BEC All Chapters Flashcards
The difference between standard hours at standard wage rates and actual hours at standard wage rates is referred to as which of the following types of variances?
A.
Labor rate
Correct B.
Labor usage
C.
Direct labor spending
D.
Indirect labor spending
SR(SH-AH)
What is inside the parenthesis HRS used so you calculate labor usage.
Which of the following is the best way to identify and manage risk?
A.
Know the impact on the project
B.
Have experts on the team
C.
Control costs
Incorrect D.
Know the risks
The best way to identify and manage risk is to have experts in the area of the project on the team. These experts will have had experience in the aspects of the project and can help identify possible risks as well as manage the risks without busting the bank.
To help identify risks, the project manager may perform brainstorming sessions. One example of brainstorming is the Delphi method, a technique for decision making and problem solving. The Delphi method attempts to develop a forecast through a group consensus. Individual experts are asked to respond to an initial questionnaire followed by a second one prepared using the information and opinions gathered through the first questionnaire. In this process, each expert is asked to reconsider and revise his or her initial answers to the various questions. This process continues until some type (or range) of consensus is reached.
Which of the following assumptions is associated with the economic order quantity formula?
A.
The carrying cost per unit will vary with quantity ordered.
B.
The cost of placing an order will vary with quantity ordered.
Correct C.
Periodic demand is known.
D.
The purchase cost per unit will vary based on quantity discounts.
Assumptions of economic order quantity analysis include the following:
Periodic demand for the good is known.
Total carrying costs vary with quantity ordered.
Costs of placing an order are unaffected by quantity ordered.
Purchase costs per unit are not affected by quantity discounts.
Everything else being equal, a noncallable bond will be priced in comparison to a callable bond so that the noncallable bond will provide:
Incorrect A.
a higher yield.
B.
a lower yield.
C.
the same yield.
D.
a yield 1% less.
Callable bonds reduce issuer risk by allowing the bonds to be called in if interest rates decline. The holder of callable bonds, however, is exposed to greater risk (i.e., loss of relatively high interest in a declining interest rate period).
In contrast, a noncallable bond is less risky for a bondholder, so it should sell at a lower yield.
A normal profit is:
Incorrect A.
the same as an economic profit.
B.
the same as a pure profit.
C.
an explicit or out-of-pocket cost.
D.
a cost of resources from an economic perspective.
Normal profit is the level of return required to keep resources in their current use (i.e., the cost of capital). Normal profits are included by economists (but not businessmen) in total costs.
Economic or pure profit is simply the difference between revenue and costs, including opportunity costs of all resources including capital.
The Sarbanes-Oxley Act changed the way financial reports are treated. What section of the act requires the CEO to review the financial statements?
A.
Section 202
Correct B.
Section 302
C.
Section 102
D.
Section 402
Correct B.
Section 302
The federal budget deficit is the:
A.
total accumulation of the federal government’s surpluses and deficits.
B.
excess of state, local, and federal spending over their revenues.
Correct C.
amount by which the federal government’s expenditures exceed its revenues in a given year.
D.
amount by which liabilities exceed assets on the federal government’s balance sheet.
The federal budget deficit is the amount by which the federal government’s expenditures exceed its revenues in a given year.
Total accumulation of the federal government’s surpluses and deficits over time is the national debt.
Excess of state, local, and federal spending over their revenues would represent aggregate government budget deficit.
The amount by which liabilities exceed assets on the federal government’s balance sheet represents a negative fund balance.
Which one of the following statements concerning cash flow determination for capital budgeting purposes is incorrect?
A.
Tax depreciation must be considered since it affects cash payments for taxes.
Correct B.
Book depreciation is relevant since it affects net income.
C.
Sunk costs are not incremental flows and should not be included.
D.
Net working capital changes should be included in cash flow forecasts.
Depreciation itself is not a cash outflow. Depreciation is relevant for capital budgeting purposes only because it affects the income upon which taxes must be assessed. Taxes are a cash outflow. Therefore, only tax depreciation is relevant. Book depreciation is not relevant despite its effect on net income.
Which of the following is a technique for assessing the potential effect of risk in a capital budgeting project?
A.
Sensitivity analysis
B.
Adjusting required rate of return
C.
Adjusting estimated future cash inflows
Correct D.
All of the answer choices are correct.
Sensitivity analysis involves testing the effects of various assumptions. Adjusting the required rate of return involves increasing the rate for more risky projects. Similarly, adjusting estimated future cash flows is to make them more conservative for more risky projects. Thus, all of these are techniques for dealing with risk in capital budgeting projects.
Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio?
A.
$20,000
B.
$30,000
Correct C.
$40,000
D.
$60,000
Accounting rate of return = Increase in income ÷ Required investment
Increase in income (numerator) = $40,000
Enert Inc.’s current capital structure is shown as follows. This structure is optimal, and the company wishes to maintain it.
Debt 25% Preferred equity 5% Common equity 70% Enert's management is planning to build a $75 million facility that will be financed according to this desired capital structure. There is currently $15 million of cash that is available for capital expansion. The percentage of the $75 million that will come from a new issue of common stock is:
A.
52.50%.
B.
56.25%.
C.
70.00%.
Correct D.
56.00%.
To find the percentage that will come from a new stock issue, first assume that the $15 million available for capital expansion will be used. Then apply the 70% rate to the remaining $60 million. That results in $42 million, or 56% of the $75 million.
Which of the following types of bonds is most likely to maintain a constant market value?
Incorrect A.
Zero coupon
B.
Floating rate
C.
Callable
D.
Convertible
B.
Floating rate
With most bonds, interest rates are fixed, resulting in an identical interest payment for each payment period over the life of the bonds. As current market interest rates rise, the market value of the bonds will go down since that value is based upon the present value of the future cash flows related to the current market rate; therefore, most bonds expose the holder to interest rate risk.
Floating-rate bonds eliminate interest rate risk since the interest rate paid for a given payment period is based upon the prevailing rates in the current bond market; therefore, if interest rates rise, the interest payment will also increase. Since the market value of bonds is based upon the present value of future cash flows, the market value of floating-rate bonds will remain relatively constant.
A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property?
A.
$11,500
B.
$12,500
Incorrect C.
$13,000
D.
$13,500
The present value of $14,000 in one year discounted at 12% is 14,000/1.12 = $12,500. The net present value of $1,000 is the difference between this $12,500 present value and the cost of the investment therefore the cost of the investment must be $11,500.
A firm’s dividend policy may treat dividends either as the residual part of a financing decision or as an active policy strategy.
Treating dividends as the residual part of a financing decision assumes that:
Correct A.
earnings should be retained and reinvested as long as profitable projects are available.
B.
dividends are important to shareholders, and any earnings left over after paying dividends should be invested in high-return assets.
C.
dividends are relevant to a financing decision.
D.
dividends are costly, and the firm should retain earnings and issue stock dividends.
Treating dividends as the residual part of a financing decision assumes that earnings should be retained and reinvested as long as profitable projects are available.
Dividends do not need to be a focus of company strategy, since in a world with taxes, dividends can be problematic for both the company (dividends are not tax deductible) and the stockholder (dividends are taxable).
In addition, the transaction and other costs of financing by selling additional stock (as discussed by Rozeff) lead a company to prefer using internal funds (i.e., retained earnings) for expansion.
Masulis and Trueman suggest that firms will use internal funds to finance all investments that have high returns—younger firms will invest more and older firms will pay more dividends since profitable investment opportunities for older firms will be smaller relative to funds available.
According to COSO, which of the following serves as a starting point for control monitoring?
Documentation of the system.
A baseline understanding of the system.
An assessment of the system.
An understanding of the flow of transactions through the system.
n all situations, a baseline understanding of internal control system’s effectiveness in an area serves as the starting point for monitoring. This baseline understanding allows organizations to design ongoing and separate monitoring procedures. Monitoring may be considered as consisting of the following sequence of activities (monitoring-for-change control continuum):
1. Control baseline—establishing a starting point that includes a supported understanding of the existing internal control system.
2. Change identification—identifying through monitoring changes in internal control that are either necessary because of changes in the operating environment or have already taken place.
3. Change management—evaluating the design and implementation of the changes, and establishing a new baseline.
4. Control revalidation/update—periodically revalidating control operation when no known changes have occurred.
Kanban is:
Correct A.
a technique for managing a just-in-time (JIT) inventory system developed by the Japanese.
B.
a method of evaluating alternative credit policies developed by the Japanese.
C.
a method of determining the economic order quantity expressed in mathematical terms.
D.
a method of developing a relationship between sales and inventory used in forecasting.
Kanban is a technique for managing a just-in-time inventory system. The kanban is a tag attached to the storage container where component parts are kept. As a component is used, a kanban is placed in a box. Managers determine the number of kanbans needed to be in the box of the component part before a reorder of that part is necessary.
The following information data pertains to a manufacturing company:
Total sales $80,000
Total variable costs 20,000
Total fixed costs 30,000
What is the breakeven level in sales dollars?
A.
$30,000
Correct B.
$40,000
C.
$50,000
D.
$80,000
The contribution margin ratio is the contribution margin (sales of $80,000 less variable costs of $20,000, or $60,000) divided by the sales revenue of $80,000, or 0.75.
Breakeven revenue is found by dividing the fixed costs of $30,000 by the contribution margin ratio of 0.75, for breakeven sales revenue of $40,000.
Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?
Correct A.
Accounts payable
B.
Mortgages payable
C.
Bonds payable
D.
Common stock
When forecasting using the percentage of sales method, a company would first determine a new sales figure. Other financial statement accounts would then be forecasted as a percentage of sales. Of the answers given, only accounts payable would fluctuate in proportion to sales (as sales increase, the trade accounts payable necessary to support inventory and overhead costs would increase also). Mortgages payable and bonds payable would decrease as principal is paid; any increase would be linked to a management decision not directly proportional to sales. Common stock, likewise, would increase or decrease according to management decisions to increase cash flow (selling stock) or to lessen outside control of the company (purchase treasury stock). Equity financing decisions are not necessarily proportional to sales.
The purpose of the TDRA (top-down risk assessment) is for the company to analyze the internal controls currently in place and to assess the effectiveness of those controls so as to avoid material misstatement in the company’s financial reporting. As part of that assessment process, which of the following items would be done?
Incorrect A.
The TDRA will focus on the identification and analysis of pertinent risks related to the achievement of the company’s objectives. The starting point for this assessment will be the lowest-level control, such as a process-level control (separation of duties and steps involved in a single task, such as issuing a credit for returned merchandise).
B.
As a starting point of the TDRA, management must conclude whether the danger of an internal control failure is high, medium, or low. After that decision is made, the focus then shifts to the areas suspected of being vulnerable.
C.
The focus of the TDRA assessment of internal controls is to ferret out all possible areas of error within the financial reporting process.
D.
As part of the TDRA, management will develop a list related to a particular account that would have a reasonable likelihood of material misstatement, focusing on problems that have been encountered in the past and the solutions that were developed to avoid such errors in the future.
The purpose of the TDRA is for the company to analyze the internal controls currently in place and to assess the effectiveness of those controls to avoid material misstatement in the firm’s financial reporting.
The focus of the assessment of internal controls will deal with significant (material) accounts.
The TDRA will focus on the identification and analysis of pertinent risks related to the achievement of the company’s objectives. The higher levels are examined first in the assessment process.
Based upon the identification and analysis of risks and the associated internal control to mitigate those risks, management needs to conclude whether the danger of an internal control failure is low, medium, or high. This step is taken after the internal controls in place have been assessed.
D.
As part of the TDRA, management will develop a list related to a particular account that would have a reasonable likelihood of material misstatement, focusing on problems that have been encountered in the past and the solutions that were developed to avoid such errors in the future.
Dartmoor Company’s budgeted sales for the coming year are $40,500,000, of which 80% are expected to be credit sales at terms of n/30. Dartmoor estimates that a proposed relaxation of credit standards would increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit standards would result in an expected increase in the average accounts receivable balance of:
A.
$540,000.
B.
$2,700,000.
Correct C.
$1,620,000.
D.
$945,000.
The firm wants to relax credit standards and increase the average collection period. Previous sales are $40,500,000 and 80% of these, or $32,400,000, are credit sales. The new policies will increase these credit sales by 20%, to $38,880,000 ($32,400,000 × 1.20). Under the old system, the average day’s credit sales were $32,400,000 ÷ 360 or $90,000. Each day’s credit sales remained in accounts payable for 30 days, so the total amount in accounts payable under the old system was $90,000 × 30 days = $2,700,000. Under the new system, average day’s credit sales will be $38,880,000 ÷ 360, or $108,000. These daily sales will remain in accounts payable for 40 days, so the new accounts receivable balance will be $108,000 × 40 = $4,320,000. The expected increase in accounts receivable will be ($4,320,000 - $2,700,000) = $1,620,000.
Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures. One of the techniques involved in this approach makes use of:
A.
controlled reprocessing.
Correct B.
an integrated test facility.
C.
input validation.
D.
program code checking.
An integrated test facility allows an auditor to introduce test data (simulated files) into an actual processing run to test the processing of that data. This provides evidence about operating effectiveness of the software.
“Controlled reprocessing” is incorrect because reprocessing the same data again with the same software provides no new information. “Input validation” is incorrect because input validation is a control that improves the accuracy of data entry, but does not provide information about control effectiveness. “Program code checking” is incorrect because manual program code checking in a complex system is a difficult task, sometimes impossible, which is more efficiently done by using test data in an integrated test facility.
A computer input control is designed to ensure that
Machine processing is accurate.
Only authorized personnel have access to the computer area.
Data received for processing are properly authorized and converted to machine-readable form.
Computer processing has been performed as intended for the particular application.
This answer is correct because input controls are designed to provide reasonable assurance that data received for processing by computer have been properly authorized, converted into machine sensible form and identified, and have not been lost, suppressed, added, duplicated, or otherwise improperly changed.
When considering disaster recovery, what type of backup facility involves an agreement between two organizations to aid each other in the event of disaster? Cold site. Hot site. Reciprocal agreement. Rollback.
