BEC - Personal

Question 1

How do you calculate the amount of costs allocated on a physical quantity basis?

Answer 1

Using physical quantities costs are allocated based on the total gallons produced.

Question 2

What is the expectation about inflation when long-term rates are higher than short-term rates?

Answer 2

If the yield curve is upward sloping, long-term rates are higher than short-term rates, including a belief that inflation will increase.

Question 3

Using the dividend-yield-plus-growth-rate approach the cost of issuing new stock would be calculated using the following formula:

ks = D1 + Expected G
————
P0 – F

Answer 3

D1 = Next expected dividend

P0 = Current stock price

G = Growth rate in earnings

F = Flotation cost per share

Question 4

The Cost of New Common Stock

Answer 4

If a firm is issuing new common stock, a slightly higher return must be earned. This higher return is necessary to cover the cost of distribution of the new securities (floatation or selling costs).

Question 5

Debt to Equity ratio

Answer 5

Total Debt / Total Equity

Question 6

What effect does increased demand for Japanese goods have on the value of the yen?

Answer 6

An increase in the demand for Japanese goods in the United States would increase demand for the yen to pay for the goods.

*Balance of payments. Balance of payments is used to refer to a system of accounts that catalogs the flow of goods between the residents of two countries. If country X is a net exporter of goods and therefore has a surplus balance of trade, countries purchasing the goods must use country X’s currency. This increases the demand of the currency and therefore its relative value.

Question 7

Economic Order Quantity:

EOQ = Sq. Rt of 2aD/k

a = cost of placing one order
D = annual demand in units
k = cost of carrying one unit of inventory for one year

Answer 7

How much to order? The amount to be ordered is known as the economic order quantity (EOQ). The EOQ minimizes the sum of the ordering and carrying costs. The total inventory cost function includes carrying costs (which increase with order size) and ordering costs (which decrease with order size). The EOQ formula is derived by setting the annual carrying costs equal to annual ordering cost or by differentiating the cost function with respect to order size.

Question 8

The Budgets Process

Answer 8

The budgets process begins with an estimate of sales and then proceeds systematically as outlined below.

a. Develop a sales forecast
b. Develop a production schedule to calculate production costs and costs of goods sold
c. Estimate other expenses and revenues
d. Complete the pro forma financial statements and budgets

Question 9

Predetermined overhead rate for VARIABLE overhead

Answer 9

Use actual activity level

Est overhead costs  	=	$200,000     = $2.50/hour ---------------------------------       ------------------ Estimated activity level	      80,000 hours

Question 10

Predetermined overhead rate for FIXED overhead

Answer 10

Use normal capacity

Est overhead costs = $400,000 = $2.50/hour
——————————— ——————
Estimated activity level 100,000 hours

Question 11

The movement along the demand curve from one price-quantity combination to another is called a(n)

Answer 11

Change in the quantity demanded.

Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.

Question 12

What is a data warehouse?

Answer 12

A data warehouse is an approach to online analytical processing that combines data into a subject-oriented, integrated collection of data used to support management decision-making processes.

Question 13

What are maturity models?

Answer 13

Maturity models evaluate the sophistication of IT processes rated from a maturity level of nonexistent (0) to optimized (5).

Question 14

Expected annual loss from user error

Answer 14

Sum of the probability of losses

Question 15

Payback period

Answer 15

Annual cash flows

Question 16

An activity-based system would allocate costs based on what?

Answer 16

Set up hours

Question 17

Residual income

Answer 17

RI equals net operating income minus interest on invested capital.

Question 18

Economic Value Added (EVA)

Answer 18

EVA equals NOPAT minus cost of capital.

Question 19

What is a strategy initiative in the balanced scorecard framework?

Answer 19

It is a key action program required to achieve strategic objectives.

*An initiative is what must be achieved.

Question 20

A statement of what the strategy must achieve and what is critical to its success.

Answer 20

Strategic Objective

Question 21

What is one way to calculate sales?

Answer 21

Multiply investment turnover by the average investment.

Question 22

Are government purchases part of overall demand?

Answer 22

Yes. Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.

Question 23

Cost of debt

Answer 23

It is equal to the interest rate of the loan adjusted for the fact that interest is deductible. Specifically, the cost is calculated as the interest rate times one minus the marginal tax rate.

As an example, if a firm’s interest rate on a long-term debt is 6% and its marginal tax rate is 30%, the cost of the debt is 4.2% (0.06 x (1.00 - .30)).

Question 24

A downward-sloping yield curve depicting the term structure of interest rates implies that

Answer 24

Short-term rates are higher than intermediate-term rates which are higher than long-term rates.

Question 25

Variable (direct) costing

Answer 25

Variable (direct) costing is a method of inventory costing in which all variable product costs are treated as inventoriable costs and fixed manufacturing overhead is treated as a period cost. Variable costing is advocated because, for internal reporting, it presents a clear picture of performance when there is a significant change in inventory. However, remember that variable costing is not acceptable as GAAP for external reporting.

Question 26

Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production. The alternative (which is normally used in high-speed automated environments) of delaying journal entries until after the physical sequences have occurred is referred to as

Answer 26

Which method is often used in just-in-time systems? Backflush costing.

Question 27

Operation costing

Answer 27

Refers to a hybrid costing system that blends characteristics of both job-order and process-costing systems. It is usually applied to batches of similar products where each batch of product is a variation of a single design and requires a sequence of selected operations/activities. An operation costing system would track work in process inventory.

Question 28

Process costing

Answer 28

A sequential costing system in which the cost of a product/service is obtained by assigning costs to masses of similar units as they are produced and then computing unit costs on an average basis. There would be a tracking of work in process inventory with a process costing system.

Question 29

What is the difference between variable (direct) and absorption (full) costing methods?

Answer 29

Variable and absorption costing methods of accounting for fixed manufacturing overhead differ: under variable costing, fixed manufacturing overhead is expensed whereas under absorption costing, such amounts are treated as a product cost and inventoried. The treatment of fixed manufacturing overhead often results in different levels of net income between the absorption and variable costing methods. The differences are timing differences, which result from recognizing the fixed manufacturing overhead as an expense. 1. In the period incurred—variable costing 2. In the period in which the units to which fixed overhead has been applied are sold—absorption costing The relationship between variable costing (VC) income and absorption costing (AC) income follows: Sales = Production (no change in inventory) No difference in income Sales > Production (inventory decreases) VC income greater than AC income Sales < Production (inventory increases) VC income less than AC income

Question 30

Book value per share

Answer 30

Common stockholders’ equity divided by number of shares of common stock outstanding (Common stock + Retained earnings) ÷ Outstanding shares

Question 31

How do you calculate equivalent units using the first-in-first-out method?

Answer 31

Units completed minus equivalent units in beginning inventory plus equivalent units in ending inventory

Question 32

How are the depreciation expense and salvage value in the calculation of the net present value (NVP) of a proposed project? Ignore income tax considerations.

Answer 32

This answer is correct because depreciation expense is excluded and salvage value is included in the calculation of NPV. NPV is the difference between the required investment and the present value of the future cash flows. Since all future cash flows are included in the analysis, the inflow of cash from the salvage value of the project is included in the calculation. Depreciation, however, does not enter directly into the NPV calculation. This is because depreciation expense is a noncash flow. Note that a cash inflow will result from the tax savings generated by the depreciation deduction. However, because the question states that income tax considerations should be ignored, depreciation would be excluded from the NPV calculation.

Question 33

Gross Domestic Product

Answer 33

Measures production. It is equal to the price of all goods and services produced by a domestic economy for a year.

Question 34

Zero-balance account system

Answer 34

Involves making deposits to cover checks as they clear the bank. This cash management technique involves maintaining a regional bank account to which just enough funds are transferred daily to pay the checks presented. Regional banks typically receive the checks drawn on their customers’ accounts in the morning from the Federal Reserve. The customer can then be notified as to the amount of cash needed to cover the checks and arrange to have that amount of cash transferred to the account. This arrangement has the following two advantages: * Checks take longer to clear at a regional bank, providing more float for cash disbursements. * Extra cash does not have to be deposited in the account for contingencies. It is cost-effective if the amount the firm saves on interest costs from the longer float is adequate to cover any additional fees for account maintenance and cash transfers.

Question 35

Unsystematic risk

Answer 35

Risk that exists for one particular investment or a group of like investments (e.g., technology stock).

Question 36

Systematic risk

Answer 36

Relates to market factors that cannot be diversified away. All investments are to some degree affected by them. Examples include fluctuations in GDP, inflation, interest rates, etc.

Question 37

Portfolio

Answer 37

Allow investors to diversify away unsystematic risk. By having a balanced portfolio, investors can theoretically eliminate this risk.

Question 38

Recession

Answer 38

Contraction in the economy

Question 39

Callable bond

Answer 39

A fixed interest rate and its market value fluctuates with changes in prevailing interest rates.

Question 40

Convertible bond

Answer 40

A fixed interest rate and is convertible into stock. Therefore its market value fluctuates with both changes in prevailing interest rates and changes in the value of the stock.

Question 41

Zero-coupon bond

Answer 41

Increases in value as it approaches its maturity.

Question 42

Floating-rate

Answer 42

A bond with a floating rate will generally hold a steady market value because its value will not change due to changes in prevailing interest rates.

Question 43

In the computation of manufacturing cost per equivalent unit, FIFO considers what costs?

Answer 43

Current costs only

Question 44

In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers what costs?

Answer 44

When computing equivalent units of production under the weighted-average method, the work done last period on beginning work in process (BWIP) is considered. Therefore, when computing cost per equivalent unit, the cost associated with BWIP must be added to the current costs.

Question 45

In a job-order cost system, the use of DIRECT materials would usually be reflected in the general ledger as an increase in

Answer 45

Work in process control.

Question 46

In a job-order cost system, the use of INDIRECT materials would usually be reflected in the general ledger as an increase in

Answer 46

Factory overhead control Dr. Manufacturing Overhead Control (MOH) Cr. Stores Control Debiting MOH control increases the balance of this account.

Question 47

Online processing system

Answer 47

Posting upon entry

Question 48

Batch processing method

Answer 48

Assigned to groups before posting

Question 49

Detailed posting type

Answer 49

Each transaction has its own line entry in the appropriate ledger.

Question 50

Cumulative posting system

Answer 50

Each transaction group has a cumulative entry total in the appropriate ledger.

Question 51

Capital and operating leases differ in that the lessor

Answer 51

Finances the transaction through the leased asset only under a capital lease. In a capital lease transaction, the lessee is using the lease as a financing source and the lessor is financing the transaction (providing the investment capital) through the leased asset.

Question 52

The degree of operating leverage (DOL) is

Answer 52

A measure of the change in operating income resulting from a given change in sales. This answer is correct. The degree of operating leverage (DOL) is a measure of the change in earnings available to common stockholders associated with a given change in sales volume. It is calculated, for a particular level of sales, as Percent change in operating income ---------------------------------------------------- Percentage change in sales volume

Question 53

Transfer pricing

Answer 53

When one department in a manufacturing company sells materials to another department. The price charged is the TRANSFER PRICE. The minimum transfer price (FLOOR) is equal to avoidable outlay costs, and the ceiling is equal to the market price. Also, the most "fair" price transfer price will usually be the std variable cost + lost contribution margin.

Question 54

The Enterprise Risk Management-Integrated Framework of the committee of sponsoring organizations (COSO)

Answer 54

A process, effected by an entity's board of directors, management and other personnel, applied in a strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

Question 55

Disaster recovery plan assessment

Answer 55

An evaluation of the plan for recovery when the information system fails.

Question 56

Systems assessment

Answer 56

An evaluation of the adequacy of a system in providing required information.

Question 57

Risk assessment

Answer 57

The procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and the probability of unauthorized access occurring.

Question 58

Test of controls

Answer 58

Test the operating effectiveness of the controls.

Question 59

Internal rate of return

Answer 59

This method determines the rate by equating the investment with the future cash flows.

Question 60

A short-term speculative rise in the worldwide value of domestic currency could be moderated by a central bank decision to

Answer 60

Sell domestic currency in the foreign exchange market. Selling domestic currency would increase supply and therefore decrease price. *Increasing the domestic interest rate would increase the value of the domestic currency

Question 61

Contingency planning

Answer 61

Involves developing plans in the event of system failure.

Question 62

Hash total

Answer 62

Designed to detect errors

Question 63

Echo check

Answer 63

Designed to detect errors in transmitted data.

Question 64

How do you calculate the issue price of bonds?

Answer 64

The issue price of bonds is equal to the present value (PV) of the maturity value plus the PV of the interest annuity. The PV must be computed using the yield rate.

Question 65

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions? Creation of multilingual disaster recovery plans. Reduction in the frequency of data entry errors. Off-site storage of foreign source documents. Improvement in the audit trail for cash transactions.

Answer 65

Reduction in the frequency of data entry errors. Electronic funds transfer systems minimize the need for entry of information and, therefore, reduce the chance of entry errors.

Question 66

The approximated cost of not taking the discount in credit terms is calculated with the following formula:

Answer 66

Discount percent × 365 days ---------------------------- ---------------------------------------- 100% – Discount Total pay period – Discount period

Question 67

In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are what type of costs?

Answer 67

Costs associated with quality control and include testing and inspection.

Question 68

Assume that nominal interest rates just increased substantially but that the expected future dividends for a company over the long run were not affected. As a result of the increase in nominal interest rates, the company’s stock price should

Answer 68

Decrease If the nominal rate of interest increases, investors will expect a higher yield from all investments. Therefore, the stock price will decline.

Question 69

Exponential smoothing

Answer 69

Quantitative approach to predicting sales based on historical amounts.

Question 70

Linear programming

Answer 70

This technique is used to evaluate the use of resources when resources are constrained.

Question 71

Queuing theory

Answer 71

Technique that is designed to solve waiting line problems.

Question 72

Program Evaluation and Review Technique (PERT).

Answer 72

A technique used for scheduling problems.

Question 73

Strategic initiative

Answer 73

Key action programs required to achieve strategic objectives.

Question 74

Strategic objective

Answer 74

A statement of what the strategy must achieve and what is critical to its success.

Question 75

Strategy map

Answer 75

Diagrams of the cause-and-effect relationships between strategic objectives.

Question 76

Performance Measure

Answer 76

The level of performance or rate of improvement needed in the performance measure.

Question 77

What is the acknowledged preventive measure for a period of DEFLATION?

Answer 77

Increasing the money supply This answer is correct because in a period of deflation the government wants to encourage borrowing and investment to promote economic growth.

Question 78

Greater barriers to collusion exist for oligopolistic firms when The firms’ costs are more similar. There are fewer firms in the industry. General economic conditions are recessionary. The firms’ products are standardized.

Answer 78

General economic conditions are recessionary. 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.

Question 79

A lender and a borrower signed a contract for a $1,000 loan for one year. The lender asked the borrower to pay 3% interest. Inflation occurred and prices rose by 2% over the next year. The borrower repaid $1,030. What is the amount worth in real terms, after inflation?

Answer 79

$1,009.80 This answer is correct because the real value is equal to $1,009.80 ($1,030.00 ÷ 1.02%).

Question 80

In the cost of quality, spoilage is an example of what cost?

Answer 80

Internal failure costs Spoilage is an example of producing substandard products but discovering the lack of quality prior to shipment to the customer.

Question 81

Control objectives

Answer 81

(1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

Question 82

Excess Profitability index

Answer 82

The profitability index is the present value of the cash inflows divided by the investment outlay

Question 83

System programmers

Answer 83

Programmers are in charge of software. Systems programmers are given responsibility for maintaining system software, including operating systems and compilers.

Question 84

The market value of a firm’s outstanding common shares will be higher, everything else equal, if Investors have a lower required return on equity. Investors expect lower dividend growth. Investors have longer expected holding periods. Investors have shorter expected holding periods.

Answer 84

Investors have a lower required return on equity. Investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.

