PCM PCM Financial Management & Reporting 2 — Questions and Answers
Question 1: Which financial concept refers to the current worth of future cash flows discounted at a required rate of return, used when evaluating a debt portfolio purchase?
- Internal rate of return
- Net present value (NPV) (Correct answer)
- Payback period
- Gross margin
Correct answer: Net present value (NPV)
NPV discounts projected future cash recoveries to their present-day value, helping determine whether a portfolio purchase is financially justified.
Question 2: A collection agency tracks 'cost per contact' as a key metric. An increase in this metric most directly suggests:
- Collectors are making more contacts per day
- The cost to reach each debtor is rising relative to contacts made (Correct answer)
- Recovery rates have improved
- The agency's portfolio balance has grown
Correct answer: The cost to reach each debtor is rising relative to contacts made
Rising cost per contact means the agency is spending more resources for each debtor interaction, signaling an efficiency problem.
Question 3: When a collection agency purchases a charged-off debt portfolio at a discount, what accounting method records revenue only as cash is actually collected?
- Accrual basis accounting
- Cash basis accounting (Correct answer)
- Mark-to-market accounting
- Amortized cost method
Correct answer: Cash basis accounting
Cash basis accounting recognizes revenue only when cash is received, which aligns with the uncertain recovery nature of charged-off portfolios.
Question 4: Which financial ratio is calculated by dividing total liabilities by total assets, and indicates a collection agency's overall leverage level?
- Current ratio
- Debt-to-asset ratio (Correct answer)
- Return on equity
- Operating margin
Correct answer: Debt-to-asset ratio
The debt-to-asset ratio measures what proportion of the agency's assets are financed by debt, reflecting financial leverage and risk.
Question 5: A collection manager needs to determine the break-even point for a new collection team. Which formula is correct?
- Fixed costs ÷ variable cost per unit
- Fixed costs ÷ (revenue per unit − variable cost per unit) (Correct answer)
- Total revenue ÷ total expenses
- Variable costs × number of accounts
Correct answer: Fixed costs ÷ (revenue per unit − variable cost per unit)
Break-even equals fixed costs divided by the contribution margin (revenue minus variable cost per unit), the point where total revenues cover total costs.
Question 6: On a collection agency's balance sheet, accounts receivable from clients for contingency fee services would be classified as:
- Long-term liability
- Current asset (Correct answer)
- Fixed asset
- Shareholders' equity
Correct answer: Current asset
Client receivables expected to be collected within one year are current assets, reflecting short-term liquidity available to the agency.
PCM PCM Financial Management & Reporting 2
Which financial concept refers to the current worth of future cash flows discounted at a required rate of return, used when evaluating a debt portfolio purchase?