CFI CBCA ACCOUNT MONITORING AND WARNING SIGNS
EXAM QUESTIONS WITH CORRECT ANSWERS
"Annual Credit Review Process
An annual review is typically performed using the following components: - CORRECT
ANSWER 1. Financial Statement Review
• Comparative analysis
• Working capital analysis
• Cash flow analysis
• Financial covenant analysis
2. Security Review
• Account receivables
• Inventory
• Equipment
• Real estate
• Personal guarantees & covenants
3. Management Review
• Change in management structure
• Decision making abilities
• Budget & results monitoring
4. Business Review
• Opportunities
• Threat
• Capacity"
"Identify Warning Signs
Root Causes and Impact - CORRECT ANSWER Root Causes
• Low staff morale and poor working conditions
• Loss of a key customer
• Weak credit controls
Impact
• Increasing staff turnover
• Declining sales and profitability
• Increasing accounts receivable and bad debt
write-offs"
1
, "Leading Causes of Decline - Poor Financial Control - CORRECT ANSWER • Absence of
cash flow forecasts, costing systems and budgetary control
• Poorly designed or overly complex management accounting and reporting systems
• Poorly used management reporting systems
• Over-centralized financial reporting systems leading to remoteness
• Reporting distortions arising from inappropriate cost and overhead allocations"
"Types of Financial/Internal Controls to Look For - CORRECT ANSWER -Organizational
-Accounting Checks and Reconciliations
-Physical
-Segregation of Duties
-Personnel
-Authorization and Approval
-Supervision
-Control Culture"
"Establishing Early Warning Signals for Corporate Clients
Signals must: - CORRECT ANSWER 01Be client-specific - choose an event based on the
client's business operations
02Be measurable - you can easily measure whether the event has occurred
03Be monitorable - you can easily monitor the chosen signals using the information you
receive 04Trigger action - first action should be to contact the client"
"Bond Rating Z-Scores - CORRECT ANSWER AAA - 5.020
AA - 4.296
A - 3.613
BBB - 2.776
BB - 2.449
B - 1.673"
"Z-Score Variants
𝑍1=0.717(𝑥1 )+0.847(𝑥2 )+3.107(𝑥3 )+0.42(𝑥4 )+0.998(𝑥5 ) - CORRECT ANSWER
Companies with scores above 2.90 predicted as nonfail.
Companies with scores below 1.23 predicted as fail. *Uses book value of equity in 𝑥4"
"Non manufacturers model
𝑍2=6.56(𝑥1 ) +3.26(𝑥2 )+6.72(𝑥3 )+1.05(𝑥4 ) - CORRECT ANSWER Companies with
scores above 2.60 predicted as nonfail.
Companies with scores below 1.10 predicted as fail. *Uses book value of equity in 𝑥4 and
excludes 𝑥5 (sales/total assets) on the basis that it is industry sensitive."
2
EXAM QUESTIONS WITH CORRECT ANSWERS
"Annual Credit Review Process
An annual review is typically performed using the following components: - CORRECT
ANSWER 1. Financial Statement Review
• Comparative analysis
• Working capital analysis
• Cash flow analysis
• Financial covenant analysis
2. Security Review
• Account receivables
• Inventory
• Equipment
• Real estate
• Personal guarantees & covenants
3. Management Review
• Change in management structure
• Decision making abilities
• Budget & results monitoring
4. Business Review
• Opportunities
• Threat
• Capacity"
"Identify Warning Signs
Root Causes and Impact - CORRECT ANSWER Root Causes
• Low staff morale and poor working conditions
• Loss of a key customer
• Weak credit controls
Impact
• Increasing staff turnover
• Declining sales and profitability
• Increasing accounts receivable and bad debt
write-offs"
1
, "Leading Causes of Decline - Poor Financial Control - CORRECT ANSWER • Absence of
cash flow forecasts, costing systems and budgetary control
• Poorly designed or overly complex management accounting and reporting systems
• Poorly used management reporting systems
• Over-centralized financial reporting systems leading to remoteness
• Reporting distortions arising from inappropriate cost and overhead allocations"
"Types of Financial/Internal Controls to Look For - CORRECT ANSWER -Organizational
-Accounting Checks and Reconciliations
-Physical
-Segregation of Duties
-Personnel
-Authorization and Approval
-Supervision
-Control Culture"
"Establishing Early Warning Signals for Corporate Clients
Signals must: - CORRECT ANSWER 01Be client-specific - choose an event based on the
client's business operations
02Be measurable - you can easily measure whether the event has occurred
03Be monitorable - you can easily monitor the chosen signals using the information you
receive 04Trigger action - first action should be to contact the client"
"Bond Rating Z-Scores - CORRECT ANSWER AAA - 5.020
AA - 4.296
A - 3.613
BBB - 2.776
BB - 2.449
B - 1.673"
"Z-Score Variants
𝑍1=0.717(𝑥1 )+0.847(𝑥2 )+3.107(𝑥3 )+0.42(𝑥4 )+0.998(𝑥5 ) - CORRECT ANSWER
Companies with scores above 2.90 predicted as nonfail.
Companies with scores below 1.23 predicted as fail. *Uses book value of equity in 𝑥4"
"Non manufacturers model
𝑍2=6.56(𝑥1 ) +3.26(𝑥2 )+6.72(𝑥3 )+1.05(𝑥4 ) - CORRECT ANSWER Companies with
scores above 2.60 predicted as nonfail.
Companies with scores below 1.10 predicted as fail. *Uses book value of equity in 𝑥4 and
excludes 𝑥5 (sales/total assets) on the basis that it is industry sensitive."
2