Question 85

``` The discount rate (hurdle rate of return) must be determined in advance for the Internal rate of return method. Net present value method. Payback period method. Time adjusted rate of return method. ```

Answer 85

Net present value method. This answer is correct. There are two capital budgeting methods which consider time value of money: internal rate of return and net present value. Under the net present value method, all cash inflows and outflows related to a capital project are discounted to a present value and netted to arrive at a net present value for the project. In order to discount the inflows and outflows, a discount rate must be determined in advance of the analysis of the project.

Question 86

Internal rate of return method

Answer 86

This method determines the actual rate of return earned by analyzing the expected cash flows of a project. The discount rate is used after the rate of return is computed to determine the project’s acceptability (through comparison of the rates).

Question 87

Annual cost of carrying inventory

Answer 87

Average inventory level × Unit cost × Cost of capital. Ex: A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company has a cost of capital of 12%, its annual cost of carrying inventory is (order size / 2) × $5 × 0.12 = (500 / 2) × $5 × 0.12 = $150.

Question 88

Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for Year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson's only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of Year 1. ``` What is the budgeted gross margin for Year 1? $60,000 $70,000 $75,000 $87,500 ```

Answer 88

$70,000 This answer is correct because cost of sales is equal to $350,000 ($300,000 payments to supplier − $100,000 beginning accounts payable + $150,000 ending accounts payable + $0 change in inventory), and 20% of $350,000 (cost of sales) is equal to $70,000.

Question 89

``` A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property? $11,500 $12,500 $13,000 $13,500 ```

Answer 89

11,500 The amount paid is $11,500. The present value of the sales price of $14,000 discounted at 12% for one year is equal to $12,500 ($14,000/1.12). If the net present value of the investment is equal to $1,000, the purchase price must be equal to $11,500 ($12,500 − $1,000).

Question 90

How do you calculate purchase price?

Answer 90

Purchase price is equal to the net present value of the investment plus the present value of the selling price.

Question 91

Data control language

Answer 91

Composed of commands used to control a database, including controlling which users have various privileges (e.g., who is able to read from and write to various portions of the database).

Question 92

ROI

Answer 92

Net Operating Profit / Invested Capital

Question 93

If a government were to use only fiscal policy to stimulate the economy from a recession, it would

Answer 93

Lower consumer taxes and increase government spending. A reduction in taxes or an increase in government spending would serve to stimulate the economy (increase the demand for goods and services).

Question 94

Monetary supply

Answer 94

Increasing money supply

Question 95

For the current period production levels, Woodwork Co. budgeted 11,000 board feet of production and purchased 15,000 board feet. The material cost was budgeted at $7 per foot. The actual cost for the period was $8.50 per foot. ``` What was Woodwork’s material price variance for the period? $6,000 unfavorable. $16,500 unfavorable. $19,500 unfavorable. $22,500 unfavorable. ```

Answer 95

$22,500 unfavorable. This answer is correct because the material price variance is calculated by multiplying the actual price ($8.50) minus the standard price ($7.00) by the actual quantity used (15,000). Therefore, the material price variance is equal to $22,500 unfavorable [($8.50 – $7.00) × 15,000].

Question 96

System analyst

Answer 96

Assigned the operating responsibility for designing a computer installation, including flowcharts of data processing routines. Responsible for designing the computer system, including the goals of the system and means of achieving those goals, based upon the nature of the business and its information needs. The systems analyst also must outline the data processing system for the computer programmer with system flowcharts.

Question 97

Computer programmers

Answer 97

Write detailed programs based upon the work of the systems analyst.

Question 98

Data processing manager

Answer 98

Has overall responsibility for the computer operations function (systems design, programming, operations, library, etc.).

Question 99

Internal auditor

Answer 99

May review the systems design and program flowcharts, but is not responsible for the computer design.

Question 100

``` Layton Company has implemented an enterprise risk management system and has responded to a particular risk by purchasing insurance. Such a response is characterized by COSO’s Enterprise Risk Management Framework as: Avoidance. Sharing. Acceptance. Reduction. ```

Answer 100

Sharing Sharing involves reducing risk likelihood or impact by transferring or sharing a portion of the risk. Avoidance involves exiting the activity that gives rise to the risk. Acceptance involves taking no action. Reduction involves taking action to reduce likelihood or impact.

Question 101

Quick (acid) ratio

Answer 101

Cash equivalents plus accounts receivables and prepayments divided by current liabilities. OR Cash and cash equivalents + AR + marketable securities divided by current liabilities

Question 102

Commercial paper

Answer 102

A form of unsecured promissory note issued by large, creditworthy firms. It is sold primarily to other firms, insurance companies, pension funds, banks, and mutual funds. Commercial paper typically has maturity dates that vary from one day to nine months. This form of financing is very favorable for corporations with the financial strength to issue it. The rate is often 2 to 3% less than the prime rate and there are no compensating balance requirements. However, the market is less predictable than bank financing.

Question 103

What does Computer Integrated Manufacturing (CIM) do?

Answer 103

It improves manufacturing processes. Reduction in the costs of spoilage, reworked units, and scrap. This is a major emphasis for CIM as well as for the total quality management programs that usually precede it. Book value and depreciation expense for factory equipment may be either higher or lower with CIM. The normal expectation is that working capital will be reduced as investments shift from current to fixed assets. Actual or potential market share changes may trigger investments in CIM.

Question 104

Information systems manager

Answer 104

Developing long-range plans and directing application development and computer operations.

Question 105

Control group

Answer 105

Maintaining control over the completeness, accuracy, and distribution of input and output.

Question 106

Systems programmer

Answer 106

Selecting, implementing, and maintaining system software, including operating systems, network software, and the database management system.

Question 107

``` A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle? 15 days. 45 days. 75 days. 105 days. ```

Answer 107

45 days The cash conversion cycle is equal to the inventory conversion period plus the receivables conversion period minus the payables deferral period (45 days = 60 days + 15 days − 30 days).

Question 108

The purpose of a detailed analysis of average collection period is to evaluate what?

Answer 108

Liquidity

Question 109

Control activities

Answer 109

Encompass policies and procedures that ensure that management’s directives are carried out.

Question 110

Control environment

Answer 110

Sets the tone of an organization by influencing the control consciousness of people. It may be viewed as the foundation for the other components of internal control. Control environment factors include integrity and ethical values; commitment to competence; board of directors or audit committee; management’s philosophy and operating style; organizational structure; assignment of authority and responsibility; and human resource policies and practices.

Question 111

Normal yield curve

Answer 111

One in which short-term rates are lower than intermediate-term rates which are lower than long-term rates. Therefore, the curve is upward sloping.

Question 112

Breakeven analysis assumes over the relevant range that

Answer 112

Total costs are *linear. 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. *linear - In mathematics, linear refers to an equation or function that is the equation of a straight line and takes the form y = mx + b, where "m" is equal to the slope, and "b" is equal to the y-intercept.

Question 113

Evaluators.

Answer 113

Gross profit is equal to sales minus cost of goods sold, and cost of goods sold is equal to beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory.

Question 114

Monitoring

Answer 114

Characterized by ongoing activities and separate evaluations.

Question 115

Which costs are controllable by the manager?

Answer 115

The product line manager can control the revenue from sales, variable production costs, variable selling and administrative costs, and the traceable discretionary fixed costs. The committed (infrastructure) fixed costs would not be controllable by the product line manager because these costs arise from having property, plant, equipment, and a functioning organization structure, which would be beyond the realm of control of the product line manager. The common fixed costs are those costs that arise from operating a facility, operation, or activity that is shared by two or more managers, thus, these costs would not be controllable by a single product line manager.

Question 116

Which of the following is not a characteristic of a purely competitive market? Differentiated products. No significant control over product price exerted by individual firms. No barriers to entry for new firms. A very large number of producing firms.

Answer 116

Differentiated products. Product differentiation is not a characteristic of a purely competitive market. It is a characteristic of monopolistically competitive markets and may characterize an oligopolistic market.

Question 117

Coefficient of cross-elasticity

Answer 117

The coefficient of cross-elasticity = percent change in demand for X ÷ percent change in the price of Y.

Question 118

``` If the dollar price of the euro rises, which of the following will occur? The dollar depreciates against the euro. The euro depreciates against the dollar. The euro will buy fewer European goods. The euro will buy fewer U.S. goods. ```

Answer 118

The dollar depreciates against the euro. This answer is correct because if the euro increases in value in terms of dollars, the dollar depreciates.

Question 119

A way to calculate sales

Answer 119

Investment turnover x Average Investment

Question 120

The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the Trade account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates. Capital account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates. Fall in the dollar’s value cannot be expected to have any effect on the U.S. trade balance. Cheaper dollar helps U.S. exporters of domestically produced goods..

Answer 120

Cheaper dollar helps U.S. exporters of domestically produced goods.. When the dollar becomes weaker, it makes US exports less expensive. This answer is correct. A cheaper dollar helps U.S. exporters because it makes their products less expensive

Question 121

``` In portfolio analysis a measure that is used to express the extent of the relationship among a set of investments is the Standard deviation. Expected return. Coefficient of correlation. Percentage return. ```

Answer 121

Coefficient of correlation An effective portfolio is one in which the investments are negatively correlated. Thus, when the return on some investments is declining the return on others is increasing.

Question 122

In preparing its cash budget for July 2012, Reed Company made the following projections: ``` Sales $1,500,000 Gross profit (based on sales) 25% Decrease in inventories $70,000 Decrease in accounts payable for inventories $120,000 ``` ``` For July 2012 what were the estimated cash disbursements for inventories? $935,000 $1,050,000 $1,055,000 $1,175,000 ```

Answer 122

$1,175,000 The solutions approach is to use T-accounts for inventory and accounts payable to find cash disbursements. Purchases of inventory on account equal the CGS minus the decrease in inventories. 1,500,000 x 75% = $1,125,000 + *$50,000 = $1,175,000 *(120,000-70,000)

Question 123

If management has a variable rate short-term loan and is concerned about the volatility of short-term interest rates, which of the following would not be an effective hedging strategy? Purchase a short position in the Treasury bill futures market. Enter into an interest rate swap. Enter into a forward contract to sell Treasury bonds in the future. Enter into a forward contract to purchase Treasury bills in the future.

Answer 123

Enter into a forward contract to purchase Treasury bills in the future. This answer is correct. Purchasing Treasury bills will put the firm at additional risk with respect to short-term interest rates. *Treasury bill - a short-dated government security, yielding no interest but issued at a discount on its redemption price.

Question 124

``` The Bread Company is planning to purchase a new machine which it will depreciate on a straight-line basis over a 10-year period. A full year’s depreciation will be taken in the year of acquisition. The machine is expected to produce cash flow from operations, net of income taxes, of $3,000 in each of the 10 years.; The accounting (book value) rate of return is expected to be 10% on the initial increase in required investment. The cost of the new machine will be $12,000 $13,500 $15,000 $30,000 ```

Answer 124

$15,000 The accounting rate of return equals accounting net income over book value. The book value of the new machine would be its cost. The $3,000 cash flow net of income taxes does not reflect the 10% straight-line depreciation. The solutions approach is to set up a formula in which cost is equal to $3,000 minus depreciation (which is 10% of cost) divided by the 10% rate of return. The numerator is the expected increase in accounting income. The denominator is the capitalization rate, 10%. Solving the formula indicates that the cost of the machine is $15,000. Cost = $3,000 – .10 (cost) .10 .10 cost = $3,000 – .10 cost .20 cost = $3,000 Cost = $15,000

Question 125

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt? To cause the price of the company’s stock to rise. To lower the company’s bond rating. To reduce the risk for existing bondholders. To reduce the interest rate on the bonds being sold.

Answer 125

To reduce the interest rate on the bonds being sold. This answer is correct because such a covenant would reduce the interest rate on the debt being issued.

Question 126

If the U.S. dollar declines in value relative to the currencies of many of its trading partners, the likely result is that Foreign currencies will depreciate against the dollar. The U.S. trade deficit will worsen. U.S. exports will tend to increase. U.S. imports will tend to increase.

Answer 126

U.S. exports will tend to increase. This answer is correct. A weaker dollar decreases the prices of U.S. exports, which should increase the demand for these goods.

Question 127

Sussex Company has budgeted its operations for February 2012. No change in inventory level during the month is planned. Selected data from estimated amounts are as follows: Net loss $100,000 Increase in accounts payable 40,000 Depreciation expense 35,000 Decrease in gross amounts of trade accounts receivable 60,000 Purchase of office equipment on 45-day credit terms 15,000 Provision for estimated warranty liability 10,000 ``` How much change in cash position is expected for February? $15,000 decrease. $25,000 decrease. $30,000 increase. $45,000 increase. ```

Answer 127

$45,000 increase. This answer is correct. One approach to the solution is to arrange the data in the format used for a cash from operations section of a statement of cash flows. ``` Net loss $(100,000) Add: Expenses not requiring cash: Depreciation $35,000 Warranty expense 10,000 45,000 Changes in AR and AP: Decrease in AR $60,000 Increase in AP 40,000 100,000 Change in cash position from operations $ 45,000 ``` The purchase of office equipment will not affect cash during February.

Question 128

Strategy map.

Answer 128

Diagrams of the cause-and-effect relationships between strategic objectives.

Question 129

Value chain

Answer 129

Sequence of business processes in which usefulness is added to the products or services.

Question 130

``` A firm has daily cash receipts of $100,000 and collection time of 4 days. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is $ 3,000 $12,000 $0 $ 6,000 ```

Answer 130

$6,000 This answer is correct. A reduction of 2 days of collection time on receipts of $100,000 would increase the firm’s average cash balance by $200,000 (2 × $100,000). This would save the firm interest in the amount of $12,000 ($200,000 × 6%). The net benefit is the interest savings, $12,000, less the fee, $6,000, or $6,000.

Question 131

What's another way to calculate COGS?

Answer 131

Cost of goods sold is equal to beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory.

Question 132

Which technique deals with severity of problems? ``` A tool which indicates how frequently each type of defect occurs is a Control chart. Pareto diagram. Cause-and-effect diagram. Fishbone diagram. ```

Answer 132

Pareto diagram A Pareto chart ranks the causes of process variations by the degree of impact on quality.

Question 133

Capital asset pricing

Answer 133

Calculated using the risk free interest rate, the stock's beta coefficient, and the estimated return on the market to calculate the cost of equity.

Question 134

Capital budget

Answer 134

Plan that assesses the long-term needs of the company for plant and equipment purchases.

Question 135

Financial budget

Answer 135

Plan to ensure that there are sufficient funds available for the operating needs of the company.

Question 136

Strategic plan

Answer 136

Exercise that sets the long-range goals of the company, including the consideration of external influences caused by others in the market.

Question 137

Operating budget

Answer 137

Plan that coordinates and communicates a company’s plan for the coming year to all departments and divisions.

Question 138

A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return? Less than the company’s weighted-average cost of capital (WACC). Less than the project’s internal rate of return. Greater than the company’s weighted-average cost of capital (WACC). Greater than the project’s internal rate of return. This answer is correct. If the project has a positive net present value it has a return greater than the required return.

Answer 138

Less than the project’s internal rate of return. This answer is correct. If the project has a positive net present value it has a return greater than the required return.

Question 139

Cost of goods manufactured

Answer 139

DM + DL + manufacturing overhead

Question 140

In the past, four direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was 3 times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates that these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. ``` What amount should management budget for cost of goods manufactured? $4,820,000 $5,060,000 $5,200,000 $6,500,000 ```

Answer 140

$5,060,000 Cost of goods manufactured is calculated by adding direct materials, direct labor, and manufacturing overhead for the number of units produced during the period. If labor costs are expected to decrease by 25%, the revised budgeted labor hours are 3 hours (4 hours × 75%). The revised budgeted material costs are equal to $230 ($200 + 30). Therefore, the costs of goods manufactured is equal to direct labor costs of $600,000 (10,000 units × 3 hours × $20) plus direct material costs of $2,300,000 (10,000 units × $230) plus manufacturing overhead of $2,160,000 ($600,000 labor costs × 3.6) = $5,060,000.

Question 141

How do you calculate needed purchases?

Answer 141

Amount required for production minus expected beginning inventory plus required ending inventory.

Question 142

Direct Method

Answer 142

Simply allocates the costs of each service department to each of the producing departments based on a relative level of the apportionment base. For example, if a service department had costs of $140,000, and producing departments X and Y used 80% and 20% of the apportionment base, X and Y would be assigned $112,000 and $28,000 respectively. Note that the direct method ignores use of services by other service departments. For example, the direct method would ignore the fact that service department A uses the services of service department B. The essence of the direct method is shown in the following diagram.

