AICPA Newly Released MCQs

BUSINESS
2020 AICPA Newly

Released MCQs
and Sims
Please note that the AICPA only provides MCQs and simulations
without answer explanations. At the time of this release, the
Becker-provided MCQ and Simulation answer explanations are
still in development. The full answer explanations will be
available in an upcoming course software update.
Registered to Daljeet Singh (#1410156)

Understanding the AICPA-released Questions
The AICPA-released questions in this document contain identifying information provided by the AICPA.
Below is an explanation of how to interpret that information provided with each multiple choice question.
For a copy of the AICPA’s most recent Blueprint, please visit

https://www.aicpa.org/becomeacpa/cpaexam/examinationcontent.html
The Item ID is used by the AICPA

Item ID: 17775 to track its questions.
The Key indicates the correct

Key: B
answer for each question.
This line indicates the Blueprint version (20190101, or

January 2019 AUD Blueprint) as well as Content Group,
Topic and Subtopic in the Blueprint that is the basis for
AUD.CSO.20190101: AUD.001.001.003 each question. For example, AUD.001.001.003 means
that the question comes from AUD Blueprint Area I (001),
Topic A. Nature and Scope (.001), Subtopic 3. Nature and
scope: non-audit engagements (.003).
This line indicates the Skill Level of

AUD.SSO.20190101: Remembering and Understanding:1 the question based on the January
2019 (20190101) AUD Blueprint.

Last year a segment of Dickson Company had the following sales, assets, and operating income:
Sales $500,000
Assets 200,000
Operating income 50,000
What is the segment's asset turnover?
A. 2 times
B. 2.5 times
C. 4 times
D. 10 times
Item ID: 24913

Key: B
BEC.CSO.20190701: BEC.005.001.000
BEC.SSO.20190701: Application:2

A company's target gross margin is 40% of the selling price of a product that costs $178 per
unit. The product's selling price should be
A. $445.00
B. $296.67
C. $284.80
D. $249.20
Item ID: 24951

Key: B
BEC.CSO.20190701: BEC.005.004.001

J & L, Inc. manufactures dog beds. Each bed requires 10 square feet of material which has a
standard cost of $2 per bed. During July, J&L's results were as follows:
Square feet of material consumed 12,000

Cost of material consumed $3,600
Number of dog beds manufactured 1,000
What is the direct materials usage variance?
A. $400 favorable.
B. $400 unfavorable.
C. $600 favorable.
D. $600 unfavorable.
Item ID: 25093

Key: B
BEC.CSO.20190701: BEC.005.002.001

The following is information about three companies:
ABC Co. XYZ Co. KLM Co.

Total assets $109,000 $450,000 $850,000
Total liabilities 44,000 150,000 450,000
Total equity 65,000 300,000 400,000
Which company would be considered least risky from a creditor’s viewpoint?
A. KLM, because the debt ratio is the highest.

B. ABC, because the debt ratio is average.
C. XYZ, because the debt ratio is the lowest.
D. XYZ, because the debt ratio is the highest.
Item ID: 25833

Key: C
BEC.CSO.20190701: BEC.003.001.000

Strom, Inc. has current assets of $5,500,000. Their current ratio is 2.0 and their quick ratio is
1.5. What is Strom's total inventory?
A. $4,125,000
B. $3,750,000
C. $2,750,000
D. $1,375,000
Item ID: 25995

Key: D
BEC.CSO.20190701: BEC.003.002.001

Diamond Co. uses a material that cost $195 per ton at the beginning of the year and $200 per
ton at the end of the year. The industry experienced 4% inflation during the year. What is the
change in the real cost of Diamond's material?
A. $5.00 per ton increase.

