COURSE.1 To 10
COURSE.1 To 10
COURSE.1 To 10
Question (6)
Why is it important to register a security?
The company will know who has ownership over its assets.
The Registrar of Companies is able to maintain a Register.
Banks must create rights over security offered to be able to enforce ownership on it in the event
the loan is not repaid.
It is part of the Legal Due Diligence of lending in banks.
Question (7)
Which factor has been responsible for reducing the share of total market lending by Indian banks?
The entry of non-bank financial companies (NBFCs)
Disintermediation in the Indian financial system
The ability of banks to support long-term financing
Emergence of capital markets
Question (8)
Which of the following statements does not apply to a private limited company?
It can have no share capital and be a private unlimited company.
It can only have between two and 200 members.
Its shares are freely transferable and can be traded on the stock exchange.
It can have no share capital, but be limited by guarantee.
Question (9)
In a facility against assignment of receivables: (Select all that apply)
The bank advances money to the borrower’s debtor who gives it to the borrower.
The borrower’s debtor repays the debt directly to the bank.
The bank advances the borrower a percentage of the amount owed by the borrower’s debtor
against security of that debt.
The borrower repays the debt to the bank whether or not it is repaid by the borrower’s debtor.
Question (10)
In the RBI Master Circular on Joint Ventures and Wholly Owned Subsidiaries:
Banks are permitted to lend to foreign companies having no element of Indian ownership.
Banks are not permitted to provide buyers’ credit to overseas parties to facilitate exports from
India.
Banks are permitted to lend to foreign joint ventures and wholly owned subsidiaries of Indian
entrepreneurs.
Banks are permitted to offer only non-funded facilities to foreign JVs and wholly owned
subsidiaries of Indian entrepreneurs.
Question (11)
What does the RBI do in its banking supervision function?
Issues directives for banking conduct of all banks and institutions
Issues banking licences for commercial banks in India
Regulates interest rates of financial transactions which are outside deregulation
All of the above
Question (12)
In its circular on exposure limits/norms, the RBI effectively:
Ensures that money is lent to deserving people and purposes.
Permits groups of related parties to borrow as much as they like from a bank.
Prevents concentration of lending to related borrowers and sectors.
None of the above.
Question (13)
Which is not an important credit consideration with respect to the legal structure of the company?
Its ability to offer security.
Its ability to borrow.
The liability of its members.
The transferability of its shares.
Question (14)
When a loan is taken With Recourse, it means that:
The lender can recover the money only from the guarantor.
The lender cannot recover the loan from the borrower.
The lender has recourse only to the security provided by the borrower.
The lender can recover the loan from the borrower.
Question (15)
In which of the following company types may members be held personally liable for the debts of
the company?
Public unlimited Company having share capital.
Public Company limited by Guarantee having share capital
Private Company limited by Guarantee and having no share capital.
All of the above.
Question (16)
Why do secured facilities carry a lower capital charge than unsecured facilities?
The potential residual loss after realisation of security is lower.
Pricing on secured facilities is lower.
Secured facilities are usually for a shorter tenor.
Secured facilities are usually repaid by fixed instalments.
Question (17)
Which of the following statements is true? (Select all that apply)
In their role as aggregators of deposits and providers of credit, banks occupy a position of trust.
The primary function of banks is to show profits for their shareholders, as is the case in other
sectors of industry.
The responsibility of banks to ensure prudent lending is limited. A greater responsibility rests with
the RBI in its policy making and supervision functions.
A potential cause for large Non Performing Assets may be inadequate credit assessments carried
out by banks.
Question (18)
What types of financial services do banks typically provide to investment companies? (Select all
that apply)
Underwriting of capital.
Letters of credit to facilitate trade.
Advice on mergers and acquisitions.
Retail loans to employees of the company.
Question (19)
Which is not a role of the RBI as the banker to the Government?
All state government deposits, remittances, exchange and banking transactions are conducted
through the RBI.
All central government deposits, remittances, exchange and banking transactions are conducted
through the RBI.
The RBI provides Ways and Means Advances (WMA) to meet short-term temporary payment
mismatches and investment of surplus cash balances.
Management of Public Debt and adviser on monetary and banking matters.
Question (20)
Which of the following statements is true?
Post-shipment credits are loans to bridge the time gap from receipt of the goods by the seller to
receipt of the sales proceeds from the buyer.
Since exports are a priority for the country, the RBI has not specified any guidelines for regulation
of export credit.
Pre-shipment credit is an advance given to meet working capital needs before shipment.
Pre- and post-shipment credits can be denominated only in Indian Rupees.