Question 143

Conversion cost

Answer 143

Total production costs minus raw material costs

Question 144

Cost of raw materials used in production

Answer 144

The cost of raw materials used in production was $5,700 ($6,000 + $500 beginning inventory – $800 ending inventory).

Question 145

Total production costs

Answer 145

The total production costs for the month were $12,200 ($12,000 cost of goods sold + $1,400 ending inventory – $1,200 beginning inventory.

Question 146

How do you calculate. spread between the return on investment and the required rate of return for the Consumer Products Division?

Answer 146

ROI minus the cost of capital.

Question 147

``` Which of the following actions is the acknowledged preventive measure for a period of deflation? Increasing interest rates. Increasing the money supply. Decreasing interest rates. Decreasing the money supply. ```

Answer 147

Increasing the money supply. In a period of deflation, interest rates are negative. This answer is correct because in a period of deflation the government wants to encourage borrowing and investment to promote economic growth. Increasing interest rates is a preventive measure for a period of INflation.

Question 148

Banker's acceptance

Answer 148

A time draft, payable on a specified future date, with the bank guaranteeing the payment.

Question 149

``` A company has an online order processing system. The company is in the process of determining the dollar amount of loss from user error. The company estimates the probability of occurrence of user error to be 90%, with evenly distributed losses ranging from $1,000 to $30,000. What is the expected annual loss from user error? $13,050 $13,500 $13,950 $14,400 ```

Answer 149

$13,950 The expected loss is equal to $13,950 (($30,000 + $1,000)/2 × 90%). The expected loss of an evenly distributed loss range is equal to the sum of the ends of the ranges divided by the sum of the probability of losses

Question 150

Materials requirements planning

Answer 150

A computerized system that plans manufacturing based on demand estimates.

Question 151

``` In portfolio analysis a measure that is used to express the extent of the relationship among a set of investments is the Standard deviation. Expected return. Coefficient of correlation. Percentage return. ```

Answer 151

Coefficient of correlation This answer is correct. An effective portfolio is one in which the investments are negatively correlated. Thus, when the return on some investments is declining the return on others is increasing.

Question 152

``` A firm sells on terms of 2/10 net 60. It sells 1,000 units per day at a unit price of $10. On 60% of sales, customers take the cash discount. On the remaining 40% of sales, customers pay, on average, in 70 days. What would be the impact on the balance of accounts receivable if the firm initiates a more aggressive collection policy and is able to reduce the average payment period to 60 days for those customers not taking the cash discount? (Assume sales levels are unaffected by the change in policy.) Decrease by $4,000. Decrease by $40,000. Decrease by $240,000. Decrease by $280,000 ```

Answer 152

Decrease by $40,000. This answer is correct. On the 40% of sales to customers not taking the cash discount, a 10-day reduction in the average collection period will reduce the accounts receivable balance as follows: .4 × Daily unit sales × Unit price × Reduction in days outstanding = .4 × 1,000 × $10 × 10 = $40,000.

Question 153

``` Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials? Materials requirements planning. Cycle counting. Safety stock reorder point. Economic order quantity. ```

Answer 153

Materials requirements planning. This answer is correct because materials requirements planning is a computerized system that plans manufacturing based on demand estimates.

Question 154

Cycle costing

Answer 154

Deals with costing of facilities or products.

Question 155

Safety stock reorder point

Answer 155

A technique used to balance inventory holding costs against the costs of stockouts.

Question 156

``` Under a standard cost system, the material efficiency variances are the responsibility of Production and industrial engineering. Purchasing and industrial engineering. Purchasing and sales. Sales and industrial engineering. ```

Answer 156

Production and industrial engineering The production and industrial engineering departments have control over the usage of materials.

Question 157

``` Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment? Short-term rate on US Treasury bonds. Prime rate of interest. Weighted-average cost of capital. Long-term rate on US Treasury bonds. ```

Answer 157

Weighted-average cost of capital. The weighted-average cost of capital provides a measure of the cost of the funds that the company is considering investing in a project.

Question 158

``` The zero-coupon method is used to determine the fair value of Stocks. Options. Interest rate swaps. Foreign currency contracts. ```

Answer 158

Interest rate swaps. The zero-coupon method is used to determine the fair value of interest rate swaps.

Question 159

Assume that management of Trayco has generated the following data about an investment project that has a five-year life: Initial investment $100,000 Additional investment in working capital 5,000 Cash flows before income taxes for years 1 through 5 30,000 Yearly depreciation for tax purposes 20,000 Terminal value of machine 0 Cost of capital 8% Present value of $1 received after 5 years discounted at 8% .681 Present value of an ordinary annuity of $1 for 5 years at 8% 3.993 ``` Assume that Trayco’s marginal tax rate is 30% and all cash flows come at the end of the year. What is the amount of the after-tax cash flow in year 2? $30,000 $21,000 $27,000 $25,000 ```

Answer 159

$27,000 This answer is correct. The after-tax cash flows are calculated by taking the before-tax cash flows and deducting the income taxes. Since depreciation is deductible for tax purposes, income taxes for year two are $3,000 [($30,000 cash flows – $20,000 depreciation) × 30%]. Therefore, after-tax cash flows are equal to $27,000 ($30,000 cash flows before taxes – $3,000 taxes).

Question 160

Online analytical processing system.

Answer 160

A software technology that enables the user to query the system (retrieve data), and conduct an analysis.

Question 161

Online transaction-processing system.

Answer 161

One that supports day-to-day operations.

Question 162

Online executive information system

Answer 162

Designed to support executive decisions.

Question 163

Online information storage system.

Answer 163

Describes a general data storage system

Question 164

Each of the following is an effect from opening an emerging stock market to foreign investment, except An increase in the correlation of emerging stock markets with world markets. A change in the volatility of emerging stock market returns. A decrease in local firms' cost of capital.

Answer 164

A decrease in investment growth rates. Opening the market would cause an increase in investment growth rates.

Question 165

``` The profitability index is a variation on which of the following capital budgeting models? Internal rate of return. Economic value-added. Net present value. Discounted payback. ```

Answer 165

Net present value. The profitability index is calculated as the ratio of the net present value of the project to its initial cost.

Question 166

``` When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. The error report should most probably be reviewed and followed up by the Supervisor of computer operations. Systems analyst. Control group. Computer programmer. ```

Answer 166

Control group. Control group is responsible for providing a continuous review function by supervising and monitoring input, operations, and the distribution of output (i.e., a continuous internal audit function).

Question 167

``` Which of the following activities involves collecting data about all segments of the firm’s general environment to understand the effects of economic changes on the firm’s industry? Monitoring. Assessing. Forecasting. Scanning. ```

Answer 167

What technique involves a high-level look? Scanning Scanning involves a scan of all segments of the general environment

Question 168

Monitoring

Answer 168

Involves a study of environmental changes identified by scanning to spot trends.

Question 169

Assessing

Answer 169

Involves determining changes in the firm’s strategy that are necessary.

Question 170

Forecasting

Answer 170

Involves developing probable projections of what might happen and its timing.

Question 171

The trough of a business cycle is generally characterized by

Answer 171

Unused productive capacity and an unwillingness to risk new investments

Question 172

Peak in a business cycle

Answer 172

Marks the end of a period of economic expansion and the beginning of a recession (contraction).

Question 173

Through in a business cycle

Answer 173

Marks the end of a recession and the beginning of an economic recovery (expansion)

Question 174

``` Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials usage variance was $2,500 unfavorable and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May? $17,500 favorable. $17,500 unfavorable. $15,000 favorable. $15,000 unfavorable. ```

Answer 174

$17,500 favorable. This answer is correct. The materials price variance is equal to (Actual quantity × Actual price) − (Actual quantity × Standard cost) and the materials usage variance is equal to (Actual quantity × Standard price) − (Standard quantity × Standard price). Since the standard quantity for May was 17,000 and the actual quantity was 17,500, the excess quantity used was 500 units (17,000 − 17,500). Therefore, the standard cost is $5.00 per unit ($2,500 unfavorable usage variance ÷ 500 excess units used), and the price variance is $17,500 favorable [$70,000 actual cost − (17,500 actual quantity used × $5.00 standard unit cost)].

Question 175

Which of the following scenarios would encourage a company to use short-term loans to retire its ten-year bonds that have five years until maturity? The company expects interest rates to increase over the next five years. Interest rates have increased over the last five years. Interest rates have declined over the last five years. The company is experiencing cash flow problems.

Answer 175

Interest rates have declined over the last five years. If interest rates have declined, the loans obtained five years ago would have a higher interest rate than loans obtained today.

Question 176

Price/earnings ratio

Answer 176

A market ratio. It is calculated by dividing the price of a share of stock by earnings per share.

Question 177

Assuming that the real rate of interest is the same in both countries, if country A has a higher nominal interest rate than country B, then the currency of country A will likely be selling at a Forward discount relative to the currency of country B. Forward premium relative to the currency of country B. Spot discount relative to the currency of country B. Spot premium relative to the currency of country B.

Answer 177

Forward discount relative to the currency of country B. This answer is correct. If the real rates of interest are the same, the country with the higher nominal interest rate is expected to experience a higher rate of inflation. A higher rate of inflation is associated with a devaluing currency so the currency of the country with the higher nominal interest rate will likely be selling at a forward discount.

Question 178

Real interest rate

Answer 178

Interest rate in terms of goods. These rates are adjusted for inflation.

Question 179

Nominal interest rate

Answer 179

Interest rate in terms of the nation’s currency. These are the rates that are quoted by financial institutions and in the financial pages of newspapers. The difference between the real rate and the nominal rate is the inflation premium. It represents the expected inflation rate. The higher the expected inflation rate the larger the inflation premium. The interest rate charged to a particular business or individual will be higher than the nominal rate due to credit risk.

Question 180

Option

Answer 180

A contract that allows the holder to purchase a specified quantity of a financial instrument at a specified price An option allows, but does not require the holder to purchase the subject of the option.

Question 181

Futures contract

Answer 181

A standardized contract to take delivery of a specified quantity of a financial instrument in the future.

Question 182

Forward contract

Answer 182

A negotiated contract to purchase a specified quantity of a financial instrument in the future.

Question 183

Swap

Answer 183

An agreement to swap a stream of cash flows.

Question 184

In the contribution margin approach to pricing, the price at which the income remains constant is equal to the price that covers Prime costs. Variable costs. Fixed costs. Fixed and variable costs plus the desired profit.

Answer 184

Variable costs Prices under the contribution margin approach are set at variable cost plus a percentage markup. The percentage markup, or contribution margin, will be used to cover fixed costs and any remainder will be profit. If the selling price is set at variable cost, no contribution margin will be generated. Therefore, income will remain constant.

Question 185

Use the following information to answer this question. ``` Investment project Cash outlay Present value of cash inflows A $1,100,000 $ 980,000 B 250,000 600,000 C 1,400,000 1,830,000 D 650,000 790,000 ``` ``` The company has $2,000,000 of financing available for new investment projects. If only one project may be selected, which should the company undertake? Project A Project B. Project C. Project D. ``` *It is asking for the project with the highest NPV!!

Answer 185

Project C Project C has the highest net present value of the available projects and would be ranked as the best. *While project B does have the highest relative profitability, as measured using the profitability index in question 14 above, it does not have the highest absolute profitability as measured using net present value. When ranking mutually exclusive projects, net present value must be used. An exception is if there is a capital rationing constraint, but no such constraint exists in this case since the company has sufficient financing available for any of the four projects.

Question 186

A favorable material price variance coupled with an unfavorable material usage variance would most likely result from Machine efficiency problems. The purchase and use of higher than standard quality material. Labor efficiency problems.

Answer 186

The purchase of lower than standard quality material. Substandard materials may be less expensive but also may cause more waste. Therefore, purchasing them may result in both a favorable materials price variance and an unfavorable material usage variance.

Question 187

Flexible budget

Answer 187

One that is adjusted to the actual level of activity. It is not related to allocation of joint costs.

Question 188

``` If the dollar price of the euro rises, which of the following will occur? The dollar depreciates against the euro. The euro depreciates against the dollar. The euro will buy fewer European goods. The euro will buy fewer U.S. goods. ```

Answer 188

The dollar depreciates against the euro. If the euro increases in value in terms of dollars, the dollar depreciates.

Question 189

Accounting for factory overhead costs involves averaging in Job-order costing and Process costing

Answer 189

Factory overhead is averaged over production in both job-order costing and process costing. Because the actual costs associated with factory overhead are generally not known until after the accounting period, a predetermined overhead rate is calculated based on an estimate of overhead cost. This rate is then used to apply overhead to production for both job-order costing and process costing. The difference between the two methods is that job-order costing allocates the applied overhead to the number of units in each job (generally a small number of units) while process costing allocates overhead to the number units in each processing center (generally a much larger number of units).

Question 190

If the value of the U.S. dollar in foreign currency markets changes from $1 = 95 yen to $1 = 90 yen, The Japanese yen has depreciated against the dollar. Japanese imported products in the United States will become more expensive. U.S. tourists in Japan will find that their dollars will buy more Japanese products. U.S. exports to Japan should decrease.

Answer 190

Japanese imported products in the United States will become more expensive. When the value of the dollar declines in relation to the yen, Japanese products become more expensive.

Question 191

``` A company has $1,500,000 of outstanding debt and $1,000,000 of outstanding common equity. Management plans to maintain the same proportions of financing from each source if additional projects are undertaken. If the company expects to have $60,000 of retained earnings available for reinvestment in new projects in the coming year, what dollar amount of new investments can be undertaken without issuing new equity? $0 $ 24,000 $ 90,000 $150,000 ```

Answer 191

$150,000 This answer is correct. The proportion of equity in the financial structure of the firm is the value of outstanding equity divided by the total value of all financing sources. Value of equity = 1,000,000 = .40 Value of debt + Value of equity 1,000,000 + 1,500,000 Since the question states that the firm will maintain the same weight of each financing source, each dollar invested is composed of 40 cents of equity and 60 cents of debt. The first $60,000 of equity used in financing new projects is sourced from retained earnings. This source of equity is exhausted when the firm reaches an investment level of $60,000 / .4 = $150,000. When the level of investment exceeds this amount, equity financing must be raised externally.

Question 192

DJ Co. has a job-order cost system. The following debits (credits) appeared in the Work in Process account for the month of March: ``` March 1, balance $12,000 March 31, direct materials 40,000 March 31, direct labor 30,000 March 31, manufacturing overhead applied 27,000 March 31, to finished goods (100,000) DJ Co. applies overhead at a predetermined rate of 90% of direct labor cost. Job No. 101, the only job still in process at the end of March, has been charged with manufacturing overhead of $2,250. What was the amount of direct materials charged to Job No. 101? $2,250 $2,500 $4,250 $4,725 ```

Answer 192

$4,250 The requirement is to calculate the amount of direct materials charged to Job No. 101. To calculate the direct materials, you must first calculate the total costs charged to Job No. 101. Since it is the only job in process at the end of the month, its cost is equal to the amount of cost left in work in process (WIP) at year-end, or $9,000 ($12,000 beginning WIP + $40,000 direct materials + $30,000 direct labor + $27,000 overhead applied – $100,000 transferred out). If the amount of overhead applied to the job is $2,250 and overhead is applied at a rate of 90% of direct labor, direct labor charged to the job should be $2,500 ($2,250 ÷ 90%). Therefore, the direct materials charged to Job No. 101 must be $4,250 ($9,000 – $2,250 – $2,500).

Question 193

Annual cost of carrying inventory

Answer 193

Average inventory level × Unit cost × Cost of capital.

Question 194

Decision support system (DSS)

Answer 194

Provides information for decision making.

Question 195

On June 30, 2012, a company is preparing the cash budget for the third quarter. The collection pattern for credit sales has been 60% in the month of sale, 30% in the first month after sale, and the rest in the second month after sale. Uncollectible accounts are negligible. There are cash sales each month equal to 25% of total sales. The total sales for the quarter are estimated as follows: July, $30,000; August, $15,000; September, $35,000. Accounts receivable on June 30, 2012, were $10,000. ``` What amount would be the projected cash collections for September? $21,375 $28,500 $30,125 $37,250 ```

Answer 195

$30,125 This answer is correct because in September the company would expect to collect cash sales for September, $8,750 ($35,000 x 25%), plus September collections of accounts receivable. Collections of accounts receivable would be equal to collection of September sales on credit, $15,750 [(75% × $35,000) × 60%], plus collection of August sales on credit, $3,375 [(75% × $15,000) × 30%], plus collection of July sales on credit, $2,250 [(75% × $30,000) × 10%]. Therefore the total cash collections for September is equal to $30,125 ($8,750 + $15,750 + $3,375 + $2,250).

