BEC - Personal Flashcards
How do you calculate the amount of costs allocated on a physical quantity basis?
Using physical quantities costs are allocated based on the total gallons produced.
What is the expectation about inflation when long-term rates are higher than short-term rates?
If the yield curve is upward sloping, long-term rates are higher than short-term rates, including a belief that inflation will increase.
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
D1 = Next expected dividend
P0 = Current stock price
G = Growth rate in earnings
F = Flotation cost per share
The Cost of New Common Stock
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).
Debt to Equity ratio
Total Debt / Total Equity
What effect does increased demand for Japanese goods have on the value of the yen?
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.
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
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.
The Budgets Process
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
Predetermined overhead rate for VARIABLE overhead
Use actual activity level
Est overhead costs = $200,000 = $2.50/hour --------------------------------- ------------------ Estimated activity level 80,000 hours
Predetermined overhead rate for FIXED overhead
Use normal capacity
Est overhead costs = $400,000 = $2.50/hour
——————————— ——————
Estimated activity level 100,000 hours
The movement along the demand curve from one price-quantity combination to another is called a(n)
Change in the quantity demanded.
Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.
What is a data warehouse?
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.
What are maturity models?
Maturity models evaluate the sophistication of IT processes rated from a maturity level of nonexistent (0) to optimized (5).
Expected annual loss from user error
Sum of the probability of losses
Payback period
Annual cash flows
An activity-based system would allocate costs based on what?
Set up hours
Residual income
RI equals net operating income minus interest on invested capital.
Economic Value Added (EVA)
EVA equals NOPAT minus cost of capital.
What is a strategy initiative in the balanced scorecard framework?
It is a key action program required to achieve strategic objectives.
*An initiative is what must be achieved.
A statement of what the strategy must achieve and what is critical to its success.
Strategic Objective
What is one way to calculate sales?
Multiply investment turnover by the average investment.
Are government purchases part of overall demand?
Yes. Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.
Cost of debt
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)).
A downward-sloping yield curve depicting the term structure of interest rates implies that
Short-term rates are higher than intermediate-term rates which are higher than long-term rates.
Variable (direct) costing
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.
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
Which method is often used in just-in-time systems?
Backflush costing.
Operation costing
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.
Process costing
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.
What is the difference between variable (direct) and absorption (full) costing methods?
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.
- In the period incurred—variable costing
- 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
Book value per share
Common stockholders’ equity divided by number of shares of common stock outstanding
(Common stock + Retained earnings) ÷ Outstanding shares
How do you calculate equivalent units using the first-in-first-out method?
Units completed minus equivalent units in beginning inventory plus equivalent units in ending inventory
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.
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.
Gross Domestic Product
Measures production. It is equal to the price of all goods and services produced by a domestic economy for a year.
Zero-balance account system
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.
Unsystematic risk
Risk that exists for one particular investment or a group of like investments (e.g., technology stock).
Systematic risk
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.
Portfolio
Allow investors to diversify away unsystematic risk. By having a balanced portfolio, investors can theoretically eliminate this risk.
Recession
Contraction in the economy
Callable bond
A fixed interest rate and its market value fluctuates with changes in prevailing interest rates.
Convertible bond
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.
Zero-coupon bond
Increases in value as it approaches its maturity.
Floating-rate
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.
In the computation of manufacturing cost per equivalent unit, FIFO considers what costs?
Current costs only
In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers what costs?
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.
In a job-order cost system, the use of DIRECT materials would usually be reflected in the general ledger as an increase in
Work in process control.
In a job-order cost system, the use of INDIRECT materials would usually be reflected in the general ledger as an increase in
Factory overhead control
Dr. Manufacturing Overhead Control (MOH)
Cr. Stores Control
Debiting MOH control increases the balance of this account.
Online processing system
Posting upon entry
Batch processing method
Assigned to groups before posting
Detailed posting type
Each transaction has its own line entry in the appropriate ledger.
Cumulative posting system
Each transaction group has a cumulative entry total in the appropriate ledger.
Capital and operating leases differ in that the lessor
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.
