BEC All Chapters Flashcards

Question

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

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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.

Answer 11

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%.

Answer 12

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.

Answer 13

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.

Answer 14

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.

Answer 15

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%.

Answer 16

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.

Answer 17

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.

Answer 18

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.

Answer 19

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.

Answer 20

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.

Answer 21

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.

Answer 22

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. ```

Answer 23

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

Answer 24

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).

Answer 25

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.

Answer 26

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.

Answer 27

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.

Answer 28

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.

Answer 29

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.

Answer 30

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%

Answer 31

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.

Answer 32

Correct C. | Encryption performed by a physically secure hardware device is more secure than encryption performed by software.

Answer 33

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

Answer 34

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.

Answer 35

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.

Answer 36

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 (

Answer 37

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.

Answer 38

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.

Answer 39

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.

Answer 40

Time series analysis focuses on evaluation of trends over time. It may entail several components including seasonal variation and secular trends.

Answer 41

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.

Answer 42

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

Answer 43

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.

Answer 44

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.

Answer 45

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.

Answer 46

Contribution margin ratio = Gross profit ÷ Sales = 75% (0.75) Breakeven point in dollars = Fixed costs ÷ CM ratio = $30,000 ÷ 0.75 = $40,000

Answer 47

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

Answer 48

MPV= AQ (SP-AP) 15,000(7-8.50) 22,500 Unfavorable

Answer 49

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

Answer 50

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.

Answer 51

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.

Answer 52

"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.

Answer 53

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

Answer 54

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.

Answer 55

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

Answer 56

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

Answer 57

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.

Answer 58

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

Answer 59

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.

Answer 60

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.

Answer 61

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.

Answer 62

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.

Answer 63

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).

Answer 64

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.

Answer 65

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).

Answer 66

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. ```

Answer 67

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.

Answer 68

Purchasing raw materials and supplies online should reduce the cost of purchasing those goods. The ease of obtaining price quotations increases market intelligence.

Answer 69

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.

Answer 70

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.

Answer 71

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.

Answer 72

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

Answer 73

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.

Answer 74

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.

Answer 75

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

Answer 76

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.

Answer 77

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.

Answer 78

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.

Answer 79

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.

Answer 80

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.

Answer 81

A disaster recovery plan should include a risk assessment, recommendation (and implementation) of safeguards, and recovery plans.

Answer 82

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 ```

Answer 83

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.

Answer 84

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.

Answer 85

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.

Answer 86

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.

Answer 87

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.

Answer 88

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.

Answer 89

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.

Answer 90

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.

Answer 91

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.

Answer 92

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.

Answer 93

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.

Answer 94

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

Answer 95

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.

Answer 96

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.

Answer 97

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

Answer 98

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.

Answer 99

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.

Answer 100

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.

Answer 101

“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.

Answer 102

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.

Answer 103

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.

Answer 104

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

Answer 105

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.

Answer 106

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.

Answer 107

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.

Answer 108

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.

Answer 109

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.

Answer 110

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.

Answer 111

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.

Answer 112

This answer is correct. If wages rise in a stable market, demand for labor will decline and employment will fall.

Answer 113

This answer is correct. A static budget includes budgeted costs for budgeted output.

Answer 114

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.

Answer 115

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.

Answer 116

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.

Answer 117

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.

Answer 118

This answer is correct. Managerial accounting focuses on providing information for decision making by employees and management (internal parties).

Answer 119

This answer is correct. The total cost would equal the average cost multiplied by the number of units, or $258.02 (7 × $36.86).

Answer 120

This answer is correct because a disaster recovery plan must identify the critical applications.

Answer 121

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.

Answer 122

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.

Answer 123

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.

Answer 124

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.

Answer 125

This answer is correct. Gateways connect Internet computers of dissimilar networks.

Answer 126

This answer is correct because the use of such a manual is designed to prevent breaches of security.

Answer 127

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.

Answer 128

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.

Answer 129

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).

Answer 130

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.

Answer 131

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.

Answer 132

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.

Answer 133

This answer is correct. The production and industrial engineering departments have control over the usage of materials.

Answer 134

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.

Answer 135

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.

Answer 136

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

Answer 137

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.

Answer 138

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.

Answer 139

Recent significant increases in the use of and reliance on telecommunications procedures and devices have resulted in greater risk of data theft and manipulation.

Answer 140

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).

Answer 141

This answer is correct. With fixed compensation management may not be inclined to work hard or take appropriate risks.

Answer 142

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).

Answer 143

. In the trough of a business cycle there is unused capacity and an unwillingness to make investments.

Answer 144

This answer is correct because passwords can prevent unauthorized individuals from penetrating the firewall.

Answer 145

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.

Answer 146

This answer is correct because purchasing an asset increases the average investment which reduces both return on investment and residual income.

Answer 147

This answer is correct. The frequency of compounding explains the difference between the stated rate and the effective rate.

Answer 148

Buying British pound call options. This answer is correct because a call option allows the importer to lock in the price of British pounds at the current exchange rate.

Answer 149

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.

Answer 150

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. 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.

Answer 151

Treasury stock is shares of the firm's own stock held by the firm. The firm's financial leverage increases because the debt-to-equity ratio increases (as a result of the decrease in total stockholders' equity).

Answer 152

Beginning units 2,000 Units started 8,000 ------ Units to account for 10,000 Units completed 7,000 x 100% = 7,000 Normal spoilage 500 x 100% = 500 Ending units 2,500 x 80% = 2,000 ------ ----- Units accounted for 10,000 9,500 equivalent units Conversion cost per equivalent unit = Conversion Cost / Equivalent Units = ($10,000 + $75,500) / 9,500 = $85,500 / 9,500 = $9 per unit Conversion cost = Cost per Unit x (Good units + Normal spoilage) transferred = $9 (7,000 + 500) = $67,500

Answer 153

Consider the following relationships: Profit margin on Sales = Income ÷ Sales or Income = Profit margin on sales × Sales Asset turnover = Sales ÷ Assets or Assets = Sales ÷ Asset turnover Return on assets = Income ÷ Assets In expanded fashion: Return on assets = (Profit margin on sales × sales) ÷ (Sales ÷ Asset turnover) or (Profit margin on sales × Sales × Asset turnover) ÷ Sales Since Sales cancels out: Return on assets = Profit margin on sales x Asset turnover = .02 x 5 = .10 or 10%

Answer 154

The cash flow cycle is the full cycle of cash inflows adjusted for outflows, calculated as 90 + 65 - 60 = 95 days. By this formula, one can see that reducing either the inventory holding period or the collection period for receivables will reduce the number of days in the cash flow cycle by accelerating sales turnover and cash collections, respectively. Increasing the payables period also reduces the cash flow cycle, since cash outflows can be delayed while new inventory and receivables periods can begin.

Answer 155

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

Answer 156

The internal rate of return (IRR) can be referred to as the yield (return) expected over the life of a project. It is computed by equating the initial investment with the present value of the cash flows over the life of the project. IRR is the discount rate that results in the net present value of all cash flows to be zero. Neither the accounting rate of return nor the payback methods consider the time value of money, and the cost-benefit ratio is not a capital budgeting tool.

Answer 157

The internal rate of return (IRR) can be referred to as the yield (return) expected over the life of a project. It is computed by equating the initial investment with the present value of the cash flows over the life of the project. IRR is the discount rate that results in the net present value of all cash flows to be zero. Neither the accounting rate of return nor the payback methods consider the time value of money, and the cost-benefit ratio is not a capital budgeting tool.

Answer 158

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.

Answer 159

Financial leverage involves using borrowed funds to finance asset acquisition(s) which will generate returns exceeding the cost of borrowing. Thus, a higher debt to total assets ratio points toward the likelihood of more extensive financial leverage usage. Most of the time, assets are undervalued (i.e., at acquisition cost) rather than overvalued. A high debt to total assets ratio would often be the result from such undervaluation.

Answer 160

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.

Answer 161

Real per capita gross domestic product is gross domestic product for a particular year adjusted for inflation compared to a base year using a price index. This adjusted number is then divided by population to derive real per capita GDP (gross domestic product). This measure is often used as an estimate of changes in well-being in a society over time, but it is not one of the variables one would traditionally see in national income calculations.

Answer 162

When actual amounts differ from standard amounts, a variance is recorded. The variance should be assigned to the department or division that has the ability to control the activity that causes the variance. The customer’s early completion requirement for this job was the activity that caused the overtime cost, so the additional cost should be charged to this job. "Increased overall level of activity" is incorrect because an increase in general demand is not a cost that can be controlled. "Management's failure to include the job in the production schedule" is incorrect because the job did not cause the overtime; management’s planning error did. "Management's requirement that the job be completed before the annual factory vacation closure" is incorrect because management’s decision caused the overtime rather than the current specific job.

Answer 163

While each answer choice represents a quality improvement initiative, Six Sigma is an improvement initiative specifically designed to address errors in defects. If R Beck were to achieve Six Sigma on 92,000 units, it would represent a defect rate of one DVD per year per 310,000 DVDs produced.

Answer 164

Market risk or systemic risk is related to conditions that have an overall effect on companies. These specific risk conditions cannot be eliminated by use of diversification. Examples include conditions such as inflation and recession, congressional tax reform, energy market fluctuations, and changing interest rates.

Answer 165

Monitoring of controls assesses the quality of internal control performance over time, including assessing the design and operation of controls on a timely basis and taking necessary corrective actions. The control environment includes items such as a corporate code of conduct and ethical attitude of those charged with governance. Risk assessment refers to the identification, analysis, and management of risks relevant to the preparation of financial statements. The information and communication system refers to processing the data, including the source documents through the final reports.

Answer 166

Business process re-engineering (BPR) identifies processes and workflows, analyzes processes and workflows, and designs processes and workflows

Answer 167

COSO has developed a widely accepted and used framework for internal control that was designed to provide reasonable assurance for a firm's objects related to: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with laws and regulations. Although the expansion of markets may be in the strategic plan for a company and may come about due to the effectiveness and efficiency of operations, it is not a focus of the COSO Framework designed for internal control.

Answer 168

Net present value (NPV) is defined as the excess of present value of cash inflows from a project over the discounted net cash outflows. A positive net present value indicates that the project's rate of return is greater than the discount (bundle) rate of interest. Projects promising a positive NPV should be undertaken if funds are available.

Answer 169

The Delphi method is a collaborative process whereby managers or members of a group are independently surveyed to reach a consensus on something that will happen in the future. With no empirical evidence, this method relies mostly on judgment. A time series model involves specific measurements taken over equally spaced intervals that assist with forecasting those measurements in the future. Econometric models combine mathematical economics, statistics, economic statistics, and economic theory. This model involves regression analysis. Regression uses an independent variable to predict the value of another variable. Time series, econometric, and regression analyses all utilize mathematics and observation. Each is less subjective than the Delphi method of forecasting.

Answer 170

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.

Answer 171

The banking system can increase its total demand deposits by $5 million, computed as follows: If reserves increase by $1 million and the reserve ratio is 20%, and Reserve ratio = Reserves / Total Demand Deposits, then 0.20 = 1,000,000 / increase in deposits. Thus, the increase in deposits = $1,000,000 / 0.20, or $5,000,000.

Answer 172

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

Answer 173

Collusion is when competitors agree to restrict production so as to increase the price they receive for their product. A cartel is one form of collusion, where producers agree how much each member will produce and charge. OPEC (the Organization of the Petroleum Exporting Countries) is an example of a cartel. Dual pricing is a practice of setting different prices for a product dependent on the currency used to buy it. It often is used to set lower-than-normal prices to gain access to a particular foreign market. Predatory pricing means lowering prices to such an extent as to drive competitors out of business. A transfer price is the price charged by one unit within a larger business to another unit in that business.