Question 196

Which of the following terms best describes a payroll system? Database management system (DBMS). Transaction processing system (TPS). Decision support system (DSS). Enterprise resource planning (ERP) system.

Answer 196

Transaction processing system (TPS) A payroll system is a transaction processing system.

Question 197

Decision support system (DSS)

Answer 197

provides information for decision making.

Question 198

Flexible budget variance

Answer 198

Variance is equal to budgeted cost at actual productions minus actual cost.

Question 199

Assume that management of Trayco has generated the following data about an investment project that has a five-year life: Initial investment $100,000 Additional investment in working capital 5,000 Cash flows before income taxes for years 1 through 5 30,000 Yearly depreciation for tax purposes 20,000 Terminal value of machine 0 Cost of capital 8% Present value of $1 received after 5 years discounted at 8% .681 Present value of an ordinary annuity of $1 for 5 years at 8% 3.993 ``` Assume that Trayco’s marginal tax rate is 30% and all cash flows come at the end of the year. Calculate the net present value of the investment of the project. $105,000 $ 3,585 $ 11,216 $ 6,216 ```

Answer 199

$6,216 This answer is correct. The net present value is equal to the present value of the future after tax cash flows minus the initial investment. The after tax annual cash flows are calculated by taking the before tax cash flows and deducting the income taxes. Since depreciation is deductible for tax purposes, income taxes for year two are $3,000 ([$30,000 cash flows – $20,000 depreciation] × 30%). Therefore, after tax cash flows are equal to $27,000 ($30,000 cash flows before taxes – $3,000 taxes). The present value of $27,000 received annually for 5 years discounted at 8% is $107,811 ($27,000 × 3.993). To properly evaluate the project, the investment in working capital must be considered a part of the initial investment, and its recovery at the end of year 5 must be discounted back to its present value. The present value of $5,000 received at the end of 5 years is $3,405 ($5,000 × .681). Therefore, the net present value of the investment is calculated as Present value of annual cash flows $ 107,811 Present value of recovery of investment in working capital 3,405 Less: Initial investment ($100,000 + 45,000) ($ 105,000) Net present value of the investment $ 6,216

Question 200

A processing department produces joint products Ajac and Bjac, each of which incurs separable production costs after split-off. Information concerning a batch produced at a $60,000 joint cost before split-off follows: ``` Product Separable costs Sales value Ajac $8,000 $80,000 Bjac 22,000 40,000 Total $30,000 $120,000 ``` ``` What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value? $16,000 $40,000 $48,000 $52,000 ```

Answer 200

$48,000 This answer is correct because the estimated net realizable value (NRV) method allocates joint costs using the estimated sales values of the joint products after further processing, less the separable processing costs. Sales value minus separable costs for Ajac equals $72,000. Sales value minus separable costs for Bjac is $18,000. $72,000 is 80% of $90,000 ($72,000 + $18,000). Therefore, joint costs assigned to Ajac equal $48,000 (80% of $60,000).

Question 201

Net Realizable Value Method (NRV)

Answer 201

Allocates joint costs using the estimated sales values of the joint products after further processing, less the separable processing costs

Question 202

Lane Co. produces main products Kul and Wu. The process also yields by-product Zef. Net realizable value of by-product Zef is subtracted from joint production cost of Kul and Wu. The following information pertains to production in July 2012 at a joint cost of $54,000: ``` Product Units produced Market value Additional cost after split-off Kul 1,000 $40,000 $0 Wu 1,500 $35,000 0 Zef 500 $7,000 3,000 ``` ``` If Lane uses the net realizable value method for allocating joint cost, how much of the joint cost should be allocated to product Kul? $18,800 $20,000 $26,667 $27,342 ```

Answer 202

$26,667 This answer is correct because net realizable value (NRV) is the predicted selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. The joint cost of $54,000 is reduced by the NRV of the by-product *($4,000) to get the allocable joint cost ($50,000). The computation is Sales value at split-off Weighting Joint costs allocated Kul $40,000 $40,000/$75,000 × $50,000 $26,667 Wu 35,000 $35,000/$75,000 × $50,000 23,333 $75,000 $50,000 *$7,000-$3,000 = $4,000 Therefore, $26,667 of the joint cost should be allocated to product Kul.

Question 203

Net cost of debt

Answer 203

Effective interest rate times one minus the marginal tax rate.

Question 204

Conversion costs

Answer 204

Direct labor and overhead Total production costs minus raw material costs. Cost of raw materials used in production: Purchase of raw materials + Beginning inventory -Ending inventory Total production costs: Cost of goods sold + Ending inventory – Beginning inventory

Question 205

An enterprise resource planning (ERP) system

Answer 205

Increases responsiveness and flexibility while aiding in the decision-making process.

Question 206

``` An organization has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%. If the organization has total debt of $1,000,000, then it has a sales level of $5,000,000.00 $2,450,000.00 $408,163.26 $200,000.00 ```

Answer 206

$5,000,000.00 This answer is correct. The level of sales for the company is calculated using both ratios as follows: Total assets = Total debt / 0.70 = $1,000,000 / 0.70 = $1,428,571.40 and Sales = 3.5 × (Total assets) = 3.5 × ($1,428,571.40) = $5,000,000.00.

Question 207

``` Which of the following effects would a lockbox most likely provide for receivables management? Minimized collection float. Maximized collection float. Minimized disbursement float. Maximized disbursement float. ```

Answer 207

Minimized collection float. In a lockbox system payments are sent directly to the company’s financial institution. Therefore, collection float is minimized.

Question 208

``` An increase in production levels within a relevant range most likely would result in Increasing the total cost. Increasing the variable cost per unit. Decreasing the total fixed cost. Decreasing the variable cost per unit. ```

Answer 208

Increasing total costs Variable costs increase within the relevant range, which increases total cost.

Question 209

What does average collection period evaluate?

Answer 209

Liquidity

Question 210

Jonathan Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows: ``` Direct labor hours 21,000 Direct labor costs $110,000 Machine hours 35,000 For a particular job, 1,500 direct labor hours were used. Using direct labor hours as the cost driver, what amount of overhead should be applied to this job? $3,214 $5,357 $5,625 $7,500 ```

Answer 210

$5,625 This answer is correct. The requirement is to calculate the amount of applied overhead costs. This answer is correct because the amount is $5,625 [1,500 hours × ($75,000 ÷ 20,000)]. The application rate is calculated by dividing budgeted hours into budgeted overhead costs.

Question 211

Echo control

Answer 211

An echo check or control consists of transmitting data back to the source unit for comparison with the original data that were transmitted. In this case, the print command is sent to the printer and then returned to the CPU to verify that the proper command was received.

Question 212

How may GDP be calculated?

Answer 212

By adding personal consumption expenditures, plus gross private domestic fixed investment, plus government expenditures, adjusting for net exports and changes in business inventories. Household income is not included in the formula.

Question 213

``` In which stage of a firm’s development is it most likely to seek and obtain external equity financing in the form of venture capital? Formation. Rapid growth. Growth to maturity. Maturity and industry decline. ```

Answer 213

Rapid growth At the rapid growth stage, if a company is reasonably profitable it will experience financing needs in excess of funds available either internally or from trade credit or bank credit. Additional debt financing would often result in an unreasonable amount of financial leverage at this stage of development and public equity financing is not yet available to the company. This is the stage at which the company is most likely to seek and obtain venture capital financing.

Question 214

Wexford Co. has a subunit that reported the following data for year 1: Asset (investment) turnover 1.5 times Sales $750,000 Return on sales 8% The imputed interest rate is 12%. ``` What is the division residual income for year 1? $60,000 $30,000 $20,000 $0 ```

Answer 214

$0 If asset turnover is equal to 1.5 times, invested assets is equal to $500,000 ($750,000 sales ÷ 1.5 asset turnover). This answer is correct because residual income is equal to $0 [($750,000 × 8%) − ($500,000 invested assets × 12%)]. Profit = Sales x Return on sales

Question 215

Another way to calculate residual income

Answer 215

Equal to profit minus imputed interest on investment.

Question 216

``` Which of the following tasks would be included in a document flowchart for processing cash receipts? Compare control and remittance totals. Record returns and allowances. Authorize and generate an invoice. Authorize and generate a voucher. ```

Answer 216

Compare control and remittance totals. Comparing control and remittance totals is one of the activities involved in processing cash receipts

Question 217

A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return? Less than the company’s weighted-average cost of capital (WACC). Less than the project’s internal rate of return. Greater than the company’s weighted-average cost of capital (WACC).

Answer 217

Less than the project’s internal rate of return. This answer is correct. If the project has a positive net present value it has a return greater than the required return. The discount rate for net present value is the required rate of return

Question 218

The accounting rate of return

Answer 218

Accounting net income over book value (cost)

Question 219

What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar? The foreign company will have an advantage in the U.S. market. The foreign company will be disadvantaged in the U.S. market. The fluctuation in the foreign currency’s exchange rate has no effect on the U.S. company’s sales or cost of goods sold.

Answer 219

The foreign company will have an advantage in the U.S. market. This answer is correct because when a country’s currency weakens, its products become cheaper for purchasers in another country. When currency becomes weaker the country's products become cheaper

Question 220

Router

Answer 220

Connects two or more network segments, such that the segments maintain their separate logical identities.

Question 221

Gateway

Answer 221

Often implemented via software, translates between two or more different protocol families and makes connections between dissimilar networks possible.

Question 222

Bridge

Answer 222

Joins network segments so they appear to be one physical segment.

Question 223

Wiring concentrator

Answer 223

Accepts twisted-pair cabling from each of several PCs in the same LAN.

Question 224

Activity-based costing (ABC)

Answer 224

Any cost should be traced to the specific group of units that caused those costs to be incurred.

Question 225

Birney Company is planning its advertising campaign for 2012 and has prepared the following budget data based on a zero advertising expenditure: ``` Normal plant capacity 200,000 units Sales 150,000 units Selling price $25.00 per unit Variable manufacturing costs $15.00 per unit Fixed costs: ``` Manufacturing $800,000 Sales and administrative $700,000 ``` An advertising agency claims that an aggressive advertising campaign would enable Birney to increase its unit sales by 20%. What is the maximum amount that Birney can pay for advertising and obtain an operating profit of $200,000? $100,000 $200,000 $300,000 $550,000 ```

Answer 225

$100,000 This answer is correct. To calculate the maximum amount that can be paid for advertising, first determine the maximum amount of fixed cost which can be incurred (assuming advertising is a fixed cost). Total fixed costs allowed would equal sales minus variable cost minus profit. With advertising, sales will increase 20%, and variable costs will also increase by 20%. Given $200,000 operating profit, fixed cost will be ``` Sales $4,500,000 [120% (150,000 × $25)] – Variable cost (2,700,000) [120% (150,000 × $15)] – Profit (200,000) (given) Fixed cost $1,600,000 ``` Next, determine the increase in fixed cost. Total fixed costs allowed of $1,600,000 less current fixed cost of $1,500,000 ($800,000 + $700,000) equals a maximum advertising cost allowed of $100,000.

Question 226

Online real-time system

Answer 226

The posting of a transaction, as it occurs, to several files, without intermediate printouts. Simultaneous posting to several file

Question 227

Which of the following is accurate regarding a company with a high degree of financial leverage and significant losses for the period? Common stockholders are better off than they would have been if the firm was not as heavily leveraged. Common stockholders are worse off than they would have been if the firm was not as heavily leveraged. The extent of financial leverage is not relevant to the well-being of common stockholders. It is impossible to determine the effect without knowing the operating leverage.

Answer 227

Common stockholders are worse off than they would have been if the firm was not as heavily leveraged. When the firm performs poorly, common stockholders are better off with less financial leverage.

Question 228

Prototyping

Answer 228

The practice of rapid development of a system containing essential features for the purpose of eliciting user comments, which drive successive iterations of the prototype system.

Question 229

Change control

Answer 229

The practice of authorizing changes, approving tests results, and copying developmental programs to a production library is program change control.

Question 230

A missing digit in an invoice number in a batch of daily sales would be detected byt

Answer 230

Hash total

Question 231

A transposition error on one employee's paycheck on a weekly payroll run would be detected by

Answer 231

Batch total A batch total compares the total of the transactions to the sum of the individual items. If a transposition error occurred on an individual item, the batch total would detect this error.

Question 232

``` Which of the following concepts can best be used to understand oligopoly behavior? Concentration ratio. Interindustry competition. Game theory model. Herfindahl index. ```

Answer 232

Game theory model An oligopoly is an industry that is dominated by a small number of sellers. It is best described by game theory which models conflict and cooperation among decision makers.

Question 233

Concentration ratio

Answer 233

Is a measure of the total output by a group of firms in an industry.

Question 234

Interindustry competition

Answer 234

The competition created by firms in different industries.

Question 235

The Herfindahl index

Answer 235

A measure of industry concentration.

Question 236

Which of the following statements presents an example of a general control for a computerized system? Limiting entry of sales transactions to only valid credit customers. Creating hash totals from Social Security numbers for the weekly payroll. Restricting entry of accounts payable transactions to only authorized users.

Answer 236

Restricting access to the computer center by use of biometric devices. This answer is correct because a general control is one that controls all applications or programs.

Question 237

The cost of debt before tax

Answer 237

Bond yield to maturity

Question 238

``` The following data pertains to Blue Co.: Product Per unit data Sales price Variable cost A $70 $42 B 50 28 C 60 32 D 80 48 A customer of Blue is going to spend a total of $40,000 on one product only. Which of the following products would Blue prefer to sell to the customer? ``` A. B. C. D.

Answer 238

C The contribution from the sale of $40,000 of product C would be $18,667 (($40,000/$60) × ($60 − $32)).

Question 239

How does inflation distort reported income?

Answer 239

Depreciation is not reflective of current fixed-asset replace Fixed assets are valued at historical cost and, therefore, depreciation does not reflect the current cost of the related assets.

Question 240

``` Which of the following techniques consistently gives the best answer when evaluating investment projects that are mutually exclusive? The internal rate of return. Net present value. The payback method. The accounting rate of return. ```

Answer 240

Net present value. The net present value consistently provides the best solutions even when considering mutually exclusive projects.

Question 241

Zig Corp. provides the following information: ``` Pretax operating profit $300,000,000 Tax rate 40% Capital used to generate profits 50% debt, 50% equity $1,200,000,000 Cost of equity 15% Cost of debt 5% Which of the following represent Zig’s year-end economic value-added amount? $0 $60,000,000 $120,000,000 $180,000,000 ```

Answer 241

$60,000,000 EVA is equal to net operating profit after taxes minus the after-tax weighted-average cost of capital multiplied by invested capital. In this case, net operating profit after taxes is equal to $180,000,000 [$300,000,000 – (40% × $300,000,000)]. The weighted-average cost of capital is equal to 10% [(15% + 5%) ÷ 2]. EVA is equal to $180,000,000 – (10% × $1,200,000,000) = $60,000,000.

Question 242

The benefits of debt financing over equity financing are likely to be highest in which of the following situations? High marginal tax rates and few noninterest tax benefits. Low marginal tax rates and few noninterest tax benefits. High marginal tax rates and many noninterest tax benefits.

Answer 242

High marginal tax rates and few noninterest tax benefits. When the marginal tax rate is high and the company has few noninterest tax benefits, the deduction for interest on debt is maximized.