The degree of operating leverage (DOL) is
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
Percentage change in sales volume
Transfer pricing
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.
The Enterprise Risk Management-Integrated Framework of the committee of sponsoring organizations (COSO)
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.
Disaster recovery plan assessment
An evaluation of the plan for recovery when the information system fails.
Systems assessment
An evaluation of the adequacy of a system in providing required information.
Risk assessment
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.
Test of controls
Test the operating effectiveness of the controls.
Internal rate of return
This method determines the rate by equating the investment with the future cash flows.
A short-term speculative rise in the worldwide value of domestic currency could be moderated by a central bank decision to
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
Contingency planning
Involves developing plans in the event of system failure.
Hash total
Designed to detect errors
Echo check
Designed to detect errors in transmitted data.
How do you calculate the issue price of bonds?
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.
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.
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.
The approximated cost of not taking the discount in credit terms is calculated with the following formula:
Discount percent × 365 days
—————————- —————————————-
100% – Discount Total pay period – Discount period
In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are what type of costs?
Costs associated with quality control and include testing and inspection.
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
Decrease
If the nominal rate of interest increases, investors will expect a higher yield from all investments. Therefore, the stock price will decline.
Exponential smoothing
Quantitative approach to predicting sales based on historical amounts.
Linear programming
This technique is used to evaluate the use of resources when resources are constrained.
Queuing theory
Technique that is designed to solve waiting line problems.
Program Evaluation and Review Technique (PERT).
A technique used for scheduling problems.
Strategic initiative
Key action programs required to achieve strategic objectives.
Strategic objective
A statement of what the strategy must achieve and what is critical to its success.
Strategy map
Diagrams of the cause-and-effect relationships between strategic objectives.
Performance Measure
The level of performance or rate of improvement needed in the performance measure.
What is the acknowledged preventive measure for a period of DEFLATION?
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.
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.
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.
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?
$1,009.80
This answer is correct because the real value is equal to $1,009.80 ($1,030.00 ÷ 1.02%).
In the cost of quality, spoilage is an example of what cost?
Internal failure costs
Spoilage is an example of producing substandard products but discovering the lack of quality prior to shipment to the customer.
Control objectives
(1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.
Excess Profitability index
The profitability index is the present value of the cash inflows divided by the investment outlay
System programmers
Programmers are in charge of software.
Systems programmers are given responsibility for maintaining system software, including operating systems and compilers.
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.
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.
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.
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.
Internal rate of return method
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).
Annual cost of carrying inventory
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.
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
$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.
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
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).
How do you calculate purchase price?
Purchase price is equal to the net present value of the investment plus the present value of the selling price.
Data control language
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).
ROI
Net Operating Profit / Invested Capital
If a government were to use only fiscal policy to stimulate the economy from a recession, it would
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).
Monetary supply
Increasing money supply
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.
$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].
System analyst
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.
Computer programmers
Write detailed programs based upon the work of the systems analyst.
Data processing manager
Has overall responsibility for the computer operations function (systems design, programming, operations, library, etc.).
Internal auditor
May review the systems design and program flowcharts, but is not responsible for the computer design.
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.
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.
Quick (acid) ratio
Cash equivalents plus accounts receivables and prepayments divided by current liabilities.
OR
Cash and cash equivalents + AR + marketable securities divided by current liabilities
Commercial paper
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.
What does Computer Integrated Manufacturing (CIM) do?
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.
Information systems manager
Developing long-range plans and directing application development and computer operations.
Control group
Maintaining control over the completeness, accuracy, and distribution of input and output.
Systems programmer
Selecting, implementing, and maintaining system software, including operating systems, network software, and the database management system.
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.
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).
The purpose of a detailed analysis of average collection period is to evaluate what?
Liquidity
Control activities
Encompass policies and procedures that ensure that management’s directives are carried out.
Control environment
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.
Normal yield curve
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.
Breakeven analysis assumes over the relevant range that
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.
Evaluators.
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.
Monitoring
Characterized by ongoing activities and separate evaluations.
Which costs are controllable by the manager?
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.
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.
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.
