CREDIT BUSINESS ASSOCIATE (CBA) PRACTICE
EXAM 2 Question with Answers and
Rationales Latest Version
Question 1
What is generally the most important consideration when evaluating a commercial
loan?
A. The amount of collateral offered
B. The borrower's ability to repay the debt
C. The borrower's years in business alone
D. The size of the requested loan
Correct Answer: B
Rationale:
The primary consideration in sound commercial lending is the borrower's capacity
to repay. Cash flow generated by the business is generally the primary repayment
source. Collateral, guarantees, and other protections are important but typically
serve as secondary sources or risk mitigants.
Question 2
A company has total assets of $8 million and total liabilities of $5 million. What is
its equity?
A. $2 million
B. $3 million
C. $5 million
D. $13 million
Correct Answer: B
,Rationale:
Assets = Liabilities + Equity
Therefore:
Equity = Assets − Liabilities
= $8M − $5M
= $3 million
Question 3
A business has current assets of $1.5 million and current liabilities of $1 million.
What is its current ratio?
A. 0.50:1
B. 1.00:1
C. 1.50:1
D. 2.50:1
Correct Answer: C
Rationale:
Current Ratio = Current Assets ÷ Current Liabilities
= $1.5M ÷ $1M
= 1.50:1
Question 4
Which of the following is excluded from the quick ratio?
A. Cash
B. Accounts receivable
C. Inventory
D. Certain marketable securities
,Correct Answer: C
Rationale:
The quick ratio focuses on assets that can generally be converted into cash
relatively quickly. Inventory is normally excluded because its conversion to cash
may take longer and may involve discounts or losses.
Question 5
A company has cash of $250,000, accounts receivable of $750,000, inventory of
$1 million, and current liabilities of $800,000. What is its quick ratio?
A. 0.94:1
B. 1.00:1
C. 1.25:1
D. 2.50:1
Correct Answer: C
Rationale:
Quick Assets = Cash + A/R
= $250,000 + $750,000
= $1,000,000
Quick Ratio:
$1,000,000 ÷ $800,000
= 1.25:1
Question 6
Which financial statement reports revenues and expenses over a specified period?
A. Balance sheet
B. Income statement
, C. Statement of financial position
D. Accounts receivable aging
Correct Answer: B
Rationale:
The income statement measures financial performance over a period by reporting
revenues, expenses, gains, and losses.
Question 7
Which statement best describes EBITDA?
A. Cash balance at the end of the year
B. Earnings before interest, taxes, depreciation, and amortization
C. Total assets minus liabilities
D. Net income after taxes and interest
Correct Answer: B
Rationale:
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization. It is often used as a measure of operating performance, although it
should not automatically be treated as cash available for debt repayment.
Question 8
Why should EBITDA not automatically be considered free cash flow?
A. EBITDA includes cash taxes
B. EBITDA ignores items such as taxes, capital expenditures, and working-capital
requirements
C. EBITDA is always lower than cash flow
D. EBITDA includes only financing activities
Correct Answer: B
EXAM 2 Question with Answers and
Rationales Latest Version
Question 1
What is generally the most important consideration when evaluating a commercial
loan?
A. The amount of collateral offered
B. The borrower's ability to repay the debt
C. The borrower's years in business alone
D. The size of the requested loan
Correct Answer: B
Rationale:
The primary consideration in sound commercial lending is the borrower's capacity
to repay. Cash flow generated by the business is generally the primary repayment
source. Collateral, guarantees, and other protections are important but typically
serve as secondary sources or risk mitigants.
Question 2
A company has total assets of $8 million and total liabilities of $5 million. What is
its equity?
A. $2 million
B. $3 million
C. $5 million
D. $13 million
Correct Answer: B
,Rationale:
Assets = Liabilities + Equity
Therefore:
Equity = Assets − Liabilities
= $8M − $5M
= $3 million
Question 3
A business has current assets of $1.5 million and current liabilities of $1 million.
What is its current ratio?
A. 0.50:1
B. 1.00:1
C. 1.50:1
D. 2.50:1
Correct Answer: C
Rationale:
Current Ratio = Current Assets ÷ Current Liabilities
= $1.5M ÷ $1M
= 1.50:1
Question 4
Which of the following is excluded from the quick ratio?
A. Cash
B. Accounts receivable
C. Inventory
D. Certain marketable securities
,Correct Answer: C
Rationale:
The quick ratio focuses on assets that can generally be converted into cash
relatively quickly. Inventory is normally excluded because its conversion to cash
may take longer and may involve discounts or losses.
Question 5
A company has cash of $250,000, accounts receivable of $750,000, inventory of
$1 million, and current liabilities of $800,000. What is its quick ratio?
A. 0.94:1
B. 1.00:1
C. 1.25:1
D. 2.50:1
Correct Answer: C
Rationale:
Quick Assets = Cash + A/R
= $250,000 + $750,000
= $1,000,000
Quick Ratio:
$1,000,000 ÷ $800,000
= 1.25:1
Question 6
Which financial statement reports revenues and expenses over a specified period?
A. Balance sheet
B. Income statement
, C. Statement of financial position
D. Accounts receivable aging
Correct Answer: B
Rationale:
The income statement measures financial performance over a period by reporting
revenues, expenses, gains, and losses.
Question 7
Which statement best describes EBITDA?
A. Cash balance at the end of the year
B. Earnings before interest, taxes, depreciation, and amortization
C. Total assets minus liabilities
D. Net income after taxes and interest
Correct Answer: B
Rationale:
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization. It is often used as a measure of operating performance, although it
should not automatically be treated as cash available for debt repayment.
Question 8
Why should EBITDA not automatically be considered free cash flow?
A. EBITDA includes cash taxes
B. EBITDA ignores items such as taxes, capital expenditures, and working-capital
requirements
C. EBITDA is always lower than cash flow
D. EBITDA includes only financing activities
Correct Answer: B