Answer 174

1,600 (Indirect materials: $4,000 × 40%) + $850 (Indirect labor: $850) + $300 (factory depreciation: $600 × 50%) + $600 (Other factory costs: $1,000 × 60%) = $3,350

Answer 175

A factor buys a company's accounts receivables, assumes the risk of collection and the company gets its money immediately. In this problem, the standard factoring solution is complicated by the fact the fees and interest are not deducted in advance, changing the amount of interest. Amount of receivables to be factored $100,000 Less: 20% factoring reserve (1.00 - .80) (20,000) -------- Amount loaned to company $ 80,000 ======== 2% factoring fee (assessed on entire $100,000) $2,000 10% interest for 30 days (assessed on the entire $80,000) 667 ------ Total fees assessed on $80,000 loan $2,667 ====== These fees are offset by the savings in collection expenses. This amount is $1,500 for one month ($18,000 divided by 12). The net cost per month is $1,167 ($2,667 - 1,500). The monthly interest rate is 1.46% ($1,167 divided by $80,000). This represents an annual rate of 17.5% (1.46% × 12).

Answer 176

Under the fair value assumption as presented in FASB ASC 820, the hypothetical transaction is considered to have occurred in either the principal market for transactions similar to the subject of the valuation or the most advantageous market if a principal market does not exist. The principal market is considered to be one where the holder of the asset or liability being valued could find the greatest volume of similar transfers. The most advantageous market is one where the holder of an asset could maximize the price received in an asset sale or minimize the transfer costs in the conveyance of a liability. The characteristics of the hypothetical parties to the transaction as being unrelated and having usual and customary knowledge of the items being transferred do not define the principal market involved in the hypothetical transaction.

Answer 177

A company which wishes to minimize risk will tend to have a low ratio of current liabilities to long-term financing, as the latter entails less risk of default. It would want to have a high current ratio (current assets to current liabilities) and a longer operating cycle.

Answer 178

Risk analysis is necessary to determine an organization's definition of a disaster and evaluate the effect of that disaster. System backup analysis, vendor supply agreement analysis, and contingent facility contract analysis are all contingency planning strategies to react to a disaster.

Answer 179

he balanced scorecard concept is a management method used to help companies achieve the goals in their mission statements. There are four sections, or perspectives, to this method: financial performance, customer knowledge, internal business processes, and learning and growth. Targeted market segments would be specific groups of customers to whom a company wishes to advertise and sell. The study or review of success in these markets would fall under the customer perspective. Learning and growth encompasses the continued improvement of the major resource of companies—the training and mentoring of human resources, or employees. The financial perspective is the more traditional way to manage a business. It is based on financial data such as overall profits and financial ratios. Internal business processes allow managers to receive information that provides feedback regarding how well the products or services fulfill the overall mission of the business.

Answer 180

he average inventory level when the standard economic order quantity model is used is one-half of the EOQ. The EOQ for Product A is 200 units. One-half of 200 is 100. Add the 50-unit safety stock to arrive at 150 units as the average inventory of Product A.

Answer 181

Weighted average means beginning work-in-process inventory is included with the current period production. Therefore, costs from the previous period ($5,500) are added to those incurred this period ($18,000) and the total ($23,500) is divided by equivalent completed units. Since material is added at the beginning of the process, all units finished, as well as all those in ending work-in-process inventory, are 100% complete as to material. Equivalent completed units for the weighted-average method include equivalent units completed (100% of 42,500) as well as equivalent units in ending inventory (100% of 12,500) for total of 55,000 equivalent completed units. Dividing total material costs of $23,500 by equivalent completed units of 55,000 results in $0.43 per equivalent completed unit.

Answer 182

$250 unfavorable derives from the actual direct labor hours (6,250) times the difference between the standard direct labor rate ($12.00) and the actual direct labor rate ($75,250 ÷ 6,250 = $12.04). Therefore, 6,250 × ($12.00 - $12.04) = $250. $10 unfavorable derives from the difference between the planned direct labor hours (15,000 × .4 = 6,000) and the actual direct labor hours (6,250) times the difference between the standard direct labor rate ($12.00) and the actual direct labor rate ($75,250 ÷ 6,250 = $12.04) producing ((6,000 - 6,250) × ($12.00 - 12.04) = $10). $240 unfavorable derives from the planned direct labor hours (15,000 × .4 = 6,000) times the difference between the standard direct labor rate ($12.00) and the actual direct labor rate ($75,250 ÷ 6,250 = $12.04) producing ((6,000) × ($12.00 - 12.04) = $240). $248 unfavorable derives from the direct labor hours allowed for actual production (15,500 × .4 = 6,200) times the difference between the standard direct labor rate ($12.00) and the actual direct labor rate ($75,250 ÷ 6,250 = $12.04) resulting in ((6,200) × ($12.00 - 12.04) = $248).

Answer 183

6,000/50,000-5000=13.33

Answer 184

The variable overhead efficiency variance indicates the dollar result of either efficient or inefficient usage of the cost driver for variable overhead. For Baby Frames, this cost driver is direct labor hours (DLHs). The computation is: Variable overhead = Standard variable x Difference between actual efficiency variance overhead rate and budgeted DLHs = $2 (2,100 - (19,000 x .1)) = $2 (2,100 - 1,900) = $2 (200) = $400 Since actual DLHs exceeded budgeted DLHs, this variance is unfavorable. Budgeted DLHs are based on budgeted hours for actual product output (19,000 frames), not what Baby Frames thought it would produce (i.e., 20,000 frames). The idea is to use the budgeted rate (0.1 hour per frame) but multiply it by the actual level of production (19,000 frames). Terms

Answer 185

Note that: Current Ratio = Current Assets / Current Liabilities 2.5 = ($50,000 + $80,000 + $120,000) / Current Liabilities 2.5 = $250,000 / Current Liabilities Therefore: (2.5) Current Liabilities = $250,000 Current Liabilities = $250,000 / 2.5 = $100,000 Quick ratio = Quick Assets / Current Liabilities = ($50,000 + $80,000) / $100,000 = $130,000 / $100,000 = 1.3 to 1

Answer 186

Accounts payable increased from $100,000 at the beginning of the year to $150,000 at the end of the year (the 150% increase). Purchases of candles include the $300,000 paid in cash plus the $50,000 increase in payables for total purchases of $350,000. Since inventory does not change, the cost of goods sold equals the cost of purchases. Sales price is 120% times purchase cost, so sales are budgeted at 1.20 × $350,000, or $420,000. Gross margin is sales revenue of $420,000 less cost of sales of $350,000, or $70,000.

Answer 187

Net realizable value equals expected market value (selling price) less any separable processing and selling costs. If byproduct Moy was recorded at net realizable value, the following entry would have been made in 20X1: Dr. Byproduct Inventory 5,000($6-$2) $20,000 Cr. Work-In-Process $20,000 When the 5,000 units of Moy were sold in 20X2, the sale would be recorded using the following summary journal entry: Dr. Cash (5,000 x $6) $30,000 Cr. Byproduct Inventory $20,000 Cr. Cash (for selling costs) (5,000 x $2) 10,000 As can be seen, no profit is recognized when byproduct inventory is recorded at net realizable value.

Answer 188

Answer A is correct because implementing an ERP application is a change to the entity’s internal controls and documenting the change is part of the process of managing the change. Answer B is incorrect because documenting an application is part of the entity’s internal controls, not a social event. Answer C is incorrect because segregating one duty from another is an example of a control. It is not related to documentation of policies or training. Answer D is incorrect because this is the implementation of a change in the financial reporting system, not an economic event.

Answer 189

Under the variable costing method, fixed manufacturing costs are assumed to be period costs. Only variable production costs are inventoriable. The cost of the ending finished goods inventory can be determined by calculating the total product costs incurred during the period and dividing that total into two components: Cost of goods sold (COGS) for the period Ending finished goods inventory ``` Direct materials used $ 80,000 Direct labor incurred 40,000 Variable factory overhead 24,000 -------- Total production costs $144,000 Units produced / 20,000 -------- Cost per unit $ 7.20 ``` Cost of ending finished goods inventory = Units in inventory x Cost per unit = 2,000 x $7.20 = $14,400

Answer 190

Margin of safety = Budgeted sales - Breakeven sales = $1,000,000 - $700,000 = $300,000

Answer 191

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.

Answer 192

The board of directors of XYZ Co.'s relationship to the company is a fiduciary relationship. To understand why, you must first define “fiduciary.” A fiduciary relationship is a legal or ethical relationship of trust between two people, organizations, or other such parties.

Answer 193

In pure competition, a firm will continue to produce until marginal costs = marginal revenue; therefore, as long as marginal revenue is greater than marginal costs, the firm will continue to increase output.

Answer 194

Learning and growth Employee satisfaction and retention measures are used under the learning and growth perspective of the balanced scorecard. Employee satisfaction typically correlates with productivity employee effectiveness and retention. Retention itself often relates to reduced retraining increased opportunity for human resource development and reduced investment in learning curve.

Answer 195

Default risk as it relates to accounts receivable includes the following: The chance that the principal will not be paid by the due date The chance that the cash received will not be the promised amount The chance that the product may have declined in value if it is necessary to repossess it

Answer 196

With differing rates of return in different years, the best way to make a comparison is to calculate the net present value using both rates for the appropriate years and accept those projects with a net present value (NPV) of zero or greater. Net present value is appropriate because it allows discounting different years using the respective required rates of return for those years.

Answer 197

Project management is the key to planning, implementing, and monitoring. It does not stop with only planning, but encompasses all three processes of the project.

Answer 198

The cost of the preferred stock to the firm will be 10.4%. The cost to the firm of selling preferred stock is equal to the annual dividend the firm must pay, divided by the net funds received when the stock was sold. Since preferred dividends are not tax deductible, there is no tax adjustment for the cost of preferred stock as there is for debt. The formula for calculating the cost of preferred stock to the firm is as follows: ks = D1 / (PO - u - f) Where: D1 = Annual preferred dividends PO = Current market price of the stock u = Underpricing per share, if any f = Flotation costs paid the investment banker Here, ks = 10 / (101 - 0 - 5) = 10 / 96 = 0.104, or 10.4%.

Answer 199

Process costing is a system of accounting for production in which costs are assigned to units of finished goods indistinguishable from each other and produced in a continuous process. During the process, raw material cost, direct labor cost, and applied overhead increase the work-in-process inventory account. As units are finished, the cost of those units reduces work-in-process and increases the finished goods account. "Finished goods inventory control" is incorrect because overhead is applied as work is performed, not when units are finished. "Factory overhead control" is incorrect because the application of overhead to work-in-process would increase work-in-process, not the factory overhead control account. "Cost of goods sold" is incorrect because the application of overhead does not affect cost of goods sold. The overhead applied will be included in work-in-process, which is transferred to finished goods, which is then transferred to cost of goods sold as the goods are sold, but cost of goods sold is not affected when overhead is applied to work-in-process.

Answer 200

The payback period method can be used as an easy screening tool for capital budgeting projects since it determines the length of time required to recover the initial cash investment through net cash flows. As a general rule, the sooner the investment is recovered, the better. Weaknesses of the payback method are the following: All cash flows occurring after the payback period are ignored. The time value of money is not considered.

Answer 201

A financial transaction control is a procedure that is developed to discover and/or prevent errors, misappropriations, or policy noncompliance in a financial transaction process. Such a control will aid an organization in achieving specific goals and objectives. It is an internal control that allows for a firm's resources to be properly: used, monitored, and measured. It is hoped that such controls will detect fraud and provide adequate protection for the company's assets.

Answer 202

Rodder needs to sell the components in order to earn as much money as he would have had he used them for his alternate production use. In other words, he needs to determine the sales price that would allow him to keep the $5,000 contribution margin. The contribution margin is the difference between the revenue for the components and the variable cost of the components. The variable cost to produce these components is $9 per unit ($3 direct material + $3 direct labor + $3 variable overhead), or $9,000 total ($9 per unit × 1,000 units). $5,000 (Contribution margin) = Revenue - $9,000 Revenue = $5,000 + $9,000 = $14,000 $14,000 revenue for $1,000 units = $14 per unit $14 per unit is the lowest price Rodder should accept in order to keep his contribution margin of $5,000.

Answer 203

Structural unemployment arises because of changes in technology and international competitiveness, which change the skills required to perform jobs and/or change the location of jobs. Cyclical unemployment occurs during declines in the business cycle, and unemployment should be reduced as the economy recovers. Frictional unemployment occurs due to normal labor turnover such as people seeking employment in a higher-paid occupation or another location. Short-term unemployment is incorrect because changing technology often results in longer-term unemployment. Workers laid off due to technological change often find it difficult to obtain jobs without retraining, relocating, or additional education.