Coefficient of cross-elasticity
The coefficient of cross-elasticity = percent change in demand for X ÷ percent change in the price of Y.
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.
The dollar depreciates against the euro.
This answer is correct because if the euro increases in value in terms of dollars, the dollar depreciates.
A way to calculate sales
Investment turnover x Average Investment
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..
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
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.
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.
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
$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)
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.
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.
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
$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
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.
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.
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.
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.
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.
$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.
Strategy map.
Diagrams of the cause-and-effect relationships between strategic objectives.
Value chain
Sequence of business processes in which usefulness is added to the products or services.
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
$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.
What’s another way to calculate COGS?
Cost of goods sold is equal to beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory.
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.
Pareto diagram
A Pareto chart ranks the causes of process variations by the degree of impact on quality.
Capital asset pricing
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.
Capital budget
Plan that assesses the long-term needs of the company for plant and equipment purchases.
Financial budget
Plan to ensure that there are sufficient funds available for the operating needs of the company.
Strategic plan
Exercise that sets the long-range goals of the company, including the consideration of external influences caused by others in the market.
Operating budget
Plan that coordinates and communicates a company’s plan for the coming year to all departments and divisions.
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.
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.
Cost of goods manufactured
DM + DL + manufacturing overhead
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
$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.
How do you calculate needed purchases?
Amount required for production minus expected beginning inventory plus required ending inventory.
Direct Method
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.
Conversion cost
Total production costs minus raw material costs
Cost of raw materials used in production
The cost of raw materials used in production was $5,700 ($6,000 + $500 beginning inventory – $800 ending inventory).
Total production costs
The total production costs for the month were $12,200 ($12,000 cost of goods sold + $1,400 ending inventory – $1,200 beginning inventory.
How do you calculate. spread between the return on investment and the required rate of return for the Consumer Products Division?
ROI minus the cost of capital.
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.
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.
Banker’s acceptance
A time draft, payable on a specified future date, with the bank guaranteeing the payment.
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
$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
Materials requirements planning
A computerized system that plans manufacturing based on demand estimates.
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.
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.
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
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.
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.
Materials requirements planning.
This answer is correct because materials requirements planning is a computerized system that plans manufacturing based on demand estimates.
Cycle costing
Deals with costing of facilities or products.
Safety stock reorder point
A technique used to balance inventory holding costs against the costs of stockouts.
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.
Production and industrial engineering
The production and industrial engineering departments have control over the usage of materials.
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.
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.
The zero-coupon method is used to determine the fair value of Stocks. Options. Interest rate swaps. Foreign currency contracts.
Interest rate swaps.
The zero-coupon method is used to determine the fair value of interest rate swaps.
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
$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).
Online analytical processing system.
A software technology that enables the user to query the system (retrieve data), and conduct an analysis.
Online transaction-processing system.
One that supports day-to-day operations.
Online executive information system
Designed to support executive decisions.
Online information storage system.
Describes a general data storage system
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.
A decrease in investment growth rates.
Opening the market would cause an increase in investment growth rates.
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.
Net present value.
The profitability index is calculated as the ratio of the net present value of the project to its initial cost.
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.
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).
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.
What technique involves a high-level look?
Scanning
Scanning involves a scan of all segments of the general environment
Monitoring
Involves a study of environmental changes identified by scanning to spot trends.
Assessing
Involves determining changes in the firm’s strategy that are necessary.
Forecasting
Involves developing probable projections of what might happen and its timing.
The trough of a business cycle is generally characterized by
Unused productive capacity and an unwillingness to risk new investments
Peak in a business cycle
Marks the end of a period of economic expansion and the beginning of a recession (contraction).
Through in a business cycle
Marks the end of a recession and the beginning of an economic recovery (expansion)
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.
$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)].
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.
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.
Price/earnings ratio
A market ratio. It is calculated by dividing the price of a share of stock by earnings per share.
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.
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.
Real interest rate
Interest rate in terms of goods. These rates are adjusted for inflation.
Nominal interest rate
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.
Option
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.
Futures contract
A standardized contract to take delivery of a specified quantity of a financial instrument in the future.