Question (21)
Why are banks required to be tightly regulated?
They conduct thorough credit assessments of borrowers whom they lend money to.
They print currency notes and distribute them in the economy.
They offer high interest rates on deposits which are an important source of income to depositors.
Their borrowing and lending activities play an important role in developing the economy.
Question (22)
What additional documentation do public limited companies require prior to being able to
commence business or borrow money?
Certificate of Incorporation
Certificate of Commencement of Business
Lending Limit Provisions
Articles of Association
Question (23)
Which of the following is a guideline issued by the RBI with respect to the issue of guarantees?
Banks need not confine themselves to issuing financial guarantees and performance guarantees.
Banks shall not issue guarantees on behalf of overseas JV/WOS of Indian companies.
Banks should confine themselves to the provision of performance guarantees and exercise due
caution with regard to financial guarantees.
Banks should prefer longer maturities over shorter maturities.
Question (19)
What is the primary purpose of conducting a projections scenario analysis as part of the lending
decision process?
To confirm that the assumptions underlying the projections are valid.
To identify the impact of credit enhancements.
Determine whether there is a need to reassess the initial financial risk assessment.
To compare projected financial results with the most recently available actual financial results.
Question (20)
In the Merton approach, at what point is default considered to have occurred?
When asset volatility exceeds two standard deviations.
When the value of a firm is less than the value of its liabilities based on market values.
When the firm’s leverage ratio exceeds agreed thresholds.
When the value of a firm is less than the value of its liabilities based on accounting values.
Question (21)
What is the underlying concept on which statistical models used in credit risk assessment are
based?
That the weighted outputs for the identified factors can be combined to determine a score.
That there is a relationship between company default and financial ratios and other factors.
That regression analysis can be used to build a model.
That modelled scores can be mapped to empirically observed default probabilities.
Question (22)
What should banks do if income levels are such that risk-adjusted return thresholds are not met?
Cancel unutilised facilities
Monitor the situation and seek to improve the rate of return over time.
Ask the customer to re-bank with another bank.
Reprice existing exposures
Question (23)
What is a key difference between global and Indian national ratings scales?
The number of ratings in each scale differs, making comparisons difficult.
Ratings using Indian national ratings scales and global ones are not comparable as they use
different rating methodologies.
Indian corporates rated using global scales will have their ratings capped based on the country
rating for India.
The scales use different combinations of alpha and alphanumeric symbols for each grade.
Question (24)
Why are banks more susceptible to failure as a result of their exposure to credit risk than other
types of companies?
Because they have low capital ratios
Because credit risk is the single biggest risk that banks are exposed to
Because capital buffers can be insufficient if there are significant credit losses
Because they operate with very high leverage
Question (25)
What does a credit scorecard that uses statistical techniques enable a bank to produce?
The placement of a customer in a risk bucket.
A score for a customer as part of the credit assessment process.
A credit rating
A credit risk grade for a customer
Question (26)
Which risk ratings provide a measure of the probability of default?
Through-the-cycle risk ratings
Obligor risk ratings
Single risk ratings
Facility risk ratings
Question (27)
How can banks use the information provided by the external rating agencies to improve their
credit assessment processes?
To assess credit portfolio risks.
As a benchmark for comparing with model outputs when determining the rating for a customer.
As comparators when designing and developing their internal ratings system.
To assess the customers’ attractiveness within a particular industry.
Question (28)
Which is the longest established credit rating agency in India?
ICRA Ltd.
India Rating and Research Pvt Ltd.
SME Rating Agency of India Ltd.
CRISIL Ltd.
Question (29)
Which requirement is an element of Pillar 2 of the Basel III Pillars approach?
Disclosing details of adequate capital and risk management processes.
The calculation of capital requirements for credit risk.
Holding capital in line with minimum capital requirements.
Undertaking and documenting an annual internal capital adequacy assessment.
Question (30)
How is current market information used by the Merton approach, or contingent claims model, to
assess the credit risk for a corporate?
By directly revaluing the corporate’s assets using information contained in stock prices
By calculating the leverage ratio for the corporate based on accounting values
Through highlighting the financial structure of the corporate
By revaluing the corporate’s liabilities
Question (31)
What is a good source of relative measures of credit risk for a corporate customer?
A credit rating agency rating
A structural credit risk model that uses equity information
Altman’s Z-score model
An expert system
Question (32)
Why is the level of bank capital a concern for regulators?
If a bank incurs large losses it would reduce the level of capital the bank holds and make it
vulnerable to failure.
Credit risk is the largest risk that a banks face and capital is needed to protect against large losses
when they happen.