Question 243

``` Which of the following budgets provides information for preparation of the owner’s equity section of a budgeted balance sheet? Sales budget. Cash budget. Capital expenditures budget. Budgeted income statement. ```

Answer 243

Budgeted income statement. Owner’s equity is increased by net income

Question 244

Repatriation restrictions

Answer 244

Affect the parent's ability to get access to the cash of subsidiaries.

Question 245

American depository receipts

Answer 245

Thank negotiable certificates issued by a U.S. bank representing a specific number of shares in a foreign stock.

Question 246

Default risk premium.

Answer 246

The additional amount a borrower must pay to compensate a lender for the risk of default

Question 247

Foreign trade deficit

Answer 247

A measure of the excess of imports over exports for a country.

Question 248

When production levels are expected to decline within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following? Variable costs per unit Fixed costs per unit

Answer 248

By definition, variable costs per unit do not fluctuate within a relevant range. However, as production levels decline there will be fewer units over which to spread fixed costs, and fixed costs per unit will increase.

Question 249

Coefficient of correlation

Answer 249

An effective portfolio is one in which the investments are negatively correlated. Thus, when the return on some investments is declining the return on others is increasing.

Question 250

Financial budget

Answer 250

Plan to ensure that there are sufficient funds available for the operating needs of the company.

Question 251

Strategic plan

Answer 251

Exercise that sets the long-range goals of the company, including the consideration of external influences caused by others in the market.

Question 252

Operating budget

Answer 252

Plan that coordinates and communicates a company’s plan for the coming year to all departments and divisions.

Question 253

Capital budget

Answer 253

Forecasts future purchases and disposals of plant and equipment.

Question 254

Delphia technique

Answer 254

Involves developing consensus among a group about the future.

Question 255

``` If a CPA's client expected a high inflation rate in the future, the CPA would suggest to the client which of the following types of investments? Precious metals. Treasury bonds. Corporate bonds. Common stock. ```

Answer 255

Precious metals They would be expected to perform best when a high degree of inflation is expected.

Question 256

An unfavorable direct labor efficiency variance could be caused by a(n) Unfavorable variable overhead spending variance. Unfavorable material usage variance. Unfavorable fixed overhead volume variance. Favorable variable overhead spending variance.

Answer 256

Unfavorable material usage variance. An unfavorable material usage variance may be caused by defective materials, which also may cause an unfavorable labor efficiency variance.

Question 257

If a firm increases its cash balance by issuing additional shares of common stock, working capital Remains unchanged and the current ratio remains unchanged. Increases and the current ratio remains unchanged. Increases and the current ratio decreases.

Answer 257

Increases and the current ratio increases. Issuance of common stock increases cash and equity. Since cash is increased the current ratio is also increased.

Question 258

``` Which of the following costs would decrease if production levels were increased within the relevant range? Total fixed costs. Variable cost per unit. Total variable costs. Fixed costs per unit. ```

Answer 258

Fixed costs per unit. As the number of units produced increases, the fixed costs are spread over more products, which reduces the per-unit cost. Total fixed costs are constant over the relevant range. Variable cost per unit is fixed over the relevant range. Total variable costs would increase with an increase in production.

Question 259

Net present value (NPV) and internal rate of return (IRR) differ in that NPV assumes reinvestment of project cash flows at the cost of capital while IRR assumes reinvestment of project cash flows at the internal rate of return. NPV and IRR make different accept or reject decisions for independent projects. IRR can be used to rank mutually exclusive investment projects but NPV cannot.

Answer 259

NPV assumes reinvestment of project cash flows at the cost of capital while IRR assumes reinvestment of project cash flows at the internal rate of return. NPV 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.

Question 260

Cost of inspecting products on the production line by quality inspectors.

Answer 260

It is an example of an appraisal cost

Question 261

Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions.

Answer 261

It is an example of a prevention cost.

Question 262

Cost of reworking defective parts detected by the quality assurance group

Answer 262

It is an example of an internal failure. An internal failure cost is a cost incurred when substandard products are produced but discovered before shipping to the customer. Reworking defective parts is an example of an internal failure

Question 263

Cost of parts returned by customers

Answer 263

It is an example of an external failure cost.

Question 264

Which of the following changes would result in the highest present value? A $100 decrease in taxes each year for four years. A $100 decrease in the cash outflow each year for three years. A $100 increase in disposal value at the end of four years.

Answer 264

Which provides the most cash flow increase? A $100 decrease in taxes each year for four years A decrease in taxes by $100 each year for four years would result in the highest present value.

Question 265

Consumer price index (CPI)

Answer 265

Measured as the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period. It is therefore inappropriate for measuring what companies buy. The producer price index (PPI) is the measure used by companies. It is typically measured annually or more often. It reflects what consumers paid, not what they are willing to pay. Is not skewed by foreign currency translations.

Question 266

How should response to the fluctuations in seasonal demand be managed?

Answer 266

It should be directed at managing inventories and cash flow, not cost structure.

Question 267

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio? 0. 11 0. 78 1. 75 2. 11

Answer 267

0.78 The quick (acid) ratio is equal to (cash and cash equivalents plus accounts receivable plus marketable securities) divided by current liabilities, or .78 = ($100 million + $600 million) ÷ $900 million.

Question 268

Dual-rate allocation method

Answer 268

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.

Question 269

Step-down allocation method

Answer 269

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.

Question 270

Reciprocal allocation method

Answer 270

Also known as linear algebra method, which recognizes reciprocity among service departments by explicitly including the mutual services rendered among support departments.

Question 271

Which of the following events would decrease the internal rate of return of a proposed asset purchase? Decrease tax credits on the asset. Decrease related working capital requirements. Shorten the payback period. Use accelerated, instead of straight-line depreciation.

Answer 271

Decrease tax credits on the asset. An event that would decrease the internal rate of return would have to either decrease or extend the cash flows from, or increase the initial cost of, the investment. Answer A is correct because a decrease in tax credits would increase the initial cost of the investment. Using accelerated depreciation would result in less tax expense in the earlier years and, therefore, increase the rate of return.

Question 272

When calculating the cost of capital, the cost assigned to retained earnings should be Zero. Lower than the cost of external common equity. Equal to the cost of external common equity. Higher than the cost of external common equity.

Answer 272

Lower than the cost of external common equity. New common equity has floatation costs that increase its cost above retained earnings.

Question 273

``` A company produced and sold 100,000 units of a component with a variable cost of $20 per unit. First-quality components have a selling price of $50. The component’s specifications require its weight to be 20 kg. with a tolerance of +1 kg. Unfortunately, 1,200 of the units produced failed the company’s tolerance specifications. These 1,200 units were reworked at a cost of $12 per unit and sold as factory seconds at $45 each. Had the company had a quality assurance program in place such that all units produced conformed to specifications, the increase in the company’s contribution margin from this component would have been $14,400 $20,400 $21,600 $39,600 ```

Answer 273

$20,400 [$12 + ($50 – $45)] × 1,200 = $20,400. Increase would be what the firm recognized from sale versus what it could have, had the items been not defective.

Question 274

A manufacturing company’s primary goals include product quality and customer satisfaction. The company sells a product, for which the market demand is strong, for $50 per unit. Due to the capacity constraints in the Production Department, only 300,000 units can be produced per year. The current defective rate is 12% (i.e., of the 300,000 units produced, only 264,000 units are sold and 36,000 units are scrapped). There is no revenue recovery when defective units are scrapped. The full manufacturing cost of a unit is $29.50, including Direct material $17.50 Direct labor 4.00 Fixed manufacturing overhead 8.00 ``` The company’s designers have estimated that the defective rate can be reduced to 2% by using a different direct material. However, this will increase the direct material cost by $2.50 per unit to $20 per unit. The net benefit of using the new material to manufacture the product would be $(120,000) $120,000 $750,000 $1,425,000 ```

Answer 274

$750,000 This solution includes the variable cost of the 300,000 units produced as well as the $2.50 incremental variable cost for the new direct material. See supporting calculations. ``` Supporting calculations Original: Units produced 300,000 Good units (88%) 264,000 Revenue 264,000 × $50 $13,200,000 Variable production department costs 300,000 × $21.50 (6,450,000) Margin 6,750,000 New material: Units produced 300,000 Good units (98%) 294,000 Revenue 294,000 × $50 14,700,000 Variable production department costs 300,000 × $21.50 (6,450,000) 300,000 × $2.50 (750,000) Total variable costs (7,200,000) ``` Margin 7,500,000 Increase (decrease) $750,000

Question 275

``` A company has several long-term floating-rate bonds outstanding. The company's cash flows have stabilized, and the company is considering hedging interest-rate risk. Which of the following derivative instruments is recommended for this purpose? Structured short-term note. Forward contract on a commodity. Futures contract on a stock. Swap agreement. ```

Answer 275

Swap agreement. An appropriate swap agreement allows the company to exchange variable interest-rate debt cash flows for fixed-rate debt cash flows.

Question 276

Profit Margin

Answer 276

Net income / Net sales

Question 277

``` All else being equal, the breakeven point in units will be higher if Sales revenue is higher. Fixed costs are lower. Unit variable costs are higher. More units are sold. ```

Answer 277

Unit variable costs are higher. Higher unit variable costs would increase the breakeven point.

Question 278

``` A digital signature is used primarily to determine that a message is Unaltered in transmission. Not intercepted en route. Received by the intended recipient. Sent to the correct address. ```

Answer 278

Unaltered in transmission. The digital signature assures the recipient that the message came from a certain individual and it was not modified.

Question 279

If two companies, company X and company Y, are alike in all respects except that company X employs more debt financing and less equity financing than company Y does, which of the following statements is true? Company X has more net earnings variability than company Y. Company X has more operating earnings variability than company Y. Company X has less operating earnings variability than company Y. Company X has less financial leverage than company Y.

Answer 279

Company X has more net earnings variability than company Y. 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. The level of fixed financing charges does not affect operating income variability. The level of fixed financing charges does not affect operating income variability. Company X has greater, not less, financial leverage than company Y. Greater use of debt financing means that a company has greater financial leverage.

Question 280

``` Aba Caterers quotes a price of $30 per person for a dinner party. This price includes the 6% sales tax and the 15% service charge. Sales tax is computed on the food plus the service charge. The service charge is computed on the food only. At what amount does Aba price the food? $23.70 $24.61 $25.50 $28.20 ```

Answer 280

$24.61 The solutions approach is to algebraically reconstruct how Aba Caterers figured the total price per person. Three components make up the total price: the cost of the food alone (F), the service charge, and the sales tax. The service charge of 15% is computed on the food only (.15F). The sales tax of 6% is computed on the food plus the service charge [.06(F + .15F)]. The equation can be constructed as follows: F + .15F + .06 (F + .15F) = $30.00 Solving algebraically 1.219F = $30.00 F = $24.61

Question 281

A manufacturing company is preparing the schedules that comprise its master budget. The forecasted production in units of finished goods for the first four months of the coming year are as follows: ``` Month Production (in units) January 400,000 February 380,000 March 420,000 April 440,000 ``` Additional details regarding inventory requirements and direct material purchases are as follows. The company pays for the direct material purchases in the month of the purchase and takes all discounts. Item Requirement Month-end direct materials inventory requirement 25% of the next month’s production requirements Direct material required per unit of finished good One (1) pound of direct material Invoice price (cost) of direct material $5 per pound Purchase terms for direct material 2/10, n/30 ``` The cash that would be required to pay for direct material purchases during the month of February would be $1,813,000 $1,862,000 $1,911,000 $1,950,000 ```

Answer 281

$1,911,000 This response is payment for February purchases net of discount ($1,950,000 × .98 = $1,911,000), as calculated below. ``` January Total RM pound for production 380,000 Invoice cost per pound $___ 5 Total DM cost in $ $1,900,000 Less 2% cash discount 38,000 $1,862,000 ``` February Forecasted production 380,000 DM pounds/FG unit 1.0 Total DM pounds for production 380,000 + Ending DM requirements 105,000 Total DM needs 485,000 − Beg DM inventory 95,000 Total DM unit purchases 390,000 Invoice cost per pound $ 5 Total DM purchases in $ 1,950,000 Less 2% cash discount 39,000 February CD for DM purchases $1,911,000

Question 282

In practice, dividends Usually exhibit greater stability than earnings. Fluctuate more widely than earnings. Tend to be a lower percentage of earnings for mature firms. Are usually set as a fixed percentage of earnings.

Answer 282

Usually exhibit greater stability than earnings. Firms tend to establish a stable dividend policy and are hesitant to decrease dividends. Dividends tend to be a higher percentage of earnings for mature firms. Dividends are not usually set as a fixed percentage of earnings.

Question 283

What is the formula for calculating the profitability index of a project? Subtract actual after-tax net income from the minimum required return in dollars. Divide the present value of the annual after-tax cash flows by the original cash invested in the project. Divide the initial investment for the project by the net annual cash inflow. Multiply net profit margin by asset turnover.

Answer 283

Divide the present value of the annual after-tax cash flows by the original cash invested in the project. The profitability index is calculated by dividing the present value of the after-tax cash flows by the original cash invested.

Question 284

Sales

Answer 284

Variable costs + fixed costs + desired income.

Question 285

The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company’s accounts receivable turnover ratio? Pledging the accounts receivable to a finance company. Changing customer terms to 1/10, net 30. Entering into a factoring agreement with a finance company. Changing customer terms to 3/20, net 30.

Answer 285

Entering into a factoring agreement with a finance company. Factoring the receivables involves selling them and turnover would be increased. Pledging involves borrowing funds on the receivables, not improving turnover.

Question 286

A manufacturing company employs a process cost system. The company’s product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2.; The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below. Beginning work in process in Department 2 (90% complete with respect to conversion costs) 14,000 Transferred in from Department 1 76,000 Completed and transferred to finished goods 80,000 Spoiled units—all normal 1,500 Ending work in process in Department 2 (60% complete with respect to conversion costs) 8,500 ``` If the manufacturing company uses the weighted-average method, the equivalent units for direct materials in Department 2 for the current month would be 67,500 80,000 81,500 90,000 ```

Answer 286

81,500 This answer is correct. This is the correct calculation for direct material equivalent units. ``` Supporting Calculations Physical schedule Units to account for: Beginning WIP 14,000 Trans-in Dept. 1 76,000 Total units to account for 90,000 ``` ``` Units accounted for: Units completed (80,000) From beginning WIP (90%) 14,000 From current production 66,000 (80,000 – 14,000) Total units completed 80,000 80,000 Spoiled 1,500 1,500 Ending WIP (60%) 8,500 Total units accounted for 90,000 81,500 ```

Question 287

The following information is available on Crain Co.’s two product lines: Chairs Tables Sales $180,00 $48,000 Variable cost (96,000) (30,000) Contribution margin 84,000 18,000 Fixed costs: Avoidable (36,000) (12,000) Unavoidable (18,000) (10,800) Op inc (loss) $30,000 ($4,800) ``` Assuming the tables line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount? $13,200 $18,000 $24,000 $28,800 ```

Answer 287

$18,000 To make the determination you would compare the amount of revenue from renting the factory space to the contribution margin less the avoidable costs from producing tables. The unavoidable costs allocated to the tables line would be incurred regardless of the decision and therefore are irrelevant. This answer is correct because income would increase by $18,000 [$24,000 rent − ($18,000 contribution margin − $12,000 avoidable costs].

Question 288

Brewster Co. has the following financial information: Fixed costs $20,000 Variable costs 60% Sales price $50 What amount of sales is required for Brewster to achieve a 15% return on sales? $ 33,333 $ 50,000 $ 80,000 $133,333

Answer 288

$ 80,000 ``` This answer is correct. The amount is calculated below: Sales = Variable costs + fixed costs + desired income $50X = $30X + $20,000 + .15($50X) .85($50X) = $30X + $20,000 $42.50X = $30X + $20,000 $12.50X = $20,000 X = 1,600 units Sales = 1,600 units × $50 Sales = $80,000 ```

Question 289

``` A hospital is comparing last year's emergency rescue services expenditures to those from 10 years ago. Last year's expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5 as compared to 121.3 ten years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services? 38% increase. 13.8% increase. 0.6% decrease. 18.1% decrease. ```

Answer 289

0.6% decrease. This answer is correct because expenses decreased by 0.6% after adjusting for inflation. The cost 10 years ago adjusted for inflation is equal to $101,127 [$72,800 × (168.5 ÷ 121.3)]. This year's cost of $100,500 is 0.6% less than $101,127.

Question 290

Which of the following control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system? Segregation of duties. Ensure proper authorization of transactions. Adequately safeguard assets. Independently verify the transactions.

Answer 290

Independently verify the transactions. It is essential to test a newly implemented system.

Question 291

``` A defense contractor for a government space project has incurred $2,500,000 in actual design costs to date for a guidance system whose total budgeted design cost is $3,000,000. If the design phase of the project is 60% complete, what is the amount of the contractor’s current overrun/savings on this design work? $300,000 savings. $500,000 overrun. $500,000 savings. $700,000 overrun. ```

Answer 291

$700,000 overrun. This answer is correct. ($3,000,000) × (0.6) – $2,500,000 = $700,000.