B. $7.80 per ton increase.
C. $2.80 per ton decrease.
D. $8.00 per ton decrease.
Item ID: 27541

Key: C
BEC.CSO.20190701: BEC.002.001.000

The rankings of two mutually exclusive investments determined using the internal rate of
return (IRR) method and the net present value (NPV) method may be different in which of the
following situations?
A. If the expected lives of the two projects are equal and the amounts of the required
investments are equal.
B. If the required rate of return equals the IRR of each project.
C. If the required rate of return is higher than the IRR of each project.
D. If the two projects have unequal lives and the size of the investment for each project is
different.
Item ID: 29047

Key: D
BEC.CSO.20190701: BEC.003.003.000

A company currently sells 100,000 units of product A at $10 per unit. The company also sells
100,000 units of product B at the same price. The company raises the price of both products by
10%. Product A has an elasticity of 1.5. Product B has an elasticity of 3.0. Which of the following
effects will the price increase most likely have on company revenues?
A. Company revenues will increase for both products.

B. Company revenues will decrease for both products.
C. Company revenues will increase for product A but not product B.
D. Company revenues will increase for product B but not product A.
Item ID: 29351

Key: B
BEC.CSO.20190701: BEC.002.002.000
10

Which of the following spreadsheets most likely has the highest risk of data integrity errors?
A. A spreadsheet the CFO uses that is directly linked to the company's accounting system
database.
B. A spreadsheet that displays imported comma-delimited text files from the check
payment module and is reviewed by the accounts payable administrator.
C. A spreadsheet that captures time and attendance transactions from an automated time
clock system.
D. A spreadsheet into which the controller enters summary daily sales data from a printed
report of an automated accounting system.
Item ID: 31037

Key: D
BEC.CSO.20190701: BEC.004.002.003
11

Which of the following terms is used to describe the unique attribute that identifies a specific
record in a table?
A. A foreign key.
B. A primary key.
C. A secondary key.
D. A schema.
Item ID: 31047

Key: B
BEC.CSO.20190701: BEC.004.001.003
BEC.SSO.20190701: Remembering and Understanding:1
12

According to COSO, establishing, maintaining, and monitoring an effective internal control
system can do each of the following, except
A. Ensure an entity's financial survival.

B. Promote an entity's compliance with laws and regulations.
C. Help an entity achieve performance targets.
D. Provide protection for an entity's resources.
Item ID: 32117

Key: A
BEC.CSO.20190701: BEC.001.001.001
13

Which of the following employees of an issuer is required to certify the company's financial
reports filed with the SEC?
A. The chief executive officer, but not the chief financial officer.
B. The chief financial officer, but not the chief executive officer.
C. Neither the chief executive officer nor the chief financial officer.
D. Both the chief executive officer and the chief financial officer.
Item ID: 32923

Key: D
BEC.CSO.20190701: BEC.001.003.000
14

Which of the following is a violation of segregation of duties in internal control?
A. An employee adds vendors and makes changes to a vendor master file.

B. An employee enters and approves purchase orders.
C. An employee matches invoices to purchase orders and receiving reports, and applies
coding of account distributions.
D. An employee receives goods from vendors and signs off on the deliveries.
Item ID: 34173

Key: B
BEC.CSO.20190701: BEC.001.001.002
15

A U.S. company is purchasing inventory components from a company in a foreign country. The
price of the company's routine inventory order is 100,000 foreign currency units (FCUs), and the
exchange rate at the time of the last order was $1.45 per one FCU. The exchange rate changes
to $1.60 per one FCU, and the U.S. company orders half of its normal quantity. What is the
invoice difference from the last order?
A. A decrease of $65,000.
B. A decrease of $15,000.
C. An increase of $7,500.
D. An increase of $15,000.
Item ID: 36875

Key: A
BEC.CSO.20190701: BEC.002.003.001
16

An exporter enters into a contract to supply goods to a foreign buyer. The contract requires the
payment in foreign currency 120 days after delivery. Recently the foreign currency has
experienced many fluctuations. The exporter may incur a loss on this contract at the time
payment is received due to such fluctuations. Which of the following actions should the
exporter take to avoid such loss?
A. Cancel the export contract.