Holding too high a level of capital will result in poor returns for shareholders.
It is inevitable that a bank will incur large losses at some point in the economic cycle.
Question (33)
As an element of portfolio credit risk, which factor has the most significant impact on exposure
credit risk?
Recovery rate
Asset correlation
Concentration risk
Correlation in exposure values
Question (34)
What is the most common definition of credit risk as it applies to banks?
Credit risk is the risk of economic loss that a bank incurs as a result of the failure by a borrower to
make interest and principal payments in full and on time.
Credit risk is the possibility of losses associated with a fall in value of traded debt instruments.
Credit risk is the risk of losses on funded credit products.
Credit risk is the loss in value of a credit exposure as a result of a deterioration in the
creditworthiness of the obligor.
Question (35)
What is the definition of Common Equity Capital?
Loss absorbing capital that can be converted to common shares or written down in the event of
substantial losses
A bank's pure or concern capital
The highest quality component of capital
A bank's gone-concern or supplementary capital
Question (36)
What factors are included in rating agencies’ industry rating methodology?
An assessment of a company’s business strategy with regards to the industries they operate in.
A peer comparison of financial performance for companies operating in the same industry.
Factors that are considered most predictive of default for companies operating in that particular
industry.
The ability of management to address issues that arise in their external environment.
Question (37)
What is a key feature of the Standardised Approach for calculating credit risk capital?
The ability to use greater granularity when calculating risk-weighted assets.
The use of a bank’s own estimates for components such as Probability of Default.
The need to obtain regulatory approval before the Standardised Approach can be used.
The use of external ratings to determine risk weights for credit exposures.
Section 1: Course 03 Online Assessment
All questions are mandatory
Question (1)
Which statement correctly describes the capital investment cycle?
Each business may have several capital investment cycles that are defined by the periods of
credit extended to it under each of its principal lending arrangements.
Each business may have several capital investment cycles that are defined by the useful life of its
significant fixed assets.
Each business has a unique capital investment cycle that is defined by the expected life of the
business.
Each business has a unique capital investment cycle that is defined by the average remaining life
of its outstanding debt at any point.
Question (2)
While analysing the financial statements of a private limited company, you discover that the
enterprise has recorded revenue before completing all obligations under the associated contract.
What possible warning sign will be available in the financial statements?
Positive operating cash flow in the cash flow statement.
Unusual increase in the unsecured loan.
Cash flow from operations lagging behind net income.
Unusual increase in trade payables.
Question (3)
Which of the component described is part of the operating cycle?
The average length of time a company takes to pay its bank loans.
The life of a piece of machinery used in the manufacturing process.
The length of time a company takes to sell goods to customers once they are manufactured.
The length of time a company takes to repay short-term loans used to finance inventory
purchases.
Question (4)
Identify the statement that is most applicable to the funding of the operating cycle.
It does not matter how it is funded as the operating cycle will carry on over time, so it can be
funded by either short- or long-term debt.
It is normally funded by longer-term debt because this provides certainty to enable the operations
to continue over the longer term.
It is typically funded by shareholder loans as shareholders are likely to be closest to the
operations of the business.
It should be funded by short-term debt as this matches the nature of the operating cycle and the
assets being funded, which are intended to be converted into cash as soon as possible.
Question (5)
Ramesh has applied for a loan to grow his business, which he owns jointly with his partner Badri.
The loan will be secured on machinery owned by the business, together with a personal
guarantee from Ramesh and he has submitted his Personal Balance Sheet to support this. Which
item would you exclude in the calculation of Ramesh's net worth?
His bank balances.
The outstanding mortgage on his apartment.
His shares in the business.
His collection of rare antique toys.
Question (6)
How evident is creative accounting in a company’s financial statements?
Creative accounting always presents warning signs that can be found by comparing a company’s
audited balance sheet with the balance sheet that is available in the MCA portal.
Creative accounting usually exhibits warning signs that can be found through scrutiny of a
company’s financial statements.
Creative accounting comes with warning signs that are typically best discovered by comparing a
company’s financial statement with its income tax returns.
Creative accounting comes with warning signs that are typically best discovered through
interaction with company management.
Question (7)
Which statement most accurately describes why financial statements are commonly used as the
basis for credit analysis?
Because accounts prepared on a cash basis are not as reliable due to variables such as
exchange rate and interest rate movements.
Because cash-based financial statements always give a more optimistic view of a company's
profitability and should therefore be treated with caution.
Because lenders typically use accruals accounting to prepare their own accounts.
Because they show a more complete view of the assets controlled and amounts owed by a
company.