Close
Online databases and master files systems
(1) Checkpoint—Similar to grandfather-father-son, but at certain points, “checkpoints,” the system makes a copy of the database and this “checkpoint” file is stored on a separate disk or tape. If a problem occurs the system is restarted at the last checkpoint and updated with subsequent transactions.
(2) Rollback—As a part of recovery, to undo changes made to a database to a point at which it was functioning properly.
(3) Backup facilities
a] Reciprocal agreement—An agreement between two or more organizations (with compatible computer facilities) to aid each other with their data processing needs in the event of a disaster. This is sometimes referred to as a mutual aid pact.
b] Hot site—A commercial disaster recovery service that allows a business to continue computer operations in the event of computer disaster. For example, if a company’s data processing center becomes inoperable, that enterprise can move all processing to a hot site that has all the equipment needed to continue operation. This is also referred to as a recovery operations center (ROC) approach.
c] Cold site—Similar to a hot site, but the customer provides and installs the equipment needed to continue operations. A cold site is less expensive, but takes longer to get in full operation after a disaster. This is sometimes referred to as an “empty shell” in that the “shell” is available and ready to receive whatever hardware the temporary user needs.
d] Internal site—Large organizations with multiple data processing centers sometimes rely upon their own sites for backup in the event of a disaster.
NOTE: Be aware that most approaches to control for catastrophic failures rely upon backup of the entire system in one form or another. Also, various combinations of the above approaches may be used.
What does integrated planning accomplish?
A.
Participation of stakeholders and affected departments
Incorrect B.
The creation of strategic planning
C.
Electronic commerce
D.
Business process design
Integrated planning provides for the participation of stakeholders with affected departments within an organization. This participation helps the organization to examine costs and benefits of a plan of action.
Which of the following structures refers to the collection of data for all vendors in a relational data base?
A.
Record
B.
Field
Correct C.
File
D.
Byte
A byte is a part of a field. A field is a part of a record. A record is a set of logically related data items that describes specific attributes of an entity, such as all payroll data relating to a single employee. Multiple records make up a file, so a collection of data from all vendors would be a file.
A validation check used to determine if a quantity ordered field contains only numbers is an example of:
Correct A.
an input control.
B.
an audit trail control.
C.
a processing control.
D.
a data security control.
A validation used to assure that a quantity ordered field allows input of only numerical data is an example of an input control.
Audit trail controls seek to make sure that a record of all relevant events and transactions has been recorded chronologically.
Processing controls relate to completeness and accuracy of data during processing (i.e., updating).
Data security controls restrict unauthorized individuals from access to and use of systems.
According to the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer’s audit committee financial expert?
A.
The issuer’s current outside CPA firm’s audit partner must be the audit committee financial expert.
Correct B.
If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
C.
The issuer must fill the role with an individual who has experience in the issuer’s industry.
D.
The audit committee financial expert must be the issuer’s audit committee chairperson to enhance internal control.
The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act, was enacted to develop new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
One of its requirements is that an issuer should have an audit committee, and at least one of its members should be an individual with significant financial reporting expertise. If the firm does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
In general, it is more expensive for a company to finance with equity capital than with debt capital because:
A.
investors are exposed to greater risk with equity capital.
B.
the interest on debt is a legal obligation.
C.
equity capital is in greater demand than debt capital.
Incorrect D.
dividends fluctuate to a greater extent than interest rates.
Stockholders are the last to be paid, making their risk in the company greater. The greater degree of risk requires a greater reward. Bondholders, on the other hand, can expect a fixed return, known in advance, and therefore have a lower degree of risk.
The Sarbanes-Oxley Act of 2002 (SOX) requires that all publicly traded firms establish internal controls related to financial reporting that are documented, tested, and maintained for the purpose of preventing fraud. Per SOX, a company needs to do all of the following except:
A.
develop documentation of existing internal controls and procedures associated with financial reporting.
B.
test the effectiveness of the existing internal controls and procedures.
C.
provide information on deficiencies in the controls and/or documentation of those controls.
Correct D.
include all areas of potential risk to the misstatement of the financial statements in this documentation, testing, and reporting process.
Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) requires that all publicly traded firms establish internal controls related to financial reporting that are documented, tested, and maintained. The purpose of these controls is to reduce the probabilities of corporate fraud. In order to be in compliance with SOX 404, a company needs to:
develop documentation of existing internal controls and procedures associated with financial reporting,
test the effectiveness of those controls and procedures, and
provide details on any deficiencies in the controls and/or documentation.
Although the initial response to SOX was to document, test, and report on both high- and low-risk areas related to financial reporting, the Public Company Accounting Oversight Board (PCAOB) developed Auditing Standard 5 (An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements), approved by the SEC, that limits such activities. This standard takes a risk-based approach related to internal control documentation and testing, thus limiting the compliance measures necessary under SOX. SOX was never meant to create unnecessary compliance burdens on a company, but rather to protect shareholders’ investment from fraud.
Assume that each day a company writes and receives checks totaling $10,000. If it takes five days for the checks to clear and be deducted from the company’s account, and only four days for the deposits to clear, what is the float?
Correct A.
$10,000
B.
$(10,000)
C.
$50,000
D.
$25,000
The delay for the checks and deposits to clear the company’s account is called the “float.” During the float, the company has the use of the cash equal to the amount of checks written but does not have the use of deposits until they clear its bank.
Since it takes five days for the checks to clear (i.e., be deducted from the company’s account), the company has the use of $10,000 for five days or what is essentially a “loan” of $50,000. However, for the four days required for the deposits to clear, the company is losing the use of $10,000 × 4 or $40,000. Thus, the company enjoys a net 1-day float on the checks it writes of $10,000.
Thus, skillful management of the float requires the company to delay the coverage of checks as long as possible and to deposit checks received as quickly as possible.
The method for allocating service department costs that best recognizes the mutual services rendered to other service departments is the:
A.
dual-rate allocation method.
B.
direct allocation method.
C.
step-down allocation method.
Correct D. linear algebra (reciprocal) allocation method.
The linear algebra or reciprocal allocation method recognizes reciprocity among service department by explicitly including the mutual services rendered among support departments.
The dual-rate allocation method is really a refinement of either the direct or step-down methods, depending upon how it is applied. In the dual-rate method, variable and fixed costs are allocated to departments in a two-step process, variable costs on current use and fixed costs on a long-term, maximum capacity basis. This method may not recognize any reciprocity of services among service departments.
The direct allocation method allocates the cost of service departments directly to the production departments without any intermediate allocations to other service departments. Thus, this method does not recognize any reciprocity of services among service departments.
The step-down allocation method allocates service department costs to other service departments and production departments usually starting with the service department that provides the most service to other service departments. This method allows for partial recognition of reciprocity of services among service departments.
Which of the following changes would result in the highest present value?
A.
A $100 decrease in taxes each year for four years
B.
A $100 decrease in the cash outflow each year for three years
C.
A $100 increase in disposal value at the end of four years
Incorrect D.
A $100 increase in cash inflow each year for three years
A.
A $100 decrease in taxes each year for four years
Two general rules can be developed related to present value calculations:
Increases in cash inflows (decreases in cash outflows) will result in higher present values, all else being equal.
The earlier the cash inflows (the later the cash outflows) the higher the present value, all else being equal.
Increases in cash flows can be the result of increased revenues, increases in other cash inflows, or decreases in cash outflows. Of the answer choices available, only one (a $100 decrease in taxes each year for four years) results in increased net cash inflows for each of four years, thus resulting in the highest present value.
Which of the following is a characteristic of a flexible budget?
Correct A.
Provides budgeted numbers for various activity levels
B.
Allows for modification during the budgeted period
C.
Isolates the impact of variable costs on the overall budget
D.
Can be utilized by several product divisions
A flexible budget is developed using the static budget standards for any activity level within the relevant range. Amounts are calculated using the actual output level based on the standard cost and usage per unit for variable items, and the identical dollar amounts for the fixed costs in the static budget are used in the flexible budget. A flexible budget prepared outside the relevant range would not necessarily be accurate.
Limitations of an activity-based costing system include which of the following?
A.
Control of overhead costs is enhanced.
B.
Activity-based costing systems are less reliable.
Correct C.
The expense of obtaining cost data is relatively high.
D.
It eliminates arbitrary assignment of overhead costs
Activity-based costing (ABC) accumulates costs in cost pools related to separately identified activities that are allocated based on cost drivers. One limitation of an ABC system is that the cost of determining the pools and drivers is higher than a traditional allocation system based on one base, such as direct labor costs.
Enhanced control of overhead costs and elimination of arbitrary assignment of overhead costs are incorrect because they are advantages of ABC, not limitations. ABC systems are usually more reliable than traditional cost accounting systems because overhead costs are allocated to products in a more meaningful manner.
Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear’s return on equity?
A.
3.5%
Incorrect B.
5.3%
C.
14.7%
D.
22.9%
C.
14.7%
Assets total $2.500,000. The sum of liabilities and equity also equals $2,500,000 (Assets=Liab+OE)2.5=1M+1.5 The company will have debt equal to 40% of the $2,500,000 or $1,000,000. That leaves equity of $1,500,000. Since the profit is 11% of the $2,000,000 sales, the company has a profit of $220,000. Return on equity is net income divided by equity and profit of $220,000 divided by equity of $1,500,000 gives return on equity of 14.7%.
Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The following information pertains to product Maggie for the 10-week period:
Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit
Using absorption costing, what is Augusta’s budgeted income for the period?
Correct A.
$95,000
B.
$140,000
C.
$305,000
D.
$350,000
Absorption costing is a method of costing in which manufacturing fixed costs are treated as product costs and assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as inventoriable costs and are expensed through cost of goods sold when the units are sold.
Dividing 70,000 units to be produced into $210,000 of manufacturing fixed costs gives $3 per unit produced. Production costs include materials of $3, other variable costs of $2, and fixed costs of $3, for a total of $8 per unit.
Selling 70,000 units at $11 each results in revenue of $770,000.
Cost of sales is 70,000 units at $8, or $560,000.
This leaves a gross profit of $210,000 ($770,000 − $560,000).
Selling and administrative costs include the variable costs of 70,000 units at $1 each, or $70,000, plus fixed costs of $45,000, for a total of $115,000.
Subtracting $115,000 of selling and administrative costs from gross profit of $210,000 leaves a net profit of $95,000.
Which of the following is responsible for making sure that the information system operates efficiently and effectively?
A.
Network manager
B.
Security management
Correct C.
Systems administrator
D.
Change management
The systems administrators make sure the information system operates efficiently and effectively. The network managers make sure the networks operate continuously and properly and that all applicable devices are linked to the organization’s internal and external networks. Security management makes sure all system components are secure and protected from any and all internal as well as external threats.
Which of the following tasks would be included in a document flowchart for processing cash receipts?
Correct A.
Compare control and remittance totals
B.
Record returns and allowances
C.
Authorize and generate an invoice
D.
Authorize and generate a voucher
One of the key tasks in processing cash receipts is to compare control totals and remittance totals. Such a task may be represented by a box on a flowchart describing the process. Tasks such as recording returns and allowances, authorizing and generating invoices, and authorizing and generating vouchers are not part of processing cash receipts.
The following information pertains to Quest Co.’s Gold Division:
Sales $311,000 Variable cost 250,000 Traceable fixed costs 50,000 Average invested capital 40,000 Imputed interest rate 10%
Quest’s return on investment was:
A.
10.00%.
B.
13.33%.
Correct C.
27.50%.
D.
30.00%.
Division net income equals $311,000 sales less variable costs of $250,000 and traceable fixed costs of $50,000, or $11,000.
Return on investment is net income ($11,000) divided by investment ($40,000), or 27.5%.
The capital budgeting model that is generally considered the best model for long-range decision making is the:
A.
payback model.
B.
accounting rate of return model.
C.
unadjusted rate of return model.
Correct D.
discounted cash flow model.
The capital budgeting model that is generally considered the best model for long-range decision making is the discounted cash flow model because the time value of money (present and future values) is considered.
The payback model and accounting rate of return model are unadjusted rate of return models which do not consider the time value of money.
A distributed processing environment would be most beneficial in which of the following situations?
Correct A.
Large volumes of data are generated at many locations and fast access is required.
B.
Large volumes of data are generated centrally and fast access is not required.
C.
Small volumes of data are generated at many locations, fast access is required, and summaries of the data are needed promptly at a central site.
D.
Small volumes of data are generated centrally, fast access is required, and summaries are needed monthly at many locations.
A distributed/decentralized processing environment works best when significant volumes of data are generated at many remote locations and the user requires near-immediate access to the data. This type of processing environment will allow for quick access to the data as opposed to having that information generated at many locations and processed at a centralized location.
Which of the following security controls might prevent unauthorized access to sensitive data via an unattended data terminal directly connected to a mainframe?
A.
Use of a screen saver
Incorrect B.
Use of passwords to identify users
C.
Encryption of data files
D.
Automatic log-off of inactive users
Automatic log-off of inactive users would help to prevent unauthorized access to sensitive data displayed on an unattended terminal. This could create a problem, however, if the time interval for non-use log-off was set too short.
Using a screen saver is not a solution. Simply moving the mouse or keyboard would restore the sensitive data.
The use of a password would not prevent viewing of sensitive data already displayed on the monitor.
Encryption of data files would not prevent viewing of data displayed on a monitor.
Which of the following is not one of the five components of internal control identified in SAS 78 as originally included in the COSO Report?
A.
Control environment
Correct B.
Accounting system
C.
Control activities
D.
Information and communication
Accounting system is not one of the five components of internal control identified in SAS 78. This was one of the elements of internal control identified in SAS 55, but this part of SAS 55 has been superseded by SAS 78. The five components are control environment, risk assessment, control activities, information and communication, and monitoring activities.
The use of activity-based costing normally results in:
A.
substantially greater unit costs for low-volume products than is reported by traditional product costing.
Incorrect B.
substantially lower unit costs for low-volume products than is reported by traditional product costing.
C.
decreased set-up costs being charged to low-volume products.
D.
equalizing set-up costs for all product lines.
In the past, conventional costing techniques assigned indirect manufacturing costs to a single (or few) cost pool(s) and allocated those costs based on a single (or few) allocation base(s). The result was that both high and low volume products received the same unit “dosage” of indirect costs.