Answer 204

Two general rules can be developed related to the internal rate of return (IRR) of a proposed asset purchase: Increases in cash inflows (decreases in cash outflows) will result in a higher internal rate of return. The earlier the cash inflows (the later the cash outflows) the higher the internal rate of return, all else being equal. Taxes in general will lower the IRR of a proposed asset purchase, as will decreases in the tax credits available when an asset is purchased.

Answer 205

D. Post a sign in a visible spot near the checkout counter that states, “If you do not get a receipt, your purchase is free.” Internal controls are designed to provide reasonable assurance that objectives are achieved and compliance to laws and regulations is obtained. All of the items listed would be reasonable control procedures; however, the store receipts may not be able to support a minimum of three employees at the store at any given time. The cost of an internal control procedure is not expected to exceed its benefit. Although it would be important to carefully screen all new employees, it is often difficult to judge an individual's character during one or two short interviews, and in today's litigious society, it is often difficult to get valuable information from prior employees or other references. Following are some of the internal control goals related to this transaction: Validity: The owner would want only valid, authorized, and legal transactions to be processed. By requiring all transactions to be rung up on the cash register, the owner has the ability to review all transactions. The owner could examine items sold, discounts given, and any other adjustments recorded in sales. However, when only one employee is in the store, it would be difficult to enforce the use of the cash register for cash sales. Accuracy of recording and evidence of supportability: The owner would want transactions to be recorded free of omissions. By using the customer as a part of the internal control process, the customer can be a “monitor” of the transaction when the owner is not in the store and/or when only one employee is on the selling floor. The transaction would need to be entered into the cash register (recorded) in order to print a register receipt. Given that it may be necessary to have only one employee in the store at slower times during the day, the owner has a final “backup” to have reasonable assurance that the employees are using the other required internal control procedures—thus making this procedure key in the internal control process.

Answer 206

Since joint products frequently are not saleable at split-off, there is no sales value at split-off. Thus, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the relative sales value at split-off. Since the question uses the sales price, it is unrealistic to equate this amount to either total costs or joint costs (costs incurred prior to split-off). The question says nothing about profit margin. Allocation of joint costs based on relative sales value at split-off is considered the best method and is widely used. Under this method, costs are allocated on an “ability to bear” basis.

Answer 207

Cash flows in the form of revenue are taxable so revenues must be computed net of tax. Cash outflows in the form of expenses are deductible in computing taxes payable. Therefore, these cash outflows must be computed net of tax also. Depreciation is not a cash flow but it is a deductible expense and therefore affects the amount of taxes payable. An accelerated method of depreciation will cause larger amounts of depreciation to be deducted sooner than straight-line. Although the same amount of tax will be shielded in nominal dollars, the present value of the tax savings (or shield) is greater under accelerated depreciation because less tax is paid out earlier in the project's life.

Answer 208

The price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is greater than 1.0, the elasticity is elastic. If there are many similar substitutes available, many fewer units of this product will be demanded as the price increases, so the change in quantity purchased will be greater than the change in price, giving an elasticity greater than 1.0, a high price elasticity of demand. The other answer choices all represent situations where a purchaser would react to a price change, but not to the same percentage extent as the percentage price change. "The cost of the item is low compared to the total budget of the purchasers" is incorrect because a change in price of an inexpensive product would not be significant to buyers. "The item is considered a necessity" is incorrect because many buyers will continue to purchase necessities even with a price increase. "Changes in the price of the item are regulated by governmental agency" is incorrect because the government regulation might change the prices, but the effect on quantities purchased could be either greater or lesser than the price change effect.

Answer 209

Per FASB ASC 820, there are three groups of inputs used when developing fair value: Level 1: directly observable inputs of identical items, such as quoted active market prices Level 2: directly or indirectly observable inputs of similar items Level 3: unobservable inputs In John's valuation situation, the quoted market price is for the allegedly similar asset; therefore, this can be no more than a Level 2 fair value measurement. However, since there is a question as to the similarity of the conditions between the subject asset and the comparable, John will need to consider whether these questions related to the condition of the subject asset are significant enough to lower the fair value measurement to a Level 3. Although FASB ASC 820 expects that the CPA will attempt to use more observable than unobservable inputs when doing a fair value valuation, it only requires the use of information that is available without undue cost or effort.

Answer 210

Normally, investment projects are perceived to be subject to some degree of risk with regards to amount and timing of future cash flows. This risk is incorporated into the analysis by using a discount rate higher than the risk-free rate. If there is no risk (i.e., the cash flows are certain), the appropriate discount rate is the risk-free rate.

Answer 211

The learning curve is a graphical description of the learning process that shows the impacts of learning over a number of practice opportunities on work behaviors. The learning curve usually shows increases in work performance as an employee integrates learning experiences (classes, on-the-job training, etc.) into work practices. A basic assumption of the learning curve model is that the direct labor required for the n + 1st unit will always be less than the labor required for the n unit. Since demand exceeds supply, the company will keep increasing production with a constant number of assembly hours. Increased production requires more units of raw material (components).

Answer 212

The terms “price,”“worth,” and “value” are often used interchangeably when dealing with business-related topics. In actuality, however, these terms have quite different meanings. Price is the observed exchange price that occurs in the marketplace; therefore, it is not determined in the process of doing a business valuation, due to the fact that no actual transaction is taking place. Worth refers to the advantages of ownership based upon the perceived benefits at a particular point in time and for a particular use. Joan's client is probably concerned about worth, but worth is not the focus of a business valuation. Value is the determination of what would be received in an exchange between two willing parties in an arm's-length transaction in the marketplace where both parties had acted with knowledge, with prudence, and without compulsion. This is the focus of a business valuation. Cost is what was paid for an asset in the marketplace and is not the subject of a business valuation.

Answer 213

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.

Answer 214

Officers of an organization are not permitted to move the activities of the company outside of the United States in order to avoid the Sarbanes-Oxley Act requirements.

Answer 215

The term “mutual interdependence” relates to the fact that the outcome of pricing decisions in an oligopoly is dependent upon the reactions of organization's rivals.

Answer 216

The accounting rate of return is a capital budgeting method or technique which disregards the time value of money. It is not a rate used in a net present value analysis. Each of the other terms—cost of capital, hurdle rate, and required rate of return—describes a rate used in net present value analysis.

Answer 217

The contribution margin per test is sales price less variable cost, or $40 ($60 - $20). Unit sales necessary to produce a desired profit can be found by adding the profit to fixed costs and dividing the sum by the contribution margin per unit. At low activity with fixed costs of $160,000, the unit sales necessary for a profit of $160,000 is fixed costs of $160,000 plus the profit of $160,000 (a total of $320,000) divided by unit contribution margin, or $320,000 ÷ $40 = 8,000 tests. This is outside the range within which fixed costs equal $160,000, so this answer is incorrect. At high activity with fixed costs of $200,000, the unit sales necessary for a profit of $160,000 is fixed costs of $200,000 plus the profit of $160,000 (a total of $360,000) divided by unit contribution margin, or $360,000 ÷ $40 = 9,000 tests. This is the correct answer, since 9,000 tests can be performed with fixed costs of $200,000.

Answer 218

Payback reciprocal = 1/Payback period Where: Payback = Net cash invested/Annual cash inflow If the cash flow pattern is relatively stable, the payback reciprocal number serves as a good approximation of a present value of an annuity table factor. Using the payback number and a PV of an Annuity table, it becomes a relatively simple matter to look up an interest rate corresponding to the appropriate number of years' life of a project. This interest rate will be a close approximation of the internal rate of return.

Answer 219

According to the political business cycle theory, politicians want the economy to be “pointed in the right direction” as the election approaches with the unemployment rate and the inflation rate falling. Thus, there would be relatively expansionary fiscal policy prior to the election, followed by more restrictive fiscal policy soon after the election, often placing the blame for the reversal on the previous administration if there were a change.

Answer 220

No. outages No. of Total Out-of-Pocket Expected per month x months = outages x Costs = Cost 0 x 3 = 0 x $400 = $ 0 1 x 2 = 2 x $400 = 800 2 x 4 = 8 x $400 = 3,200 3 x 3 = 9 x $400 = 3,600 ------ Total expected cost of outages $7,600 Less cost of leasing generator (12 x $500) 6,000 ------ Estimated SAVINGS from generator $1,600

Answer 221

A is correct If taxes are ignored, depreciation is not a consideration in any of the methods based on cash flows because it is a non-cash expense. Thus, the internal rate of return, net present value, and payback methods would not consider depreciation because these methods are based on cash flows. However, the accounting rate of return is based on net income as calculated on an income statement. Because depreciation is included in the determination of accrual accounting net income, it would affect the calculation of the accounting rate of return.

Answer 222

During a recession there is insufficient aggregate demand. An expansionary fiscal policy would increase government spending or cut taxes, both of which would increase the level of aggregate demand. An expansionary monetary policy would attempt to decrease interest rates to stimulate business investment and the consumption of durable goods.

Answer 223

The key to this problem is to determine how much inventory is reduced by the increased inventory turnover and the resulting savings in interest costs due to reduced working capital requirements. A company must either borrow funds to acquire working capital or give up the next best investment opportunity to fund working capital requirements (opportunity cost). Either way, it costs a company to hold inventory. Any reduction in inventory levels reduces that cost. The formula for inventory turns is annual cost of sales divided by inventory. Solve for inventory by dividing annual cost of sales by inventory turns. Initially, Spotech has an inventory level of $16,562,500 ($132,500,000 divided by 8 turns). Spotech hopes to decrease the level to $13,250,000 by increasing inventory turns to 10 ($132,500,000 divided by 10 turns). Working capital is reduced by this change in inventory ($16,562,500 - $13,250,000 = $3,312,500). The interest avoided on the $3,312,500 represents a savings of $165,625 ($3,312,500 × 5%).

Answer 224

The price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is less than 1.0, the elasticity is inelastic. Since a 3% decrease in quantity demanded results from a 5% price increase, the elasticity of demand is: 0.3 ÷ 0.5 = 0.6 This is a number less than 1.0, indicating inelastic demand. A 4% price increase that results in a 6% decrease in the quantity demanded, and a 3% price decrease that results in a 5% increase in the quantity demanded, represent elastic demand since the change in quantity is greater than the change in price. A change of 4% in quantity demanded due to a 4% price increase results in an elasticity of exactly 1.0, neither elastic nor inelastic.

Answer 225

The most appropriate investment would appear to be the 90-day commercial paper. Commercial paper is short-term unsecured debt that may be issued directly to a purchaser on a discount basis and set to mature on a specific date. By purchasing directly, broker fees and other changes are avoided

Answer 226

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.

Answer 227

National income (NI) is defined as net domestic product (NDP), plus net income earned abroad, minus indirect business taxes (e.g., sales taxes). NDP is gross domestic product ($4,000) minus depreciation ($500), or $3,500. Thus, national income is $3,290 ($3,500 NDP + $0 net income earned abroad - $210 indirect business taxes). ``` Net domestic product $3,500 Net income earned abroad 0 Indirect business taxes (210) ------ National income $3,290 ====== ``` $3,500 is the NDP. Recall that NDP = Gross domestic product (GDP) - depreciation. $3,515 equals personal income (PI). Recall that PI = NI - corporate income taxes and undistributed profits - Social Security contributions + transfer payments (public and private). PI = NI ($3,290) - corporate income taxes ($50) - undistributed corporate profits ($25) - Social Security contributions ($200) + transfer payments ($500) = $3,515. $3,265 equals disposable income (DI). Recall that DU = PI - personal income taxes. DI = PI ($3,515) - personal income taxes ($250) = $3,265.

Answer 228

The cost of capital is the weighted-average cost (percentage) that a firm will incur in raising new funds to finance future investment. Given a need to finance specific assets, the optimal capital structure is determined by computing the lowest weighted-average cost of capital to raise that amount. The maximum degree of financial leverage (DFL). and maximum degree of total leverage (DTL) are incorrect because leverage is a measure of the portions of capital from debt and from equity; it does not determine the optimal allocation between the two. "Intersection of the marginal cost of capital and the marginal efficiency of investment" is incorrect because the marginal efficiency of investment indicates the sensitivity of the cost of capital to changes in interest rates.