Question (8)
Why would you perform an initial analytical review of a company's financial statements?
To remove credit requests that are obviously outside the bank's risk appetite.
To avoid conducting a full review of a company's financial statements if key financial targets are
met.
To make a quicker lending decision when the loan is simply being rolled over from one period to
the next.
To remove the need for further analysis where there is already a lending relationship and there is
currently no sign of financial distress.
Question (9)
Which non-current asset is categorised as an item of "property, plant, and equipment"?
Computer software
Goodwill
Investment property
Motor vehicle
Question (10)
As a lender, why is it important that you are able to reconcile the movement in equity to the
balance sheet?
Equity represents the accumulated income of a business and it is important to understand how
that has been earned.
Equity reserves are where a company stores its surplus cash, so it is critical to understand how
those reserves have changed over the period.
Changes in equity that result from unexplained items may be indicative of poor accounting
practices, indicating that the accounts may be unreliable.
Changes in equity are a result of increases in shareholder capital less dividends, so reconciling
the movement ensures you know what dividends have been paid.
Question (11)
Where would you look when trying to assess the operating lease commitments of a business?
By analysing the movement in reserves.
In the balance sheet.
In expenses in the statement of profit and loss and in the notes to the accounts.
In the directors trading update.
Question (12)
Which statement is true regarding debit entries in double-entry accounting?
Debit entries increase revenue in the statement of profit and loss and increase liabilities in the
balance sheet.
Debit entries decrease revenue in the statement of profit and loss and decrease liabilities in the
balance sheet.
Debit entries decrease revenue in the statement of profit and loss and increase liabilities in the
balance sheet.
Debit entries increase revenue in the statement of profit and loss and decrease liabilities in the
balance sheet.
Question (13)
Why are accrual-based financial statements commonly used as the basis for credit analysis?
Because accrual-based financial statements give a more conservative view of a company's
profitability.
Because lenders typically use accrual accounting to prepare their own accounts.
Because they show a more complete view of the assets owned and amounts owed by a company.
Because managers can easily manipulate accounts prepared on a cash basis by changing
accounting policies.
Question (14)
Which statement is correct in relation to funding the capital investment cycle?
Long-term financing is a suitable means of funding capital assets because it may allow the
business to extend credit beyond the serviceable life of the asset, which can then be used to
support other funding requirements.
Long-term financing is a suitable means of funding capital assets because it allows the borrower
to meet the cost of financing from operating income generated through the use of the asset.
Short-term financing is not a suitable means of funding capital assets because it is more
expensive than long-term funding.
Short-term financing is a suitable means of funding capital assets because it provides greater
flexibility to the borrower.
Question (15)
As a senior debt-holder, which of these would be a high risk indicator and would require further
investigation when monitoring financial statements?
A reduction in the total long-term liabilities.
Repayment of subordinated debt which had been held by the shareholders of the business.
Dividends paid which are more than half of the retained profit for the year.
A decrease in long-term debt compared to the previous year, with a portion re-classified as a
current liability.
Question (16)
What is a key risk factor when considering the risk of default on long-term loans?
Accepting a large order at a lower gross margin though it still returns a net profit in excess of cost
of capital.
Paying dividends that exceed current period net income.
Disposing of assets that are surplus to business requirements.
Taking advantage of supplier discounts by reducing the period of credit taken.
Question (17)
What is the correct definition of equity from an accounting perspective?
Equity is the total of nominal share capital, plus additional paid in capital plus any other non-
distributable reserves.
Equity is the difference between assets at fair value and the total of all liabilities including those
recognised by the business and those that are off balance sheet.
Equity is a residual amount that remains after all recognised liabilities are deducted from all
recognised assets.
Equity is the sum of capital invested by shareholders plus profits of the business.
Question (18)
Gearchange LLP has the following credit balances in its books at year end. What are the total
long-term liabilities?
- Trade payables 110
- Deferred tax 30
- Pension obligation 230
- Secured loan 160 (due in 4 equal annual instalments)
- Retained profits 75
- Shares issued 125
380
350
420
730
Question (19)
Which statement is accurate in relation to the operating cycle?
A company will have numerous operating cycles relating to different product or service lines.
A company usually has numerous operating cycles, each relating to a different customer.
The number of operating cycles will increase as a company sells more of its goods or services.
A company usually has just one operating cycle.
Question (20)
In relation to fixed assets and expenses which statement is correct?
Fixed assets are tangible items, whilst expenses are payments made for intangibles, including
services.
Fixed assets are those items expected to generate income for more than a year, whereas all other
payments are expenses.
Expenses are all items which will be turned into cash in less than 12 months. All other spending is
classified as fixed assets.