Forward contract
A negotiated contract to purchase a specified quantity of a financial instrument in the future.
Swap
An agreement to swap a stream of cash flows.
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.
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.
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!!
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.
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.
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.
Flexible budget
One that is adjusted to the actual level of activity. It is not related to allocation of joint costs.
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.
The dollar depreciates against the euro.
If the euro increases in value in terms of dollars, the dollar depreciates.
Accounting for factory overhead costs involves averaging in Job-order costing and Process costing
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).
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.
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.
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
$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.
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
$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).
Annual cost of carrying inventory
Average inventory level × Unit cost × Cost of capital.
Decision support system (DSS)
Provides information for decision making.
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
$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).
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.
Transaction processing system (TPS)
A payroll system is a transaction processing system.
Decision support system (DSS)
provides information for decision making.
Flexible budget variance
Variance is equal to budgeted cost at actual productions minus actual cost.
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
$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
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
$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).
Net Realizable Value Method (NRV)
Allocates joint costs using the estimated sales values of the joint products after further processing, less the separable processing costs
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
$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.
Net cost of debt
Effective interest rate times one minus the marginal tax rate.
Conversion costs
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
An enterprise resource planning (ERP) system
Increases responsiveness and flexibility while aiding in the decision-making process.
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
$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.
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.
Minimized collection float.
In a lockbox system payments are sent directly to the company’s financial institution. Therefore, collection float is minimized.
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.
Increasing total costs
Variable costs increase within the relevant range, which increases total cost.
What does average collection period evaluate?
Liquidity
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
$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.
Echo control
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.
How may GDP be calculated?
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.
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.
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.
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
$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
Another way to calculate residual income
Equal to profit minus imputed interest on investment.
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.
Compare control and remittance totals.
Comparing control and remittance totals is one of the activities involved in processing cash receipts
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).
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
The accounting rate of return
Accounting net income over book value (cost)
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.
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
Router
Connects two or more network segments, such that the segments maintain their separate logical identities.
Gateway
Often implemented via software, translates between two or more different protocol families and makes connections between dissimilar networks possible.
Bridge
Joins network segments so they appear to be one physical segment.
Wiring concentrator
Accepts twisted-pair cabling from each of several PCs in the same LAN.
Activity-based costing (ABC)
Any cost should be traced to the specific group of units that caused those costs to be incurred.
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
$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.
Online real-time system
The posting of a transaction, as it occurs, to several files, without intermediate printouts.
Simultaneous posting to several file
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.
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.
Prototyping
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.
Change control
The practice of authorizing changes, approving tests results, and copying developmental programs to a production library is program change control.
A missing digit in an invoice number in a batch of daily sales would be detected byt
Hash total
A transposition error on one employee’s paycheck on a weekly payroll run would be detected by
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.
Which of the following concepts can best be used to understand oligopoly behavior? Concentration ratio. Interindustry competition. Game theory model. Herfindahl index.
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.
Concentration ratio
Is a measure of the total output by a group of firms in an industry.
Interindustry competition
The competition created by firms in different industries.
The Herfindahl index
A measure of industry concentration.
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.
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.
The cost of debt before tax
Bond yield to maturity
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.
C
The contribution from the sale of $40,000 of product C would be $18,667 (($40,000/$60) × ($60 − $32)).
How does inflation distort reported income?
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.
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.
Net present value.
The net present value consistently provides the best solutions even when considering mutually exclusive projects.
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
$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.
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.
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.
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.
Budgeted income statement.
Owner’s equity is increased by net income
Repatriation restrictions
Affect the parent’s ability to get access to the cash of subsidiaries.
American depository receipts
Thank negotiable certificates issued by a U.S. bank representing a specific number of shares in a foreign stock.
Default risk premium.
The additional amount a borrower must pay to compensate a lender for the risk of default
Foreign trade deficit
A measure of the excess of imports over exports for a country.
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
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.
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.
Financial budget
Plan to ensure that there are sufficient funds available for the operating needs of the company.
Strategic plan
Exercise that sets the long-range goals of the company, including the consideration of external influences caused by others in the market.
