AICPA Exam CPA-Business Topic 3 Question 85 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 85
Topic #: 3

[All CPA-Business Questions]

Which one of the following statements about trade credit is correct? Trade credit is:

ANot an important source of financing for small firms.

BA source of long-term financing to the seller.

CSubject to risk of buyer default.

DUsually an inexpensive source of external financing.

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:

$60,000/$40,000 = 1.5

Choice 'a' is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000.

Choice 'b' is incorrect. .6 is obtained by dividing total costs into fixed costs.

Choice 'd' is incorrect. 2.5 is obtained by dividing total costs by variable costs.

by Johnson at Apr 25, 2024, 03:23 PM

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Beatriz

1 months ago

I'm going with option C. The risk of buyer default is a crucial consideration when it comes to trade credit. It's like playing financial Russian roulette, but without the revolver.

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Leatha

1 months ago

Ha! I bet the person who wrote this question has never tried to collect on overdue trade credit. It's about as 'inexpensive' as a trip to the dentist!

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Herman

13 days ago

I think the statement about trade credit being inexpensive is not always true.

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Rusty

19 days ago

Definitely, the risk of buyer default is always there with trade credit.

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Martina

25 days ago

I agree, collecting on overdue trade credit can be a nightmare.

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Margret

2 months ago

I'm not sure about option D. Trade credit may not always be an inexpensive source of financing, especially for small firms with limited bargaining power.

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Ona

2 months ago

That's true, but it can also be subject to risk of buyer default, so small firms need to be cautious.

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Reita

2 months ago

Option D is correct. Trade credit is usually an inexpensive source of external financing.

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Lemuel

2 months ago

I'm not sure, but I think D) Usually an inexpensive source of external financing could also be correct.

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Timmy

2 months ago

Option C is clearly the correct answer. Trade credit is indeed subject to the risk of buyer default. Small businesses should always be cautious when extending credit to customers.

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