Answer 229

Sales = Unit Price x Number of units COGS = Unit Cost x Number of Units Gross Margin = (Unit Price - Unit Cost) x Number of Units Clearly, both unit cost and unit sales price affect the calculated amount of gross margin and additionally, the gross margin ratio.

Answer 230

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.

Answer 231

Business process management is supported by the approaches, techniques, and measures of the organization (not the systems). These processes are analyzed throughout the life of the organization. After a decade of what has often been conflicting and contentious debate over the meaning of “BPM”, we at BPM.com have joined with other industry experts on the establishment of an official and definitive definition of BPM: “Business Process Management (BPM) is a discipline involving any combination of modeling, automation, execution, control, measurement and optimization of business activity flows, in support of enterprise goals, spanning systems, employees, customers and partners within and beyond the enterprise boundaries.” The goal of this effort is to find the definition that closely represents the concept that most people (including both experts and otherwise) have for the term BPM. The goal was not offer judgment on different BPM methods, technologies or products, many of which are discussed on this site. This definition is by design short and concise, yet definitive and complete. Some broader considerations BPM is a discipline; it is a practice; it is something you do. Business stems from the state of being busy, and it implies commercially viable and profitable work. A business exists to provide value to customers in exchange for something else of value. Process means a flow of business activities and seeing those activities as connected toward the achievement of some business transaction. Flow is meant loosely here: the order may or may not be strictly defined. A person doing BPM must consider a process at the scope of interrelated business activities which holistically cooperate to fulfill a business objective. This is the key difference from a functional view of business where each function might be optimized independent of the other functions. In a complex system like a business, it is well known that local optimization of part of the system will rarely lead to good overall results. A BPM practitioner must consider the metrics of the entire system when evaluating a specific process. Modeling means that they would identify, define, and make a representation of the complete process to support communication about the process. There is no single standard way to model, but the model must encompass the process. Automation refers to the work that is done in advance to assure the smooth execution of the process instances. In many cases this means writing software, but it might include building machinery or even creating signage to direct participants. Execution meaning that instances of a process are performed or enacted, which may include automated aspects. Conceptually, the process instance executes itself, following the BPM practitioner’s model, but unfolding independent of the BPM practitioner. Control means that the there is some aspect of making sure that the process follows the designed course. This can be strict control and enforcement, or it might be loose control in the form of guidelines, training, and manual practices. Measurement means that effort is taken to quantitatively determine how well the process is working in terms of serving the needs of customers. Optimization means that the discipline of BPM is an ongoing activity that builds over time to steadily improve the measures of the process. Improvement is relative to the goals of the organization, and ultimately in terms of meeting the needs of customers. Enterprise is used here simply to mean a business organization; any organization where people are working together to meet common goals; it does not need to be exceptionally large, and it does not need to be for profit. The mention of enterprise goals is included here to emphasize that BPM should be done in the context of the goals of the enterprise, and not some small part of it. This might seem a bit redundant in one sense: any improvement of a process must be an improvement in terms of the enterprise goals – anything else would not be called an improvement. Within and beyond the enterprise boundaries recognizes that the enterprise is part of a larger system. Customers are part of the business process. Their interaction, along with those of employees should be considered as part of the end-to-end interaction.

Answer 232

Exponential smoothing is a statistical method that is useful as a sales forecasting technique. This forecasting procedure is a special type of weighted moving average: it is reverse geometric progression in which the effect of past events (in this case sales) is discounted based on some multiple so that the effect which the past event has on current projections decreases as the time since the event increases. The other methods are not useful in forecasting sales: Linear programming is a model for the allocation of scarce resources. Queuing theory relates to the balancing of the cost of waiting with the cost of service; for example, the cost of lost sales resulting from long lines at the cash register versus the cost of opening another cash register. Cost-volume-profit analysis is a model used to aid decision making relating to product lines, pricing of products, marketing strategy, and utilization of production facilities.

Answer 233

A zero-balance account is one that maintains a zero-balance since funds only sufficient to cover the checks presented are transferred from another account. Payable-through drafts are legal instruments that look like checks, but they are not drawn on the bank. Payable-through drafts are drawn on and approved by the issuing company against its demand deposit account. Concentration banking is when a company uses a geographically dispersed collection center to speed up the collection process.

Answer 234

Section 302 of the Sarbanes-Oxley Act requires that CEOs and CFOs certify that the periodic statutory financial statements were reviewed before being signed.

Answer 235

There are two types of business valuation engagements outlined in the SSVS 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset: In a valuation engagement, the valuation analyst is free to employ the use of any valuation approach or method that is professionally deemed appropriate under the circumstances. The results are expressed in terms of a conclusion of value and can either be a single number or a range. The premise of value can be either a going concern or liquidation. In a calculation engagement, the valuation analyst and the client agree upon the valuation methods and approaches to be used; therefore, the analyst is not free to use any approach or method available. The results are expressed in terms of a calculated valued and can be either a single number or a range. The premise of value can be either a going concern or liquidation.

Answer 236

Using activity-based costing, the setup cost of $400,000 would be allocated based on the activity driver that is most closely related to the cost. The relevant activity for setup costs would be setup time required for each product rather than labor hours. Total setup hours of 2,000 (500 for X and 1,500 for Y) would be allocated using the ratio 500/2,000 × $400,000, or $100,000 for Product X. Product Y would be allocated using the ratio 1500/2000 × $400,000, or $300,000 for Product Y.

Answer 237

Johnson must budget for purchases to cover (1) 60% of the units produced in January (since 40% was left from December) and (2) 40% of units produced in February. Raw materials needed for January's production = 12,000 × 4 lbs. of materials per unit × 60% = 28,800 pounds Raw materials to cover 40% of February's needs = 11,000 × 4 lbs. of materials per unit × 40% = 17,600 pounds Total materials to be purchased in January = 28,800 + 17,600 = 46,400 pounds

Answer 238

Section 404 of the Sarbanes-Oxley Act requires issuers of annual reports to include the scope and capabilities of the internal control system. It also requires the issuer to include procedures for financial reporting.

Answer 239

The real issue here is the reinvestment assumption applied to “recovered funds.” Net present value (NPV) assumes reinvestment at the cost of capital whereas internal rate of return (IRR) assumes reinvestment at the IRR. NPV makes the more realistic assumption about the rate of return that can be earned on cash flows from the project.

Answer 240

Organizations must collect data before, during, and after the implementation to reach a desired target. By performing a SWOT or gap analysis, the organization can first establish a baseline of where it stands and where it needs to go, and also determine if the initiative will fit into the organization as a whole. However, once an initiative has been chosen and launched, ongoing data collection and analysis is critical to determine if the initiative is on target or whether changes need to be made. Once the initiative is fully implemented, additional data is collected and analyzed to determine a cost benefit analysis.

Answer 241

In macroeconomics, equilibrium national income is affected by changes in autonomous consumption, net investment, and government expenditures. The actual impact on national income will be multiplied, positively or negatively, by some multiple of the initial change. This is due to the “multiplier effect,” which magnifies small changes in C, In, or G into larger overall changes to national income. Thus, a decrease in net investment (In) will decrease national income by a larger amount than the original decline in investment.

Answer 242

The 10-year Treasury bond is subject to significant interest rate risk. If the firm purchased the commercial paper, they would receive $51,000 = ($2,000,000 × .051) ÷ 2. While they would receive $60,000 in interest on the T-bond during the same period, they would have to sell the bond at the end of six months to obtain the needed cash. They would be forced to take a capital loss of more than $9,000 on the sale of the bond if interest rates climbed above 6.18% when the bond had to be sold at the end of the 6-month period. The other securities all mature at the time the firm expects to need the funds and thus would not expose the firm to interest rate risk. While commercial paper is unsecured debt, the AAA-rating indicates a low level of default risk. Federal agency securities are less marketable than Treasury securities, but this security matures at the time the funds are expected to be required. These other securities have slightly higher default risk than Treasury securities.

Answer 243

Annual Demand = A = 100,000 Units (Given) Cost per Order = D = $35 (Variable Cost Only, Ignore Allocation of Fixed Cost) Carrying Cost/Unit/Year = K = Handling Costs + Interest Handling Cost = 20% of Cost (Given) = (.2) ($12) = $2.40 Interest (Capital Cost) = 15% (Given) of Cost (Given) = (.15) ($12) = $1.80 Carrying Cost = K = $2.40 + $1.80 = $4.20 EOQ = Sq. Root of 2AD/K = Sq. Root of ((2 x 100,000 x $35)/$4.20) EOQ = Sq. Root of 7,000,000/4.20 EOQ = Sq. Root of 1,666,666 EOQ = 1,291

Answer 244

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.

Answer 245

Absorption costing is a method of costing in which both fixed and variable production costs are assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost and are expensed through cost of goods sold when the units are sold. Direct (variable) costing is a method of costing in which fixed costs are charged to expense as a period cost when incurred. It is more useful for management decision-making because it separates out fixed costs that do not change with the level of activity (volume). Depreciation on factory machinery is part of fixed factory overhead that is inventoried under absorption costing and expensed under variable costing. The cost of electricity used to operate production machinery is a variable cost that is inventoried under variable costing. The cost of material scrapped is a variable inventoriable product cost under both absorption and variable costing. Wages of assembly-line personnel are a direct labor cost, a variable inventoriable product cost under both absorption and variable costing.

Answer 246

The coefficient of determination (r2) is a ratio that indicates the proportion of variance in the dependent variable determined by the independent variable using the regression equation. The purpose of regression analysis is to use an independent variable to predict the value of another variable. It is a mathematical equation used to fit the best line possible to the observed data. It is the line that minimizes the sum of the squares of the lengths of the vertical lines drawn from the data point to the line (i.e., the deviation of the actual observation from the estimate). The smaller the sum of the deviations, the better the fit of the line to the data. Multiple regression involves the analysis of more than two variables. The key to regression analysis is the computation of the constant and the coefficient b in the linear equation Y = a + bX. Consult a cost accounting or business statistics text for the equations for computing a and b.

Answer 247

Producing more units than planned in the master budget will not affect the efficiency of the materials used for each unit. Poorly functioning machines will have more material waste and spoilage. An inadequately trained and supervised labor force will have more material waste and spoilage than an adequately trained and supervised labor force. Rush orders disrupt the manufacturing process by interfering with normal work routines, practices, and procedures. These disruptions will adversely affect each of the manufacturing processes, including the efficient use of material, labor, and overhead.

Answer 248

Stronger than expected sales would produce higher cost of goods sold and lower end-of-year inventories than planned. Since inventory turnover is computed as cost of goods sold divided by average inventory, the overall effect is a higher turnover ratio. Each of the other conditions mentioned affects cost of goods sold and/or average inventory in a negative manner, causing a lower than expected inventory turnover.

Answer 249

In the short-run, average variable cost for a firm is rising; therefore: A. average variable cost is below average fixed cost. B. average fixed cost is constant. C. average total cost is at a minimum. Correct D. marginal cost is above average variable cost.

Answer 250

The recessionary phase is a period in which more resources become unemployed and actual output falls below potential output. There will be a decline in the number of hours in the average workweek since output falls. There will be an increase in unemployment claims; however, the natural rate of unemployment will remain unchanged. Cost will have a tendency to fall.

Answer 251

A material purchase price variance is computed: MPPV = Quantity Purchased × Difference between actual and standard price If this variance is favorable, the actual material price must have been less than the standard material price.

Answer 252

Profitability is the ability of an enterprise to maintain a satisfactory dividend policy while at the same time steadily increasing ownership equity. Gross margin as a percentage of sales revenue is an indication of profitability on those sales. The current ratio does not measure profit; it measures current assets and current liabilities. The inventory turnover ratio does not measure profit; it measures the time from acquiring inventory to selling it, a current asset. Debt to total assets measures leverage, not profitability.

Answer 253

Shared services is combining efforts of two departments that share the same resources. Why have two internal departments working on one common goal and spending twice the money? Shared services combines the two internal departments that can then share in the resources and costs

Answer 254

The drum-buffer-rope theory: assumes that within a manufacturing system there is at least one (or a limited number) of constraints created by scarce resources. states that in order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected. states that it is important to protect against inflationary inventory levels (inventory build ups) and the associated carrying costs which can occur at bottlenecks (constraints). focuses on only the queuing area within a manufacturing firm that is in front of the constraint (bottleneck).