B. Enter into a forward contract with a bank.
C. Wait for the settlement date to see if the foreign currency actually fluctuates.
D. Invest the foreign currency in the buyer's country to avoid short-term fluctuations.
Item ID: 39229

Key: B
BEC.CSO.20190701: BEC.002.003.002
17

A company's purchasing department creates purchase orders based on electronic requests sent
by operations. These requests are approved by operations, and no further approvals are
required to place a purchase order. Purchasing clerks key the order information, including
vendor names and prices, into the purchasing system based on the electronic requests. Which
of the following is the best control to ensure that orders are entered accurately?
A. Approvals from management in operations are sent to clerks along with the order
requests, which are then filled.
B. Clerks use preformatted screens, which show the clerks the type of information
expected, but do not restrict input.
C. The purchasing system compares vendor information and prices entered by the clerks to
master vendor and pricing data and rejects variances.
D. A hash total of the total quantity of all items entered by purchasing clerks each day is
compared to the total quantity of all the items originated by operations personnel.
Item ID: 90698

Key: C
BEC.CSO.20190701: BEC.004.003.001
18

The total quality management process identifies each of the following as a cost of quality,
except
A. Prevention costs.
B. Investment costs.
C. Internal failure costs.
D. External failure costs.
Item ID: 95504

Key: B
BEC.CSO.20190701: BEC.005.003.002
19

According to the COSO Enterprise Risk Management Framework, each of the following is
considered by management as part of a risk assessment, except
A. Inherent risk.
B. Unknown risk.
C. Actual residual risk.
D. Target residual risk.
Item ID: 501045

Key: B
BEC.CSO.20190701: BEC.001.002.002
20

Ace Co. is evaluating a new novelty product that would sell for $30 per unit and have the
following costs:
Variable manufacturing $20 per unit

Variable selling and distribution 4 per unit
Fixed manufacturing $100,000 per year
Product design and development $80,000 total
The product is expected to have a market life of one year, at the end of which all production
and sales would be discontinued. Ace has a target rate of return on sales of 0.10. How many
units must Ace sell to earn the target rate of return?
A. 16,667
B. 30,000
C. 33,333
D. 60,000
Item ID: 24983

Key: D
BEC.CSO.20190701: BEC.005.004.002
21

A new venture will require an initial investment in fixed assets of $20,000 and in working capital
of $10,000. The fixed assets will have no salvage value at the end of the project's four-year life,
and the working capital will be completely recovered at the end of the project. The
organization's cost of capital is 16%. At a time value of money of 16%, the present value of an
ordinary annuity of $1/year for four years is 2.8 and the present value of $1 at the end of four
years is 0.6. What is the annual net cash inflow required for the project to break even on a
time-adjusted basis?
A. $ 7,143
B. $ 8,571
C. $10,714
D. $12,857
Item ID: 25005

Key: B
BEC.CSO.20190701: BEC.003.003.000
22

Echo Company uses a normalized job costing system and applies factory overhead on the basis
of machine hours. Echo's yearly profit plan disclosed anticipated factory overhead of
$4,800,000 if 200,000 machine hours are worked. By year end, actual factory overhead charges
and machine hours worked amounted to $4,730,000 and 215,000, respectively. What amount
correctly states the factory overhead applied to Echo's actual year-end overhead?
A. $ 70,000 overapplied.
B. $360,000 overapplied.
C. $430,000 overapplied.
D. $430,000 underapplied.
Item ID: 25155

Key: C
BEC.CSO.20190701: BEC.005.002.001
23

In analyzing its current-year operating performance, Merle Co. determined that its return on
assets improved significantly from the prior year. Total assets and operating expenses were
stable and overall debt decreased, while net earnings increased due to greater sales volume. An
additional 50,000 shares of common stock were authorized during the year. Which of the
following statements best explains Merle’s improved return on assets in the current year?
A. Merle made more efficient use of its assets.