Activity-based costing (ABC) utilizes multiple cost pools for accumulating indirect costs. These costs are then allocated to products in proportion to the respective products’ consumption of those resources. Thus, low volume products which consume more resources (such as set-up costs) receive substantially greater unit costs than they would receive under traditional costing.
A disk storage unit is preferred over a magnetic tape drive because the disk storage unit:
A.
has nine tracks.
B.
offers sequential access to data files.
C.
offers random access to data files.
Incorrect D.
is a cheaper medium for data storage.
Access to data takes less time with disk storage than with magnetic tape storage.
Consider how data is stored on magnetic tape. Blocks of data files are arranged linearly along the entire length of the tape. In order to move from a read location at or near the beginning of the tape to a read location near the end of the tape, it is necessary to travel over all tape between the two read locations.
On the other hand, if disk storage is used, it is possible to jump directly from one read location to another. This is possible because disk storage offers random access to data files.
Yola Co. manufactures one product with a standard direct labor cost of four hours at $12.00 per hour. During June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was:
A.
$1,220.
Correct B.
$1,200.
C.
$820.
D.
$400.
LEV= SR (SR-AH)
12(4,000-4,100)
=1,200
The labor efficiency (usage) variance is the difference between standard cost of actual hours and the standard cost of the budgeted labor hours.
Standard cost (at $12 per hour) of the actual hours of 4,100 hours was $49,200. Standard cost (at $12 per hour) of the standard hours (4 hours × 1,000 units) was $12 × 4,000 hours, or $48,000. Since the actual cost was more than the budgeted cost ($49,200 − $48,000), the labor efficiency (usage) variance was $1,200 unfavorable.
The following information is available on Crain Co.’s two product lines:
Chairs Tables
--------- --------- Sales $180,000 $ 48,000 Variable costs (96,000) (30,000)
--------- --------- Contribution margin $ 84,000 $ 18,000 Fixed costs: Avoidable (36,000) (12,000) Unavoidable (18,000) (10,800)
--------- --------- Operating income (loss) $ 30,000 $ (4,800)
========= ========= Assuming that the table line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount?
When looking at business segment issues, relevant items are those that are avoidable. In other words, revenue, variable costs, and avoidable fixed costs are relevant. The allocated common costs are not relevant since they will continue even if the table line is discontinued. If the segment margin is positive, this means that the segment is making a contribution toward the common costs of the organization. Reordering the information given in the problem, it can be seen that the table segment has a positive segment margin.
Total Chairs Tables
--------- --------- --------- Sales $228,000 $180,000 $ 48,000 Variable costs (126,000) (96,000) (30,000)
--------- --------- --------- Contribution margin $102,000 $ 84,000 $ 18,000 Avoidable fixed costs (48,000) (36,000) (12,000)
--------- --------- --------- Segment margin $ 54,000 $ 48,000 $ 6,000
========= ========= Unavoidable fixed costs (28,800)
--------- Operating income $ 25,200
========= What items are relevant if the table line is discontinued? The table-line segment margin would be eliminated; however, factory space that would be freed up could then be rented for $24,000 per year (opportunity cost).
Solution:
Lost contribution to overhead $(6,000)
Rental opportunity 24,000
——–
Increase in operating income $18,000
FASB ASC 820 discusses the disclosures that need to be presented in financial statements related to fair value measurements. A basic goal of these disclosures is to provide:
Correct A.
enough information to the user of the financial statements so that the inputs used in the fair value measurement can be assessed.
B.
evidence that the fair value measurement is accurate.
C.
a reconciliation of the beginning and ending balances of the various fair value measurements for all nonrecurring fair value measurements.
D.
information on the effect of the fair value measurements on the retained earnings balance.
Per FASB ASC 820, the disclosures related to fair value measurements contained in the financial statements need to:
allow for enough information to be provided so that the user of that information can do a reasonable assessment of the inputs used to develop the fair value.
provide for enough information so that the use of significant unobservable inputs (Level 3 inputs) can be assessed.
Although a reconciliation of the beginning and ending balances of balance sheet items using a fair value measurement needs to be provided for all recurring measurements, a reconciliation only needs to be done for nonrecurring fair value measurements when significant unobservable inputs are used (Level 3).
Madi and Molly, Inc., produces lumber, with an average pine tree having 61% of its trunk producing construction grade lumber. Of the remaining 39%, 22% is used for producing wood products for a local furniture manufacturer, and 17% goes to waste. Therefore, Madi and Molly’s lumber usage rate is 83%. In 20X1 the local furniture manufacturer closed, leaving no viable prospects for Madi and Molly to sell the 22% of the wood allocated to the furniture manufacturer. What improvement initiative should Madi and Molly implement to have its lumber usage rate rise back above 80%? You can assume that an increase in the lumber usage rate will replace 100% of the revenue lost from the furniture manufacturer.
A.
Lean production
B.
Business excellence framework
C.
Six Sigma
Incorrect D.
Business process re-engineering
Lean manufacturing, which is often known simply as “lean,” is a production practice and methodology that focuses on reduction of the seven wastes (overproduction, waiting time, transportation, processing, inventory, motion, and scrap) in manufacturing products.
Upon the loss of sales to the furniture manufacturer, Madi and Molly were looking at waste of 39% (100% - 61% for lumber = 39%) as well as a loss in revenue. By implementing lean production tools to achieve 80% conversion of the raw materials (pine trees) into lumber, Madi and Molly would see its revenue stream remain even, while its waste was reduced from 39% to 20%. While it is true that waste was originally 17% before the loss of the furniture client, Madi and Molly’s decision to implement lean production tools must be based upon the current production data, which showed a 39% waste factor.
In a large organization, the biggest risk in not having an adequately staffed information center help desk is:
A.
increased difficulty in performing application audits.
B.
inadequate documentation for application systems.
C.
increased likelihood of use of unauthorized program code.
Correct D.
persistent errors in user interaction with systems.
The biggest risk in not having an adequately staffed help desk is that users will unknowingly persist in making errors in their interaction with the information systems.
Application audits should be about the same difficulty with or without an adequately staffed help desk.
Preparation of documentation is a development function, not a help desk function.
The likelihood of use of unauthorized program code is a function of change control, not a help desk.
Box Co. uses regression analysis to estimate the functional relationship between an independent variable (cost driver) and overhead cost. Assume that the following equation is being used:
y = A + Bx
What is the symbol for the independent variable?
A.
y
Correct B.
x
C.
Bx
D.
A
Linear regression with two variables takes the form y = Bx + A.
A is the y intercept.
B is the slope of the line. (Linear means a straight line, so the slope of the line is the same at any point on the line.)
y is the dependent variable since it is determined based on the other three terms.
x is the independent variable since it is an input to the equation, not based on the other terms.
When estimating a cost function (y), x is the cost driver that determines the value of y.
Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:
Variable manufacturing costs $ 9
Variable selling and administrative costs 6
—
Total $15
Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy’s pretax profit?
A.
$3,000 increase
Incorrect B.
$4,200 increase
C.
$3,000 decrease
D.
$4,200 decrease
Contribution margin per unit was $10 ($25 sales price less variable costs of $9 and $6). The contribution margin ratio was 40% ($10 contribution per unit divided by $25 sales revenue per unit).
Additional sales of $30,000 would have increased the contribution margin by $12,000 ($30,000 × 0.40). The increased contribution margin of $12,000 fails to cover the advertising costs of $15,000, leaving a decrease of $3,000 in pretax profit.
Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results:
Machine Direct Materials
Hours Weight
------- ---------------- Y intercept coefficient 2,500 4,600 B coefficient 5.0 2.6 R2 0.70 0.50
Which regression equation should be used?
A.
Y = 2,500 + 5.0X
Incorrect B.
Y = 2,500 + 3.5X
C.
Y = 4,600 + 2.6X
D.
Y = 4,600 + 1.3X
Coefficient of determination is a measure of the extent to which the independent variable accounts for the variation of the dependent variable (i.e., the amount of variation in y that is explained by x). It is the measure of how well the regression line fits the actual data points. The symbol for the correlation coefficient is R and the coefficient of determination is r squared (R2). Values of R range between -1 and 1. The closer the value is to 1, the greater the association (correlation) between the two variables.
Since the coefficient of determination (R2) is greater for machine hours than for direct materials weight (0.7 instead of 0.5), there is a stronger relationship between machine hours (the independent variable) and the resulting cost than there is between the resulting cost and direct materials weight. Thus, the resulting cost can be best estimated by substituting machine hours for X in the equation Y = 2,500 + 5.0X.
Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%.
Williams can sell 8% preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
Williams’ common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and flotation costs are expected to amount to $5 per share.
Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
Williams’ preferred capital structure is long-term debt, 30%; preferred stock, 20%; and common stock, 50%.
The firm’s weighted average cost of capital would be:
A.
4.8%.
Correct B.
6.6%.
C.
6.8%.
D.
7.3%.
he weighted cost of capital is 6.6%.
Step 1: Calculate the after-tax cost of each source of capital.
The cost of long-term debt, after tax, is given at 4.8%.
The cost of new preferred stock can be calculated as:
kpm = D / (PO - u - f), or kpm = 8.40 / (105 - 0 - 5) = 8.4%
Where:
D = Annual dividend, or 0.08 × $105 (the par value), or $8.4
PO = Selling price to the public of the new issue
u = Underpricing
f = Flotation cost per share
New equity consists of retained earnings and/or new issues of common stock. In this case, 50% of the 200,000 of total new funds must come from equity. Since the firm has $100,000 in retained earnings, the relevant cost of new equity is the cost of retained earnings, 7 ÷ 100 + 0%, or 7.0%.
Step 2: Calculate the Weighted Average Cost of Capital:
Source After-Tax Cost x Weight =
------ -------------- ------ a. L-T Debt .048 x .30 = .0144 b. Pref. Stock .084 x .20 = .0168 c. Ret. Earnings .070 x .50 = .0350
-----
Weighted Average Cost of Capital = .066 or 6.6%
Which of the following is most useful when risk is being prioritized?
A.
Low- and high-probability exposures
B.
Low- and high-degree loss exposures
Correct C.
Expected value
D.
Uncontrollable risks
Expected value is the sum of the outcomes (payoff) of each event multiplied by the probability of each event occurring. It combines the likelihood of each outcome with the payoff of that outcome, and so is a way of prioritizing alternatives while considering risk. None of the other answer choices consider both the likelihood and payoff of each alternative course of action.
Which of the following statements is correct concerning the security of messages in an electronic data interchange (EDI) system?
A.
Removable drives that can be locked up at night provide adequate security when the confidentiality of data is the primary risk.
B.
Message authentication in EDI systems performs the same function as segregation of duties in other information systems.
Correct C.
Encryption performed by a physically secure hardware device is more secure than encryption performed by software.
D.
Security at the transaction phase in EDI systems is not necessary because problems at that level will be identified by the service provider.
Correct C.
Encryption performed by a physically secure hardware device is more secure than encryption performed by software.
Wong Company utilizes both strategic planning and operational budgeting. Which one of the following items would normally be considered in a strategic plan?
A.
Setting a target of 12% return on sales
B.
Maintaining the image of the company as the industry leader
Incorrect C.
Setting a market price per share of stock outstanding
D.
Distributing monthly reports for departmental variance analysis
Strategic planning is the general planning done by top management that charts a company’s course through its operating environment. Maintaining the image of a company as an industry leader is therefore a strategic goal.
The other answer choices, listed below, are all operational or budgetary goals:
Setting a target of 12% return on sales
Setting a market price per share of stock outstanding
Distributing monthly reports for departmental variance analysis
The controller of Gray, Inc., has decided to use ratio analysis to analyze business cycles for the past two years in an effort to identify seasonal patterns. Which of the following formulas should be used to compute percentage changes for account balances for Year 1 to Year 2?
A.
(Prior balance - Current balance) / Current balance
B.
(Prior balance - Current balance) / Prior balance
Incorrect C.
(Current balance - Prior balance) / Current balance
D.
(Current balance - Prior balance) / Prior balance
The question concerns the change for Year 2 compared to Year 1. The amount of change is the increase or decrease from the prior year to the current year, equal to the current balance less the prior balance. The percentage change is calculated by dividing the amount of change by the beginning balance.
Data input validation routines include:
A.
terminal logs.
Correct B.
hash totals.
C.
backup controls.
D.
access logs.
Data input validation is the verification of accurate input of data which is an input control (a type of application control). A hash total is a kind of input control where some set nonfinancial numbers not normally totaled (such as invoice numbers or employee identification numbers) are totaled by the system after input and are compared to the total generated by the documents themselves. Terminal logs and access logs are all examples of access controls. A backup control is a kind of corrective control.
Data input validation also include?
Validation methods[edit]
Allowed character checks Checks that ascertain that only expected characters are present in a field. For example a numeric field may only allow the digits 0-9, the decimal point and perhaps a minus sign or commas. A text field such as a personal name might disallow characters such as , as they could be evidence of a markup-based security attack. An e-mail address might require at least one @ sign and various other structural details. Regular expressions are effective ways of implementing such checks. (See also data type checks below)
Batch totals Checks for missing records. Numerical fields may be added together for all records in a batch. The batch total is entered and the computer checks that the total is correct, e.g., add the ‘Total Cost’ field of a number of transactions together.
Cardinality check Checks that record has a valid number of related records. For example if Contact record classified as a Customer it must have at least one associated Order (Cardinality > 0). If order does not exist for a “customer” record then it must be either changed to “seed” or the order must be created. This type of rule can be complicated by additional conditions. For example if contact record in Payroll database is marked as “former employee”, then this record must not have any associated salary payments after the date on which employee left organization (Cardinality = 0).
Check digits Used for numerical data. An extra digit is added to a number which is calculated from the digits. The computer checks this calculation when data are entered. For example the last digit of an ISBN for a book is a check digit calculated modulus 10.[3]
Consistency checks Checks fields to ensure data in these fields corresponds, e.g., If Title = “Mr.”, then Gender = “M”.
Control totals This is a total done on one or more numeric fields which appears in every record. This is a meaningful total, e.g., add the total payment for a number of Customers.
