AICPA CPA-Business Exam - Topic 3 Question 37 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 37
Topic #: 3

The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows:

Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1 percent of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

A$61,000

B$80,000

C$132,000

D$240,000

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. First, determine the amount and timing of cash needs:

Comments

1 Given

2 Computed balance, positive cash flows

3 Computed balance, negative cash flows

4 Borrow from LOC

5 Computed balance, negative cash flows + interest

6 Cumulative LOC Balance

7 Computed positive cash flows

8 Computed balance, positive cash flows - interest

9 Immediate pay down of LOC

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

by Maurine at May 09, 2022, 04:09 AM

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5 months ago

I feel pretty confident about this one. Hiring service-savvy people and establishing high standards seem like the most important principles to me.

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