B. Merle made more efficient use of its cash flow.
C. Merle increased its outstanding capital.
D. Merle decreased its operating expenses.
Item ID: 25255

Key: A
BEC.CSO.20190701: BEC.005.001.000
24

When the demand for a product is inelastic, a decrease in price has what effect on the number
of units sold and total revenue?
A. The percentage change in price will be greater than the percentage change in quantity,
and total revenue will fall.
B. The percentage change in price will be greater than the percentage change in quantity,
and total revenue will rise.
C. The percentage change in price will be less than the percentage change in quantity, and
total revenue will fall.
D. The percentage change in price will be less than the percentage change in quantity, and
total revenue will rise.
Item ID: 29871

Key: A
BEC.CSO.20190701: BEC.002.002.000
25

One euro will buy U.S. $1.48, and a British pound will buy U.S. $2.06. What is the cross rate of
euros per pound?
A. 0.72
B. 1.39
C. 1.48
D. 2.06
Item ID: 30489

Key: B
BEC.CSO.20190701: BEC.002.003.001
26

An employee obtains a blank check, makes it payable to a fictitious company, and then cashes
it. Each of the following internal control procedures should prevent this threat to the
expenditure cycle, except
A. Positive pay with the bank.

B. Requiring electronic funds transfer transactions.
C. Bank reconciliations.
D. Restricted access to blank checks.
Item ID: 32495

Key: C
BEC.CSO.20190701: BEC.001.001.002
27

According to the Sarbanes-Oxley Act of 2002, an issuer must disclose whether or not it has
adopted a code of ethics for which of the following?
A. All employees of the issuer.

B. The issuer's senior financial officers, but not for other employees of the issuer.
C. The audit committee.
D. Audit staff.
Item ID: 32919

Key: B
BEC.CSO.20190701: BEC.001.003.000
28

In which of the following situations should a U.S.-based company consider hedging its
transaction because it is in a short position?
A. One receiving shipments from Japan and owing 800,000,000 yen in 60 days.
B. One selling its Brazilian mine and receiving 10,000,000 reals in 30 days.
C. One inheriting stock in a New Zealand company worth 90,000 New Zealand dollars with
distribution in 180 days.
D. One exporting products to Denmark and receiving 500,000 krone in 90 days.
Item ID: 33991

Key: A
BEC.CSO.20190701: BEC.002.003.002
29

Each of the following is a potential problem for a company that has implemented just-in-time
inventory management, except
A. Seasonal fluctuations in inventory requirements could cause inventory shortages.

B. Actual lead time for material orders could be longer than expected.
C. Loss of quantity discounts could be more than the cost of handling and purchasing
larger lots of inventory.
D. Low quality inventory could cause shortages.
Item ID: 35623

Key: A
BEC.CSO.20190701: BEC.005.003.001
30

A large organization uses batch processing to process sales transactions. The system sorts sales
transactions by customer number and performs edit checks when preparing invoices,
processing payment information, recording journal entries, and updating customer account
balances. Which of the following reports should be analyzed most frequently to ensure correct
customer balances?
A. Exception reports with control totals.

B. A cash reconciliation report.
C. An accounts receivable aging report.
D. A report on the sales-price master file.
Item ID: 35855

Key: A
BEC.CSO.20190701: BEC.004.003.001
31

A company provides the following financial information:
Cost of equity 20%

Cost of debt 8%
Tax rate 40%
Debt-to-equity ratio 0.8
What is the company's weighted-average cost of capital?
A. 9.8%
B. 11.5%
C. 13.3%
D. 14.7%
Item ID: 36501

Key: C
BEC.CSO.20190701: BEC.003.001.000
32

A company has the following financial information:
Net operating profit after taxes $18,000

Capital expenditures 10,000
Depreciation expense 8,000
Change in working capital 4,000
What amount is the company's free cash flow?
A. $4,000
B. $8,000
C. $12,000
D. $16,000
Item ID: 40315

Key: C
BEC.CSO.20190701: BEC.003.002.001
33

A company has a capital project with before-tax cash inflows in real dollars that are expected to
be $200,000 within two years. The inflation rate is expected to be 6% each year during that
period. What is the before-tax cash inflow expressed in nominal dollars?
A. $177,999
B. $178,571
C. $224,000
D. $224,720
Item ID: 40545

Key: D
BEC.CSO.20190701: BEC.002.001.000
34

A manufacturer actively monitors a foreign country's political events whenever a supply chain
disruption occurs within the country that exceeds 90 days. According to the COSO Enterprise
Risk Management principles, the manufacturer is following which of the following risk-response
strategies?
A. Share.
B. Avoid.
C. Accept.
D. Reduce.
Item ID: 86551