Answer 255

The eight components of COSO's ERM framework are internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. ERM processes must be monitored, deficiencies reported to management, and modifications performed when required.

Answer 256

The payback period serves as a fair approximation of the annuity factor value from the table of present values of an annuity. Using the data given: Payback = Investment / Annual saving = $100,000 / $20,000 = 5.00 Thus, internal rate of return can be obtained as a percentage rate from an annuity table for 10 periods nearest the annuity factor of 5.00. Internal rate of return (IRR) is the method used to determine the rate of return that causes the present value of the net cash flows to equal the initial investment. It is a way of evaluating an investment as the present value of the net future cash flows from the investment, expressed as: Investment = PV (i,t) …where i (the rate at which the cash flows are discounted) is unknown. An acceptable or beneficial proposal is one for which the IRR is equal to or greater than the firm's predetermined minimum acceptable rate of return on the investment.

Answer 257

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

Answer 258

This ratio basically compares the change in earnings after interest and taxes to the change in earnings before interest and taxes. The higher this ratio, the greater the return available to companies who finance their asset purchases with debt.

Answer 259

The material efficiency (usage) variance is the difference between the budgeted cost of materials used ($2 × 9,000 actual board feet) and the budgeted cost of materials that should have been used ($2 × 8,500 standard board feet), or $18,000 less $17,000, which is $1,000. The variance is unfavorable because the company actually used more material than the standard amount. The company used an extra 500 board feet at a standard price of $2 per foot for an unfavorable efficiency variance of $1,000.

Answer 260

Note that based on the number of orders, March is the “high” month and January is the “low” month. Variable Rate Per = Change in cost / Change in orders Order = ($4,320 - $3,120) / (1,800 - 1,200) = $1,200 / 600 orders = $2.00 per order

Answer 261

Perhaps because material inspection would only detect problems that had already been purchased it wouldn't prevent them. Same with the quality inspectors. Prevention costs are the costs of production process changes that reduce the rate at which product defects occur. This category includes employee training ($20,000), preventative maintenance ($19,500), and supplier education ($17,500). The cost of quality inspectors is an inspection cost that identifies a defect but does not prevent it. Internal failure costs include reworking or scrapping defective products that are identified by the inspection process. External failure costs include warranty and repair expenses and product recalls.

Answer 262

The weighted-average process cost method includes in equivalent units (EUs) all units completed plus work done on ending work-in-process (WIP). Thus: ``` Weighted-average EUs = Units completed + Work done on ending WIP For Kerner Manufacturing: Direct labor EUs = 400 + 75% (200) = 400 + 150 = 550 ``` Cost per direct labor EU = Total labor cost / Equivalent units = ($50,000 + $720,000) / 550 = $770,000 / 550 = $1,400 Ending direct labor WIP = 150 units in ending WIP x $1,400 per EU = $210,000 Under the FIFO assumption, only the costs incurred this period are allocated between finished goods and ending work-in-process (WIP) because FIFO maintains beginning inventory costs that are completely separate from current-period costs. Goods finished this period are costed separately as either started last period or started this period. Under FIFO, equivalent units of production (EUP) equals work done in the current period on Beginning WIP, plus the units started and completed in the current period, plus the work done on Ending WIP. The weighted-average assumption averages all materials and all processing (conversion) costs (both those incurred this period and those in Beginning WIP). No distinction is made between goods started in the preceding and the current periods. EUP differ from the FIFO calculation by the amount of EUP in Beginning WIP. EUP under weighted average equals the EUP transferred to finished goods plus the EUP in Ending WIP.

Answer 263

Expected value is the mean or average value of a random variable over the possible outcomes. It is calculated by weighting the value of each possible outcome by its probability and summing over all values. Here there are two possible outcomes: $250,000 profit with an 80% probability gives an expected value of 0.8 × $250,000, or $200,000. Zero profit with a 20% probability gives an expected value of -$100,000 (the cost of preparing the bid) for an expected value of -$20,000. Summing an expected value of $200,000 with an expected loss of $20,000 gives a net expected value of $180,000. We would not want to subtract the $100,000 cost of preparing the bid from the $250,000 profit because profit means revenue minus expenses. Therefore, the $250,000 profit is the amount after the $100,000 cost of preparing the bid has been subtracted from revenue.

Answer 264

The profit margin on sales is a profitability ratio that measures the profit generated from each dollar of sales. Profit margin on sales can be computed for gross profit, operating profit, or net income. Return on sales is net income divided by net sales revenue. Wexford has a return of 8% on sales revenue of $750,000, so net income is $60,000. Asset turnover is a measure of how effectively a business unit uses its assets. It equals sales revenue divided by average total assets. If the turnover is 1.5 times, the revenue of $750,000 can be divided by the turnover of 1.5 to find that total assets equal $500,000. Residual income is operating income less the imputed interest on the assets used to generate the income. The imputed income at 12% multiplied by assets of $500,000 is $60,000. Subtracting imputed income of $60,000 from net income of $60,000 leaves residual income of zero.

Answer 265

The major benefit of using a real options approach is its effectiveness in dealing with uncertainty. An investment is considered similar to acquisition of stock using options. The option is purchased but will be exercised only if investment in the related shares of stock appears profitable. If not, the option is not exercised and the potential loss minimized. Capital investment projects can be dealt with similarly.

Answer 266

The just-in-time (JIT) production environment is characterized by production generated by need. This is a “demand-pull” system in which sales occur first and trigger the production of units. Typical features of a JIT system include small lot sizes, low setup times/costs, and balanced workloads. Traditional production systems, on the other hand, produce products based on expected demand. They produce on a fixed schedule in a “push-through” mode.

Answer 267

The profitability index is also known as the excess present value index. It is calculated by dividing the project's initial (or average) cost into the present value of the cash flows. If the profitability index is greater than one, then a project's net present value (NPV) is positive. This index allows comparisons between two projects. The profitability index is a variation on the net present value method of capital budgeting. The net present value method adjusts for the time value of money by comparing the present value of the estimated net future cash inflows to the cost of the investment. The profitability index uses these same two variables in its calculation. The internal rate of return budgeting model calculates the rate of discount (interest) that equates the present value of the net cash flows (including the initial cash outlay) to zero. If the resulting rate of return is lower than the desired rate of return, the project should not be undertaken. The calculation of the economic value added amount (EVA) is not considered a capital budgeting method. The discounted payback method is the length of time required to recover the initial cash investment using a sum of the discounted future cash flows.

Answer 268

The wholesale price index (WPI) reflects the change in prices of goods at the wholesale level. Since price increases are generally passed on to consumers, the WPI serves as an early predictor for changes in consumer price levels.

Answer 269

Given free entry and exit in a monopolistically competitive industry, firms only earn normal profits in the long-run. However, since the firm faces a downward-sloping demand curve with MR

Answer 270

Sales $500,000 - Variable costs (300,000) - Traceable fixed costs ( 50,000) -------- = Segment margin $150,000 - Imputed interest (6% of $100,000) (6,000) -------- = Residual income $144,000 ========

Answer 271

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.

Answer 272

Return on investment (ROI) is net income divided by invested capital. It does not consider profitability to the company as a whole because it does not use the corporate cost of capital. A division manager may decide to forego an investment that has an ROI below the division ROI even though it is above the overall corporation cost of capital. Residual income (RI) is net income above a minimum desired rate of return on invested capital. The minimum desired net income is found by multiplying the desired rate of return by invested capital. Division managers would desire to accept projects that exceed the overall corporate cost of capital. The profitability index is an analysis of investment alternatives rather than a performance measurement. It is calculated as the present value of the cash flows not counting the initial investment divided by the amount of that investment. Economic value-added (EVA) is the earnings above the required cost of capital for shareholders; this measure is similar to residual income, but it is applied by external investors rather than the company's management.

Answer 273

The theory of constraints uses three measurements: throughput contribution, investments, and operating costs.

Answer 274

In the recession phase of a business cycle, more resources become unemployed so that actual output falls below potential output, so the answer choice "potential national income exceeds actual national income "is correct. The answer choice "the rate of unemployment decreases" is incorrect because unemployment increases during a recession. "The purchasing power of money declines rapidly" is incorrect because in a recession more resources become unemployed. This may occur with either inflation or deflation. "There is a shortage of essential raw materials and costs are rising" is incorrect because in a recession more resources become unemployed. There would be sufficient raw materials, and costs could be dropping or rising due to inflation or deflation.

Answer 275

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.

Answer 276

Gross domestic product is the primary measure of the level of economic activity in the United States.

Answer 277

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.

Answer 278

Many financial measures such as ROI, Residual Income and Contribution Margin Percentage are capable of being independently verified. Companies strive to find performance measures that are not subject to manipulation but also recognize that most financial measures can be subjected to some financial manipulation. Financial management usually monitors possible manipulation practices. For example, with respect to ROI, financial managers will monitor the results to ensure the appropriate use of accruals and capitalization.

Answer 279

Under variable costing, only variable manufacturing costs are assigned to inventory. This would include direct material and labor costs as well as variable overhead costs. All period costs (i.e., selling and administrative costs) would be treated as expenses of the period. Thus, variable factory overhead costs are assigned to inventory while variable selling and administrative costs are not.

Answer 280

Benchmarking is a tool for improving business processes by comparison with performance leaders. "A technique that examines product and process attributes to identify areas for improvements" is incorrect because it does not mention comparisons with similar organizations. "The development of the most effective methods of completing tasks in a particular industry" is incorrect because benchmarking is not the development of effective methods; it is emulating the best methods of others. "The complete redesign of a process within an organization" is incorrect because benchmarking does not necessarily involve complete redesign of a process but merely improvements to bring it up to the best performance of similar organizations.

Answer 281

The use of a cost (asset-based) approach for valuation is appropriate when: the company is in liquidation. the company is worth more in liquidation than as a going concern. the company's value is basically related to the assets held. the company has had no income in recent years. future benefit streams cannot be adequately predicted.

Answer 282

Monitoring is intended to insure that controls are functioning effectively as designed. The question asks for the answer choice that is not a step in monitoring the system. Increasing financial reporting reliability and compliance with laws and regulations are goals of the internal control structure, but are not steps in the monitoring of that system. The other answer choices are all steps in the monitoring process, since they relate to evaluating whether the system is functioning as designed.

Answer 283

Using the income approach, the relationship between GDP, NNP, NI, PI, and DI can be found as follows: GDP - Capital consumption allowance ------------------------------- NDP - Net foreign factor income - Indirect business taxes ------------------------------- NI - Social Security contribution - corporate income taxes - undistributed corporate profits + transfer payments ------------------------------- PI - personal taxes ------------------------------- DI Terms

Answer 284

Human resources policies and procedures should include the following: Hire employees based on the written job requirements Verify resumes and perform background checks Promote on both merit and performance Train members of the organization n many aspects

Answer 285

This answer is correct. The internal rate of return method determines the rate of return at which the present value of the cash flows or benefits will exactly equal the investment outlay. This method assumes that cash flows received are reinvested to earn the same internal rate of return. On the other hand, the net present value method requires the selection of a discount rate which represents the minimum rate of return desired. This method assumes that all cash flows received are reinvested at this minimum rate of return and not at the rate earned on the investment.

Answer 286

This answer is correct. For any given quoted nominal rate, the least frequent compounding is associated with the lowest effective annual percentage cost. Annual compounding is less frequent than semiannual, quarterly, or monthly. Note that the term of the loan is not relevant to the calculation of the effective annual percentage cost of financing.

Answer 287

This answer is correct. Since company X has more debt financing, it has greater fixed financing charges than company Y. Interest payments are fixed financing charges while dividends are not. As a result, company X will have a more volatile net income stream than company Y, all else equal.

Answer 288

This answer is correct. The subordinated debentures are unsecured and subordinated to other liabilities.

Answer 289

This answer is correct. Purchase of treasury stock decreases the firm’s assets and stockholders’ equity. Therefore it increases the firm’s financial leverage.

