Question 1

A company is considering a lockbox system to accelerate cash collections. The system will cost $5,000 per month. It is expected to reduce the average collection float by 3 days. Average daily collections are $200,000. The company's short-term borrowing rate is 6%. What is the net annual benefit (or cost) of adopting the system?

Accepted Answer

1. Calculate cash freed up (Days saved × Daily collections). 2. Calculate interest savings (Cash freed × Interest rate). 3. Subtract annual cost of system.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to annualize the monthly cost; calculating interest on daily collections instead of total freed cash.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 5

More questions from this exam