Key: C
BEC.CSO.20190701: BEC.001.002.002
35

Which of the following IT controls would a company appropriately use to mitigate the risk of
unauthorized access to its payroll data?
A. Validity checks.
B. A neural network.
C. Biometric devices.
D. Employee purchase cards.
Item ID: 88734

Key: C
BEC.CSO.20190701: BEC.004.003.003
36

When evaluating a cloud service provider's data security measures, a company would
appropriately consider each of the following risk factors, except
A. The provider's vertical scalability.

B. The provider's third-party suppliers.
C. The provider's multi-tenant architecture.
D. The provider's cloud-of-cloud agreements.
Item ID: 92844

Key: A
BEC.CSO.20190701: BEC.004.002.004
37

According to the COSO Enterprise Risk Management Framework, uncertainty in enterprise risk
management refers to
A. The impact of events or the time it would take to recover.

B. The state of not knowing how or if potential events may manifest.
C. The possibility that events will occur and affect the achievement of objectives.
D. The boundaries of acceptable variation in performance related to achieving business

objectives.
Item ID: 501053

Key: B
BEC.CSO.20190701: BEC.001.002.001
38

Item: 2454
You are the head of internal audit for Stark Co., an issuer. A new member of the board of directors has asked
you to explain the five components of internal control according to the COSO framework.
In a memo to the new member of the board, explain these components.
Type your communication in the response area below.
REMINDER: Your response will be graded for technical content and writing skills. Technical content
will be evaluated for information that is helpful to the intended audience and clearly relevant to the
issue. Writing skills will be evaluated for development, organization, and the appropriate expression of
ideas in professional correspondence. Use an appropriate business format with a clear introduction,
body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other
abbreviated presentation.
END OF CONTENT - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
39

Blueprint Information
CSO: 001.001.001
Skill: Written Communication
40

Item: 2464
Gloff, Inc., your consulting client, requires all customers to pay with cash. Gloff finds that this practice limits its
customer base and is considering selling to customers on account.
Write a memo to Gloff providing guidance about credit risk, and factors to consider before moving
away from being a cash-only business.
Type your communication in the response area below.
REMINDER: Your response will be graded for technical content and writing skills. Technical content
will be evaluated for information that is helpful to the intended audience and clearly relevant to the
issue. Writing skills will be evaluated for development, organization, and the appropriate expression of
ideas in professional correspondence. Use an appropriate business format with a clear introduction,
body, and conclusion. Do not convey information in the form of a table, bullet-point list, or other
abbreviated presentation.
END OF CONTENT - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
41

CSO: 002.003.001
Skill: Written Communication
42

Item: 500433
Scroll down to complete all parts of these tasks.
Elbow Industries, Inc., a manufacturer, converts unfinished pipe into a usable state by perforating and
threading it for use in plumbing before selling it to customers. The company typically manufactures 100,000
units of standard finished pipe per year and uses that amount for its per-unit cost estimates.
The company received a one-time order for 50 units of custom finished pipe. The company can fill this order by
manufacturing unfinished pipe in-house or by purchasing finished pipe. The controller provided cost
information related to the custom order in the exhibit above. The controller also indicated:
• Three years ago, Elbow purchased 200 units of unfinished pipe at a cost of $80 per unit. After
purchasing the unfinished pipe, the company determined that it would not be able to resell it or use it in
the manufacturing process. Two years ago the material was determined to be obsolete, with no net
realizable value, and was written down to zero on the books. The company can use 50 units of this
obsolete unfinished pipe to fill the custom order, if manufactured in- house.
• If the company finishes the pipe in-house for the custom order, it will use the same facility and
machinery as the standard products manufactured, with no additional capacity required. Other than the
costs detailed in the exhibit, there are no other costs associated with manufacturing the finished pipe in-
house for the custom order.
• If the company purchases finished pipe for the custom order, it will need to perform an in-house
inspection for quality control. No inspection is necessary for units that are finished in-house.
Task 1:
The controller asked you to calculate the cost of manufacturing the units of finished pipe in-house and the cost
of buying the units of finished pipe in order to determine how best to fill this custom order. Additionally, the
controller asked you to calculate the total sunk cost for this order. For each cost listed below in column A,
enter the applicable amount in the associated cell in column B. Enter the amounts as positive, whole dollars. If
an amount is zero, enter a zero (0).
A B
1 Cost Amount
2 Fixed overhead cost per unit of standard finished pipe manufactured 23
Relevant cost per unit to fulfill the custom order by manufacturing the
3 110
finished pipe
4 Relevant cost per unit to fulfill the custom order by buying the finished pipe 170
5 Total sunk costs for the custom order 4,000
43