Expenses are those transactions relating to the operational activities of the business. Fixed assets
are those assets which will generate income for more than 12 months.
Question (21)
What would you find on a typical business balance sheet that you would not normally find on a
personal statement of net worth?
A list of liabilities
Shareholders' equity
Tangible assets
A total for net assets or net worth
Question (22)
Which statement relating to the components of the operating cycle is accurate?
A decreasing length of the operating cycle is a sign of deteriorating performance.
As the company grows it is inevitable that the operating cycle will increase in length.
As the operating cycle gets longer, less cash is tied up.
A decreasing length of the operating cycle will result in less borrowing being needed for a
business.
Question (23)
Why are capital investment cycles often financed by long-term debt?
Short-term debt is more expensive than long-term debt, so using long-term financing minimises
the average cost.
It minimises the risk to the business rather than having to re-finance short-term borrowing
repeatedly during the life of the asset.
The loan repayments can be matched to the economic life of the asset and spread through the
statement of profit and loss over the life of the asset.
The cost of debt is known, whereas equity shareholders may demand higher returns in the future.
Question (24)
Which item would be classed as an asset on the balance sheet at the year end?
Finished goods inventory which was sold soon after the year end.
Costs of researching possible new uses of biotechnology.
Security costs relating to warehousing facilities.
Rental payments on the company's head office.
Question (25)
Which statement is correct regarding assets and expenses?
Items purchased by a business that have a useful life of less than a year are expenses. Items with
a longer life are assets.
Assets are items that are not used up immediately by a business. As an asset is used up over
time, the reduction in value is recorded as an expense.
Assets are physical items that a business purchases. Services that are purchased are expenses.
Expenses relate to the current operating activities of a business. Investments in capital assets are
used to provide returns on funds surplus to operating requirements.
Question (26)
Which of the following statements is correct?
Creative accounting is not intended to mask poor financial performance.
Creative accounting is not intended to make reasonable performance look even better.
Some level of creative accounting is present in all financial statements.
The use of creative accounting tends to reduce the financial statements’ quality and reliability.
Question (27)
Who decides the accounting policies used by a company in preparing financial accounts?
The shareholders.
The company auditors.
Senior management of the company.
Local accounting standard setters.
Question (28)
Which statement is correct regarding the funding of the operating cycle?
Long-term funding is suitable because the funds can be used elsewhere in the business if they are
surplus to the needs of the operating cycle.
A long-term loan would place an unnecessary burden on the business beyond the period that the
financing is required for.
Equity financing is suitable because it is relatively simple to organise and investors can have their
investment returned to them if the funds are no longer required.
Long-term loans are suitable because they can easily be repaid if funding is no longer required.
Question (29)
What is the purpose of financial statement notes?
To provide further analysis of the performance of the company.
To further clarify and explain the numbers found in the financial statements and provide any other
relevant information not included elsewhere.
To give detail of the key assumptions made in preparing the financial statements and show the
impact of using other assumptions.
To provide management's view of the trading environment and detail of the performance highlights
of the business.
Question (30)
You have carried out a cursory review of the financial statements of a business your bank has lent
money to and have identified some key trends. Which of the following would be of most concern to
you?
Operating cash flows have turned increasingly negative, even while the company has reported
increased turnover and profits.
Inventory turnover has increased slightly during the last 12 months, whilst sales have been flat.
Sales are flat year on year, but profit has risen due to falling cost of goods sold.
Sales and profit have been flat during the year but trade receivables has reduced significantly.
Question (31)
Which factor ultimately determines the life cycle of trade receivables?
The speed with which the company collects cash from customers.
The volume of sales made.
The payment terms offered to customers.
The length of time finished goods are held before being delivered to a customer.
Question (32)
Which statement is correct regarding the classification of an item as an asset on the balance
sheet?
Assets sold shortly after the balance sheet date should not be included on the balance sheet.
Items from which the business expects to gain an economic benefit and which it has control over
should be included.
Items the company has taken ownership of and is using, but which have not yet been paid for,
should not be included on the balance sheet.
Items on short-term lease should be included in the balance sheet.
Question (33)
Which statement accurately describes an accounting risk?
A risk that there may be insufficient assets to repay liabilities as they fall due.
A risk that the carrying amount of fixed assets may be overstated compared to their market value.
A risk that a company's financial controls may be weak, leading to the possibility of undetected
fraud, waste, or inefficiency.
A risk that severe commodity price fluctuations will destabilise the cost base of the business.
Question (34)
Which of these actions would cause the short-term financing gap of a company to increase?