Cross-system consistency checks Compares data in different systems to ensure it is consistent, e.g., The address for the customer with the same id is the same in both systems. The data may be represented differently in different systems and may need to be transformed to a common format to be compared, e.g., one system may store customer name in a single Name field as ‘Doe, John Q’, while another in three different fields: First_Name (John), Last_Name (Doe) and Middle_Name (Quality); to compare the two, the validation engine would have to transform data from the second system to match the data from the first, for example, using SQL: Last_Name || ‘, ‘ || First_Name || substr(Middle_Name, 1, 1) would convert the data from the second system to look like the data from the first ‘Doe, John Q’
Data type checks Checks the data type of the input and give an error message if the input data does not match with the chosen data type, e.g., In an input box accepting numeric data, if the letter ‘O’ was typed instead of the number zero, an error message would appear.
File existence check Checks that a file with a specified name exists. This check is essential for programs that use file handling.
Format or picture check Checks that the data is in a specified format (template), e.g., dates have to be in the format DD/MM/YYYY. Regular expressions should be considered for this type of validation.
Hash totals This is just a batch total done on one or more numeric fields which appears in every record. This is a meaningless total, e.g., add the Telephone Numbers together for a number of Customers.
Limit check Unlike range checks, data are checked for one limit only, upper OR lower, e.g., data should not be greater than 2 (
An incentive compensation program will:
A.
give all employees a bonus.
B.
lead to too much change.
C.
give only management bonuses.
Correct D.
lead employees toward the goals of the organization.
An incentive compensation program should be set up for the sake of leading employees toward accomplishing the goals of the organization. It is not the purpose of the program to give bonuses at will.
Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should:
Correct A.
have a cause-and-effect relationship with the cost items in the cost pool.
B.
assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way.
C.
be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is more objective.
D.
have a high correlation with the cost items in the cost pool as the sole criterion for selection.
All costs in a homogeneous cost pool should have a cause-and-effect relationship with the base that is employed for allocation.
An averaged or smoothed allocation may result in significant under or over allocation of costs.
Both financial and nonfinancial measures may be used as allocation bases.
Economic plausibility as well as high correlation are desirable for allocation bases.
Multiple regression differs from simple regression in that it:
A.
provides an estimated constant term.
B.
has more dependent variables.
C.
allows the computation of the coefficient of determination.
Correct D.
has more independent variables
Regression analysis seeks to identify change in a dependent variable (such as cost) related to change in an independent variable (such as a cost driver). Simple regression estimates a relationship between one dependent variable and one independent variable. On the other hand, multiple regression estimates a relationship between one dependent variable and two or more independent variables. Thus, multiple regression has more independent variables than does simple regression.
Cyclical fluctuations, random variations, seasonal variations, and secular trend are all components of:
A.
exponential smoothing.
B.
learning curve analysis.
C.
sales forecasting.
Correct D.
time series analysis.
Time series analysis focuses on evaluation of trends over time. It may entail several components including seasonal variation and secular trends.
Which of the following types of budgets is the last budget to be produced during the budgeting process?
Correct A.
Cash
B.
Capital
C.
Cost of goods sold
D.
Marketing
A cash budget is the last budget to be prepared in the budgeting process because the other steps must be completed before the effects of each part on cash can be estimated.
The steps to prepare a master budget are:
develop a sales forecast,
determine the desired level of finished goods inventory,
prepare a purchases or production budget,
estimate selling, administrative, and other general expenses,
organize the preceding information into an income statement, and
prepare a cash forecast.
In preparing the annual profit plan for the coming year, Wilkens Company wants to determine the cost behavior pattern of the maintenance costs. Wilkens has decided to use linear regression by employing the equation y = a + bx for maintenance costs. The prior year’s data regarding maintenance hours and costs, and the results of the regression analysis are given here.
Hours Maintenance
of Activity Costs
----------- -----------
Sum 4,480 $43,200
Average 400 3,600
Average cost per hour = $9.00; a = 684.65; b = 7.2884; Standard error of a = 49.515; Standard error of b = .12126; Standard error of the estimate = 34.469; r2 = .99724.
Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean the maintenance costs (rounded to the nearest dollar) would be budgeted at:
A.
$3,780.
B.
$3,790.
Correct C.
$3,746.
D.
$3,756.
In this problem, hours of activity is the independent variable (x) with maintenance costs (y) being dependent upon the level of activity achieved. Using the standard simple regression equation and the other information given:
y = a + bx
y = 684.65 + 7.2884x If maintenance activity (x) in a month is 420 hours, then maintenance costs for the month would be:
y = 684.65 + 7.2884(420)
= 684.65 + 3061.13
= 3745.78
= $3,746
Probability (risk) analysis is:
A.
used only for situations involving five or fewer possible outcomes.
B.
used only for situations in which the summation of probability weights is greater than one.
Correct C.
an extension of sensitivity analysis.
D.
incompatible with sensitivity analysis.
Sensitivity analysis determines how the results will change if the original data or the underlying assumptions change. It is the process of identifying the data changes that alter optimal solutions and the decisions made based on that solution. Probability analysis combines the likelihood of various outcomes with sensitivity analysis.
Probability analysis can be used with an infinite number of outcomes, and 1.00 is the largest possible probability. It is helpful to combine probability analysis with sensitivity analysis to evaluate the sensitivity of various outcomes to risk.
Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity?
A.
$35,000
B.
$25,000
C.
$15,000
Correct D.
$10,000
Opportunity costs are the earnings that could have been received had the storage been used in their best alternative use, such as foregone rental income. The company could have earned $10,000 renting out the space, and they have lost that opportunity by using the space for production. It may have been the correct decision, however, because they could earn more by producing in the space than by renting the space. Even if it is the correct decision, they have still lost the opportunity to earn the $10,000 from rental.
Which of the following inputs would be most beneficial to consider when management is developing the capital budget?
A.
Supply/demand for the company’s products
Incorrect B.
Current product sales prices and costs
C.
Wage trends
D.
Profit center equipment requests
Capital budgeting involves management making decisions about spending money on long-term assets. In order to make these decisions, management must first know what each profit center’s equipment needs are.
Supply and demand for the company’s products, current sales prices and costs, and wage trends would be helpful in order to determine future cash flows as they relate to implementing various capital projects, but these are not the best answers.
Pinecrest Co. had variable costs of 25% of sales and fixed costs of $30,000. Pinecrest’s breakeven point in sales dollars was:
A.
$24,000.
B.
$30,000.
Correct C.
$40,000.
D.
$120,000.
Contribution margin ratio = Gross profit ÷ Sales = 75% (0.75)
Breakeven point in dollars = Fixed costs ÷ CM ratio = $30,000 ÷ 0.75 = $40,000
When using a flexible budget, a decrease in production levels within a relevant range:
A.
decreases variable cost per unit.
Correct B.
decreases total costs.
C.
increases total fixed costs.
D.
increases variable cost per unit.
In a normal flexible budget situation (where both variable and fixed costs are present), a decrease in the level of production would be accompanied by a decrease in total costs.
Proof: Assume that variable cost per unit is $10 and total fixed cost is $50,000 per time period.
Production (units) 10,000 decreases to 8,000
——– ——–
Variable costs
(10,000 x $10) $100,000
( 8,000 x $10) $ 80,000
Fixed costs 50,000 50,000
——– ——–
Total cost $150,000 decreases to $130,000
For the current-period production levels, Woodwork Co. budgeted 11,000 board feet of production and purchased 15,000 board feet. The material cost was budgeted at $7 per foot. The actual cost for the period was $8.50 per foot. What was Woodwork’s material price variance for the period?
A.
$6,000 unfavorable
B.
$16,500 unfavorable
C.
$19,500 unfavorable
Correct D.
$22,500 unfavorable
MPV= AQ (SP-AP)
15,000(7-8.50)
22,500 Unfavorable
Brewster Co. has the following financial information:
Fixed costs $20,000
Variable costs 60%
Sales price $50
What amount of sales is required for Brewster to achieve a 15% return on sales?
A.
$33,333
B.
$50,000
Correct C.
$80,000
D.
$133,333
To achieve a 15% return on sales, $80,000 is required:
Net income = 0.15 x Sales
Sales - Variable costs - Fixed costs = Net income
Sales - (0.60 x Sales) - $20,000 = 0.15 x Sales
(0.85 x Sales) - (0.60 x Sales) = $20,000
0.25 x Sales = $20,000
Sales = $80,000
Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The following information pertains to product Maggie for the 10-week period:
Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit
What amount should Augusta budget for cash payments to material suppliers during the period?
A.
$189,000
B.
$229,000
Incorrect C.
$210,000
D.
$214,000
Manufacturing and sales occur evenly over the period, so each week has the same production and sales. At 70,000 units, that is 7,000 units per week. Cash payments for materials are $3 per unit, so payments for material for one week’s production is $21,000.
They will pay $40,000 at the beginning of the period for beginning accounts payable in addition to paying for 70,000 units at $3 per unit, or $210,000, for a total of $250,000. However, the materials used during the last week, 7,000 units at $3, or $21,000, will not be paid until the first week after the end of the period, reducing cash payments during the period down to $229,000.
What is the cost of ending inventory given the following factors?
Beginning inventory $ 5,000 Total production costs 60,000 Cost of goods sold 55,000 Direct labor 40,000 A. $5,000
Correct B.
$10,000
C.
$45,000
D.
$50,000
Ending inventory = Production costs + Beginning inventory -
COGS (Cost of goods sold)
= $60,000 + $5,000 - $55,000
= $10,000
Note: Direct labor would have already been included in the total production costs.
To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes. Which of the following attributes would selected sales volume reflect?
A.
The midpoint of the range
B.
The median
C.
The greatest probability
Incorrect D.
The expected value
“Most likely” is another way of saying the question is looking for the outcome with the greatest probability of occurrence.
Measures of central tendency include mean (average), mode (most common value), and median (the amount with half the values above and half below). Expected value is the weighted average of all the outcomes weighted by probability of occurrence.
The midpoint, median, and expected value may not have the greatest probability of occurrence, so none of those are necessarily the most likely to occur.
At annual sales of $900,000, the Ebo product has the following unit sales price and costs:
Sales price $20
—
Prime cost 6
Manufacturing overhead
Variable 1
Fixed 7
Selling and admin. costs
Variable 1
Fixed 3
—
18
—
Profit $ 2
===
What is Ebo’s breakeven point in units?
Prime cost consists of direct material and direct labor. Both of these are variable costs, so total variable cost is $8 per unit ($6 + $1 + $1).
Current unit sales = $900,000 / $20 per unit = 45,000 units
Total fixed costs = (45,000 x $7) + (45,000 x $3)
= $315,000 + $135,000
= $450,000
Breakeven units = Total fixed costs / (Selling price - Variable cost)
= $450,000 / ($20 - $8)
= $450,000 / $12
= 37,500 units
A company produces and sells two products. The first product accounts for 75% of units sold and the second product accounts for the remaining 25% of units sold. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the breakeven point, what number of units of the first product will have been sold?
A.
52,000
B.
39,000
Incorrect C.
25,000
D.
14,625
Total fixed costs of $312,000 ($100,000 from Product 1 and $212,000 from Product 2) must be covered by the contribution margin of the two products combined.
We know three times as many Product 1 units are sold as Product 2 units because 75% of unit sales is from Product 1. If we imagine a product package of 3 units of Product 1 and 1 unit of Product 2, it would be sold for (3 × $10) + $25, or $55. The variable cost of the package would be 3 × $6, or $18 for Product 1, plus $13 for Product 2, a total variable cost of $31. The contribution margin of the package would be $24 ($55 - $31).
Breakeven package units = Fixed costs ÷ Contribution margin per package = $312,000 ÷ $24 = 13,000 package units
Since there are 3 units of Product 1 in each package, sales of Product 1 will be 3 × 13,000 packages, or 39,000 units of Product 1.
Mien Co. is budgeting sales of 53,000 units of product Nous for October. The manufacture of one unit of Nous requires four kilos of chemical Loire. During October, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase in October?
A.
138,000
B.
162,000
Correct C.
186,000
D.
238,000
Units produced = Unit sales + Increase in inventory
= 53,000 + 6,000
= 59,000 units of Nous
Purchases of Loire = Production requirement - Decrease in inventory
= (59,000 x 4) - 50,000
= 236,000 - 50,000
= 186,000 kilos of Loire
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the price per cup to be $9.00, variable manufacturing costs to increase 33.3%, and fixed costs to increase 10%. How many cups (rounded) does the company need to sell this year to break even?
A.
17,111
B.
17,500
C.
19,250
Incorrect D.
25,667
Total fixed costs were not given directly in the problem; however, they can be determined by first calculating the fixed costs for the prior year. Last year, the company needed to sell 20,000 cups in order to break even; therefore:
Last year’s fixed costs = 20,000 units x ($7.50 - $2.25)
= $105,000
The projected fixed costs are 10% more than the prior year.
Projected fixed costs = $105,000 x 1.10
= $115,500
Breakeven in units = FC ÷ (P - V) = $115,500 ÷ ($9 - $3) = 19,250 units
Terms
A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:
Per Unit Total
-------- ------- Direct materials $4 $40,000 Direct labor 3 30,000 Fixed plant facility cost 2 20,000
The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company’s monthly costs change?
A.
Decrease $15,000
B.
Decrease $10,000
Correct C.
Increase $5,000
D.
Increase $10,000
The product should be produced if the incremental cost to produce the product, including any opportunity cost of idle facilities, is less than the purchase price.
Since the fixed plant charge will not change due to this decision, it is irrelevant and should not be considered. The direct materials and direct labor costs ($40,000 + $30,000 = $70,000) are relevant costs. These incremental costs total $70,000 per month to make the product, while they can buy the part for $80,000 per month, an increase in monthly costs of $10,000.
However, the rental income from renting the idle capacity of $5,000 reduces the monthly cost of purchasing the parts, for a net increase in monthly costs of $5,000.
A company’s controller is adjusting next year’s budget to reflect the impact of an expected 5% inflation rate. Listed below are selected items from next year’s budget before the adjustment:
Total salaries expense $250,000
Health costs 100,000
Depreciation expense 65,000
Interest expense on 10-year, fixed-rate notes 37,750
After adjusting for the 5% inflation rate, what is the company’s total budget for the selected items before taxes for next year?