What is the difference between the total relevant costs to fill the custom order by manufacturing the finished
pipe and the total cost to fill the custom order by buying the finished pipe? If manufacturing costs more, enter
the difference as a positive, whole dollar amount. If buying costs more, enter the difference as a negative,
whole dollar amount. If there is no difference, enter a zero (0).
Total Cost
(3,000)
Task 2:
Prior to the decision, the customer contacted Elbow to accelerate the completion date of the order. In order to
meet the new deadline by manufacturing, the company would use additional labor totaling $1,200. With both
approaches, Elbow would incur $800 to expedite the shipping of the completed pipes to the customer. These
are the only additional costs that will be incurred to meet the new deadline.
The controller asked you to update the make-versus-buy analysis for the custom order as a result of the new
deadline. Enter the additional cost per unit to manufacture the pipe that is relevant to the make-versus-buy
decision. Enter the amount as a positive, whole dollar. If an amount is zero, enter a zero (0).
Amount
24
END OF CONTENT - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
44

Exhibits Information
Exhibits included in this item 1. Cost Elements for Make vs. Buy Decision
45

Exhibit for Item: 500433
Exhibit 1: Cost Elements for Make vs. Buy Decision
Elbow Industries, Inc.

Cost Elements for Make vs. Buy Analysis
Cost Elements Cost per unit

Cost to purchase finished pipe for the custom order $ 120
Cost of unfinished pipe for the custom order $- 1
Threading labor $65
Perforating labor $45
Depreciation - machine (straight-line, five-year life) $5
Depreciation - building allocation to manufacturing $6 2
Inspection $50
Insurance on machinery $4
Plant managers’ salaries $8
1 The unfinished pipes are carried on the books at a value of $0.

2 The building is depreciated $1,000,000 per year, of which 60% is allocated to
manufacturing.
46

CSO: 005.004.002
Skill: Application
Representative task: Prepare and calculate metrics to be utilized in the planning process such
as cost benefits analysis, sensitivity analysis, breakeven analysis, economic order quantity,
etc.
47

Item: 505886
Scroll down to complete all parts of these tasks.
Tropic Co. is a T-shirt manufacturer. Use the information in the exhibits above to complete the tasks below.
Task 1:
The controller of Tropic asked you to review and explain changes in the year 7 working capital accounts.
During year 7, what was the company’s cash collections amount related to sales? Enter the amount as a positive, whole
number.
44,550,000
In addition to the collections from sales, what other event could explain the greater cash balance at December 31, year 7, as
compared to December 31, year 6? Select the event from the options in the table below.
Events
Payment terms with one of Tropic’s major suppliers were revised from 30 days to 45 days,
causing the accounts payable balance to be higher as of December 31, year 7.
-- Option List Details --

• A major supplier began offering early-payment discounts, resulting in Tropic paying in 15 days
instead of 30 days, causing the accounts payable balance to be lower as of December 31, year
7.
• An estimated tax payment due on January 15, year 8, was made on December 31, year 7,
causing the tax payable balance to be zero as of December 31, year 7.
• More raw materials were purchased and paid for in year 7 than in year 6, in anticipation of an
Table
increase in production levels, causing the inventory balance to be higher as of December 31,
2
year 7.
• Payment terms with one of Tropic’s major suppliers were revised from 30 days to 45 days,
causing the accounts payable balance to be higher as of December 31, year 7.
• Year 7 actual sales were below expectations, causing the inventory balance to be higher as of
December 31, year 7.
48

