantee the borrower maintains specific financial ratios

c) To ensure timely loan repayment

d) To encourage the borrower to seek additional funding

213. Which type of company is least likely to experience seasonal cash flow fluctuations?

a) Retail stores

b) Agriculture-based businesses

c) Utility companies

d) Tourism-based businesses

214. What is a characteristic of an unsecured loan?

a) It requires collateral

b) It is based solely on the borrower’s creditworthiness

c) It has a lower interest rate than secured loans

d) It is only available to corporate borrowers

215. Which factor is most likely to increase a company’s cash flow?

a) An increase in inventory levels

b) An increase in accounts receivable

c) An increase in capital expenditures

d) A decrease in accounts receivable

216. What is the primary purpose of a Letter of Credit (LC)?

a) To extend a loan to a customer

b) To guarantee payment from the bank to the supplier

c) To facilitate international trade transactions

d) To confirm the buyer’s creditworthiness

217. Which strategy can reduce a company’s financial risk?

a) Increasing reliance on short-term debt

b) Diversifying revenue streams

c) Delaying accounts payable

d) Reducing inventory turnover

218. What type of financial risk is associated with changes in interest rates?

a) Liquidity risk

b) Credit risk

c) Operational risk

d) Interest rate risk

219. Which type of loan repayment structure involves equal periodic payments?

a) Balloon payment

b) Bullet repayment

c) Amortised repayment

d) Step-up repayment

220. What is a key purpose of financial statement analysis?

a) To evaluate a company’s financial performance

b) To measure economic growth

c) To assess government policy

d) To forecast exchange rate trends

221. What action should be taken after filing a civil suit to recover loan proceeds?

a) Serve a recall notice.

b) Ensure documents are properly stamped.

c) File an application for the sale of hypothecated goods.

d) Check to ensure the period of limitations has not expired.

222. Inventory is categorised as what type of asset?

a) Tangible and fixed.

b) Tangible and current.

c) Intangible and fixed.

d) Intangible and current.

223. What is the typical loan-to-value ratio for companies with lower levels of financial risk or high levels of available equity finance?

a) 60%

b) 80%

c) 50%

d) 30%

224. What would be most impacted if a dominant employer makes a significant number of its staff redundant?

a) Availability of skilled workers.

b) Supply of goods and services.

c) Lobbying power with local authorities.

d) The level of competition in the industry.

225. Which type of credit risk measurement is used to calculate a percentage probability of default for a specific firm?

a) Absolute.

b) Implied.

c) Ordinal.

d) Ranking.