Renegotiation of a revolving credit facility on more favourable terms.
Purchase of new machinery to reduce production time.
Changing the payment terms offered to customers from 30 to 60 days.
Improvements in the manufacturing process to use less raw material content.
Question (35)
Which statement correctly defines the asset conversion cycle?
A continuous series of operating cycles within a longer capital conversion cycle.
The speed with which the business turns raw materials into cash.
A continuous series of capital conversion cycles within a longer operating cycle.
The speed with which the business recovers the cost paid for capital items such as plant and
machinery.
Question (36)
What warning sign would be a clue that a company is inflating its revenues in a given year?
Trade receivables growing much more rapidly than sales in that year.
Bank balances growing much faster than sales in that year.
Trade receivables growing much more slowly than sales in that year.
Inventory growing much faster than sales in that year.
Question (37)
Which accounting treatment is correct?
Penalty imposed by the Custom Department and confirmed on appeal as having been paid is
shown as a contingent liability; payment is shown as a receivable by the company, which has
been pointed out by the auditor as being legitimately contingent in the auditor’s report.
Penalty imposed by the Custom Department and confirmed on appeal as having been paid is
shown as contingent liability; payment made is shown as a receivable by the company.
Penalty imposed by the Custom Department and allowed on appeal, but the amount paid under
protest is shown as liabilities and charged to the statement of profit and loss.
Penalty imposed by the Custom Department and confirmed on appeal as having been paid is
shown as a provision; payment is shown as an expenditure by the company.
Question (38)
Which of the following accurately describes a determining feature of a current liability?
The debt does not carry an interest charge.
The liability relates to items that are part of the trading activities such as payments to suppliers.
The original settlement period of the liability was less than 12 months at the time the liability was
recognised.
The liability is expected to settle within the normal operating cycle of the business.
Question (39)
Your client is a small group of companies that follows Ind AS. On examining the financial
statements of its main subsidiary, you notice that its accounts are not prepared under Ind AS, but
under the other accounting standards for its country of registration. Which approach should you
take in this situation?
There is little cause for concern, because national accounting standards are generally more
conservative than Ind AS.
You should research the local accounting policies and practices, compare them to those of Ind AS,
and consider their potential impact.
You should ask your customer to provide an alternative set of financial statements based on Ind
AS for the subsidiary.
You should request disclosures to align with the requirements of Ind AS, which are typically more
stringent than others.
Question (40)
You lend a company Rs.20 lacs to buy a new piece of machinery, with the loan secured against
the asset. Shortly after the machine is purchased, another company sells a similar machine for
Rs.12 lacs. What impact does this information have?
The company can choose whether to reduce the carrying value of the asset.
None; the company should record the asset at cost because it is going to be used over a number
of years and your credit analysis is based on this valuation.
The company should conduct an impairment review, which might result in a downward adjustment
of the asset's value and the need for additional security.
The company should retain the asset at cost, but it should shorten the asset's life by increasing
future depreciation.
Question (41)
How would failure to record depreciation expense affect a company’s earnings?
Failure to fully record depreciation expense inflates company earnings.
Depreciation is only an adjustment by debiting depreciation and crediting fixed assets and does
not, therefore, impact earnings.
Since depreciation is a non-cash expense, company earnings are not affected one way or the
other by its inclusion in the statement of profit and loss.
Failure to fully record depreciation expense reduces company earnings.
Question (42)
Which of these statements explains why generic IFRS might not have been fully adopted in India?
Because IFRS has yet to develop standards that are suitable for anything other than large multi-
national businesses.
Because IFRS accounts typically produce lower reported profits, which is unpopular with
investors.
Due to the reporting needs of the Indian business and banking community that were specific to
this country.
Because IFRS is technically more challenging than most national accounting standards.
Question (43)
Rudolf Trading has a seasonal business and typically has a borrowing requirement during the first
quarter of the year. When you review the financial statements prepared at the year end, which
factor would be an indicator of high risk?
The length of the operating cycle is lower than it was the previous year.
Long-term loans have been re-negotiated during the last 12 months and are now repayable on
various maturity dates beginning in 3 years.
The company has short-term borrowing at the year end close to its funding limit.
The cash flow statement shows increased operational cash flow compared to the previous year.
Question (44)
Which statement relating to the Income Statement (profit and loss account) is correct?
Differences in statement of profit and loss accounts from one period to the next reflect activity in
that period.
Statement of profit and loss balances are carried forward from one period to the next.
The amount recorded in an account within the statement of profit and loss reflects the value of
transactions in that account during the period.