Cash outflows for noncurrent assets and liabilities occurred during year 7. In the table below, calculate the cash outflows
related to the two events listed. Enter each amount as a positive, whole number. If an amount is zero, enter a zero (0).
Events Amount ($)
Acquisition of property, plant and equipment 1,800,000
Payment of long-term debt that was not due in year 7 900,000
Task 2:
The controller asked you to provide cash projections for year 8. For each question in the table below, enter the amount as a
positive whole number. If an amount is zero, enter a zero (0).
Question Amount ($)
What is the projected total cash collections amount during the second
quarter of year 8 related to sales? 9,750,000
What is the projected total uses of cash amount during the second quarter of
year 8? 10,850,000
Task 3:
The controller asked you to suggest two changes to improve the cash conversion cycle. Select two changes from the options in
the table below.
1 Changes
2 Apply lean manufacturing practices to reduce raw materials inventory on hand.
3 Provide incentives to encourage customers to pay on delivery.
-- Option List Details --

• Apply lean manufacturing practices to reduce raw materials inventory on hand.
• Buy new T-shirt dyeing equipment to broaden the range of product offerings using cashon
hand.
• Pay dividends with funds received from issuance of debt.
Table
• Pay suppliers sooner to take advantage of early-payment discounts.
5
• Produce more finished goods to increase inventory on hand.
• Provide incentives to encourage customers to pay on delivery.
• Reduce the early-payment discounts on sales to realize higher revenues.
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49

Exhibits Information
Exhibits included in 1. Tropic's Balance Sheet as of Year 6 and Year 7
this item 2. Tropic's Income Statement for Year 7
3. Production and Sales Analysis Email
4. Analytics Definitions
50

Exhibit 1: Tropic's Balance Sheet as of Year 6 and Year 7
51

52

Exhibit 2: Tropic's Income Statement for Year 7
53

Exhibit 3: Production and Sales Analysis Email
From: [email protected]
To: [email protected]
Date: December 30, year 7
Subject: Projections for year 8
Dear Controller,
Year 8 expectations are as follows:
Sales:
• First quarter forecasted sales are $10,000,000. Subsequent quarterly sales are forecasted to show 5% growth
over each prior quarter. All sales are invoiced on the date of the sale.
• Some customers’ markets are beginning to deteriorate. Beginning with fourth quarter, year 7, sales, we
expect collections to be:
◦ 50% collected within the same quarter as invoiced
◦ 45% collected in the subsequent quarter
◦ 5% uncollectible
Production:
Raw materials are expected to be $1.50 per T-shirt, unchanged from year 7. Planned production is as follows:
Planned Production for year 8
Period Units
First quarter 4,000,000
Second quarter 4,150,000
Third quarter 4,400,000
Fourth quarter 4,500,000
Total 17,050,000
All raw materials are purchased at the beginning of each quarter and paid for within the same quarter, based on
planned production levels.
Payroll and other purchases:

Quarterly cash outlays:
Category Amount
Payroll $3,000,000
Indirect manufacturing overhead 500,000
Other administrative costs 270,000
54

Capital budget:
The approved capital budget is allocated as follows:
Period Capital Outlay
First quarter $ 50,000
Second quarter 250,000
Third quarter 600,000
Fourth quarter 100,000
Total $1,000,000
Debt and tax planning:

• Because of the early payment made on the long-term debt in year 7, our semi-annual principal and interest
payments for year 8 will be $285,000, due June 30, and $282,000, due December31.
• Our scheduled estimated quarterly income tax payments are $160,000 each, due on April 15, June 15,
September 15, and January 15, year 9.
Regards,
Bob Smith
Financial Planning Manager
55

Exhibit 4: Analytics Definitions
56

57

58

CSO: 003.002.001
Skill: Analysis
Representative task: Detect significant fluctuations or variances in the working capital cycle using
working capital ratio analyses.
59

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