Correct A.
$470,250
B.
$472,138
C.
$473,500
D.
$475,388
The expected inflation rate of 5% will affect items where the costs are being incurred due to activities taking place during the year, as opposed to being related to past actions or decisions. For example, the depreciation expense is based upon the systematic expensing of prior capital purchases. The interest expense is based upon a contract entered into sometime in the past.
The total budget before taxes for the items listed would be as follows:
Total salaries expense ($250,000 x 1.05 (105%)) $262,500
Health costs ($100,000 x 1.05) 105,000
Depreciation expense 65,000
Interest expense on 10-year, fixed-rate notes 37,750
——–
Adjusted budget $470,250
========
Terms
The operating results in summarized form for a retail computer store for 20X1 are:
Revenue:
Hardware sales $4,800,000
Software sales 2,000,000
Maintenance contracts 1,200,000
———-
Total revenue $8,000,000
Costs and expenses:
Cost of hardware sales $3,360,000
Cost of software sales 1,200,000
Marketing expenses 600,000
Customer maintenance costs 640,000
Administrative expenses 1,120,000
———-
Total costs and expenses $6,920,000
———-
Operating income $1,080,000
==========
The computer store is in the process of formulating its operating budget for 20X2 and has made the following assumptions:
The selling prices of hardware are expected to increase 10% but there will be no selling price increases for software or maintenance contracts.
Hardware unit sales are expected to increase 5% with a corresponding 5% growth in the number of maintenance contracts; growth in software unit sales is estimated at 8%.
The cost of hardware and software is expected to increase 4%.
Marketing expenses will be increased 5% in the coming year.
Three technicians will be added to the customer maintenance operations in the coming year, increasing the customer maintenance costs by $120,000.
Administrative costs will be held at the same level.
The retail computer store’s budgeted total revenue for 20X2 would be:
A.
$8,804,000.
Incorrect B.
$8,460,000.
C.
$8,904,000.
D.
$8,964,000.
Hardware sales = $4,800,000 x 1.05 x 1.10 = $5,544,000
Software sales = $2,000,000 x 1.08 = $2,160,000
Maintenance contracts = $1,200,000 x 1.05 = $1,260,000
———-
Total budgeted revenue for 20X2 $8,964,000
Hardware sales = $4,800,000 x 1.05 x 1.10 = $5,544,000 Correct
Software sales = $2,000,000 Incorrect(*)
Maintenance contracts = $1,200,000 x 1.05 = $1,260,000 Correct
———-
Total $8,804,000 Correct
$8,804,000 is incorrect because software sales do not include 8% growth.
Hardware sales = $4,800,000 x 1.05 = $5,040,000 Incorrect(*)
Software sales = $2,000,000 x 1.08 = $2,160,000 Correct
Maintenance contracts = $1,200,000 x 1.05 = $1,260,000 Correct
———-
Total $8,460,000
$8,460,000 is incorrect because hardware sales do not reflect a 10% price increase.
Hardware sales = $4,800,000 x 1.05 x 1.10 = $5,544,000 Correct
Software sales = $2,000,000 x 1.08 = $2,160,000 Correct
Maintenance contracts = $1,200,000 Incorrect(*)
———-
Total $8,904,000
$8,904,000 is incorrect because the computation does not include the 5% increase in maintenance contracts.
Carter Co. paid $1,000,000 for land three years ago. Carter estimates it can sell the land for $1,200,000, net of selling costs. If the land is not sold, Carter plans to develop the land at a cost of $1,500,000. Carter estimates net cash flow from the development in the first year of operations would be $500,000. What is Carter’s opportunity cost of the development?
A.
$1,500,000
Correct B.
$1,200,000
C.
$1,000,000
D.
$500,000
B. Correct! Opportunity cost is the (discounted) dollar value of benefits lost from an alternative (opportunity) as a result of choosing another alternative (opportunity). By choosing to develop the land, Carter would give up the opportunity to sell the land for $1,200,000, the opportunity cost.
Which of the following types of variances would a purchasing manager most likely influence?
A.
Direct materials price
Incorrect B.
Direct materials quantity
C.
Direct labor rate
D.
Direct labor efficiency
A purchasing manager contracts for purchases of raw materials, which affects the price per unit that is used in computing the direct materials price variance.
Direct materials quantity is incorrect because the quantity purchased is determined by the requisition from the using department, not negotiated by the purchasing manager. Direct labor rate and direct labor efficiency are incorrect because the purchasing manager purchases materials, not labor.
Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:
Fixed costs: $21,000
Variable costs: $33,000
The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?
A.
$36,700
B.
$40,750
C.
$54,000
Incorrect D.
$58,050
Relevant costs are expected future costs that are important or pertinent to the decision under consideration and will be affected by the decision. Historical or past (sunk) costs are irrelevant to the actual decision because the past costs will not be changed (recovered) by future action.
In this question, the fixed costs are a sunk cost that cannot be changed whether this special order is accepted or not. The relevant costs for this job include the variable costs of $33,000 plus the external design cost of $7,750 for a total of $40,750. Any price received for the special job above this will increase the company’s profit by the amount the price exceeds $40,750.
A company has gathered the following information from a recent production run:
Standard variable overhead rate $10 Actual variable overhead rate 8 Standard process hours 20 Actual process hours 25 What is the company's variable overhead spending variance?
A.
$50 unfavorable
Correct B.
$50 favorable
C.
$40 unfavorable
D.
$40 favorable
The variable overhead spending variance is the difference between the actual amount paid ($8) and standard overhead ($10) for the 25 actual hours. The difference of $2 multiplied by 25 actual hours gives $50. The variance is favorable because the actual cost ($8) was less than the standard cost ($10).
The ABC Company is trying to decide between keeping an existing machine and replacing it with a new machine. The old machine was purchased just 2 years ago for $50,000 and had an expected life of 10 years. It now costs $1,000 a month for maintenance and repairs due to a mechanical problem. A new machine is being considered to replace it at a cost of $60,000. The new machine is more efficient and it will only cost $200 a month for maintenance and repairs. The new machine has an expected life of 10 years. In deciding to replace the old machine, which of the following factors, ignoring income taxes, should ABC not consider?
A.
Any estimated salvage value on the old machine
Correct B.
The original cost of the old machine
C.
The estimated useful life of the new machine
D.
The lower maintenance cost on the new machine
The original cost of the old machine is a sunk cost. It will not change whether or not the machine is replaced, and so it is irrelevant to the replacement decision.
The sales price (salvage value) of the old machine reduces the net cost of acquiring the new machine and should be considered. The longer the useful life of the new machine, the less the cost of using it each year. The lower maintenance cost should be considered since it reduces the cost of changing to the new machine.
In a computerized billing system, the computer generates a form that has two parts. The first part is a bill that customers are to retain and the second part is to be returned by customers with their payments. The return portion of the form is referred to as:
Correct A.
a turnaround document.
B.
a point-of-sale document.
C.
a transaction document.
D.
an accounts payable document
A turnaround form is an output form that is later used for input. The turnaround form increases efficiency and eliminates input errors.
Point-of-sale document may only be electronic in that the transaction is sent from a terminal without the use of a portion of a form.
A transaction document could be an internal, as well as external, document (e.g., deposit ticket, GL ticket).
An accounts payable document is a transaction document used in the accounts payable system (e.g., invoices, GL tickets).
Controllable revenue would be included in a performance report for:
Correct A.
a profit center.
B.
a cost center.
C.
both a profit center and a cost center.
D.
neither a profit center nor a cost center.
The performance report of a profit center would appear as follows:
Controllable revenue XXX
Less Controllable costs XX
---
Profit center income XX
===
Note that controllable revenue does appear in this performance report. On the other hand, only controllable costs appear in the cost center performance report.
In business information systems, the term “stakeholder” refers to which of the following parties?
A.
The management team responsible for the security of the documents and data stored on the computers or networks
B.
Information technology personnel responsible for creating the documents and data stored on the computers or networks
C.
Authorized users who are granted access rights to the documents and data stored on the computers or networks
Correct D.
Anyone in the organization who has a role in creating or using the documents and data stored on the computers or networks
A “stakeholder” is a broad term, encompassing all those with an interest in preparing or using the information. The other answer choices describe specific stakeholders, but there are other stakeholders as well.
A recent application of electronic data interchange (EDI) and the Internet is business-to-business (B2B) online commerce. Effective use of B2B should enable companies to:
A.
increase market efficiency.
B.
reduce purchasing costs.
Correct C.
both increase market efficiency and reduce purchasing costs.
D.
neither increase market efficiency nor reduce purchasing costs.
Purchasing raw materials and supplies online should reduce the cost of purchasing those goods. The ease of obtaining price quotations increases market intelligence.
A financial lease:
A.
may normally be canceled by the lessee on 30 days’ notice.
Correct B.
has a duration that corresponds to the useful life of the asset and payments that amortize the cost of the asset while providing the lessor an interest return.
C.
is only available through a bank.
D.
is only available on assets whose economic life exceeds 20 years.
Financial leases are financing-type leases. They typically are noncancelable and extend over the life of the leased asset with title transferring to lessee at the end of the lease term. Lease payments “pay for” the asset while providing the lessor with interest income.
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
A.
The client is a single-product manufacturer.
B.
Most of the client’s costs currently are classified as direct costs.
Correct C.
The client produced products that heterogeneously consume resources.
D.
The client produced many different products that homogeneously consume resources.
Activity-based costing (ABC) systems use a two-step process. First, a separate pool accumulates the overhead costs associated with each activity and some distinct measure is found for that activity. Overhead costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the overhead costs accumulated by product line are then allocated to the individual units in the product line.
The idea is that when various products consume significantly different levels of resources, costs can be more accurately assigned by identifying the level of resource use for each different product. Therefore, activity-based costing would be appropriate if the client’s products heterogeneously consume resources (each takes different levels of resources).
A single product manufacturer would not be able to benefit from closely analyzing the cost structure of different products. ABC systems are used to assign indirect costs, not direct costs clearly associated with specific products. If the different products homogeneously consume resources, they all have the same level of resource consumption, so the client would not benefit from analyzing the differences in resource consumption.
An employee mistakenly enters “April 31” in the date field. Which of the following programmed edit checks offers the best solution for detecting this error?
A.
Online prompting
B.
Mathematical accuracy
C.
Preformatted screen
Correct D.
Reasonableness
Programmed edit checks deal with the mathematical accuracy and reasonableness of data entries. There is no mathematical calculation in determining that April 31 is an incorrect date. However, the determination would be part of a reasonableness check comparing the actual number of days in a specific month with the day of the month entered in the date field.
Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney’s desired payback period, the press must produce a minimum annual before-tax, operating cash savings of:
Incorrect A.
$90,000.
B.
$110,000.
C.
$114,000.
D.
$150,000.
Payback period is the number years required to repay the initial investment in a capital project. A $360,000 capital investment would need an after-tax cash flow of $90,000 to meet the goal of a 4-year payback. The key to solving this problem involves remembering to consider the cash savings resulting from decreased taxes due to the depreciation expense. Note that the problem asks for the operating cash savings.
In this problem, operating cash savings would be total cash savings less nonoperating cash savings (e.g., cash savings from lower taxes). Annual depreciation on a $360,000 asset with an estimated 6-year life with zero salvage value using straight-line depreciation is $60,000. The tax savings generated by this depreciation is $60,000 times 40%, or $24,000. Now calculate after-tax operating cash savings: $90,000 - $24,000 = $66,000. However, the problem asks for before-tax operating cash savings, calculated as follows:
$66,000 ÷ (1 - Tax rate of 0.40) = $66,000 ÷ 0.60 = $110,000
A bank implemented an expert system to help account representatives consolidate the bank’s relationships with each customer. The expert system has:
A.
a sequential control structure.
B.
distinct input/output variables.
Correct C.
a knowledge base.
D.
passive data elements.
Expert systems have knowledge bases that represent the facts and inferences it knows, which were “taught” to it by human experts.
Traditional programs (e.g., COBOL) have sequential control structures, distinct input/output variables, and passive data elements; expert systems do not.
Most large-scale computer systems maintain at least three program libraries: production library (for running programs); source code library (maintains original source coding); and test library (for programs which are being changed). Which of the following statements is correct regarding the implementation of sound controls over computer program libraries?
Incorrect A.
Only programmers should have access to the production library.
B.
Users should have access to the test library to determine whether all changes are properly made.
C.
Only the program librarian should be allowed to make changes to the production library.
D.
The computer operator should have access to both the production library and the source code library to assist in diagnosing computer crashes.
Allowing only the program librarian to make changes to the production library would appropriately restrict access to the program modules that are running.
Good control dictates that programmers cannot make undetected, unrecorded changes to data or programs. Thus, programmers should be restricted from accessing the production library.
Programmers should be responsible for making program changes and users should be responsible for testing the changes. It would be poor control to allow users to have access to the test library. It would decrease accountability, as well as the competence to make the changes.
If the operator had access to both program libraries, the operator would be in a position to make unauthorized and undetected changes to the computer programs.
Which of the following is necessary to be an audit committee financial expert according to the criteria specified in the Sarbanes-Oxley Act of 2002?
A.
A limited understanding of generally accepted auditing standards
B.
Education and experience as a certified financial planner
Correct C.
Experience with internal accounting controls
D.
Experience in the preparation of tax returns
A. Although an understanding of GAAS would be likely to be at least tangentially helpful in this setting, this is not specified by SOX as one of the key criteria. These directors are not going to be doing any audits themselves.
B. SOX is not looking for financial planners.
C. (Correct!) SOX, in Section 407, provides that, in defining the term “financial expert” (which the SEC has done in detail), the Commission shall consider whether a person has through education and experience acquired: (1) an understanding of GAAP and financial statements; (2) experience in (a) preparation of financial statements and (b) application of such principles in connection with the accounting for estimates, accruals, and reserves; (3) experience with internal accounting controls; and (4) an understanding of audit committee functions.
D. Tax return preparation experience is not what SOX is concerned with
In an automated payroll processing environment, a department manager substituted the time card for a terminated employee with a time card for a fictitious employee. The fictitious employee had the same pay rate and hours worked as the terminated employee. The best control technique to detect this action using employee identification numbers would be a:
A.
batch total.