Answer 290

Here we use effective market rate eventhough to calculaye pmts we use stated or coupon rate because we do get a dicount if effective is less than stated or coupon, so our cost is really based on Market or

Answer 291

This answer is correct. Eurobonds are subject to less stringent registration requirements making them less costly to issue.

Answer 292

Close Forward contracts and swaps are often created and exchanged by financial intermediaries, such as a. Commercial banks b. Insurance companies c. Pension funds d. Savings and loan associations e. Mutual funds f. Finance companies g. Investment bankers h. Money market funds i. Credit unions The other party to the contract or agreement is referred to as the counterparty.

Answer 293

Residual income is the amount of net income in excess of the imputed interest on its invested capital, so "income less the imputed interest on its invested capital" is correct. The imputed interest on investment is a rate determined by corporate headquarters to encourage the investment center managers to invest in projects that would return more than that rate since residual income will be increased. "Income plus the imputed interest on its invested capital" is incorrect because the imputed interest is subtracted from income rather than added. "Contribution margin plus [or less] the imputed interest on its invested capital" is incorrect because the contribution margin is not used in the computation of residual income.

Answer 294

Accounting rate of return = Increase in income ÷ Required investment Increase in income (numerator) = $40,000

Answer 295

The profitability index considers the size of the original investment and the value of the discounted cash flows. It is calculated by dividing the present values of the cash flows after the initial investment by that investment. The other answer choices are incorrect because they do not compare the present value of the investment’s cash flows with the initial investment.

Answer 296

Interest payment per year ($1,000 x 12%) = $120 Before-tax cost = 120 / 985 = .1218 After-tax cost = .1218 x (1-40%) = 7.31% Note the use of the $985 proceeds, not the par value, in this calculation. Alternative Calculation: Interest payment per year ($1,000 x 12%) = $120 Tax Savings per year ($120 x 40%) = $ 48 ---- Effective Interest paid per year = $ 72 ==== After-tax cost ($72 / $985) = 7.31%

Answer 297

The calculation for the interest payment on a bond is the Stated rate of interest × Par value. This is the calculation used by the corporation to establish the interest to be paid.

Answer 298

Remember the significance of these ratios: The debt-to-equity ratio measures the percentage of total financing provided by creditors, in the form of debt, compared to financing by owners. The interest coverage ratio measures the firm's ability to make required interest payments. The return on equity reflects the net income that accrues to owners. Financial risk increases as the debt-to-equity ratio increases, and as the volatility of returns increases. Both of these suggest difficulty in repaying the debt. A higher interest coverage ratio means greater ability to repay debt.

Answer 299

In the first year it cost the consumers $990 to purchase the market-basket of goods ((20 × $15) + (18 × $25) + (6 × $40)). In year 2 it took $1,092 to purchase the same market-basket of goods ((20 × $18) + (18 × $28) + (6 × $38)). Thus, if the base year is 100 = ($990 ÷ $990) × 100, the CPI for the second year would be ($1,092 ÷ $990) × 100 = 110.3.

Answer 300

The weighted average cost of capital (WACC) is the weighted average of the debt and equity used to finance the assets of the company. This weighted average can be based upon either the current capital structure of the organization or on a particular target structure desired by management, both using market values of the various components. This problem can be solved by first determining the current weights for each of the capital components. Capital Item Market Value Weight ------------ ------------ ------ Debt $1,000,000 33.3% Equity 2,000,000 66.7% ---------- ------ Total $3,000,000 100.0% Now the weighted average of the cost of capital can be calculated: Capital Item Weight Cost Weighting Factor ------------ ------ ---- ---------------- Debt 33.3% 8% 2.7% Equity 66.7% 9% 6.0% ------ ---- 100.0% WACC 8.7% Terms

Answer 301

Treating dividends as an active policy strategy assumes that dividends provide information to the market. If a firm chooses to use dividend policy as an active policy strategy (rather than as a residual part of a financing decision), the firm is more concerned about the announcement effects of the dividend than the available investment opportunities (alternative uses of the retained earnings). This is particularly important when management wants to signal improved prospects to the outside investors.

Answer 302

Variable rate loans affect both loan parties when market interest rates change. The overall impact is to reduce the risk of significant gains or losses than could affect either borrowers or lenders.

Answer 303

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.

Answer 304

Advantages of using the net present value method for decision making include the following: The time value of money is considered (compounding of returns). Given a perfect market, correct decision advice will be obtained. A correct ranking will be obtained for mutually exclusive projects given similar lives and investments. An absolute value is obtained. Disadvantages of using the net present value method for decision making include the following: The discount rate is difficult to determine. Assumptions related to cash flows have to be made that may or may not be correct.

Answer 305

U.S. Treasury securities are considered to be the financial instrument with the least default risk, followed by securities of federal government agencies. Default risk is simply the possibility that interest or principal payments will not be made. Bankers' acceptances are agreements by a business to pay for a transaction (e.g., import), guaranteed by a bank. Commercial paper is unsecured short-term notes of major corporations.

Answer 306

D. Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller. You answered B. The correct answer is D. Fair market value is probably the most common standard of value used in business valuation engagements. The International Glossary of Business Terms defines fair market value as “the price, expressed in terms of the cash equivalent, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” The International Glossary of Business Terms defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The differences between fair market value and fair value are quite substantial: Fair market value implies a willing buyer and seller, whereas the buyer and seller under fair value are not necessarily willing. Fair market value defines the seller as hypothetical, whereas there is a specific seller when using fair value. Fair market value takes advantage of an unrestricted market, whereas fair value uses the principal or most advantageous market.

Answer 307

Debt to equity is total debt divided by total stockholders' equity. STC's total stockholders' equity consists of total assets of $16,000,000 less total debt of $10,000,000 for a net of $6,000,000. Thus, STC's ratio of debt to equity is: Debt to Equity = $10,000,000 / $6,000,000 = 1.67

Answer 308

As defined in the International Glossary of Business Valuation Terms, the premise of value is defined as “an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation.” The premise of value will be one of two situations: a going concern or liquidation. Although The Charter Company has displayed poor performance in the past few years, the business does not appear to be in liquidation at this time. Companies can falter, regroup, and continue. It appears that The Charter Company is currently in the process of regrouping, as demonstrated by the owner's attempts to obtain and implement expert advice; therefore, this business valuation should use a “going concern” as the premise of value.

Answer 309

B. the use of the property as a small restaurant serving a variety of light meals, exotic desserts, and alcohol. FASB ASC 820 provides guidance when determining the fair value of an asset or business ownership. The fair value measurement assumes that the business (or item) being valued will be put to the highest and best use that is physically possible, legally permissible, and financially feasible. The result will be the maximization of value. It is important to realize that the highest and best use may not be the current use; therefore, the highest and best use is determined from the viewpoint of the purchaser and not the seller.

Answer 310

Inventory turnover is costs of goods sold divided by average inventory. A very high inventory turnover could be the result of very low inventory levels. If this is the case, a serious risk of stockouts could exist. Management should certainly check this situation out. Each of the other answers would result from excessive inventory holdings (i.e., a lower than average inventory turnover situation).

Answer 311

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.

Answer 312

Economic value added (EVA) is after-tax operating income less the weighted average cost of capital. Free cash flow is a measure of financial performance calculated as operating cash flow minus capital expenditures, not a measure of income. Market value added is the difference between the current market value of a firm measured by the price of stock on the stock exchange and the capital contributed by investors, not the income remaining after cost of capital is deducted. Net operating capital is a term used to describe working capital (current assets less current liabilities), not the cost of capital.

Answer 313

All of the items listed can be used to measure inflation except the gross domestic product inflator. It is not a technique for measurement of inflation. In contrast, the gross domestic product deflator does measure inflation.

Answer 314

Answer (A) is correct. According to the residual theory of dividends, the amount (residual) of earnings paid as dividends depends on the available investment opportunities and the debt-equity ratio at which cost of capital is minimized. The rational investor should prefer reinvestment of retained earnings when the return exceeds what the investor could earn on investments of equal risk. However, the firm may prefer to pay dividends when investment opportunities are poor and the use of internal equity financing would move the firm away from its ideal capital structure.

Answer 315

Control activities are included in an organization's policies, procedures, techniques, and mechanisms to aid management in achieving the firm's objectives, protect the firm's assets, and measure performance. These activities can be either preventive or detective. Preventive activities would include: ``` separation of duties, use of passwords, required authorizations, required approvals, alarm systems, use of locks, security guards and cameras, and education, training, and monitoring of employees. Detective activities would include: ``` ``` audits, required vacations, background investigations, rotation of duties, variance analysis, reconciliations, and physical inventories.Control activities are included in an organization's policies, procedures, techniques, and mechanisms to aid management in achieving the firm's objectives, protect the firm's assets, and measure performance. These activities can be either preventive or detective. systems, use of locks, securi ```

Answer 316

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.

Answer 317

Long-term fixed interest rate loans create the greatest interest-rate risk for both borrowers and lenders. Borrowers benefit from fixed rates when interest rates go up but lose when they decline. Lenders' risk is in the opposite direction. The chance for interest rates to change is much greater over a long time period than over a short time period.

Answer 318

in the capital structure to 30% debt and 70% equity. This change w

Answer 319

The cost of the preferred stock to the firm will be 10.4%. The cost to the firm of selling preferred stock is equal to the annual dividend the firm must pay, divided by the net funds received when the stock was sold. Since preferred dividends are not tax deductible, there is no tax adjustment for the cost of preferred stock as there is for debt. The formula for calculating the cost of preferred stock to the firm is as follows: ks = D1 / (PO - u - f) Where: D1 = Annual preferred dividends PO = Current market price of the stock u = Underpricing per share, if any f = Flotation costs paid the investment banker Here, ks = 10 / (101 - 0 - 5) = 10 / 96 = 0.104, or 10.4%.

Answer 320

Market or systemic risk is risk that cannot be eliminated through diversification. It includes noncontrollable factors such as inflation or recession, fluctuations in world energy markets, and congressional tax reform. Company risk is not a component of market risk. It is related to a particular company and is much more specific than market risk. Company risk can be alleviated or avoided through diversification.

Answer 321

The internal rate of return (time adjusted rate of return) is the rate which equates the present value of the projected future net cash flows with the cost of the investment. The net present value method seeks to determine whether the present value of estimated future cash inflows at a desired rate of return will be greater or lesser than the cost of the proposed investment. When the net present value is zero, the internal rate of return equals the rate used in computing the net present value. Using the present value formula, one can see that an increase in the discount rate decreases present value. The discount rate can increase until the present value of future cash flows becomes less than the initial outflow, making net present value negative. ``` 1 Present Value = F -------- n (1 + i) If a net present value of zero means the internal rate of return equals the discount rate, then a negative net present value would indicate that the discount rate used is higher than the internal rate of return. ```

Answer 322

Deflation, or negative inflation, occurs when prices fall because the supply of goods is higher than the demand for those goods. This is usually due to a reduction in money, credit, or consumer spending. Deflation can occur as a result of a combination of four factors: the supply of money goes down; the supply of other goods goes up; demand for money goes up; or demand for other goods goes down. To prevent deflation, the opposite actions (i.e., inflationary actions) must take place: increase the money supply; decrease the supply of other goods; decrease the demand for money; or increase the demand for other goods. The only correct answer choice is increasing the money supply. When the Federal Reserve (the Fed) takes action to increase the money supply, it begins a cycle whereby interest rates decrease and the demand for goods and services increases. Eventually this creates inflationary pressure on the economy, and the Fed then begins to implement deflationary policies.

Answer 323

The overall cost of capital is the rate of return on assets that covers the costs associated with the funds employed. A firm's overall cost of capital is a weighted average of the costs of the different sources of funds that the firm uses to finance its assets. These sources are usually some combination of debt and equity. Cost of capital usually refers to the cost of long-term sources of funds, such as long-term debt, preferred stock, and common stock. A firm must pay a return to the suppliers of all of these sources of funds. Theoretically, the minimum return that a firm must earn to keep the value of its stock from declining is equal to the weighted average cost of capital. If a firm earns less than this on its total assets, then there are not enough earnings to pay the suppliers of funds what they expect to receive. Since interest costs are fixed and must be paid first, common stockholders are the ones who will usually suffer a shortfall in returns. If common stockholders do not receive at least the minimum return they require for the risk they are taking by holding common stock, then the value of their investment decreases and the value of their stock falls.

