AICPA CPA-Business Exam - Topic 1 Question 101 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 101
Topic #: 1

The sales manager at Ryan Company feels confident that if the credit policy at Ryan's was changed, sales would increase and, consequently, the company would utilize excess capacity. The two credit proposals being considered are as follows:

Currently, payment terms are net 30. The proposal payment terms for Proposal A and Proposal B are net 45 and net 90, respectively. An analysis to compare these two proposals for the change in credit policy would include all of the following factors, except the:

ACost of funds for Ryan.

BCurrent bad debt experience.

CImpact on the current customer base of extending terms to only certain customers.

DBank loan covenants on days sales outstanding.

Show Suggested Answer

Suggested Answer: B

Choice 'b' is correct. Because the bad debt percentage is the same under either of the two proposals, there is no differential cost associated with bad debt. Because it is not a differential cost, it is not considered in comparing the two alternatives.

Choice 'a' is incorrect. Because Proposal A and B have different net collection dates, Proposal B will cause a greater amount of accounts receivable with a corresponding increase in working capital. The cost to fund this will be greater for Proposal B, so this is a legitimate concern.

Choice 'c' is incorrect. Customers may feel they should be given the extended terms. If this is granted, the additional working capital need will be even greater.

Choice 'd' is incorrect. Banks may require that days sales outstanding cannot exceed a certain number of days. If so, it will be harder to meet this covenant with Proposal B.

by Francine at Sep 19, 2024, 06:43 PM

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Afton

3 months ago

I think bank loan covenants should definitely be included.

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Scarlet

3 months ago

Current bad debt experience is crucial to consider.

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Joanne

3 months ago

Wait, extending terms could hurt cash flow, right?

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Maile

4 months ago

Totally agree, net 90 is risky!

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Renea

4 months ago

Proposal A seems like a safer bet than B.

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Tammara

4 months ago

I think the bank loan covenants might not be directly related to the credit policy change, but I need to double-check that.

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Caprice

4 months ago

I feel like the current bad debt experience should be considered, but I’m a bit confused about the bank loan covenants.

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Cristal

4 months ago

This question reminds me of a practice question about credit terms. I think the impact on the customer base is definitely relevant.

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Reita

5 months ago

I remember discussing how the cost of funds is crucial in credit policy decisions, but I'm not sure if it applies here.

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Jolene

5 months ago

I feel pretty confident about this type of question. I'll start by clearly outlining the factors I need to analyze, then systematically work through each one to compare the two credit proposals. Shouldn't be too difficult as long as I stay organized.

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Tamala

5 months ago

This is a tricky one. I'll need to dive into the details of the credit proposals and really understand how they would affect the company's sales, capacity, and financial metrics. Gotta make sure I don't miss anything crucial.

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Adela

5 months ago

Hmm, I'm a bit unsure about this one. There are a lot of factors to weigh, and I'll need to really analyze the potential impact of the credit policy changes on the company's operations and finances.

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Rusty

5 months ago

This seems like a straightforward question about evaluating credit policy changes. I'll need to consider the impact on sales, capacity utilization, and various financial factors like cost of funds and bad debt experience.

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Elenore

5 months ago

Okay, I think I've got a handle on this. The key will be to thoroughly evaluate each credit proposal against the current policy, looking at the pros and cons of the changes. I'll need to be careful not to overlook any important considerations.

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Mitsue

1 year ago

Good point about the current customer base. Offering different payment terms could create some unintended consequences and friction with existing customers.

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