Incorrect B.
record count.
C.
hash total.
D.
subsequent check.
Assuming that the substitution takes place after the time cards have been batched for processing, the best control technique listed would be the hash total. The hash total is a type of batch control total. It is the summation of a quantitative but noninformational data field; for example, check numbers, purchase order numbers, and employee identification numbers.
Gartshore, Inc., is a mail-order book company. The company recently changed its credit policy in an attempt to increase sales. Gartshore’s variable cost ratio for obtaining credit is 70% and its required rate of return is 12%. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 to 40 days. Ignoring any tax implications, what is the cost of carrying additional investment in accounts receivable, using a 360-day year?
A.
$168
B.
$1,512
C.
$2,000
Incorrect D.
$2,160
Cost of holding accounts receivable before credit policy change: $360,000 sales ÷ 360 days = $1,000 average daily sales:
30 days average collection period = $30,000 average A/R balance
12% required rate of return = $3,600 annual interest
Cost of holding accounts receivable after credit policy change: $432,000 sales ÷ 360 days = $1,200 average daily sales:
40 days average collection period = $48,000 average A/R balance
12% required rate of return = $5,760 annual interest
$5,760 - $3,600 = $2,160 additional annual interest on holding A/R balance.
However, by stating the variable cost ratio, the problem implies it expects a distinction made between actual investment in A/R and margin earned. The actual investment by Gartshore is its variable cost, which for a mail-order book company represents cost of goods purchased for sale. That is, there is no change in fixed costs. Consequently, the $2,160 needs to be reduced to represent only the interest on the variable cost portion: $2,160 × 70% variable cost = $1,512.
Which of the following input controls would prevent an incorrect state abbreviation from being accepted as legitimate data?
A.
Reasonableness test
B.
Field check
C.
Digit verification check
Correct D.
Validity check
A validity check is an edit test in which an identification number or transaction code is compared with a table of valid identification numbers or codes maintained in computer memory. As an example, the system would compare an incorrect state abbreviation of “PS” with all possible valid state abbreviations and determine that it is not an abbreviation for one of the 50 states.
A reasonableness check or test would compare the data entry to the database to make sure that the input was logically correct, not valid. In other words, does the entry make sense in light of the data required?
A field check makes sure that the entry is the correct type for the field (numeric or alphanumeric). Any letters would satisfy this requirement, whether or not they were a valid state abbreviation.
A check digit verification uses redundant digits to detect errors in data transcription. This check would not prevent an incorrect state abbreviation from being accepted as legitimate data.
In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:
A.
all cost drivers.
Correct B.
nonvalue-adding activities.
C.
all cost drivers and nonvalue-adding activities.
D.
neither all cost drivers nor nonvalue-adding activities.
The focal point in activity-based costing systems is activities, not cost drivers or products. Under activity-based costing, cost reduction is achieved through identifying and eliminating nonvalue-adding activities; that is, activities that do not add to the value of the finished product, such as unneeded material handling.
A software tool used to infrequently select or access items in the database would most likely be:
A.
a report generator.
B.
a program generator.
C.
an application generator.
Correct D.
a query utility program.
Report, program, and applications generators are fourth-generation languages that are used to create reports, programs, and applications on a routine basis.
Query utility programs enable a user to query or interrogate a database. Typically this is done on an as-needed basis.
Risk assessments, recovery plans for data systems, and implementation of safeguards are all components of:
A.
a control flowchart.
B.
a database.
Correct C.
a disaster recovery plan.
D.
an insurance claim form.
A disaster recovery plan should include a risk assessment, recommendation (and implementation) of safeguards, and recovery plans.
In a large multinational organization, which of the following job responsibilities should be assigned to the network administrator?
Correct A.
Managing remote access
B.
Developing application programs
C.
Reviewing security policy
D.
Installing operating system upgrades
Managing A. remote access
Database administrators (DBAs), also called network administrators, are responsible for developing and maintaining the organization's databases and for establishing controls to protect their integrity. Managing remote access would be one method used by DBAs to protect the integrity of the organization's databases
Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost?
Correct A.
Economic order quantity
B.
Just-in-time
C.
Materials requirements planning
D.
ABC
Economic order quantity (EOQ) is the quantity of inventory that should be ordered at one time in order to minimize the associated costs of carrying and ordering inventory, such as purchase-order processing, transportation, and insurance. Carrying costs increase as the size of the order increases. Setup or ordering costs, however, decrease as the size of the production run or order increases.
Just-in-time (JIT) is a manufacturing philosophy where the company receives raw materials just in time to go into production, manufactures parts just in time to be assembled into products, and completes products just in time to be shipped to customers. JIT reduces the cost of carrying inventory but does not equate inventory carry costs with restocking costs.
Materials requirements planning (MRP) meets forecasted sales demand by balancing existing production capacity and raw materials needs. MRP does not attempt to equalize restocking and carrying costs.
The ABC inventory management system establishes priorities based on valuation of the inventory items (A = high value; B = medium value; C = small value) so that management can pay more attention to categories A and B. It has nothing to do with ordering points.
It is important to maintain proper segregation of duties in a computer environment. Which of the following access setups is appropriate?
Correct A.
Users have update access for production data
B.
Users have update access for production data and application programmers have update access for production programs
C.
Application programmers have update access for production data and users have update access for production programs
D.
Users have update access for production data and application programmers have update access for both production data and programs
Users need to update data through applications programs.
Application programmers should not be able to change production programs. They should submit changes to the change control unit.
Application programmers should never have update access to production data. Users have no need to change production programs.
Which of the following is the primary advantage of using a value-added network (VAN)?
A.
It provides confidentiality for data transmitted over the Internet.
Correct B.
It provides increased security for data transmissions.
C.
It is more cost effective for the company than transmitting data over the Internet.
D.
It enables the company to obtain trend information on data transmissions.
Value-added networks (VANs) are telecommunication networks providing communication facilities, enhancing basic telecommunication services by passing, storing, and converting messages using enhanced security techniques.
“It provides confidentiality for data transmitted over the Internet” is incorrect because many VANs use private networks instead of the public Internet. “It is more cost effective for the company than transmitting data over the Internet” is false because the use of a VAN comes at additional cost above that for using the Internet. “It enables the company to obtain trend information on data transmissions” is false because, although a VAN may supply trend information on data transmissions, that is not a primary advantage of using a VAN.
An online database management system for sales and receivables was recently expanded to include credit approval transactions. An evaluation of controls was not performed prior to implementation.
If certain data elements were not defined in the expansion, the following problem could result:
A.
Unlimited access to data and transactions
Correct B.
Incomplete transaction processing
C.
Unauthorized program execution
D.
Manipulation of the database contents by an application program
Failure to completely define the program specification blocks (PSB) prevents the application program from accessing or changing data, resulting in incomplete processing.
Data element definition allows application programs to access or change data; therefore, if they are not defined, no access takes place.
Without the program specification blocks, the application program cannot access data and cannot execute.
The desired manipulation of the database contents by an application program cannot take place if program specification blocks are not defined.
Company management completes event identification and analyzes the risks. The company wishes to assess its risk after management’s response to the risk. According to COSO, which of the following types of risk does this situation represent?
A.
Inherent risk
Correct B.
Residual risk
C.
Event risk
D.
Detection risk
Answer A is incorrect because inherent risk is the risk that exists before management takes any steps to control the likelihood or impact of a risk.
Answer B is correct because residual risk is the risk that remains after management reacts to the risk, such as by instituting appropriate internal controls.
Answer C is incorrect because event risk is the risk of unforeseen events associated with a particular entity, not after management responds to the risk.
Answer D is incorrect because detection risk is the risk that auditors fail to detect a material misstatement in financial statements.
A total interruption of processing throughout a distributed information technology system can be minimized through the use of:
A.
exception reporting.
Correct B.
fail-soft protection.
C.
backup and recovery.
D.
data file security.
The capability to continue processing at all sites except a nonfunctioning one is called fail-soft protection, an advantage of distributed systems.
Exception reporting can be used to control correctness and timeliness of updates but cannot minimize the impact of an interruption.
Backup procedures are intended to prevent the recovery process from introducing any erroneous changes into the system after computer failure.
Data file security is intended to prevent unauthorized changes to data files.
To ensure the completeness of update in an online system, separate totals are accumulated for all transactions processed throughout the day. The computer then agrees these totals to the total of items accepted for processing. This is an example of:
Correct A.
run-to-run controls.
B.
computer matching.
C.
computer sequence check.
D.
one-for-one checking.
Run-to-run controls for an online system are able to accumulate separate totals for all transactions processed during the day and then agree the totals to the total of items accepted for processing.
Computer matching compares transaction data to referenced fields or records.
Computer sequence checks identify changes or breaks in a numerical sequence.
One-for-one checking generally requires manual comparisons of input data elements to processing results.
A manufacturing company employs a process cost system. The company’s product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2. The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below.
Beginning work-in-process 14,000
in Department 2 (90% complete
with respect to conversion costs)
Transferred in from Department 1 76,000
Completed and transferred to 80,000
finished goods
Spoiled units - all normal 1,500
Ending work-in-process in 8,500
Department 2 (60% complete
with respect to conversion costs)
If the manufacturing company uses the weighted-average method, the equivalent units for direct mat
Under weighted-average process costing, equivalent units is equal to units completed (both good and spoiled) plus work done on ending work-in-process. Thus:
Equivalent units for direct materials = 80,000 + 1,500 + 0 = 81,500
67,500 is the result of incorrectly subtracting beginning work-in-process units (i.e., 80,000 + 1,500 - 14,000 = 67,500). Under weighted average, work on beginning work-in-process is counted in the current period.
The 80,000 unit average is only partially correct. The good units completed plus spoiled units completed should be included in equivalent units.
90,000 is the result of adding units transferred-in to beginning work-in-process (76,000 + 14,000 = 90,000). Neither of these is used in computing weighted-average equivalent units.
Hint: There is a reason why the ending work-in-process (WIP) is not included in the answer to this problem. The information that precedes the question says that direct material is added in Department 2 when conversion is 80% complete. The question then asks for the equivalent units for direct materials in Department 2. Since the ending WIP is only 60% complete with respect to conversion costs, direct materials have not yet been added to the ending WIP. Therefore, 60% of the 8,500 is not part of the equivalent units for direct materials.
During a meeting with the CEO of the Marble Company, Connie CPA learned that the son of the CEO had worked at the company during one summer doing odd jobs. The year in question was included in the past financial records being used as a basis for the business valuation for which Connie had been engaged. The payroll records revealed that the son had received $40,000 (including taxes and other benefits) for this summer work. Connie should make a normalization adjust for:
A.
a nonoperating item for the full $40,000 received by the son.
Incorrect B.
a nonrecurring item for the full $40,000 received by the son since he only worked at the Mable Company for one summer.
C.
a comparability item for $20,000 since it is not likely that guideline companies would have paid $40,000 for the work performed.
D.
a discretionary item for $35,000 since the going market rate for the work performed by the son would have been $5,000.
Business valuators often have to make adjustments during the normalization process. There are four basic categories of normalization adjustments:
Nonoperating adjustments: the removal of nonoperating items included in the historical financial statements that are not part of normal operations. The performance of “odd jobs” around a business facility would be normal operating items.
Nonrecurring adjustments: the removal of unusual, unexpected, or items not likely to occur again from the financial statements. Although the son is not likely to perform these duties in the future, someone would need to do general maintenance on an ongoing basis.
Comparability adjustments: adjustments of the historical financial statements to match GAAP choices of potential guideline companies. The payment of wages is not a “GAAP” question, even though they may be excessive.
Discretionary adjustments: adjustments to the historical financial statement to include or to remove items not considered part of normal operations. Excessive wages paid to family members are considered to be discretionary items. The normalization adjustment would need to be made to bring the amount paid within going market rates.
Which of the following statements is correct regarding corporate debt and equity securities?
Both debt and equity security holders have an ownership interest in the corporation.
Both debt and equity securities have an obligation to pay income.
A.
I only
B.
II only
C.
Both I and II
Correct D.
Neither I nor II
Debt is a form of financing that increases the liabilities of a corporation, whereas equity securities are an ownership interest.
Debt holders receive interest that is a deductible expense to the payer and recognized as income by the debt holder. Due to the contractual nature of debt, the debt holder is obligated to pay the agreed-upon interest.
Equity holders may receive dividends that are a distribution of income earned by the subject company; however, a company is not obligated to pay dividends until the board of directors has declared them.
The CPA reviewed the minutes of a board of directors meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR could not fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR’s action?
Correct A.
The use of resource markets outside of LQR involves opportunity cost.
B.
Accounting profit is total revenue minus explicit costs and implicit costs.
C.
Implicit costs are not opportunity costs because they are internal costs.
D.
Explicit costs are opportunity costs from purchasing widget handles from the resource market.
Each decision made by a company involves opportunity cost. Opportunity cost refers to the benefits given up by making one choice over another. Even though LQR Corp. seems to have made the right decision by outsourcing, intangible opportunity costs are always present when one plan of action is chosen over another.
Accounting profit equals revenue minus explicit costs (cash expenditures). Accounting profit does not take into account implicit costs (earnings that could have been received had the resources been used in an alternative use).
Opportunity costs are a form of implicit cost. Explicit costs are not opportunity costs.
The following information pertains to Base Manufacturing Co.:
Selected Cost Driver Costs
———————————- ———-
Estimated annual overhead $ 900,000
Estimated annual direct labor cost 1,800,000
Actual direct labor cost for March 160,000
Actual overhead for March 90,000
Base Manufacturing Co.’s applied overhead for March is:
A.
$320,000.
B.
$75,000.
C.
$80,000.
Incorrect D.
$90,000.
The overhead rate is calculated as follows:
Estimated annual overhead ÷ Estimated annual direct labor = Overhead Rate
$900,000 ÷ $1,800,000 = 0.50
Therefore, overhead is applied at 50% of actual direct labor cost:
$160,000 × 0.50 = $80,000 applied overhead
Universal Air, Inc., supplies instrumentation components to airplane manufacturers. Although there are only a few competitors in this market, the competition is fierce. In order to remain competitive, Universal Air’s executive team conducted a customer survey and developed thirty new indicators to measure middle-management performance. This system was not successful, so new cross-functional teams, consisting of executives and middle managers, were formed to develop new performance measures. To ensure that the cross-functional teams are effective, all necessary resources should be provided. The most important such resource would be:
A.
comfortable meeting rooms.
