AICPA CPA-Business CPA Exam Practice Test Instant Access

Question 1

In planning and controlling capital expenditures, the most logical sequence is to begin with:

AAnalyzing capital addition proposals.

BAnalyzing and evaluating all promising alternatives.

CIdentifying capital addition projects and other capital needs.

DDeveloping capital budgets.

Answer : C

Choice 'c' is correct. The most logical sequence in planning and controlling capital expenditures is to begin with identifying capital addition projects and other capital needs.

Choice 'a' is incorrect. Analyzing capital addition proposals omits other capital needs.

Choice 'b' is incorrect. Analyzing and evaluating all promising alternatives is beyond the scope of planning and controlling capital expenditures.

Choice 'd' is incorrect. Developing capital budgets is the same as planning and controlling capital expenditures.

Question 2

Which one of the following statements is most correct if a seller extends credit to a purchaser for a period of time longer than the purchaser's operating cycle? The seller:

AWill have a lower level of accounts receivable than those companies whose credit period is shorter than the purchaser's operating cycle.

BIs, in effect, financing more than just the purchaser's inventory needs.

CIs, in effect, financing the purchaser's long-term assets.

DHas no need for a stated discount rate or credit period.

Answer : B

Choice 'b' is correct. If a seller extends credit to a purchaser for a period of time longer than the purchaser's operating cycle, the seller is, in effect, financing more than just the purchaser's inventory needs.

Choice 'a' is incorrect. Accounts receivable would be higher than those companies whose credit period is shorter than the purchaser's operating cycle.

Choice 'c' is incorrect. Seller is financing the purchaser, but not necessarily long-term assets.

Choice 'd' is incorrect. It is appropriate for the seller to have stated policies for discount rate and credit periods.

Question 3

A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in the investment in accounts receivable. Based upon this information, the company's:

AAverage collection period has decreased.

BPercentage discount offered has decreased.

CAccounts receivable turnover has decreased.

DWorking capital has increased.

Answer : A

Choice 'a' is correct. Average collection period has decreased due to a change in credit policy that has caused:

1. Increase in sales,

2. Increase in discounts taken,

3. Decrease in the amount of bad debt; and

4. Decrease in the investment in accounts receivable

Choice 'b' is incorrect. Percentage discount offered has probably increased, as discounts taken has increased.

Choice 'c' is incorrect. Accounts receivable turnover has increased, as sales are up and accounts receivable are down.

Choice 'd' is incorrect. Change in gross profit and working capital is not determinable from these facts.

Question 4

A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company's average collection period for new customers is expected to be 75 days; and the payment behavior of the existing customers is not expected to change.

Variable costs are 80 percent of sales. The firm's opportunity cost is 20 percent before taxes. Assuming a 360-day year, what is the company's benefit (loss) on the planned change in credit terms?

A$28,800

B$144,000

C$120,000

D$126,000

Answer : C

Choice 'c' is correct. $120,000 benefit on the planned change in credit standards.

This question pertains to the economic benefit associated with a change in credit terms.

The question tells us that the credit sales will increase by $720,000 if we relax our credit terms. We know variable costs are 80%, so we will earn $144,000 as a result of the expanded sales. The 20% contribution margin is equal to the 20% opportunity cost so there is no better investment of our resources for the expanded credit sales relative to its margin.

What about the variable costs, though?

We have $576,000 in variable costs that will be outstanding, pro rata, 75 days of the year. So the resources we will use to produce our sales is 75/360ths of $576,000, or $120,000 at any given time during the year. These $120,000 in resources could earn 20% annual return or $24,000. The $24,000 opportunity cost, compared to the $144,000 margin results in a $120,000 benefit in relaxing credit terms.

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

Question 5

The average collection period for a firm measures the number of days:

AAfter a typical credit sale is made until the firm receives the payment.

BIt takes a typical check to 'clear' through the banking system.

CBefore a typical account becomes delinquent.

DIn the inventory cycle.

Answer : A

Choice 'a' is correct. The average collection period for a firm measures the number of days after a typical credit sale is made until the firm receives the payment.

Choice 'b' is incorrect. 'Float' measures the number of days it takes a typical check to 'clear' through the banking system.

Choice 'c' is incorrect. 'Credit period (term)' measures the number of days before a typical account becomes delinquent.

Choice 'd' is incorrect. 'Average days sales in inventory' measures the number of days in the inventory cycle.

Question 6

An organization would usually offer credit terms of 2/10, net 30 when:

AThe organization can borrow funds at a rate less than the annual interest cost.

BThe cost of capital approaches the prime rate.

CMost competitors are not offering discounts, and the organization has a surplus of cash.

DMost competitors are offering the same terms, and the organization has a shortage of cash.

Answer : D

Choice 'd' is correct. Offering favorable credit terms is usually a response to either competitive forces in the market or to improve cash flow.

Choice 'a' is incorrect, although the payment terms of AR is a form of borrowing (or lending) to customers, companies are more likely to extend credit terms because of competitive pressures rather than because it represents a cheaper form of borrowing.

Choice 'b' is incorrect. The cost of capital at (or approaching) the prime rate is irrelevant without additional information.

Choice 'c' is incorrect. If most competitors are not offering discounts or credit terms, there is no reason to offer them. Also, if there is a surplus of cash, there is no reason to accelerate accounts receivable collection by offering credit terms.

Question 7

The following information regarding a change in credit policy was assembled by the Wilson Wax Company. The company has a required rate of return of 10 percent and a variable cost ratio of 60 percent.

The pretax cost of carrying the additional investment in receivables, using a 360-day year, would be:

A$5,760

B$9,600

C$8,160

D$960

Answer : A

Choice 'a' is correct.

Step 1 Determine the average accounts receivable balance and the additional accounts receivable as follows:

Therefore, the accounts receivable balance is $96,000 higher under the new credit policy.

Step 2 Determine the additional INVESTMENT in the additional accounts receivable.

Although Wilson has an additional $96,000 in accounts receievable, Wilson's actual investment in the additional accounts receivable is only 60% of $96,000 (because variable costs are 60% of sales). Wilson's investment in the additional accounts receivable is calculated as follows:

$96,000 x 60% = $57,600

Step 3 Calculate the cost of carrying the additional accounts receivable.

Wilson's additional investment in accounts receivable is $57,600 and we are given a 10% required rate of return. This means that Wilson's carrying cost of $5,760 is calculated as follows:

$57,600 x 10% = $5,760

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

AICPA CPA Business Environment and Concepts CPA Exam Practice Test