AICPA CPA-Business CPA Business Environment and Concepts CPA Exam Practice Test

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Total 530 questions
Question 1

The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given below.

A: Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at 10 percent and charge a fee of 2 percent of all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

B: Borrow $110,000 from a bank at 12 percent interest. A 9 percent compensating balance would be required.

C: Issue $110,000 of six-month commercial paper to net $100,000. (New paper would be issued every 6 months.)

D: Borrow $125,000 from a bank on a discount basis at 20 percent. No compensating balance would be required.

Assume a 360-day year in all of your calculations.

The cost of Alternative D . is:



Answer : C

Choice 'c' is correct.

Choices 'a', 'b', and 'd' are incorrect, per the above calculation.


Question 2

Which one of the following provides a spontaneous source of financing for a firm?



Answer : A

Choice 'a' is correct. Accounts payable provide a spontaneous source of financing for a firm.

Choice 'b' is incorrect. Accounts receivable take time to factor.

Choices 'c' and 'd' are incorrect.

Each of the following take time to issue:

C Debentures.

D Preferred stock.


Question 3

Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?



Answer : C

Choice 'c' is correct. Trade credit generally provides the largest source of short-term credit for small firms.

Choices 'a', 'b', and 'd' are incorrect, per the above Explanation:.


Question 4

A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6 percent. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's checking account earns interest at an annual rate of 2 percent.

Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?



Answer : A

Choice 'a' is correct. 6.44%. To calculate the effective interest rate:


Question 5

All of the following are inventory carrying costs, except:



Answer : D

Choice 'd' is correct. Inspections. Inspections are part of order costs, not carrying costs.

Choices 'a' and 'c' are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory).

Choice 'b' is incorrect. The economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.


Question 6

Gartshore Inc. is a mail-order book company. The Company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360-day year?



Answer : A

Choice 'a' is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now:

Choice 'c' is incorrect. This considers the entire account receivable as a cost.

Choices 'b' and 'd' are incorrect, per the above calculation.


Question 7

A company enters into an agreement with a firm who will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average $100,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at an annual rate of 10 percent and charge a fee of 2 percent on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year.

Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?



Answer : D

Choice 'd' is correct. 17.5% annual cost of financing.


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Total 530 questions