Operating budget
Plan that coordinates and communicates a company’s plan for the coming year to all departments and divisions.
Capital budget
Forecasts future purchases and disposals of plant and equipment.
Delphia technique
Involves developing consensus among a group about the future.
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.
Precious metals
They would be expected to perform best when a high degree of inflation is expected.
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.
Unfavorable material usage variance.
An unfavorable material usage variance may be caused by defective materials, which also may cause an unfavorable labor efficiency variance.
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.
Increases and the current ratio increases.
Issuance of common stock increases cash and equity. Since cash is increased the current ratio is also increased.
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.
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.
Net present value (NPV) and internal rate of return (IRR) differ in that
NPV assumes reinvestment of project cash flows at the cost of capital while IRR assumes reinvestment of project cash flows at the internal rate of return.
NPV and IRR make different accept or reject decisions for independent projects.
IRR can be used to rank mutually exclusive investment projects but NPV cannot.
NPV 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.
Cost of inspecting products on the production line by quality inspectors.
It is an example of an appraisal cost
Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions.
It is an example of a prevention cost.
Cost of reworking defective parts detected by the quality assurance group
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
Cost of parts returned by customers
It is an example of an external failure cost.
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.
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.
Consumer price index (CPI)
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.
How should response to the fluctuations in seasonal demand be managed?
It should be directed at managing inventories and cash flow, not cost structure.
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?
- 11
- 78
- 75
- 11
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.
Dual-rate allocation method
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.
Step-down allocation method
Allocates service department costs to other service departments and production departments usually starting with the service department that provides the most service to other service departments. This method allows for partial recognition of reciprocity of services among service departments.
Reciprocal allocation method
Also known as linear algebra method, which recognizes reciprocity among service departments by explicitly including the mutual services rendered among support departments.
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.
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.
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.
Lower than the cost of external common equity.
New common equity has floatation costs that increase its cost above retained earnings.
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
$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.
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
$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
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.
Swap agreement.
An appropriate swap agreement allows the company to exchange variable interest-rate debt cash flows for fixed-rate debt cash flows.
Profit Margin
Net income / Net sales
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.
Unit variable costs are higher.
Higher unit variable costs would increase the breakeven point.
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.
Unaltered in transmission.
The digital signature assures the recipient that the message came from a certain individual and it was not modified.
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.
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.
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
$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
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
$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
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.
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.
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.
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.
Sales
Variable costs + fixed costs + desired income.
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.
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.
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
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
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
$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].
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
$ 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
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.
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.
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.
Independently verify the transactions.
It is essential to test a newly implemented system.
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.
$700,000 overrun.
This answer is correct. ($3,000,000) × (0.6) – $2,500,000 = $700,000.
Estimated overrun
Budget cost – Actual cost.
Transfer price
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.
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
$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.
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
$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.
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.
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.
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.
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.
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
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.
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.
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.
Reorder point
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.
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%
$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)].
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
$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).
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.
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.
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.
$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)].
Direct labor usage variance
DLU is calculated by multiplying the standard labor rate by the difference between the actual hours and the standard hours.
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
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.
Sales
FC + VC + NI
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.
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.
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.
$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).
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.
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.
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.
Desktop client, application, and database.
This answer is correct because the layers consist of the desktop client, an application server, and a database server.
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.
Data elements needed.
A systems specification document should include a description of the data elements needed.
Horizontal merger
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.
Conglomerate
Occurs between companies in totally different industries so it would not create on oligopoly.
Divestiture
The sale of a firm or a part of a firm. It could reduce market dominance but would not increase it.
Vertical merger
Occurs between a firm and its suppliers or customers. It would not result in domination of a product market.
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
$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%)].
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
$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
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
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)].
Raw materials needed
Projected sales – Beginning inventory + Desired ending inventory.
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.
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.
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.
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.
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
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.
Invested assets
Sales / asset turnover
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%
3%
This answer is correct because a Treasury bill has a rate of the risk-free rate plus the expected rate of inflation.
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
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%).