In the statement of profit and loss, movement in Revenue accounts is always equal to movement
in Expense accounts.
I. Understand how market (industry and business) risk can affect a borrower's liquidity.
II. Recognise the importance of the competitive marketplace.
III. Grasp how financial, market (industry and business) and management risk affect one another.
IV. Consider the availability of liquidity in the marketplace.
III and IV only.
I, III and IV only.
II and IV only.
I, II and III only.
Question (32)
What is the effect of economies of scale on competition in an industry?
Economies of scale tend to encourage new competitors to enter an industry.
Economies of scale have no impact on competition in an industry.
Economies of scale tend to encourage established competitors to exit an industry.
Economies of scale tend to discourage new competitors from entering an industry.
Question (33)
Which factor is most likely to increase the intensity of competition within a given market?
Rapid industry growth.
Low fixed costs.
An economic recovery.
Diverse, successful competitors.
Question (34)
What statement concerning the impact of domestic competition on debt repayment is most
accurate?
Low domestic competition leads to increased cash flow and increased ability to repay debt as
scheduled.
Low domestic competition leads to increased cash flow and decreased ability to repay debt as
scheduled.
Low domestic competition leads to decreased cash flow and decreased ability to repay debt as
scheduled.
Low domestic competition leads to decreased cash flow and increased ability to repay debt as
scheduled.
Question (35)
For a business that has many small clients, what type of relationship is it likely to have with
individual customers?
Individual clients will likely exert little pressure on supplier prices.
Individual clients will likely exert significant pressure on supplier prices.
Individual clients will tend to buy more product.
The supplier will exert substantial pressure on individual clients to reduce their inventory (stock)
levels.
Section 1: Course 05 Online Assessment
All questions are mandatory
Question (1)
What typically causes position overload?
The need for a flatter organisational structure.
Traditional competitive pressures.
Insufficient management depth.
Employee dissatisfaction with supervisors.
Question (2)
What is the key risk that is evaluated in assessing a business's credit risk?
How changes in the economic environment affect a business's financing costs.
The degree of a business's earnings volatility.
Whether a business can repay principal and interest as scheduled.
The business's competitive position in its industry.
Question (3)
What statement concerning credit agency reports is most accurate?
Their value depends on the working relationship management has with the credit agency.
Their value depends on the quantity, quality and completeness of the data they contain.
They provide a complete picture of a business's financial position.
They provide a complete picture of a business's credit position and history.
Question (4)
In what way is management's response to past market disturbances useful in the credit risk
assessment process?
It is normally a useful indicator of how management might perform during similar events in the
future.
It reveals information about when disturbances occurred, but not about how they were managed.
It is generally unhelpful since major disturbances are all different from one another.
It is an unhelpful indicator because there is no independent verification of past actions.
Question (5)
What type of business plan provides the best chance for success?
Clear, unchanging and realistic.
Clear, realistic and measurable.
Unchanging, highly detailed and measurable.
Clear, highly flexible and time-tested.
Question (6)
Generally, who creates a business plan?
Management.
Lender.
Payroll department.
Human resources department.
Question (7)
Why is integrity a critical management characteristic?
It is the best single indicator of repayment ability.
The lender's relationship is with management, not with the business.
It is the best single indicator of business success.
Most of the information needed to properly assess credit risk is provided by management.
Question (8)
Which statement about credit agency reports is correct?
They are the most valuable management risk assessment tool available.
They almost always point to integrity issues if they show slow trade payments.
They are unhelpful in assessing integrity because management provides most of the report
information.
They almost always point to integrity issues if they show payment defaults.
Question (9)
What is the liquidity test?
A technique to streamline the credit risk assessment process through the use of quantitative
analytics.
An assessment of the business's ability to generate sufficient cash from ongoing operations to
meet debt service requirements.
An assessment of cash available from the distressed liquidation of a business's assets to pay
interest and amortise debt.
It is synonymous with a 'solvency test', in that it assesses whether a borrower's assets exceed its
liabilities.
Question (10)
What are the two considerations that need to be deliberated when mitigating against position
overload and ensuring adequate management depth?
Management positions should have functional overlap while ensuring managers are not
overburdened.
Management positions should have functional overlap while avoiding unnecessary overhead
expense.
Management positions should be properly staffed while ensuring managers are not overburdened.
Management positions should be properly staffed while avoiding unnecessary overhead expense.
Question (11)
Which of the following parties does not represent a typical level of oversight in the corporate
governance process?
Board of directors.
Executive officers.
Regulators.
Shareholders.
Question (12)
What would have limited value in relation to succession planning?
Emphasising on-the-job experience.