Answer 324

A top-down risk assessment (TDRA) is used to identify and assess: financial reporting items. the risks related to financial reporting. the internal control procedures meant to limit the identified risks. The internal control procedures are meant to prevent fraud and embezzlement—not to find evidence of such actions.

Answer 325

The key to solving this problem is separating the cash flow items from the noncash items. The $40,000 cost to remove the asset is a cash outflow. The scrap salvage value of $10,000 is a cash inflow. Both of these items are also part of the net income upon which tax must be computed. The $75,000 loss that will result from the disposal is also part of the net income upon which tax must be computed. However, the loss is not a cash outflow. What is a cash flow is the tax or tax savings in the net income or loss. The “end-of-life” cash flow may be calculated as follows: Outflow: Cost to remove ($ 40,000) Inflow: Salvage value $ 10,000 Inflow: Tax savings from net loss $ 42,000 * ---------- Net cash inflow $ 12,000 * The tax savings is calculated on a net loss of $105,000. The loss is a result of the $65,000 tax loss on the asset disposal ($75,000 tax basis offset by $10,000 scrap value) and the $40,000 cost to remove the asset.

Answer 326

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.

Answer 327

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. It is important to note that a business valuation cannot be based upon one guideline organization, nor is a comparable expected to be identical to the subject of the valuation in any manner.

Answer 328

“Most likely” means “greatest probability” (or likelihood) of occurrence. Mid-point and median are simply the central numbers in an array. They do not convey a specific message as to the probability or likelihood of occurrence. Expected value goes beyond probability to get an expected dollar value outcome.

Answer 329

Interest payment per year ($1,000 x 12%) = $120 Before-tax cost = 120 / 985 = .1218 After-tax cost = .1218 x (1-40%) = 7.31% Note the use of the $985 proceeds, not the par value, in this calculation. Alternative Calculation: Interest payment per year ($1,000 x 12%) = $120 Tax Savings per year ($120 x 40%) = $ 48 ---- Effective Interest paid per year = $ 72 ==== After-tax cost ($72 / $985) = 7.31%

Answer 330

Capital asset pricing model is the risk of price change due to the unique circumstances of a specific security, as opposed to the overall market that can be virtually eliminated from a portfolio through diversification.

Answer 331

Calculation of a project's net present value is accomplished by: computing the discounted (present) value of all future cash inflows and outflows of the proposed project. subtracting the present value of outflows from inflows to arrive at the net present value. Past costs used to calculate the carrying value and depreciation on the asset(s) to be replaced or used on the project are not used in the present value computation. In addition, depreciation is not a cash flow. Expected proceeds from the sale of the asset to be replaced are a future cash inflow, which will affect the proposed project's net present value.

Answer 332

he use of a cost (asset-based) approach for valuation is appropriate when: the company is in liquidation. the company is worth more in liquidation than as a going concern. the company's value is basically related to the assets held. the company has had no income in recent years. future benefit streams cannot be adequately predicted.

Answer 333

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.

Answer 334

Long-term fixed interest rate loans create the greatest interest-rate risk for both borrowers and lenders. Borrowers benefit from fixed rates when interest rates go up but lose when they decline. Lenders' risk is in the opposite direction. The chance for interest rates to change is much greater over a long time period than over a short time period.

Answer 335

You have borrowed $2,000 from the bank and the purchasing power of those dollars at the end of the year with a 10% rate of inflation would be $1,800. In this specific instance, even if you add the interest the bank would earn ($160), the purchasing power of the money they receive would be less than the amount lent.

Answer 336

The payback period is the time required to recover the $365,000 initial investment. At the end of the third year cash flows total $325.000, which is $40,000 short of the investment of $365,000. Cash flows in the fourth year are $50,000. If we assume cash flows occur evenly during the year, it takes $40/$50 or 80% of the fourth year cash flows for cash to equal the investment cost. The payback period is three years plus 80% of the fourth year.

Answer 337

This answer is correct. If cost of sales is $132,500,000 and inventory turnover is 8 times per year, average inventory is $16,562,500 ($132,500,000 ÷ 8) If turnover increases to 10 times, average inventory would decrease to $13,250,000 ($132,500,000 ÷ 10). Average inventory would decrease by $3,312,500 ($16,562,500 – $13,250,000), which would save Spotech $165,625 ($3,312,500 × 5%) in interest.

Answer 338

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.

Answer 339

The only effect depreciation expense has on cash flows is the determination of income tax. Depreciation expense is subtracted from income to find taxable income. Therefore, while depreciation is not a cash flow directly, it does affect income tax cash flows. “Included as a cash or other cost” is incorrect because depreciation is not a cash flow. “Excluded for all purposes in the computation” is incorrect because depreciation is considered in determining cash flows for income taxes. “Utilized to estimate the salvage value of an investment” is incorrect because the salvage value is the cash value of the asset at the end of its useful life, which is not related to the book value remaining after deducting annual depreciation expense.

Answer 340

Cash and marketable securities are liquid assets that are held to meet short-term financial needs. Valid reasons for a business to hold cash and marketable securities include all of the following: To satisfy compensating balance requirements To maintain adequate cash needed for transactions To meet future needs To maintain a precautionary balance The goal of earning maximum returns on investment assets is a long-term goal achieved by investing cash in long-term investments. This is not a valid reason for a business to hold cash and marketable securities.

Answer 341

Stronger than expected sales would produce higher cost of goods sold and lower end-of-year inventories than planned. Since inventory turnover is computed as cost of goods sold divided by average inventory, the overall effect is a higher turnover ratio. Each of the other conditions mentioned affects cost of goods sold and/or average inventory in a negative manner, causing a lower than expected inventory turnover.

Answer 342

The problem is set up to enable you to use both the “Future value of $1” factors and the “Future value of an annuity of $1” factors. The initial investment will earn interest for three years (December 31, 2007, until December 31, 2010) and will be factored with a “future value” factor of 1.2597. The three deposits of $4,000 are an annuity of $4,000 for three years. This annuity will use a “future value of an annuity” factor of 3.2464. Initial Deposit: $75,000 x 1.2597 = $ 94,478 Annuity of $4,000 for 3 years at 8%: $ 4,000 x 3.2464 = $ 12,986 -------- Total account balance at 12/31/10 $107,464

Answer 343

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.

Answer 344

Net annual cash inflows = Cash inflow - income taxes = $7,500 - (.40 x ($7,500 - $5,000)) = $7,500 - (.40 x ($2,500)) = $7,500 - $1,000 = $6,500 Present value of cash inflow = Net annual cash inflow x PV factor = $6,500 x 1.7355 = $11,280.75, or 11,281 rounded

Answer 345

A successful niche market requires that the buyers need very specific product attributes. These attributes must differ from those offered on the general market product so much so that the general product does not meet the needs of the niche market. Another possibility would be for the niche market buyers to have different uses for the product, and with its package of attributes, the general product cannot meet the needs for the niche market.

Answer 346

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).

Answer 347

Answer A is incorrect because some U.S. businesses will be helped and others will be hurt. U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers. Answer B is incorrect because U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers. Answer C is correct because a decline in the exchange rate of the U.S. dollar will make goods produced in the U.S. less expensive in foreign currencies, improving the competitiveness of U.S. exporters. Answer D is incorrect because U.S. consumers will have to pay more dollars for goods priced in foreign currencies, making those goods more expensive for those consumers.

Answer 348

Variations, or differences, between business cycles in the economy as a whole are due to many factors that result in fluctuations in business activity over time. These are measured by duration (from peak to peak) and intensity (the peaks and troughs in the cycle). The law of diminishing returns applies to an individual firm in the intensity of its use of fixed costs, not to the business cycle of the economy as a whole. Comparative advantage describes the internal factors within one company that give that firm strengths in comparison to other firms; it does not apply to the economy as a whole. Opportunity costs represent the lost income when a firm chooses to use a resource in one area instead of another; again, this does not apply to the economy as a whole.

Answer 349

Factoring involves the sale of accounts receivable as a way for the seller to obtain financing. However, the seller receives an amount less than the face amount of the accounts sold to compensate the factor for assuming the risk and the costs of collection. In this case, the amount of cash the seller will receive from the finance company is $90,675, computed as follows: Face amount of accounts receivable factored = $100,000 LESS: 6% reserve = .06 x $100,000 = $6,000 1% commission = .01 x $100,000 = $1,000 7,000 -------- Net amount available $ 93,000 LESS: 10% interest = .10 x $93,000 x (90 / 360) = 2,325 -------- Cash proceeds $ 90,675

Answer 350

C. | Interest is deductible for tax purposes.

Answer 351

An embedded audit module is coded into the information processing software, allowing the auditor to access real data. Often the routines search for unusual items as transactions are processed and report those items to the auditor. There is some danger of data contamination since the routines are working with real data. Also, the auditors must work closely with management in the design of the embedded audit module, which may affect their independence. "Embedded audit modules cannot be protected from computer viruses" is incorrect because embedded audit modules can be protected from viruses in the same ways as other software, such as with effective firewalls. "Auditors are required to monitor embedded audit modules continuously to obtain valid results" is incorrect because embedded audit modules can accumulate information to be reviewed by the auditor periodically. "Embedded audit modules can easily be modified through management tampering" is incorrect because embedded audit modules can be protected with passwords and biometric controls in the same manner as other software components.

Answer 352

Inventory levels tend to be high as the economy begins the contraction phase of the business cycle and firms cut orders and use their unanticipated inventory to meet demand, attempting to bring inventory levels back to their desired level as contraction continues. Thus, inventory levels tend to be low at the end of the contraction phase due to deliberate management actions.

Answer 353

Depositor transfer checks are non-negotiable. They are used to move funds from one account to another (i.e., from a local bank to a concentration bank). This allows companies to have flexibility and control over their cash accounts but it can be somewhat time consuming.

Answer 354

The term “mutual interdependence” relates to the fact that the outcome of pricing decisions in an oligopoly is dependent upon the reactions of organization's rivals.

Answer 355

The term “mutual interdependence” relates to the fact that the outcome of pricing decisions in an oligopoly is dependent upon the reactions of organization's rivals.

Answer 356

Policies and procedures help the employee understand the organization's policies for operation and the procedures that are followed to meet the policies. The policies and procedures include such things as the proper business practices, the purpose of the organization, responsibilities, and definitions.

Answer 357

The price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is less than 1.0, the elasticity is inelastic. Since a 3% decrease in quantity demanded results from a 5% price increase, the elasticity of demand is: 0.3 ÷ 0.5 = 0.6 This is a number less than 1.0, indicating inelastic demand. A 4% price increase that results in a 6% decrease in the quantity demanded, and a 3% price decrease that results in a 5% increase in the quantity demanded, represent elastic demand since the change in quantity is greater than the change in price. A change of 4% in quantity demanded due to a 4% price increase results in an elasticity of exactly 1.0, neither elastic nor inelastic.

Answer 358

COSO has developed a widely accepted and used framework for internal control that was designed to provide reasonable assurance for a firm's objects related to: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with laws and regulations. Although the expansion of markets may be in the strategic plan for a company and may come about due to the effectiveness and efficiency of operations, it is not a focus of the COSO Framework designed for internal control.

Answer 359

Short-term interest rates are usually lower than long-term rates, because there is less risk involved in a shorter time period, and lenders require less compensation since their money is tied up for a shorter time. Short-term rates are definitely related to long-term rates, but tend to be more volatile, in part due to the exercise of monetary policy actions by the Federal Reserve.

Answer 360

Answer A is incorrect because the internal audit department evaluates risk procedures and should not be in the position of evaluating procedures it has developed. Answer B is incorrect because the CEO in a large organization does not have the time or knowledge to devise risk procedures for every department. Answer C is correct because a manager within the department has the most detailed knowledge of risks in that department. Answer D is incorrect because the audit committee of the board has overall responsibility for the selection of the auditor and receipt of audit results. They do not have detailed knowledge of any one department.

Answer 361

The segregation of duties is insufficient as there should be another person to process the receiving documents. In the absence of effective monitoring, credit cards could easily be used for personal benefit.