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
$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
The excess present value index
The present value of future net cash inflows divided by the initial investment times 100
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.
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.
The ability to add or update documentation items in data dictionaries should be restricted to Database administrators. System programmers. System librarians. Application programmers.
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.
Gross margin
Gross profit / sales
Gross profit
Sales - cost of goods sold
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.
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.
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.
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.
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.
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.
The marginal propensity
The percent of each additional dollar that is save
Change in CONSUMPTION/Change in income
The direct purchasing budget
Per unit cost times (sales + budgeted ending finished goods − budgeted beginning finished goods + budgeted ending finished goods − budgeted beginning direct materials inventory).
The variable portion of the semivariable cost of electricity for a manufacturing plant is a
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.
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.
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
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.
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.
Validity check
The computer compares input reference data to tables or master files to make sure that valid codes are being used.
Field check
A computer checks attributes such as character content, length, or sign of the individual data fields.
Free cash flow
Net operating profit after taxes plus noncash expenses less capital expenditures and the change in working capital requirements.
Market value-added
Equal to the market value of the firm minus the original investment.
Economic value-added.
Equal to net operating profit after taxes minus the cost of capital.
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.
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.
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
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
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.
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.
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.
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
Receivables turnover
Equal to net sales divided by average receivables
Which of the following is assigned to goods that were either purchased or manufactured for resale? Relevant cost. Period cost. Opportunity cost. Product cost.
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.
Which of the following structures refers to the collection of data for all vendors in a relational data base? Record. Field. File. Byte.
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.
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.
Provides budgeted numbers for various activity level
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.
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.
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.
Operating systems and compilers.
Systems programmers are given responsibility for maintaining system software, including operating systems and compilers.
Debt financing
The least costly and using it would tend to maximize earnings per share
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
$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)
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.
$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).
Flexible budget variance
Budgeted cost at actual productions minus actual cost.
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
$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].
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.
$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.
Conformance costs
Prevention and appraisal costs
Nonconformance costs
Internal failure and external failure costs.
Times interest earned
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.
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
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.
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.
The nominating/corporate governance committee.
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?
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
Variable overhead spending variance
Equal to the difference between the actual overhead rate and the standard overhead rate multiplied by the actual hours
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.
$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].
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.
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.
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.
Measure performance.
The primary purpose of the balanced scorecard is to measure performance.
An organization’s computer help desk function is usually a responsibility of the Applications development unit. Systems programming unit. Computer operations unit. User departments.
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).
Systems programming unit
Implement and maintain system-level software such as operating systems, access control software, and database systems software.
Applications development unit
Responsible for developing systems. After formal acceptance by users, developers typically cease having day-to-day contact with a system’s users.
User departments.
Interact with application systems as planned. User departments typically do not have the expertise necessary to solve their own systems problems.
Economic rate of return on common stock
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.
Simple earnings per share.
Net income - preferred dividend) divided by common shares outstanding.
Price-earnings ratio
Market price per share divided by earnings per share.
Dividend rate on a share of stock.
Dividends per share divided by market price per share.
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
($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].
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.
External labels.
This answer is correct because external labels will prevent file destruction by properly identifying each file.
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.
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.
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
$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%).
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.
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.
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.
Increasing the money supply.
A period of deflation the government wants to encourage borrowing and investment to promote economic growth.
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.
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.
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
$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).
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.
Periodic demand is known.
Periodic demand must be assumed to use the economic quantity formula.
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
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.
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
$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
Cyclical unemployment rate.
Caused by the recession phase of the business cycle, that is, by a deficiency of aggregate spending.
Structural unemployment rate.
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.
Frictional unemployment rate.
Due to imperfections in the labor market and relates to workers searching for jobs or waiting to take jobs in the near future.
Full employment unemployment rate.
The sum of frictional and structural unemployment. Full employment does not mean zero unemployment.
Equivalent Units of Production (EUP)
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.
Weighted-average process costing approach
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.
Encumbrances would not appear in which fund?
Capital projects
Special revenue
General
Enterprise
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.
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
$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.
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.
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.
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.
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.
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.
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
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.
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.
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
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.