B.
daily progress reports.
Correct C.
strong top management commitment to the process.
D.
None of the choices listed are necessa
Strong top management commitment to the process that is clearly communicated is extremely important to the success of this participative management effort. Comfortable meeting rooms and frequent progress reports are also important but are not as critical as actual and indicated top management support.
What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
A.
To cause the price of the company’s stock to rise
B.
To lower the company’s bond rating
C.
To reduce the risk for existing bondholders
Correct D.
To reduce the interest rate on the bonds being sold
Agreeing to a debt covenant limiting the percentage of long-term debt would have an effect on a company’s capital structure (debt-to-equity ratio). A favorable debt-to-equity ratio (along with other indicators of financial health) means a higher bond rating. A high bond rating means lower interest rates for bonds being sold, which also lowers the cost of capital for future bond issuances.
A debt covenant would not have any effect on risk for current bondholders or on the price of the company’s stock.
A corporation manages inventory performance by monitoring its inventory turnover. Selected financial records for the corporation are as follows:
Year 1 Year 2 Year 3
---------- ---------- ---------- Annual sales $1,262,500 $1,062,500 $1,459,000 Gross annual profit percentage 45% 30% 40% The beginning finished goods inventory for Year 2 was 20% of Year 2 sales. The ending finished goods inventory for Year 2 was 18% of Year 3 sales. What was the corporation's inventory turnover for Year 2?
A.
1.34
B.
2.83
C.
3.03
Correct D.
3.13
Inventory turnover = Cost of goods sold ÷ Average inventory
Cost of goods sold:
Gross profit for Year 2 = $1,062,500 × 0.30 = $318,750
Year 2 gross profit is revenue less cost of goods sold (CGS), so:
$1,062,500 - CGS = $318,750
CGS = $1,062,500 - $318,750 = $743,750
Average inventory:
Beginning finished goods inventory was 0.20 × $1,062,500, or $212,500.
Ending finished goods inventory was 0.18 × $1,459,000, or $262,620.
Average inventory = (Beginning inventory + Ending inventory) ÷ 2 = ($212,500 + $262,620) ÷ 2 = $237,560
Inventory turnover = Cost of goods sold ÷ Average inventory = $743,750 ÷ $237,560 = 3.13
The concept of a management information system (MIS) continues to evolve over time. Which of the following is generally understood to be a central element of an MIS?
A.
Maintenance of a large collection of raw, unorganized data to support a variety of information needs
B.
Processing of data items is based on decision models.
C.
The user-machine nature of an MIS means that users have to be skilled in the use of computers to realize any benefits.
Incorrect D.
A single, highly integrated computer system that combines processing for all organizational functions.
The use of decision models to organize data is a central element of MIS.
The management of data in an organized database is a central element of MIS.
Users of an MIS do not have to be computer experts to realize benefits.
The MIS concept is not based on computers, and consists of an organized federation of subsystems rather than a single, highly integrated system.
Which of the following allows customers to pay for goods or services from a website while maintaining financial privacy?
A.
Credit card
B.
Site draft
Correct C.
E-cash
D.
Electronic check
E-cash currencies, such as bitcoins, are anonymous and allow payment for purchases from websites.
A credit card, a sight draft (one that promises immediate payment to the holder of the draft), and an electronic check (such as created when a debit card is used for a purchase) are not anonymous.
Which of the following procedures would an entity most likely include in its disaster recovery plan?
A.
Convert all data from EDI format to an internal company format.
B.
Maintain a Trojan horse program to prevent illicit activity.
C.
Develop an auxiliary power supply to provide uninterrupted electricity.
Correct D.
Store duplicate copies of files in a location away from the computer center.
In the event of certain disasters, the company will need to restore computer files. For certain disasters, the backup will only be possible if the copies are stored at a separate location.
The computer operations procedures should call for a backup of the files. This is a process of making duplicate copies of files and storing them in a different location to protect against loss through fire, flood, and other disasters. If the backup copies are needed, they are copied back to the primary storage devices.
A senior executive of an international organization who wishes to demonstrate the importance of the security of company information to all team members should:
Correct A.
visibly participate in a global information security campaign.
B.
allocate additional budget resources for external audit services.
C.
review and accept the information security risk assessments in a staff meeting.
D.
refer to the organization’s U.S. human resources policies on privacy in a company newsletter.
“All team members” refers to the entire international organization, which implies the executive would provide this message to all employees worldwide. The tone at the top is most clearly demonstrated by personal example set by senior executives. The other answer choices are good behaviors but they are not visible to the worldwide entity.
The diagram below represents the production and sales relationships of joint products P and Q. Joint costs are incurred until split-off, then separable costs are incurred in refining each product. Market values of P and Q at split-off are used to allocate joint costs.
If the market value of P at split-off increases and all other costs and selling prices remain unchanged, then the gross margin of:
A.
P increases and Q decreases.
B.
P increases and Q increases.
C.
P decreases and Q decreases.
Correct D.
P decreases and Q increases.
If the market value of P at split-off increases while everything remains the same, a larger portion of the joint costs would be allocated to P and a smaller portion of joint costs would be allocated to Q. Therefore, P would have greater cost of goods sold, resulting in lower gross margin. Similarly, Q would have smaller cost of goods sold, resulting in a higher gross margin.
Assume a joint cost of $100, a sales price at split-off of $100 for P and $100 for Q, and separable costs of $25 for each product. Also assume an eventual sales price of $200 for each product. Allocating joint cost of $100 on the ratio of sales value at split-off ($100 for each product out of $200 sales value of both) would result in a joint cost of 100/200 × $100, or $50 allocated to each product.
What would be the gross profit of each? Each would have a sales price of $200, from which we would subtract $50 of allocated joint cost and $25 separable cost for gross profit of $200 − $75, or $125.
Now assume that the market value of P at split-off increases to $150. We would allocate 150/250 × $100 of joint cost ($60) to P. Product P would still be sold for $200, from which we would subtract $60 of allocated joint cost and $25 separable cost for gross profit of $200 − $60 − $25, or $115 of gross profit.
The gross profit of product P decreased from $125 to $115.
Like product P, product Q would have a gross profit of $125 under the original assumptions. When we increase the value of product P at split-off to $150, it changes the joint cost allocation for product Q to 100/250 × $100, or $40. Product Q would still be sold for $200, from which we would subtract $40 of allocated joint cost and $25 separable cost for gross profit of $200 − $40 − $25, or $135 of gross profit.
The gross profit of product Q increased from $125 to $135.
The ability to manage cash effectively requires a knowledge of disbursement float. The time necessary to clear funds received can be decreased through use of all of the following, except:
A.
wire transfers.
Correct B.
an overdraft system.
C.
a concentration bank.
D.
a lockbox.
An overdraft system allows a company to “overdraw” on a checking account since the bank will automatically transfer funds from an interesting-bearing account of the company’s to cover the checks presented for payment.
Wire transfers, concentration banks, and lockboxes are used to speed up the collection process.
An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information:
Type of Investment Mean Return Standard Deviation
———————————- ———– ——————
Common stocks 12% 20%
Long-term corporate bonds 6% 8%
Intermediate-term government bonds 5% 5%
U.S. Treasury bills 4% 3%
Which of the following investments has the greatest reward/risk ratio if a return’s standard deviation is an accurate assessment of investment risk?
A.
Common stocks
B.
Long-term corporate bonds
C.
Intermediate-term government bonds
Correct D.
U.S. Treasury bills
The reward/risk ratio is the rate of return divided by a measure of risk (the standard deviation in this question). Computing this reward-to-risk ratio for U.S. Treasury bills gives 4%/3%, or 1.33, which exceeds the ratio for the other investment alternatives:
Common stocks: 12%/20%, or 0.60
Long-term corporate bonds: 6%/8%, or 0.75
Intermediate-term government bonds: 5%/5%, or 1.00
Which of the following phrases defines the internal rate of return on a project?
A.
The number of years it takes to recover the investment
Correct B.
The discount rate at which the net present value of the project equals zero
C.
The discount rate at which the net present value of the project equals one
D.
The weighted-average cost of capital used to finance the project
The internal rate of return is the interest rate that will make the present value of the future net cash flows equal to the initial cash outlay. In other words, it is the interest rate that gives a net present value of zero.
The answer choice “the number of years it takes to recover the investment” is incorrect because it is the definition of the payback period, a number of years, not a rate of return. “The discount rate at which the net present value of the project equals one” is incorrect because the internal rate of return is the rate of return where the net present value is zero, not one. “The weighted-average cost of capital used to finance the project” is incorrect because weighted-average cost of capital is the interest rate that the company is paying on its other sources of financing. It is used to determine that project rate of return that would be acceptable to the company, but it is not used to calculate the internal rate of return.
Which of the following is a risk that is higher when an electronic funds transfer (EFT) system is used?
A.
Improper change control procedures
B.
Unauthorized access and activity
C.
Insufficient online edit checks
Incorrect D.
Inadequate backups and disaster recovery procedures
Unauthorized access is a risk which is higher in an EFT environment.
Improper change control procedures, insufficient online edit checks, and inadequate backups and disaster recovery procedures are risks that are common to all IT environments.
Computer program libraries can best be kept secure by:
Correct A.
restricting physical and logical access.
B.
denying access from remote terminals.
C.
monitoring physical access to program library media.
D.
installing a logging system for program access.
Restricting physical and logical access secures program libraries from unauthorized use, in person and remotely via terminals.
Installing a logging system for program access would permit detection of unauthorized access but would not prevent it. Monitoring physical access to program library media would control only unauthorized physical access. Denying all remote access via terminals would likely be inefficient and would not secure program libraries against physical access.
Which of the following solutions creates an encrypted communication tunnel across the Internet for the purpose of allowing a remote user secure access into the network?
A.
Packet-switched network
Incorrect B.
Digital encryption
C.
Authority certificate
D.
Virtual private network
A virtual private network (VPN) uses the Internet to provide secure remote access to an organization’s network.
The other answer choices (packet-switched network, digital encryption, and authority certificate) are incorrect because none of them create an encrypted communications tunnel across the Internet. They all refer to verification of the data being transmitted rather than the communication process.
Which of the following statements is correct when a corporation is earning excess profits?
A.
Participating preferred stock acts more like equity than cumulative preferred stock.
B.
Cumulative preferred stock acts more like equity than participating preferred stock.
C.
Cumulative preferred stock does not act more or less like equity than participating preferred stock.
Incorrect D.
No statement can be made comparing cumulative preferred and participating preferred stocks to equity.
Participating preferred stock acts more like equity than cumulative preferred stock when a corporation is earning excess profits because the stock does not receive a fixed percentage like debt. When excess profits are earned, the participating preferred stock receives additional dividends.
The market approach is one of the three basic methodologies available to the valuator. When determining whether this approach can be employed in a particular engagement (whether guideline companies are available), the valuator must keep all of the following in mind except:
A.
the normalized statements of the subject of the valuation need to use similar GAAP choices, such as LIFO and FIFO, as the guideline companies.
B.
one company does not make a comparable.
Correct C.
the guideline companies will need to be identical to the subject of the valuation.
D.
a guideline company needs to produce (supply) similar products, serve similar markets, and be within a similar size range as the subject company.
Finding guideline companies when performing a business valuation is often difficult. When developing a list of potential guideline companies, the business valuator assesses items such as whether the potential guideline company:
uses similar GAAP choices as the subject company.
has a similar product diversification as the subject company.
serves similar markets as the subject company.
has a similar geographic diversification as the subject company.
is of a similar size as the subject company.
has similar financial and operating leverage as the subject company.
has similar liquidity, solvency, growth, and profitability as the subject company.
Breakeven analysis assumes over the relevant range that
Total costs are linear.
Fixed costs are nonlinear.
Variable costs are nonlinear.
Selling prices are nonlinear.
Total costs are linear.
This answer is correct. There are a number of underlying assumptions to breakeven analysis that need to be considered in the calculation and interpretation of breakeven computations. One of these assumptions is that the behavior of total cost and total revenue is linear, even though in actuality it may not be. It is important to note that under breakeven analysis, the linearity assumption is only applicable for a particular relevant range of activity and is not assumed for all levels of activity. Since the actual behavior of total cost and total revenue within a relevant range is usually close to being linear, this assumption will only slightly affect the precision and reliability in a given breakeven calculation.
In a competitive market for labor in which demand is stable, if workers try to increase their wage,
This answer is correct. If wages rise in a stable market, demand for labor will decline and employment will fall.
A static budget contains which of the following amounts?
Actual costs for actual output.
Actual costs for budgeted output.
Budgeted costs for actual output.
Budgeted costs for budgeted output.
This answer is correct. A static budget includes budgeted costs for budgeted output.
Which of the statements best describes the concept of six-sigma quality? 10 defects per million. 3.4 defects per million. 6.0 defects per million. 100 defects per million.
What is six-sigma? A statistical measure expressing how close a product comes to its quality goal. One-sigma means 68% of products are acceptable; three-sigma means 99.7%. Six-sigma is 99.999997% perfect: 3.4 defects per million parts.
Six-sigma black belts must attend a minimum of four months of training in statistical and other quality improvement methods. Six-sigma black belts are experts in the six-sigma methodology. They learn and demonstrate proficiency in the DMAIC methodology and statistical process control (SPC) techniques within that methodology. DMAIC is the structured methodology for process improvement within the six-sigma framework. It stands for define, measure, analyze, improve, and control.
Which of the following characteristics represent an advantage of the internal rate of return technique over the accounting rate of return technique in evaluating a project?
I. Recognition of the project’s salvage value.
II. Emphasis on cash flows.
III. Recognition of the time value of money.
I only.
I and II.
II and III.
I, II, and III.
Close
The following chart summarizes the strengths and weaknesses of the capital budgeting methods.