Question 292

Estimated overrun

Answer 292

Budget cost – Actual cost.

Question 293

Transfer price

Answer 293

The country where the producer is located has the lower tax rate, so the overall tax burden is lowered by maximizing the transfer price. This will maximize reported taxable income in the lower tax country (by maximizing revenue) and minimize reported taxable income in the lower tax country (by maximizing expenses). A LOWER TRANSFER PRICE RESULTS IN HIGHER TOTAL TAXES PAID. The country where the producer is located has the lower tax rate, so the overall tax burden is higher when the minimum transfer price is used. With a lower transfer price, reported taxable income will be lower in the lower tax country and reported taxable income will be maximized in the higher tax country, since expenses there will be minimized. Establishing a transfer price that results in the same profit margin for both operations will not minimize taxes. As explained in the correct answer, any transfer price lower than the maximum will result in higher total taxes paid.

Question 294

Dean Company is preparing a flexible budget for 2012 and the following maximum capacity estimates for department M are available: ``` At maximum capacity Direct manufacturing labor hours 60,000 Variable factory overhead $150,000 Fixed factory overhead $240,000 Assume that Dean’s normal capacity is 80% of maximum capacity. What would be the total factory overhead rate, based on direct manufacturing labor hours, in a flexible budget at normal capacity? $6.00 $6.50 $7.50 $8.13 ```

Answer 294

$7.50 This answer is correct. The variable portion of the factory overhead rate can be computed by dividing variable factory overhead (at maximum capacity) by direct manufacturing labor hours (at maximum capacity). $150,000/60,000 = $2.50 Note that the variable overhead rate is constant over the relevant range of activity. Since total fixed overhead is constant over the relevant range, the budgeted fixed overhead is divided by direct manufacturing labor hours at 80% of maximum capacity, or 48,000 hours (60,000 × 80%). $240,000/48,000 = $5.00 The total factory overhead rate is $2.50 plus $5.00, or $7.50 per direct manufacturing labor hour.

Question 295

``` A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers. Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the company at any point in time, assuming a 365-day year? $684.93 $1,808.22 $27,123.30 $45,205.48 ```

Answer 295

$45,205.48 The average accounts receivable balance is calculated as: Credit sales per day x Average collection period = (10,000 units × $66 unit price) / 365 × 25 days = $45,205.48.

Question 296

Which of the following would lessen internal control in a computer processing system? The computer librarian maintains custody of computer program instructions and detailed listings. Computer operators have access to operator instructions and detailed program listings. The control group is solely responsible for the distribution of all computer output. Computer programmers write and debug programs which perform routines designed by the systems analyst.

Answer 296

Computer operators have access to operator instructions and detailed program listings. Computer operators who have access to detailed program listings have the opportunity to modify the programs. The computer librarian should maintain custody of program instructions and detailed listings to strengthen controls in a computer system. The control group should be responsible for the distribution of all computer output to strengthen controls in a computer system. Computer programmers should write and debug programs which perform routines designed by the systems analyst in order to strengthen controls in a computer system.

Question 297

Segmented statements, prepared in a responsibility accounting reporting format, can be useful in performance evaluation and in operational decision making. An outline of a segmented income statement prepared in responsibility accounting format and segmented by product line is presented below. Total company Product line A Product line B Revenue from sales $xxx $xxx $xxx Variable production costs xxx xxx xxx Margin I $xxx $xxx $xxx Variable selling and administrative costs xxx xxx xxx Margin II $xxx $xxx $xxx Traceable discretionary fixed costs xxx xxx xxx Margin III $xxx $xxx $xxx Traceable committed (infrastructure) fixed costs xxx xxx xxx Margin IV $xxx $xxx $xxx Common fixed costs xxx Margin V $xxx The common fixed costs which appear on this segmented income statement refer to costs which Are due to the production of finished goods. Are incurred by each of the individual segments in the conduct of normal business. Are incurred at one level for the benefit of two or more segments. Can be influenced by a single segment manager over a short-term time period.

Answer 297

Are incurred at one level for the benefit of two or more segments. This is the correct definition of common cost. A common cost arises from operating a facility, operation, or activity that is shared by two or more managers.

Question 298

``` A manufacturing company is attempting to implement a just-in-time (JIT) purchase policy system by negotiating with its primary suppliers to accept long-term purchase orders which result in more frequent deliveries of smaller quantities of raw materials. If the JIT purchase policy is successful in reducing the total inventory costs of the manufacturing company, which of the following combinations of cost changes would be most likely to occur? Cost category to increase Cost category to decrease Purchasing costs Stockout costs Purchasing costs Quality costs Quality costs Ordering costs Stockout costs Carrying costs ```

Answer 298

Increase in stockout costs and decrease in carrying costs In this situation, the company will be receiving fewer materials at any point in time, increasing the likelihood of stockout; at the same time, the average inventory will be less, resulting in a reduction in the carrying costs.

Question 299

The production volume variance is due to Inefficient or efficient use of direct labor hours. Efficient or inefficient use of variable overhead. Difference from the planned level of the base used for overhead allocation and the actual level achieved. Excessive application of direct labor hours over the standard amounts for the output level actually achieved.

Answer 299

Difference from the planned level of the base used for overhead allocation and the actual level achieved. The production volume variance is caused by the fact that production activity is different from planned.

Question 300

Reorder point

Answer 300

Lead time x Usage per day expected The most common approach to setting the optimum safety-stock level is to examine previous lead time periods to determine the probabilities of running out of stock (a stockout) for different assessed levels of safety stock. Cost is used to determine the amount to be ordered, known as the economic order quantity, NOT when to reorder.

Question 301

``` A company has an outstanding one-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan? 8% 10% 20% 28% ```

Answer 301

$10 The effective rate is calculated by dividing the interest amount by the outstanding balance less the compensating balance requirement. The annual interest amount is equal to $40,000 (8% × $500,000) and the compensating balance amount is equal to $100,000 (20% × $500,000). The effective interest rate is equal to 10% [$40,000 ÷ ($500,000 – $100,000)].

Question 302

``` Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and an operating loss of $10,000. By how much would Koby have to increase its sales in order to achieve an operating income of 10% of sales? $400,000 $251,000 $231,000 $200,000 ```

Answer 302

$200,000 The solutions approach is to use the standard breakeven formula and solve for sales (S). Variable costs are $150,000 at a sales level of $200,000; therefore, variable costs are .75S ($150,000/$200,000). S = VC + FC + Expected profit S = .75S + $60,000 + .10S .15S = $ 60,000 S = $400,000. Remember that the requirement was the increase in sales to achieve a profit of 10% of sales. The correct answer is $200,000 ($400,000 total sales needed less $200,000 present sales level).

Question 303

``` One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6. What is the effect on profits of processing product Y further into product Z? $60 increase. $30 increase. No change. $60 decrease. ```

Answer 303

No change. Joint costs should be ignored in deciding whether to sell or process a product further. The sell or process further decision should be based on incremental revenues and costs. Since Z is processed only from product Y, we only compare the incremental costs and revenues between Z and Y. Y’s revenue is $120, whereas Z’s revenue is $180, or $60 more. In addition, Z’s cost is $60 more, which causes no change in profits when product Y is further processed into product Z.

Question 304

``` A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor usage variance? $25,000 favorable. $25,000 unfavorable. $30,000 favorable. $30,000 unfavorable. ```

Answer 304

$30,000 favorable. This answer is correct because the direct labor usage variance is calculated by multiplying the standard labor rate ($15) by the difference between the actual hours (3,000 hours) and the standard hours, which is 5,000 hours (10,000 units × .5 hours per unit). Therefore, the direct labor usage variance is equal to $30,000 favorable [$15 × (3,000 – 5,000)].

Question 305

Direct labor usage variance

Answer 305

DLU is calculated by multiplying the standard labor rate by the difference between the actual hours and the standard hours.

Question 306

``` A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year? 21,000 21,600 21,960 22,600 ```

Answer 306

22,600 Last year the company sold enough cups to make $5,040 in net income. Net income before taxes is equal to $8,400 [$5,040 ÷ .60 (1 − 40% tax rate)]. Therefore, the unit sales last year is equal to 20,000 (breakeven number) plus $8,400 ÷ $5.25, the contribution margin, or 21,600 units. Since the company expects to sell 1,000 more units this year, 22,600 is the correct answer.

Question 307

Sales

Answer 307

FC + VC + NI

Question 308

``` In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are Prevention costs. Appraisal costs. Internal failure costs. External failure costs. ```

Answer 308

Appraisal costs. Appraisal costs are costs associated with quality control and include testing and inspection. Prevention costs involve any quality activity designed to do the job right the first time. Internal failures occur when substandard products are produced but discovered before shipment to the customer. External failure costs are incurred for products that do not meet requirements of the customer and have been shipped to the customer.

Question 309

A company manufactures a product that has the direct material standard cost presented below. Budgeted and actual information for the current month for the manufacture of the finished product and the purchase and use of the direct material are also presented. Standard cost for direct material 1.60 lb. @ $2.50 per lb. = $4.00 Budget Actual Finished goods (in units) 30,000 32,000 Direct material usage (in pounds) 48,000 51,000 Direct material purchases (in pounds) 48,000 50,000 Total cost of direct material purchases $120,000 $120,000 The direct material price variance for the current month is $7,500 unfavorable. Zero. $5,000 favorable. $5,100 favorable.

Answer 309

$5,000 favorable. This alternative correctly calculates the direct material price variance as the difference between the standard ($2.50) and actual cost ($120,000 ÷ 50,000 = $2.40) of direct materials per pound ($2.50 – $2.40 = $0.10) times the actual pounds purchased (50,000).

Question 310

A distributed processing environment would be most beneficial in which of the following situations? Large volumes of data are generated at many locations and fast access is required. Large volumes of data are generated centrally and fast access is not required. Small volumes of data are generated at many locations, fast access is required, and summaries of the data are needed promptly at a central site. Small volumes of data are generated centrally, fast access is required, and summaries are needed monthly at many locations.

Answer 310

Large volumes of data are generated at many locations and fast access is required. This answer is correct because a distributed data processing system is useful when processing is done in multiple locations. It enables processing of a large volume of transactions and fast access to data.

Question 311

Most client/server applications operate on a three-tiered architecture consisting of which of the following layers? Desktop client, application, and database. Desktop client, software, and hardware. Desktop server, application, and database. Desktop server, software, and hardware.

Answer 311

Desktop client, application, and database. This answer is correct because the layers consist of the desktop client, an application server, and a database server.

Question 312

Which of the following items would be most critical to include in a systems specification document for a financial report? Cost-benefit analysis. Data elements needed. Training requirements. Communication change management considerations.

Answer 312

Data elements needed. A systems specification document should include a description of the data elements needed.

Question 313

Horizontal merger

Answer 313

An oligopoly is formed by the combination of firms in the same line of business, as in a horizontal merger. An oligopoly is a market for a good or service that is dominated by a small number of firms.

Question 314

Conglomerate

Answer 314

Occurs between companies in totally different industries so it would not create on oligopoly.

Question 315

Divestiture

Answer 315

The sale of a firm or a part of a firm. It could reduce market dominance but would not increase it.

Question 316

Vertical merger

Answer 316

Occurs between a firm and its suppliers or customers. It would not result in domination of a product market.

Question 317

Wexford Co. has a subunit that reported the following data for year 1: ``` Asset (investment) turnover 1.5 times Sales $750,000 Return on sales 8% The imputed interest rate is 12%. What is the division residual income for year 1? $60,000 $30,000 $20,000 $0 ```

Answer 317

$0 If asset turnover is equal to 1.5 times, invested assets is equal to $500,000 ($750,000 sales ÷ 1.5 asset turnover). This answer is correct because residual income is equal to $0 [($750,000 × 8%) − ($500,000 invested assets × 12%)].

Question 318

A company uses a job-order cost system in accounting for its manufacturing operations. Because its processes are labor-oriented, it applies manufacturing overhead on the basis of direct labor hours (DLH). Normal spoilage is defined as 4% of the units passing inspection. The company includes a provision for normal spoilage cost in its budgeted manufacturing overhead and manufacturing overhead rate. Data regarding a job consisting of 30,000 units are presented below. Volume Data: Total units in job 30,000 Units failing inspection (spoiled) 1,500 Good units passing inspection 28,500 ``` Cost Data: Per unit Total cost Direct materials $ 18.00 $ 540,000 Direct labor ``` 2 DLH @ $16.00/DLH 32.00 960,000 Manufacturing overhead ``` 2 DLH @ $30.00/DLH 60.00 1,800,000 Total $110.00 $3,300,000 ``` ``` The 1,500 units that failed inspection required .25 DLH of direct labor hours per unit to rework the units into good units. What is the proper charge to the Loss from Abnormal Spoilage account? $1,440 $4,140 $3,450 Zero ```

Answer 318

$4,140 This answer is correct because manufacturing overhead is appropriately charged for the normal spoilage (provision is made for normal spoilage in manufacturing overhead) and the correct spoilage and rework cost calculations are used [Normal: 1,140 × ($4.00 + $7.50); Abnormal: 360 × ($4.00 + $7.50)] = $4,140. Supporting Calculations Normal/Abnormal Spoilage Calculation: Correct Incorrect Total spoilage in units 1,500 1,500 Normal spoilage calculation 28,500 × .04 1,140 30,000 × .04 1,200 Abnormal spoilage 360 300 Rework Cost per Unit Calculation: Direct labor cost per unit (.25 × $16.00) $ 4.00 $ 4.00 Manufacturing overhead (.25 × $30.00) 7.50 -- Total cost per unit $11.50 $ 4.00

Question 319

Crisper, Inc. plans to sell 80,000 bags of potato chips in June, and each of these bags requires five potatoes. Pertinent data includes: ``` Bags of potato chips Potatoes Actual June 1 inventory 15,000 bags 27,000 potatoes Desired June 30 inventory 18,000 bags 23,000 potatoes ``` ``` What number of units of raw material should Crisper plan to purchase? 381,000 389,000 411,000 419,000 ```

Answer 319

411,000 This answer is correct. To calculate the number of units of raw materials to be purchased in June, we must first determine the production of bags of chips for the month, which is equal to 83,000 bags (80,000 sales + 18,000 desired ending inventory – 15,000 beginning inventory). The raw material required for June production would then be calculated as 415,000 (83,000 × 5). Finally, the required raw material purchase would be calculated as 411,000 [415,000 + 23,000 (desired ending inventory) – 27,000 (beginning inventory)].

Question 320

Raw materials needed

Answer 320

Projected sales – Beginning inventory + Desired ending inventory.

Question 321

The purchase of treasury stock with a firm’s surplus cash Increases a firm’s assets. Increases a firm’s financial leverage. Increases a firm’s interest coverage ratio. Dilutes a firm’s earnings per share.

Answer 321

Increases a firm’s financial leverage. Purchase of treasury stock decreases the firm’s assets and stockholders’ equity. Therefore it increases the firm’s financial leverage.