Answer 362

The internal and external auditors are responsible for the following: The assessment of whether internal controls are correctly designed The assessment of whether internal controls are properly implemented The assessment of whether internal controls are effective Making recommendations for improvements in the internal control procedures The CEO of an organization is expected to set an ethical tone and provide direction and leadership in this area for senior staff. The board of directors provides additional guidance to help assure ethical behavior within the organization. Even though a company has excellent internal controls, there are still unexpected events outside the company's control, such as economic conditions and the competition that can prevent an organization from meeting its goals.

Answer 363

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.

Answer 364

Aggregate demand is the amount of goods and services—the amount of real national income—that will be purchased at each possible price level. There is an inverse relationship between the price level and real GDP (gross domestic product). There are three different price effects that explain this inverse relationship. The real balance effect reduces the purchasing power effectiveness of accumulated public savings balances. Since consumers are now poorer in real terms, they will need to reduce their spending. The interest-rate effect causes consumers to need more money for their purchases as prices increase. The increase in demand for money will drive up interest rates which would reduce business investment and interest-related consumption spending, thus reducing demand. Finally, we have the foreign purchases effect. When prices of domestic goods rise relative to foreign prices, foreign consumers would buy fewer of our goods, and our consumers would buy more foreign goods.

Answer 365

Payback period is the length of time in years required to recover the cash invested in a project. Payback is computed as net investment divided by average expected annual cash inflow. Payback focuses on rapid recovery of cash investment (i.e., liquidity).

Answer 366

The change control process should never be released without testing. The procedures for a well-defined change control process would include the following: The change control board approves the change and assigns a project manager. The project manager makes sure all paperwork has been received and approved. The project manager sets up schedules for all personnel involved. The projects are completed. Changes are tested and approved before release.

Answer 367

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.

Answer 368

As a general rule, if observable inputs such as quoted market prices for identical assets are available, the subject asset should be used in determining value, since this would represent a Level 1 input in the fair value hierarchy. However, if a company announces negative information that has a negative impact on the market price shortly after the close of the market, the fair value valuation should employ the use of the new information and list the value of the subject asset at the lower price. This would also drop the input level to Level 2.

Answer 369

The accounting rate of return is a capital budgeting method or technique which disregards the time value of money. It is not a rate used in a net present value analysis. Each of the other terms—cost of capital, hurdle rate, and required rate of return—describes a rate used in net present value analysis.

Answer 370

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.

Answer 371

The use of MACRS depreciation would result in a greater deduction in Year 2 (40% MACRS versus 25% straight line). This will result in tax dollars saved in the early life of the project. The use of straight line (SL) would, of course, not provide this saving until the third and fourth years. The result would be: a slightly lower net cash flow from the use of SL in year 2. lower net present value using SL. less desirable investment.

Answer 372

The profitability index considers the size of the original investment and the value of the discounted cash flows. It is calculated by dividing the present values of the cash flows after the initial investment by that investment. The other answer choices are incorrect because they do not compare the present value of the investment’s cash flows with the initial investment.

Answer 373

The net present value is the excess of the discounted present value of future cash returns less the investment cost. The formula to calculate present value for any single future payment is PV = Payment ÷ (1 + r)n, where r is the interest rate and n is the number of periods. The present value of the payment in the first year is $3,000 ÷ 1.1, or $2,727. The present value of the payment in the second year is $3,000 ÷ (1.1 × 1.1), or $2,479. The present value of the payment in the third year is $3,000 ÷ (1.1 × 1.1 × 1.1), or $2,254. The present value of the payment in the fourth year is $3,000 ÷ (1.1 × 1.1 × 1.1 × 1.1), or $2,049. The present value of the payment in the fifth year is $3,000 ÷ (1.1 × 1.1 × 1.1 × 1.1 × 1.1), or $1,863. The sum of the present value of the five future payments is $11,372. The cost of the investment is $11,000, so the net present value is $11,372 - $11,000, or $372, rounded to $370.

Answer 374

As defined in the International Glossary of Business Valuation Terms, the premise of value is defined as “an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation.” The premise of value will be one of two situations: a going concern or liquidation. Although The Charter Company has displayed poor performance in the past few years, the business does not appear to be in liquidation at this time. Companies can falter, regroup, and continue. It appears that The Charter Company is currently in the process of regrouping, as demonstrated by the owner's attempts to obtain and implement expert advice; therefore, this business valuation should use a “going concern” as the premise of value.

Answer 375

Terms of trade credit of 3/10, net 45 means a 3% discount may be taken if the bill is paid in 10 days or the full amount must be paid in 45 days. If a retailer's payment terms of trade are 3/10, net 45 with a particular supplier, for every $100 the retailer pays in 10 days, he only has to pay $97. If the retailer waits 45 days to pay, he must pay the full $100. This 3% discount works out to be a higher effective interest rate because the three additional dollars the retailer pays in 45 days is in addition to the $97, not the $100. The natural inclination when presented with a problem of this type is to simply consider the 3% to be 3% of 100%. However, it must be noted that the retailer will only pay 97% if he pays in 10 days. It is this 97% that will be penalized with the additional 3%. Therefore, the actual interest rate for the period is derived by calculating .03 ÷ .97 or 3.093%. This interest rate is charged over a time period of 35 days (45 days minus 10 days). There are 10.286 35-day periods in 360 (360 ÷ 35). Therefore, the cost of not taking the discount on an annual basis is 10.286 × 3.093% or 31.81%.

Answer 376

The average inventory level when the standard economic order quantity model is used is one-half of the EOQ. The EOQ for Product A is 200 units. One-half of 200 is 100. Add the 50-unit safety stock to arrive at 150 units as the average inventory of Product A.

Answer 377

nternal rate of return is the interest rate which will result in a net present value (PV) of zero. Therefore: PV of Cash Savings = PV of Investment Outlay $65,000 x PV factor = $200,000 x 1.0 $65,000(PV factor) = $200,000 Then dividing by $65,000: PV factor = $200,000 / $65,000 = 3.08 Referring to the present value factors in the question, the percentage rates for present value of an annuity indicates that a present value factor of 3.08 would relate to an interest rate of more than 16%.

Answer 378

An opportunity cost is the lost inflow of the next best alternative that is forgone as the result of a decision. Although opportunity costs are important in the decision-making process, they are not included as actual costs in financial statements. For example, a company has idle space that could be used for the production of a new product or could be rented to a third party. If the production of a new product is considered, then the lost rental income would be an opportunity cost that would have to be considered during the decision-making process. If idle space has no alternative use, it has an opportunity cost of zero.

Answer 379

The economic rate of return is a percentage measure of the total return received by the investor. This is determined by the following formula: [Dividends received + (Ending price - Beginning price)] ÷ Beginning price

Answer 380

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%.

Answer 381

Ijust have one extra day of 10k since my deposits only take 4 days. 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.

Answer 382

The net present value is the excess of the discounted present value of future cash returns above the investment cost. The present value of the future cash returns is the annual cash flow of $25,000 multiplied by the present value of an annuity of $1 a year for six years at 10%, which is 4.355. Thus, the present value of the future cash flows is $108,875 ($25,000 × 4.355). The salvage value of $20,000 will be received in cash in six years, so its present value is $20,000 multiplied by the present value of a single payment of $1 in six years at 10%, or 0.564, giving a present value of the salvage value of $11,280. Summing the present value of the annual payments ($108,875) and the present value of the salvage value ($11,280) gives a total present value of future cash flows of $120,155. The cost of the machine is $100,000, so the net present value is $120,155 less $100,000, or $20,155.

Answer 383

Risk analysis is necessary to determine an organization's definition of a disaster and evaluate the effect of that disaster. System backup analysis, vendor supply agreement analysis, and contingent facility contract analysis are all contingency planning strategies to react to a disaster.

Answer 384

Long-term fixed interest rate loans create the greatest interest-rate risk for both borrowers and lenders. Borrowers benefit from fixed rates when interest rates go up but lose when they decline. Lenders' risk is in the opposite direction. The chance for interest rates to change is much greater over a long time period than over a short time period.

Answer 385

Net working capital is current assets minus current liabilities. Aye's net working capital = Current assets - Current liabilities = Cash + Accounts receivable - Accounts payable = $70,000 + $100,000 - $40,000 = $130,000

Answer 386

Under the hedging approach, the length of financing term is matched to the life or duration of assets financed. Long-term assets are financed with long-term debt and short-term assets (such as current assets) are financed with short-term debt.

Answer 387

Leverage refers to the amount of debt in the firm's capital structure. Of the financial instruments mentioned, only debenture bonds are considered to be debt. Both common and preferred stock are considered equity, even though preferred stock may pay a fixed dividend.

Answer 388

The overall discounted cash flow impact of Gunning Industries' Working Capital investment for the new production machine is calculated as follows: -- Initial working capital investment at beginning of Year 1: $(35,000) -- Discounted return of initial WC investment at end of Year 5: $35,000 x Present value of $1 at 10% for 5 periods (.6209) 21,732 --------- Overall discounted cash flow of Working Capital Investment: $(13,268)

Answer 389

Answer (D) is correct. The categories of risk responses under the COSO ERM model are avoidance, acceptance, reduction, and sharing. If management does not insure a building, the response is acceptance. Ordinarily, acceptance is based on a judgment that the cost of another response is excessive. However, once management purchases insurance, the risk is shared with an outside party.

Answer 390

Answer (B) is correct. | Implementation of internal control is not an objective of enterprise risk management

Answer 391

Answer (C) is correct. Inherent risk is the risk when management has not taken action to reduce the effect or likelihood of an adverse event. Thus, it is risk in the absence of a risk response.

Answer 392

Answer (A) is correct. To protect the corporation against self-dealing, a director is required to make full disclosure of any financial interest (s)he may have in any transaction to which both the director and the corporation may be a party. Under modern corporate law, a transaction is not voidable merely on the grounds of a director’s conflict of interest if the transaction is fair to the corporation or has been approved by a majority of (1) informed, disinterested qualified directors or (2) holders of qualified shares. This rule applies even if the director was counted for the quorum and voted to approve the transaction. A qualified director does not have (1) a conflict of interest regarding the transaction or (2) a special relationship (familial, professional, financial, etc.) with another director who has a conflict of interest. Shares are qualified if they are not controlled by a person with (1) a conflict of interest or (2) a close relationship with someone who has a conflict. Thus, the director who contracts with the corporation cannot provide the vote that approves the contract.

Answer 393

control environment are: (1) human resource policies and practices, (2) integrity and ethical values, (3) organizational structure, (4) commitment to competence, (5) philosophy and operating style of management, (6) board of directors or audit committee participation, and (7) assignment of authority and responsibility. C. Integrity and ethical values.

Answer 394

Answer (D) is correct. After the internal control is designed and implemented, the inherent design of the control will not change. Therefore, internal controls are not likely to fail because their design changes. However, internal controls may fail due to (1) established objectives not suitable for internal control, (2) failures due to human judgment and errors, (3) breakdowns and employee misunderstanding, (4) management override, (5) collusion, and (6) external events.

Answer 395

``` nswer (C) is correct. The following are the categories of the capabilities of ERM: Risk appetite and strategy Risk response decisions Operational surprises and losses Multiple and cross-enterprise risks Opportunities Deployment of capital Although increased productivity may result from ERM, it is not directly a capability provided by ERM. ```

Answer 396

Answer (C) is correct. A component is present and functioning effectively if (1) no material weaknesses exist, and (2) risk is within the risk appetite.

Answer 397

Answer (D) is incorrect. Enterprise risk management is concerned with selecting not the best risk response but the risk response that falls within the enterprise’s risk tolerances and appetite.

Answer 398

Answer (B) is correct. The chief executive officer (CEO) sets the tone at the top of the organization and has ultimate responsibility for ownership of the ERM. The CEO will influence the composition and conduct of the board, provide leadership and direction to senior managers, and monitor the entity’s overall risk activities in relation to its risk appetite. If any problems arise with the organization’s risk appetite, the CEO will also take any measures to adjust the alignment to better suit the organization.

Answer 399

Answer (C) is correct. The COSO model for internal control describes control activities as the policies and procedures helping to ensure that management directives are executed and actions are taken to address risks to achievement of objectives.

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