Methods Strengths Weaknesses**
Payback 1. Easy to understand and use 1. Ignores time value of money
2. Emphasizes liquidity 2. Ignores cash flows after payback period
3. Does not measure profitability
Net Present Value (NVP) 1. Emphasizes cash flows 1. Favors larger, longer projects
2. Recognizes time value of money 2. Assumes no change in required rate of return
3. Assumes discount rate is reinvestment rate*
4. Easy to apply
Internal Rate of Return (IRR) 1. Emphasizes cash flows 1. Assumes IRR is the reinvestment rate*
2. Recognizes time value of money
2. Favors shorter projects
3. Computes true return of projects
Accounting rate of Return (ARR) 1. Easy to understand and use
1. Does not emphasize cash flows
2. Ties in with income statement and performance evaluation
2. Ignores time value of money
3. Misstates the true return of projects
- Note that assuming the discount rate is the reinvestment rate results in using the same reinvestment rate for projects of similar risk, while assuming the IRR is the reinvestment rate assumes higher reinvestment rates for projects with higher true returns, regardless of the risk involved.
Greater barriers to collusion exist for oligopolistic firms when
The firms’ costs are more similar.
There are fewer firms in the industry.
General economic conditions are recessionary.
The firms’ products are standardized.
This answer is correct. In a recession, firms in the industry have lower sales volume, higher average costs per unit, and excess capacity. The resulting profit squeeze makes price cutting more of a temptation, in the hope of gaining sales at the expense of rivals.
An overall description of a database, including the names of data elements, their characteristics, and their relationship to one another, would be defined by using a
Data definition language.
Data control language.
Data manipulation language.
Data command interpreter language.
This answer is correct. The data definition language defines the database structure and content, especially the schema and subschema descriptions, including the names of the data elements contained in the database and their relationship to each other.
Which of the following topics is the focus of managerial accounting?
Financial statements and other financial reports.
Historical cost principles.
The needs of creditors.
The needs of the organization’s internal parties.
This answer is correct. Managerial accounting focuses on providing information for decision making by employees and management (internal parties).
This question is based on the following information.
Total units of product Average fixed cost Average variable cost Average total cost 6 $15.00 $25.00 $40.00 7 12.86 24.00 36.86 8 11.25 23.50 34.75 9 10.00 23.75 33.75 The total cost of producing seven units is $90.02 $168.00 $258.02 $280.00
This answer is correct. The total cost would equal the average cost multiplied by the number of units, or $258.02 (7 × $36.86).
Which of the following procedures should be included in the disaster recovery plan for an Information Technology department?
Replacement of personal computers for user departments.
Identification of critical applications.
Physical security of warehouse facilities.
Cross-training of operating personnel.
This answer is correct because a disaster recovery plan must identify the critical applications.
The budgeting tool or process where estimates of revenues are prepared for each product beginning with the product’s research and development phase and traced through to its customer support phase is a(n) Master budget. Activity-based budget. Zero-based budget. Life-cycle budget.
A life-cycle budget is one that develops a budget for a product from its research and development phase to the last sales of the product.
Which of the following is themost expensive form of additional capital? New debt. New preferred stock. Retained earnings. New common stock.
This answer is correct. Common stock is the most expensive form of financing and because of floatation costs new common stock is more expensive than retained earnings.
Net present value (NPV) and internal rate of return (IRR) differ in that
NPV assumes reinvestment of project cash flows at the cost of capital while IRR assumes reinvestment of project cash flows at the internal rate of return.
NPV and IRR make different accept or reject decisions for independent projects.
IRR can be used to rank mutually exclusive investment projects but NPV cannot.
NPV is expressed as a percentage while IRR is expressed as a dollar amount
This answer is correct. NPV assumes that cash inflows from the investment project can be reinvested at the cost of capital while IRR assumes that cash flows from each project can be reinvested at the IRR for that particular project. This underlying assumption is considered to be a weakness of the IRR technique.
In an interest rate swap the first company?
Sells its right to low interest rate financing at a financial institution to the second company that is seeking to borrow funds.
Agrees to service the debt of the second company by making interest payments directly to the bank of the second company, while the second company agrees in exchange to make interest payments to the bank of the first company.
Buys the outstanding public debt of the second company and swaps the interest payments it receives on that debt for the interest payments it must make on its own debt.
Agrees to exchange with the second company the difference between the interest charges on its own borrowings and the interest charges on the borrowings of the second company.
Agrees to exchange with the second company the difference between the interest charges on its own borrowings and the interest charges on the borrowings of the second company.
This answer is correct. In an interest rate swap, two companies exchange their debt servicing obligations on some amount of debt principal. The actual exchange of funds during the agreement is in the form of a net payment from the party owing the greater amount for the period.
The Internet is made up of a series of networks which include
Gateways to allow mainframe computers to connect to personal computers.
Bridges to direct messages through the optimum data path.
Repeaters to physically connect separate local area networks (LANs).
Routers to strengthen data signals between distant computers.
This answer is correct. Gateways connect Internet computers of dissimilar networks.
An organization relied heavily on e-commerce for its transactions. Evidence of the organization’s security awareness manual would be an example of which of the following types of controls? Preventive. Detective. Corrective. Compliance.
This answer is correct because the use of such a manual is designed to prevent breaches of security.
n a daily computer run to update checking account balances and print out basic details on any customer’s account that was overdrawn, the overdrawn account of the computer programmer was never printed. Which of the following control procedures would have been most effective in detecting this fraud?
Use of the test-data approach by the author in testing the client’s program and verification of the subsidiary file.
Use of a running control total for the master file of checking account balances and comparison with the printout.
A program check for valid customer code.
Periodic recompiling of programs from documented
source files, and comparison with programs currently in use.
This answer is correct because a periodic recompiling of the program from the original source files and comparison with the program currently in use would allow the auditor to detect the modification in the program that has permitted the fraud to occur.
Which of the following is not one of the four perspectives of the balanced scorecard?
Customer perspective.
Learning and growth perspective.
Internal business processes perspective.
Research and development perspective.
Four Perspectives of the Balanced Scorecard
a. Financial perspective. This perspective focuses on return on investment and other supporting financial performance measures. Example performance measures include profitability, return on invested capital, and revenue growth.
b. Customer perspective. This perspective focuses on performance in areas that are most critical to the customer. Example performance measures include customer satisfaction and customer retention.
c. Internal business processes perspective. This perspective focuses on operating effectively and efficiently and includes performance measures on cost, quality, and time for processes that are critical to the customers. Example performance measures include number of defects and cycle time.
d. Learning and growth perspective. This perspective focuses on performance measures relating to employees, infrastructure, teaming, and capabilities necessary for the internal processes to achieve customer and financial objectives. Example performance measures include employee satisfaction, hours of training per employee, and information technology expenditures per employee.
This question is based on the following information.
Total units of product Average fixed cost Average variable cost Average total cost 6 $15.00 $25.00 $40.00 7 12.86 24.00 36.86 8 11.25 23.50 34.75 9 10.00 23.75 33.75 The marginal cost of producing the ninth unit is $23.50 $23.75 $25.75 $33.75
Marginal cost is the additional cost of producing one more unit. The amount may be obtained by subtracting the total cost of 9 units from the total cost of 8 units. $25.75 = ($33.75 × 9) – ($34.75 × 8).
The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the
Trade account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates.
Capital account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates.
Fall in the dollar’s value cannot be expected to have any effect on the U.S. trade balance.
Cheaper dollar helps U.S. exporters of domestically produced goods.
Close
International purchasing power effect—When domestic price levels increase relative to foreign currencies, foreign products become less expensive causing an increase in imported goods and a decrease in exported goods. This decreases the aggregate demand of domestic products.
More than one file may be stored on a single magnetic disc. Several programs may be in the core storage unit simultaneously. In both cases it is important to prevent the mixing of data. One way to do this is to use File integrity control. Boundary protection. Interleaving. Paging.
This answer is correct because the primary purpose of boundary protection is to prevent the mixing of data on a magnetic memory disc and a core storage unit.
A company has a foreign-currency-dominated trade payable, due in 60 days. In order to eliminate the foreign exchange risk associated with the payable, the company could
Sell foreign currency forward today.
Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time.
Buy foreign currency forward today.
Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds in a domestic bank deposit until the invoice payment date.
This answer is correct. The company can arrange today for the exchange rate at which it will purchase the foreign currency in 60 days’ time by buying the currency in the forward market. This will eliminate the exchange risk associated with the trade payable.
Under a standard cost system, the material efficiency variances are the responsibility of
Production and industrial engineering.
Purchasing and industrial engineering.
Purchasing and sales.
Sales and industrial engineering.
This answer is correct. The production and industrial engineering departments have control over the usage of materials.
If controls add to the efficiency of operations, management must:
A.
implement the controls immediately.
B.
ask the internal auditor for recommendations.
Correct C.
weigh the benefit of reducing loss or inefficiency against the cost of the control.
D.
consider only the cost of the control.
Managers must weigh the benefit of reducing loss or inefficiency against the cost of the controls. They should not implement controls without first understanding whether any benefits of implementing these controls outweigh the costs. Although management can solicit recommendations from the internal auditor, it is not a requirement.
To identify those components of a telecommunication system (i.e., network) that present the greatest risk, the internal auditor should first:
A.
review the open systems interconnect (OSI) network model.
B.
identify the network operating costs.
Correct C.
determine the business purpose of the network.
D.
map the network software and hardware products into their respective layers.
Determining the business purpose of the network will be the best first step to identify those components of a telecommunication system which present the greatest risk.
Reviewing the open systems interconnect (OSI) network model may be done as part of audit preparation.
Identifying the network operating costs may be an audit step.
Mapping the network software and hardware products into their respective layers may be a subsequent audit step.
Internal auditors play a role in assessing an organization’s risk management by determining if:
A.
organizational objectives are distinct and separate from the organization’s mission.
B.
significant risks are completely and fully mitigated.
C.
risk responses have been selected that increase the organization’s risk appetite.
Correct D.
relevant risk information is captured and communicated in a timely manner.
Internal auditors are required by the International Standards for the Professional Practice of Internal Auditing (set forth by the IIA, Institute of Internal Auditors) to evaluate the effectiveness and contribute to the improvement of risk management processes.
Determining whether risk management processes are effective is a judgment resulting from the internal auditor’s assessment that:
organizational objectives support and align with the organization’s mission,
significant risks are identified and assessed,
appropriate risk responses are selected that align risks with the organization’s risk appetite, and
relevant risk information is captured and communicated in a timely manner across the organization, enabling staff, management, and the board to carry out their responsibilities.
IIA International Standards for the Professional Practice of Internal Auditing 2120
Communications risk has increased in recent years primarily because of changes in which of the following?
Correct A.
Technology used
B.
Asset accessibility
C.
Business regulations
D.
Duties of managers
Technological change, particularly in the area of telecommunications, has greatly increased communications risk for businesses utilizing this technology. Lack of security access to telecommunication systems tied into entity computer files can lead to loss of data and theft of assets.
Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when:
A.
internal auditors have direct access to the board of directors and the entity’s management.
Correct B.
management is dominated by one individual who is also a shareholder.
C.
external policies established by parties outside the entity affect its accounting practices.
D.
the audit committee is active in overseeing the entity’s financial reporting policies.
The auditor must consider the client’s control environment when measuring control risk. One of the factors of the control environment, management philosophy and operating style, presents as an example the situation where management is dominated by only one or a few individuals. This domination directly affects the control environment because it is the only item listed above over which management has significant influence. The other answers (external policies, internal auditors, and the audit committee) all involve a degree of independence from management.
Communications risk is concerned with the unauthorized access to and manipulation of which of the following?
A.
Signatures
B.
Assets
C.
Liabilities
Correct D.
Data
Recent significant increases in the use of and reliance on telecommunications procedures and devices have resulted in greater risk of data theft and manipulation.
A company reports the following account balances at year-end:
Account Balance
Long-term debt
$200,000
Cash
50,000
Net sales
600,000
Fixed assets (net)
320,000
Tax expense
67,500
Inventory
25,000
Common Stock
100,000
Interest expense
20,000
Administrative expense
35,000
Retained earnings
150,000
Accounts payable
65,000
Accounts receivable
120,000
Cost of goods sold
400,000
Depreciation expense
10,000
Additional Information:
The opening balance of common stock was $100,000
The opening balance of retained earnings was $82,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has a gross margin of
This answer is correct. Gross margin is equal to gross profit divided by net sales. In this case gross profit is equal to $200,000 ($600,000 net sales – $400,000 cost of goods sold), and gross margin equals 33.3% ($200,000 ÷ 600,000).
Which of the following forms of compensation is more likely to result in shirking by management?
Fixed compensation.
Base salary and bonus
.
Base salary and stock options.
Base salary and stock grants.
This answer is correct. With fixed compensation management may not be inclined to work hard or take appropriate risks.
A management accountant performs a linear regression of maintenance cost versus production using a computer spreadsheet. The regression output shows an “intercept” value of $322,897. How should the accountant interpret this information?
Y has a value of $322,897 when X equals zero.
X has a value of $322,897 when Y equals zero.
The residual error of the regression is $322,897.
Maintenance cost has an average value of $322,897
This answer is correct. The general form of the linear regression equation is y = a (the intercept) + bx. Therefore, when x equals 0, y is equal to a (the intercept).
The trough of a business cycle is generally characterized by
Shortages of essential raw materials and rising costs.
Increasing purchasing power and increasing capital investments.
Rising costs and an unwillingness to risk new investments.
Unused productive capacity and an unwillingness to risk new investments.
. In the trough of a business cycle there is unused capacity and an unwillingness to make investments.
Which of the following risks can be minimized by requiring all employees accessing the information system to use passwords?
Collusion.
Data entry errors.
Failure of server duplicating function.
Firewall vulnerability.
This answer is correct because passwords can prevent unauthorized individuals from penetrating the firewall.
Which of the following would illustrate vertical financial statement analysis?
Interest expense as a percentage of net sales.
Gross profit compared to industry averages.
Net sales over time.
Earnings per share as compared to the prior year.
This answer is correct. Vertical analysis involves presenting everything within a financial statement as a percentage of a base. For a common-size income statement all items would be presented as a percentage of net sales.