Question 322

``` A company with three products classifies its costs as belonging to five functions: design, production, marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to the three products. The direct costs of each of the five functions are traced directly to the three products. The indirect costs of each of the five business functions are collected into five separate cost pools and then assigned to the three products using appropriate allocation bases. The allocation base that would most likely be the best for allocating the indirect costs of the distribution function is Number of customer phone calls. Number of shipments. Number of salespersons. Dollar sales volume. ```

Answer 322

Number of shipments. The number of shipments would be an appropriate base because there could be a cause and effect relationship between the number of shipments and distribution costs.

Question 323

The Polly Company wishes to determine the amount of safety stock that it should maintain for Product D that will result in the lowest cost. The following information is available: Stockout cost $80 per occurrence Carrying cost of safety stock $2 per unit Number of purchase orders 5 per year The available options open to Polly are as follows: ``` Units of safety stock Probability of running out of safety stock 10 50% 20 40% 30 30% 40 20% 50 10% 55 5% ``` ``` The number of units of safety stock that will result in the lowest cost is 20 40 50 55 ```

Answer 323

55 This answer is correct. The solutions approach is to compute the total cost for each of the four choices as illustrated below. The carrying cost is $2 for each unit of safety stock. The stockout cost per year equals the probability of running out of inventory times $80 per stockout times five orders per year. The lowest total cost of carrying safety stock and stockouts is $130 [(55 units × $2/unit) + ($80 × 5% × 5 reorders)]. Thus, 55 units of safety stock should be maintained.

Question 324

Invested assets

Answer 324

Sales / asset turnover

Question 325

The following information is available on market interest rates: The risk-free rate of interest 2% Inflation premium 1% Default risk premium 3% Liquidity premium 2% Maturity risk premium 1% What is the market rate of interest on a one-year U.S. Treasury bill? 3% 5% 6% 7%

Answer 325

3% This answer is correct because a Treasury bill has a rate of the risk-free rate plus the expected rate of inflation.

Question 326

On January 1, 2012, Colt Company issued 10-year bonds with a face amount of $1,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.463 0.386 Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145 The total issue price (rounded) of the bonds was $1,000,000 $ 954,600 $ 922,800 $ 877,600

Answer 326

The issue price must be calculated using the yield rate. This answer is correct. The issue price of bonds is equal to the present value (PV) of the maturity value plus the PV of the interest annuity. The PV must be computed using the yield rate. The computation is Amount PV Factor PV $1,000,000 × .386 = $386,000 80,000 × 6.145 = 491,600 Total issue price $877,600 The interest amount above ($80,000) is the principal ($1,000,000) times the stated rate (8%).

Question 327

The Cutting Department is the first stage of Mark Company’s production cycle. Conversion costs for this department were 80% complete as to the beginning work in process and 50% complete as to the ending work in process. Information as to conversion costs in the Cutting Department for January 2012 is as follows: Units Conversion costs Work in process at January 1, 2012 25,000 22,000 Units started and costs incurred during January 135,000 $143,000 Units completed and transferred to next department during January 100,000 ``` Using the FIFO method, what was the conversion cost of the work in process in the Cutting Department at January 31, 2012? $33,000 $38,100 $39,000 $45,000 ```

Answer 327

$39,000 This answer is correct because first, the number of units in ending work in process must be computed: Work in process BWIP 25,000 100,000 Units completed Units started 135,000 ? EWIP Units to account for 160,000 160,000 Units accounted for EWIP = 160,000 units to account for – 100,000 units completed = 60,000 units. The next step is to compute equivalent units of production (EU) under the FIFO method: Units completed 100,000 EU in ending WIP (60,000) (50%) 30,000 130,000 EU in beginning WIP (25,000) (20,000) (80%) EU of production 110,000 Conversion cost per unit for the current period is $143,000/110,000 or $1.30 per equivalent unit. The cost of the ending WIP equals the equivalent units in ending WIP times the conversion cost per unit of $1.30: (30,000) ($1.30) = $39,000

Question 328

The excess present value index

Answer 328

The present value of future net cash inflows divided by the initial investment times 100

Question 329

Mason Company uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of direct-labor dollars. This rate was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and direct labor added to jobs were as follows: ``` No. 150 No. 151 No. 152 Raw materials $ X $4,000 $1,000 Direct labor 1,500 5,000 2,500 ``` Actual manufacturing overhead for the month of August was $20,000. During the month, Mason completed Job Nos. 150 and 151. For August, manufacturing overhead was Overapplied by $4,000 Underapplied by $7,000 Underapplied by $2,000 Underapplied by $1,000 This answer is correct because predetermined overhead rate is based on 200% of direct-labor dollars. The sum of the direct-labor dollars for the month of August was $9,000. To find manufacturing overhead applied for August, the $9,000 direct-labor dollars is multiplied by 200%, which is $18,000. Therefore, subtracting applied manufacturing overhead from $20,000, actual manufacturing overhead accounts for $2,000 of underapplied manufacturing overhead in the month of August.

Answer 329

Underapplied by $2,000 This answer is correct because predetermined overhead rate is based on 200% of direct-labor dollars. The sum of the direct-labor dollars for the month of August was $9,000. To find manufacturing overhead applied for August, the $9,000 direct-labor dollars is multiplied by 200%, which is $18,000. Therefore, subtracting applied manufacturing overhead from $20,000, actual manufacturing overhead accounts for $2,000 of underapplied manufacturing overhead in the month of August.

Question 330

``` The ability to add or update documentation items in data dictionaries should be restricted to Database administrators. System programmers. System librarians. Application programmers. ```

Answer 330

Database administrators Access must be controlled to ensure integrity of documentation although "read" access should be provided to other parties as it is important for applications development and maintenance.

Question 331

Gross margin

Answer 331

Gross profit / sales

Question 332

Gross profit

Answer 332

Sales - cost of goods sold

Question 333

Which one of the following factors might cause a firm to increase the debt in its financial structure? An increase in the corporate income tax rate. Increased economic uncertainty. An increase in the federal funds rate. An increase in the price-earnings ratio.

Answer 333

An increase in the corporate income tax rate. Interest is tax-deductible. Therefore, an increase in income tax rate would reduce the after-tax cost of debt as a form of financing.

Question 334

Companies can reduce the potential loss from host-government expropriation of their foreign subsidiaries by Financing the subsidiary with local-country capital. Structuring operations so that the subsidiary has value as a stand-alone company. Reducing the cost of capital to reflect political risk when assessing foreign investment opportunities.

Answer 334

Financing the subsidiary with local-country capital. To protect their investment, local capital would be preferred. The parent company could then default on the local creditors in the event that the subsidiary is expropriated from them. The creditors’ claims would have to be satisfied by the expropriating host government.

Question 335

A company has a foreign-currency-dominated trade payable, due in 60 days. In order to eliminate the foreign exchange risk associated with the payable, the company could Sell foreign currency forward today. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time. Buy foreign currency forward today. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds in a domestic bank deposit until the invoice payment date.

Answer 335

Buy foreign currency forward today 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.

Question 336

The marginal propensity

Answer 336

The percent of each additional dollar that is save Change in CONSUMPTION/Change in income

Question 337

The direct purchasing budget

Answer 337

Per unit cost times (sales + budgeted ending finished goods − budgeted beginning finished goods + budgeted ending finished goods − budgeted beginning direct materials inventory).

Question 338

The variable portion of the semivariable cost of electricity for a manufacturing plant is a

Answer 338

Cost that attaches to the physical units is termed a product cost. Product costs would include direct materials, direct manufacturing labor, and manufacturing overhead. Conversion cost is the cost involved in converting the direct materials into a finished product. It is composed of direct manufacturing labor and manufacturing overhead. Any cost that does not attach to the physical units would be termed a period cost and would be expensed as incurred. Therefore, a cost is either a period or a product cost. Electricity cost, whether variable or fixed, would be included in manufacturing overhead and classified as conversion costs, and therefore cannot be classified as a period cost.

Question 339

``` Which of the following Federal Reserve policies would increase money supply? Change the multiplier effect. Increase reserve requirements. Reduce the discount rate. Sell more U.S. Treasury bonds. ```

Answer 339

Reduce the discount rate. A reduction in the discount rate would encourage banks to borrow more from the Federal Reserve and this would increase the money supply. An increase in the reserve requirements would decrease the money supply. Selling U.S. Treasury bonds would decrease the money supply

Question 340

A bank wants to reject erroneous checking account numbers to avoid invalid input. Management of the bank was told that there is a method that involves adding another number at the end of the account numbers and subjecting the other numbers to an algorithm to compare with the extra numbers. What technique is this? Optical character recognition (OCR) software. Check digit. Validity check. Field (format) check.

Answer 340

Check digit An extra reference number that follows an identification number and bears a mathematical relationship to the other digits. The identification number can be subjected to an algorithm and compared to the check digit.

Question 341

Validity check

Answer 341

The computer compares input reference data to tables or master files to make sure that valid codes are being used.

Question 342

Field check

Answer 342

A computer checks attributes such as character content, length, or sign of the individual data fields.

Question 343

Free cash flow

Answer 343

Net operating profit after taxes plus noncash expenses less capital expenditures and the change in working capital requirements.

Question 344

Market value-added

Answer 344

Equal to the market value of the firm minus the original investment.

Question 345

Economic value-added.

Answer 345

Equal to net operating profit after taxes minus the cost of capital.

Question 346

The law of diminishing marginal utility states that Marginal utility will decline as a consumer acquires additional units of a specific product. Total utility will decline as a consumer acquires additional units of a specific product. Declining utilities cause the demand curve to slope upward. Consumers’ wants diminish with the passage of time.

Answer 346

Marginal utility will decline as a consumer acquires additional units of a specific product. The principle of diminishing marginal utility states that marginal utility declines with each additional unit the consumer receives. Total utility will increase with each additional unit but not to the same extent.

Question 347

A manufacturing company employs a process cost system. The company’s product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2. The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below. Beginning work in process in Department 2 ``` (90% complete with respect to conversion costs) 14,000 Transferred in from Department 1 76,000 Completed and transferred to finished goods 80,000 Spoiled units—all normal 1,500 Ending work in process in Department 2 ``` (60% complete with respect to conversion costs) 8,500 ``` If the manufacturing company uses the FIFO (first-in, first-out) method, the equivalent units for conversion costs in Department 2 for the current month would be 72,500 74,000 85,200 86,600 ```

Answer 347

74,000 This answer is correct. This response uses the correct calculations. ``` Supporting Calculations Physical schedule Units to account for: Beginning WIP 14,000 Trans-in Dept. 1 76,000 Total units to account for 90,000 ``` ``` Units accounted for: Units completed (80,000) From beginning WIP (90%) 14,000 1,400 From current production 66,000 66,000 (80,000 – 14,000) Total units completed 80,000 Spoiled 1,500 1,500 Ending WIP (60%) 8,500 5,100 Total units accounted for 90,000 74,000 Question 18: RMCB-0011 ```

Question 348

``` If the dollar price of the euro rises, which of the following will occur? The dollar depreciates against the euro. The euro depreciates against the dollar. The euro will buy fewer European goods. The euro will buy fewer U.S. goods. ```

Answer 348

The dollar depreciates against the euro If the euro increases in value in terms of dollars, the dollar depreciates The dollar goes down in value.

Question 349

A company employs a process costing system for its two-department manufacturing operation using the first-in, first-out (FIFO) inventory method. When units are completed in department 1, they are transferred to department 2 for completion. Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion. The specific identification method is used to account for lost units. Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected. Defective units have minimal value, and the company sells them without any further processing for whatever it can. Generally the amount collected equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for department 2, in units for the current month, is presented below. Physical flow (output units) Beginning inventory (60% complete with respect to conversion) 20,000 Units transferred in from department 1 180,000 Total units to account for 200,000 Units completed in department 2 during the month 170,000 Units found to be defective at inspection 5,000 Ending inventory (80% complete with respect to conversion) 25,000 Total units accounted for 200,000 ``` The equivalent units for direct materials for the current month would be 175,000 units. 181,500 units. 195,000 units. 200,000 units. ```

Answer 349

195,000 units This answer is correct. This alternative is the correct equivalent unit calculation for direct material. It appropriately provides for the recognition of the units that have to be added to both beginning and ending work-in-process as well as the units completed, but ignores the materials that would not be added to the defective units. Supporting Calculations ``` Units completed From beginning WIP 20,000 From current production 150,000 Defective units   Ending WIP 25,000 Equivalent units 195,000 ```

Question 350

Receivables turnover

Answer 350

Equal to net sales divided by average receivables

Question 351

``` Which of the following is assigned to goods that were either purchased or manufactured for resale? Relevant cost. Period cost. Opportunity cost. Product cost. ```

Answer 351

Product cost The requirement is to identify the type of costs that are assigned to goods for resale. This answer is correct because product costs are assigned to such goods to move the costs to cost of sales when they are sold and to value inventory for financial statement purposes.

Question 352

``` Which of the following structures refers to the collection of data for all vendors in a relational data base? Record. Field. File. Byte. ```

Answer 352

File A record would have information about one vendor. A field is an element of a record. A byte is a piece of a field.

Question 353

Which of the following is a characteristic of a flexible budget? Provides budgeted numbers for various activity levels. Allows for modification during the budgeted period. Isolates the impact of variable costs on the overall budget. Can be utilized by several product divisions.

Answer 353

Provides budgeted numbers for various activity level

Question 354

``` Financing some current assets with long-term debt is considered to be An unsound financing policy. A conservative financing policy. An aggressive financing policy. A policy used to maximize net income. ```

Answer 354

A conservative financing policy. Financing permanent working capital with long-term debt is considered to be a conservative policy. Long-term financing is typically more expensive than short-term financing.

Question 355

Which of the following areas of responsibility are normally assigned to a systems programmer in a computer system environment? Systems analysis and applications programming. Data communication hardware and software. Operating systems and compilers. Computer operations.

Answer 355

Operating systems and compilers. Systems programmers are given responsibility for maintaining system software, including operating systems and compilers.

Question 356

Debt financing

Answer 356

The least costly and using it would tend to maximize earnings per share

Question 357

Paulson Company had inventories at the beginning and end of 2012 as follows: ``` 1/1/12 12/31/12 Raw material (RM) $55,000 $65,000 Work in process (WIP) 96,000 80,000 Finished goods (FG) 50,000 85,000 ``` During 2012 the following costs were incurred: ``` Raw materials purchased $400,000 Direct manufacturing labor payroll 220,000 Factory overhead 330,000 ``` ``` Paulson’s cost of goods sold for 2012 was $921,000 $956,000 $966,000 $979,000 ```

Answer 357

$921,000 This answer is correct because for a manufacturing firm, the calculation for cost of goods sold is calculated as beginning FG plus the cost of goods manufactured less ending FG. Thus, cost of goods sold is Beg. Finished goods $50,000 Add Cost of goods mfd.: Beg. WIP $96,000 + Raw materials used* 390,000 + Direct manufacturing labor 220,000 + Factory overhead 330,000 – End WIP (80,000) 956,000 Less End. Finished goods (85,000) Cost of goods sold $921,000 *(55,000 + 400,000 – 65,000)

Question 358

``` Quick Co. was analyzing variances for one of its operations. The initial budget forecast production of 20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced 19,000 units during the year. Actual variable manufacturing costs were $210,000. What amount would be Quick’s flexible budget variance for the year? $10,000 favorable. $20,000 favorable. $10,000 unfavorable. $20,000 unfavorable. ```

Answer 358

$20,000 unfavorable. The variance is equal to budgeted cost at actual level of production, $190,000 (19,000 × $10) minus actual costs ($210,000). Therefore, the budget variance is $20,000 unfavorable ($190,000 – $210,000).

Question 359

Flexible budget variance

Answer 359

Budgeted cost at actual productions minus actual cost.

Question 360

Fabricating and finishing are the two production departments of a manufacturing company. Building operations and information services are service departments that provide support to the two production departments as well as to each other. The company employs departmental overhead rates in the two production departments to allocate the service department costs to the production departments. Square footage is used to allocate building operations, and computer time is used to allocate information services. The costs of the service departments and relevant operating data for the departments are as follows: ``` Building operations Information services Fabricating Finishing Costs: Labor and benefit costs $ 200,000 $ 300,000 Other traceable costs 350,000 900,000 Total $550,000 $1,200,000 Operating data: Square feet occupied 5,000 10,000 16,000 24,000 Computer time (in hours) 200 1,200 600 If the company employs the step method to allocate the costs of the service departments and if information services are allocated first, then the total amount of service department costs (information services and building operations) allocated to finishing would be $657,000 $681,600 $730,000 $762,000 ```

Answer 360

$762,000 The Costs of Info. services dept are allocated first (given in the question). Building ops dept has used 200 hours of the total 2000 hours. So, 10% of $1.2mn is allocated to building dept. This increases the total cost of building ops dept to $670,000.Again this is allocated to the production depts in ratio of sq.ft occupied. This answer is correct. This response allocates the information service’s costs first using the total hours (200 + 1,200 + 600 = 2,000). The second allocation of the building operation’s cost is really the direct method: only the square feet in just the two production departments (16,000 + 24,000 = 40,000) are employed and the costs of the building operations ($550,000) and the information service’s costs allocated to it ($120,000) are allocated using this base. Therefore the allocation is equal to $762,000 = Information costs $360,000 [(600/2,000) × $1,200,000] + Building costs $402,000 [(24,000/40,000) × $670,000].