Gathering competitive intelligence.
Cross training.
Educational seminars.
Question (13)
What does the existence of a business operating budget indicate?
Management emphasises strong corporate governance.
Management has focused attention on all revenues and expenses for the relevant periods
covered by the budget.
Management has a conservative bias toward future operations.
Management will make strong profits during the budget period.
Question (14)
Which methods are useful in assessing a business's ability to recover from disturbances?
Question (1)
Which factor is a reflection of a substantial problem loan portfolio and is also most likely to trigger
further problems related to such a portfolio?
Question (2)
Which situation does not describe that of a wilful defaulter?
The borrower is unable to pay because the project's viability has changed following government
regulation.
Financing for the project has been diverted to acquisition of shares.
Borrowings have been used for a purpose other than that for which the advance was made.
Short-term borrowings have been diverted to investment in shell subsidiaries.
Question (3)
Which definition best fits a special mention account?
Question (4)
Which situation would result in an account being classified as SMA-0?
Question (6)
What is an early warning sign that might affect an individual business operation?
Question (7)
Which measure is not used as a penal measure in dealing with wilful defaulters?
Question (8)
What is one sign that an account should should be classified as RFA (i.e., a red flag account)?
Question (9)
Which characteristic describes an out-of-order account?
Question (10)
Review and assess the accuracy of this statement: When initiating a DRT suit against a defaulting
party, the lender must send a recall notice to the borrower with sufficient time given to the borrowers
and guarantors to comply.
Question (11)
How can you reduce exposure to potential losses with new clients?
This is a mulitiple choice question.
Reduce pricing on uncommitted letter of credit.
Replace existing facilities with lower-risk products.
Restrict new draw-downs on committed facilities.
Offer additional facilities on a cash-secured basis.
Question (12)
What is the purpose of the Central Repository for Information on Large Credits (CRILC)?
Wilful defaulters of Rs. 1 million or more must be reported to the CIC with RBI.
Even one isolated instance is adequate to categorise the case as one of wilful default.
A case where the borrower loses diverted funds and makes a full disclosure of the diversion and loss
is still a case of wilful default.
A substandard or doubtful account is almost always a case of wilful default.
Question (14)
Which statement is correct with respect to restructuring options?
Taking no action is always the worst option.
A judicial process is not an option in restructuring a corporate debt.
One method to induce a reduction in exposure is to reduce pricing.
Liquidation is rarely used for companies of material size.
Question (15)
Why can cyclicality affect an entire industry?
Question (16)
If an RP involves restructuring, how should the accounts that were classified as 'standard' prior to
such restructuring be re-classified?
Doubtful
SMA-2
Sub-standard
SMA-1
Question (17)
Which item is a direct cost of problem loans?
Legal expenses
Damage to reputation
Event risk
Lost opportunities
Question (18)
Which statement is correct with respect to provisioning on doubtful exposures?
Interest may continue to be recognised as income, without there being any credits to the account.
The exposure should be classified as a Special Mention Account in the grading system of the bank.
Past interest should be reversed out of income if not collected.
A provision of 50% should be created when the exposure is first classified as an NPA.
Question (20)
How can aggressive competition from a new entrant into the market affect a company's business and
operations?
Question (21)
Which rule, practice, or principle was acknowledged as the prime basis for prudential norms?
Objectivity.
Accounting practices.
Rules set by the Ministry of Finance.
Consensus of the relevant committees.
Question (22)
What is an example of a lagging indicator?
Question (23)
Which item is an early warning signal listed by the RBI?
Question (24)
How should security be regarded when determining whether an account should be classified as a
non-performing asset (NPA)?
It should be ignored.
None of the above.
The value should be deducted from the debt, and only the net debt should be classified.
The account should first be classified disregarding security and then be upgraded.
Question (25)
With respect to the borrower's management, what does a successful restructuring require?
The management should be focused, motivated and going in the same direction as the bank.
The management should be competent more than anything else.
The management should have a good general understanding of the situation.
The management should be focused and ready to push its agenda ahead, regardless of other parties'
opinions.
Question (26)
Which statement is correct with respect to wilful defaulters and liability?
Part time directors of the borrowing company are as liable as full time directors in the process of
determining wilful default.
An individual guarantor automatically becomes a wilful defaulter when the original borrower is
identified as a wilful defaulter.
A committee consisting of senior staff from relationship and credit, constituted for identification of
wilful default, may issue a final judgment on the issue.
Corporate guarantors within the group are held as wilful defaulters only if they do not honor claims
on their guarantees.
Question (27)
What is involved in the second step, developing an action plan, during the restructuring process?