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

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.

Question 3

A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that:

ANet profit has increased.

BThe average collection period has decreased.

CGross profit has declined.

DThe size of the discount offered has decreased.

Answer : B

Choice 'b' is correct. Whenever accounts receivable (AR) are decreasing when sales are increasing (and the decrease in AR is not due to an increase in bad debt write offs), this would indicate that the average collection period for AR has decreased.

Choices 'a', 'c', and 'd' are incorrect. There is insufficient information in the question to draw conclusions about these items.

Question 4

Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40 percent of their customers pay on the discount date, 40 percent on the net due date, and 20 percent pay 15 days after the net due date. Assuming uniform sales and a 360-day year, what is the projected days sales outstanding (rounded to the nearest whole day)?

A20 days.

B24 days.

C27 days.

D30 days.

Answer : C

Choice 'c' is correct. 27 days projected days sales outstanding.

Question 5

Which of the following represents a firm's average gross receivable balance?

I Days' sales in receivables x accounts receivable turnover.

II Average daily sales x average collection period.

III Net sales average gross receivables.

AI only.

BI and II only.

CII only.

DII and III only.

Answer : C

Choice 'c' is correct. II only - Average daily sales ($27,397) Average collection period (36.5) = $1,000,000 Avg gross A/R

Not I Days' sales in receivables (36.5) AR turnover 10 = 365 days in year.

Not III Net sales ($10,000,000) Avg gross receivables ($1,000,000) = 10 AR turnover.

Question 6

Corbin Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000. Transaction costs would be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, would be:

A2.16%

B8.48%

C8.65%

D8.00%

Answer : C

Choice 'c' is correct. The cost to issue the commercial paper is the $20,000 original issue discount ($1 million - $980,000), plus transaction costs of $1,200 for a total of $21,200. Therefore, it costs $21,200 to borrow $980,000 for 3 months. The 3-month interest cost is 2.16% ($21,200 / $980,000).

The annual interest cost is 8.65%

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

Question 7

Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?

AThe borrower avoids the expense of maintaining a compensating balance with a commercial bank.

BThere are no restrictions as to the type of corporation that can enter into this market.

CThis market provides a broad distribution for borrowing.

DA benefit accrues to the borrower because its name becomes more widely known.

Answer : B

Choice 'b' is correct. There are restrictions as to the type of corporation that can enter into the commercial paper market for short-term financing, since the use of the open market is restricted to a comparatively small number of the most credit-worthy large corporations.

The commercial paper market:

A Avoids the expense of maintaining a compensating balance with a commercial bank.

C Provides a broad distribution for borrowing.

D Accrues a benefit to the borrower because its name becomes more widely known.

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