Question 361

Sussex Company has budgeted its operations for February 2012. No change in inventory level during the month is planned. Selected data from estimated amounts are as follows: Net loss $100,000 Increase in accounts payable 40,000 Depreciation expense 35,000 Decrease in gross amounts of trade accounts receivable 60,000 Purchase of office equipment on 45-day credit terms 15,000 Provision for estimated warranty liability 10,000 How much change in cash position is expected for February? $15,000 decrease. $25,000 decrease. $30,000 increase. $45,000 increase.

Answer 361

$45,000 increase. This answer is correct. One approach to the solution is to arrange the data in the format used for a cash from operations section of a statement of cash flows. ``` Net loss $(100,000) Add: Expenses not requiring cash: Depreciation $35,000 Warranty expense 10,000 45,000 Changes in AR and AP: Decrease in AR $60,000 Increase in AP 40,000 100,000 Change in cash position from operations $ 45,000 ``` The purchase of office equipment will not affect cash during February.

Question 362

Conformance costs

Answer 362

Prevention and appraisal costs

Question 363

Nonconformance costs

Answer 363

Internal failure and external failure costs.

Question 364

Times interest earned

Answer 364

Times interest earned is calculated as earnings before interest and taxes divided by interest expense: [sales – cost of goods sold – administrative expense – depreciation expense] ÷ interest expense = [$600,000 – 400,000 – 35,000 – 10,000] ÷ 20,000 = $155,000 ÷ 20,000 = 7.75 times.

Question 365

Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of this year, the finished product inventory is expected to include 2,000 bicycles, and raw material inventory is expected to include 3,000 bicycle tires. Each finished bicycle requires two tires. The marketing department provided the following data from the sales budget for the first quarter: ``` Expected bicycle sales (units) January February March 12,000 16,000 18,000 ``` ``` The company inventory policy is to have finished product inventory equal to 20% of the following month’s sales requirements, and raw material equal to 10% of the following month’s production requirements. In the January budget for raw materials, how many tires are expected to be purchased? 24,200 26,120 26,600 26,680 ```

Answer 365

26,680 This answer is correct because 26,680 tires should be purchased. This is calculated by first computing the number of bicycles budgeted to be produced in January, which is equal to January sales + Desired ending inventory (20% of February sales) – Beginning inventory (2,000), or 13,200 [12,000 + (20% × 16,000) – 2,000]. To calculate tire purchases we also need to calculate the February production requirements, which is equal to 16,400 [February sales (16,000) + Desired ending inventory (20% × 18,000) – Beginning inventory (20% × 16,000)]. Then tire purchases for January can be calculated as January production (13,200 × 2) + Desired ending inventory (16,400 × 10% × 2) – Beginning inventory (3,000), which is equal to 26,680.

Question 366

Which of the following committees of the board of directors generally has the responsibility of overseeing CEO succession? The audit committee. The nominating/corporate governance committee. The compensation committee. The investment committee.

Answer 366

The nominating/corporate governance committee.

Question 367

Minon, Inc. purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?

Answer 367

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

Question 368

Variable overhead spending variance

Answer 368

Equal to the difference between the actual overhead rate and the standard overhead rate multiplied by the actual hours

Question 369

Relevant information for product A follows: Actual variable overhead cost per hour $8.00 Standard variable overhead cost per hour $7.50 Actual hours 4,500 Standards hours 5,000 What was the variable overhead spending variance for product A? $2,250 favorable. $4,000 favorable. $2,250 unfavorable. $4,000 unfavorable.

Answer 369

$2,250 unfavorable. Variable overhead spending variance is calculated by multiplying the difference between the actual overhead rate and the standard overhead rate by the actual hours. In this case, the variable overhead spending variance is equal to $2,250 unfavorable [($8.00 – $7.50) × 4,500 hours].

Question 370

``` An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars? Buying British pound call options. Buying British pound put options. Selling British pound put options. Selling British pound call options. ```

Answer 370

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.

Question 371

``` Management uses a number of techniques to achieve its strategies. The balanced scorecard is primarily designed to Develop strategies. Measure performance. Measure product quality. Decrease cost. ```

Answer 371

Measure performance. The primary purpose of the balanced scorecard is to measure performance.

Question 372

``` An organization’s computer help desk function is usually a responsibility of the Applications development unit. Systems programming unit. Computer operations unit. User departments. ```

Answer 372

Computer operations unit. Help desks are usually a responsibility of computer operations because of the operational nature of their functions (for example, assisting users with systems problems involving prioritization and obtaining technical support/vendor assistance).

Question 373

Systems programming unit

Answer 373

Implement and maintain system-level software such as operating systems, access control software, and database systems software.

Question 374

Applications development unit

Answer 374

Responsible for developing systems. After formal acceptance by users, developers typically cease having day-to-day contact with a system’s users.

Question 375

User departments.

Answer 375

Interact with application systems as planned. User departments typically do not have the expertise necessary to solve their own systems problems.

Question 376

Economic rate of return on common stock

Answer 376

Dividends + change in price) divided by beginning price Return on stock is measured by the return to the investor both in appreciation and in dividends.

Question 377

Simple earnings per share.

Answer 377

Net income - preferred dividend) divided by common shares outstanding.

Question 378

Price-earnings ratio

Answer 378

Market price per share divided by earnings per share.

Question 379

Dividend rate on a share of stock.

Answer 379

Dividends per share divided by market price per share.

Question 380

An investment in a new product will require an initial outlay of $20,000. The cash inflow from the project will be $4,000 a year for the next six years. The payment will be received at the end of each year. What is the net present value of the investment at 8% using the correct factor from below? Present value of $1 to be received after six periods 0.63017 Present value of an ordinary annuity of $1 per period for six periods 4.62288 Present value of an ordinary annuity due of $1 per period for six periods 4.99271 Future value of $1 at the end of six periods 1.58687 ($4,875.92) ($1,508.48) ($ 29.16) $18,084.88

Answer 380

($1,508.48) This answer is correct because the net present value is equal to negative $1,508.48 [($4,000 × 4.62288) − $20,000].

Question 381

``` A procedural control used in the management of a computer center to minimize the possibility of data or program file destruction through operator error includes Control figures. Crossfooting tests. Limit checks. External labels. ```

Answer 381

External labels. This answer is correct because external labels will prevent file destruction by properly identifying each file.

Question 382

``` Which of the following instruments of monetary policy is the most important means by which the money supply is controlled? Changing the reserve ratio. Open market operations. Manipulation of government spending. Changing the discount rate. ```

Answer 382

Open market operations. Open market operations through bond sales and purchases are flexible (government securities can be purchased or sold in large or small amounts), cause prompt changes in bank reserves, and are more subtle than reserve ratio changes. Changing the reserve ratio. This answer is incorrect. Reserve ratio changes are infrequent, offer less flexibility, and have less prompt effects than open market operations. Manipulation of government spending This answer is incorrect. Manipulation of government spending is an instrument of fiscal policy, not monetary policy. Changing the discount rate. This answer is incorrect. The amount of commercial bank reserves obtained by borrowing from the central bank is small and because whether a change in the discount rate has much impact depends on whether the change occurs at a time when the commercial banks are inclined to alter their central bank borrowings.

Question 383

``` Pinecrest Co. had variable costs of 25% of sales, and fixed costs of $30,000. Pinecrest’s breakeven point in sales dollars was $24,000 $30,000 $40,000 $120,000 ```

Answer 383

$40,000 This answer is correct because breakeven is calculated by dividing fixed costs by the contribution margin percentage. The contribution margin percentage is equal to 75% (100% – 25% variable cost percentage). Therefore, breakeven is equal to $40,000 ($30,000 ÷ 75%).

Question 384

Which of the following inputs would be most beneficial to consider when management is developing the capital budget? Supply/demand for the company’s products. Current product sales prices and costs. Wage trends. Profit center equipment requests.

Answer 384

Profit center equipment requests. This answer is correct because a capital budget is a budget of future expenditures for buildings and equipment, and equipment requests from profit centers are an important input.

Question 385

``` Which of the following actions is the acknowledged preventive measure for a period of deflation? Increasing interest rates. Increasing the money supply. Decreasing interest rates. Decreasing the money supply. ```

Answer 385

Increasing the money supply. A period of deflation the government wants to encourage borrowing and investment to promote economic growth.

Question 386

``` Controls in the information technology area are classified into the preventive, detective, and corrective categories. Which of the following is a preventive control? Contingency planning. Hash total. Echo check. Access control software. ```

Answer 386

Access control software. This answer is correct. A preventive control is designed to prevent a misstatement from occurring. Access control software prevents unauthorized individuals from gaining access to a system or application and therefore prevents unauthorized transactions or changes in data.

Question 387

``` Based on the following data, what is the gross profit for the company? Sales $1,000,000 Net purchases of raw materials 600,000 Costs of goods manufactured 800,000 Marketing and administrative expenses 250,000 Indirect manufacturing costs 500,000 Beginning inventory Ending inventory Work in process $500,000 $400,000 Finished goods 100,000 500,000 $200,000 $400,000 $600,000 $900,000 ```

Answer 387

$600,000 This answer is correct because gross profit is equal to sales ($1,000,000) minus cost of goods sold ($400,000), or $600,000. Cost of goods sold is calculated by adding beginning finished goods inventory ($100,000) to cost of goods manufactured ($800,000) and deducting ending finished goods inventory ($500,000).

Question 388

Which of the following assumptions is associated with the economic order quantity formula? The carrying cost per unit will vary with quantity ordered. The cost of placing an order will vary with quantity ordered. Periodic demand is known.

Answer 388

Periodic demand is known. Periodic demand must be assumed to use the economic quantity formula.

Question 389

Wren Co. manufactures and sells two products with selling prices and variable costs as follows: ``` A B Selling price $18.00 $22.00 Variable costs 12.00 14.00 Wren’s total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If operating income last year was $28,800, what was the number of units Wren sold? 5,486 6,000 9,600 10,500 ```

Answer 389

10,500 This answer is correct. For every 5 products sold (4 units of A and 1 unit of B) Wren’s contribution margin is $32 [($18 × 4 + $22) − ($12 × 4 + $14)]. To produce a profit of $28,800 with fixed costs of $38,400, Wren must sell 2,100 [($28,800 desired profit + $38,400 fixed costs) ÷ $32)] sets of 5 products. Wren must sell 10,500 (2,100 sets × 5 products per set) total products.

Question 390

The Cutting Department is the first stage of Mark Company’s production cycle. Conversion costs for this department were 80% complete as to the beginning work in process and 50% complete as to the ending work in process. Information as to conversion costs in the Cutting Department for January 2012 is as follows: Units Conversion costs Work in process at January 1, 2012 25,000 22,000 Units started and costs incurred during January 135,000 $143,000 Units completed and transferred to next department during January 100,000 ``` Using the FIFO method, what was the conversion cost of the work in process in the Cutting Department at January 31, 2012? $33,000 $38,100 $39,000 $45,000 ```

Answer 390

$39,000 This answer is correct because first, the number of units in ending work in process must be computed: Work in process BWIP 25,000 100,000 Units completed Units started 135,000 ? EWIP Units to account for 160,000 160,000 Units accounted for EWIP = 160,000 units to account for – 100,000 units completed = 60,000 units. The next step is to compute equivalent units of production (EU) under the FIFO method: Units completed 100,000 EU in ending WIP (60,000) (50%) 30,000 130,000 EU in beginning WIP (25,000) (20,000) (80%) EU of production 110,000 Conversion cost per unit for the current period is $143,000/110,000 or $1.30 per equivalent unit. The cost of the ending WIP equals the equivalent units in ending WIP times the conversion cost per unit of $1.30: (30,000) ($1.30) = $39,000

Question 391

Cyclical unemployment rate.

Answer 391

Caused by the recession phase of the business cycle, that is, by a deficiency of aggregate spending.

Question 392

Structural unemployment rate.

Answer 392

Changes over time in the structure of consumer demand, which in turn alters the structure or composition of the demand for labor, is what is referred to as structural unemployment.

Question 393

Frictional unemployment rate.

Answer 393

Due to imperfections in the labor market and relates to workers searching for jobs or waiting to take jobs in the near future.

Question 394

Full employment unemployment rate.

Answer 394

The sum of frictional and structural unemployment. Full employment does not mean zero unemployment.

Question 395

Equivalent Units of Production (EUP)

Answer 395

An EUP is the amount of work equivalent to completing one unit from start to finish. In a process costing system, products are assigned costs periodically (usually monthly). At any one moment some units are incomplete which makes the EUP calculations necessary to allocate manufacturing costs between 1. Goods finished during the period (cost of goods manufactured) 2. Ending work in process The two primary EUP methods used for process costing are first-in, first-out (FIFO) and weighted-average (WA). Past questions on the exam have emphasized the weighted-average method.

Question 396

Weighted-average process costing approach

Answer 396

Current costs are combined with prior period costs, and all units are carried at an average cost of production. Importantly, the method assumes that all units completed during a period are started and completed during that period. As a result, the percentage of work done last period on the beginning work in process inventory is ignored.

Question 397

Encumbrances would not appear in which fund? Capital projects Special revenue General Enterprise

Answer 397

Enterprise Encumbrances are a specific type of budget transaction used in governmental fund types. Enterprise funds - which are business type programs or transactions - don't use encumbrance accounting.

Question 398

A nongovernmental not-for-profit organization received a $2 million gift from a donor who specified it be used to create an endowment fund that would be invested in perpetuity. The income from the fund is to be used to support a specific program in the second year and beyond. An investment purchased with the gift earned $40,000 during the first year. At the end of the first year, the fair value of the investment was $2,010,000. What is the net effect on temporarily restricted net assets at year end? $0 $10,000 increase $40,000 increase $50,000 increase

Answer 398

$50,000 increase The income from the investment is to be used for a specific program starting in year 2, so at the end of year 1 the $40,000 is included in temporarily restricted net assets. Along with the $10,000 increase in fair value of the investment, it's $50,000 increase.

Question 399

How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with permanently restricted assets? Gains may not be netted against losses in the statement of activities. Gains and losses can only be reported net of expenses in the statement of activities. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in unrestricted net assets. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in permanently restricted net assets.

Answer 399

Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in unrestricted net assets. Gains and losses on permanently restricted investments are classified as unrestricted, unless the donor set restrictions for the actual gains as well.

Question 400

Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except The net change in fair value of each significant class of investments. The net change in the actuarial present value of accumulated plan benefits. Contributions from the employer and participants. Benefits paid to participants.

Answer 400

The net change in the actuarial present value of accumulated plan benefits. The actuarial present value of accumulated plan benefits is referring to the actual benefits the plan is going to pay out, meaning it refers to the liability side of the plan. The other responses are all aspects of the plan assets.

Question 401

As of December 1, year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, year 2 if no debt repayments were made in December? Current liabilities of $1,000,000; long-term liabilities of $1,050,000. Current liabilities of $500,000; long-term liabilities of $1,550,000. Current liabilities of $400,000; long-term liabilities of $900,000. Current liabilities of $500,000; long-term liabilities of $800,000.

Answer 401

Current liabilities of $400,000; long-term liabilities of $900,000. ``` The current liabilities include: The $250,000 drawn on the line of credit 1/5 of the $750,000 installment note, so $150,000 Total of $400,000 The long-term liabilities include: The $600,000 of the installment note The $300,000 balloon note These total $900,000 ```

Question 402

Nongovernmental not-for-profit organizations are required to provide which of the following external financial statements? Statement of financial position, statement of activities, statement of cash flows. Statement of financial position, statement of comprehensive income, statement of cash flows. Statement of comprehensive income, statement of cash flows, statement of gains and losses. Statement of cash flows, statement of comprehensive income, statement of unrelated business income.

Answer 402

Statement of financial position, statement of activities, statement of cash flows. These are the 3 main financial statements a non-profit prepares. Voluntary health & welfare organizations are required to also prepare a statement of functional expenses, but it is recommended that all non-profits prepare this statement as well, and most do.

Question 403

Jonn City entered into a capital lease for equipment during the year. How should the asset obtained through the lease be reported in Jonn City’s government-wide statement of net assets? General capital asset Other financing use Expenditure Not reported

Answer 403

General capital asset As far as capital leases, governments report them just like private companies; as both an asset and a liability. Specifically, the capital lease becomes a general capital asset. As a side note, keep in mind that government-wide financial statements are prepared with the 'economic resources' measurement focus, and the accrual basis of accounting.