MCQ's Needing Reviewed Aug 2023

Question 1

General controls include

A. I, II, III, IV, and V.
B. II, III, and IV.
C. I, II, and III.
D. I and IV.

Answer 1

A. I, II, III, IV, and V.

General controls include the following:
1. Physical controls. Physical controls limit physical access and environmental damage to computer equipment, data, and important documents.
2. Access controls. Access controls prevent improper use or manipulation of data files and programs.
3. Hardware controls. Hardware controls are built into the equipment by the manufacturer. They ensure the proper internal handling of data as they are moved and stored.
4. Environmental controls. Environmental controls includes but are not limited to ensuring the processing facility is equipped with both a cooling and heating system (to maintain a year-round constant level of temperature and humidity) and a fire-suppression system.
5. Logical controls. Logical controls are established to limit access in accordance with the principle that all persons should have access only to those elements of the organization’s information systems that are necessary to perform their job duties.

Question 2

Fact Pattern: Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited $100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000 in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies, $80,000 for insurance, and $7,000 for utilities.

If Jennilyn’s projections are accurate and she earns $250,000 in revenue from the business, she will have earned

A. An economic profit but not an accounting profit.
B. An accounting profit but not an economic profit.
C. Neither an accounting nor an economic profit.
D. Both an accounting profit and an economic profit.

Answer 2

B. An accounting profit but not an economic profit.

An accounting profit is the excess of revenues over explicit costs, in this case ($250,000 revenue) – ($120,000 salaries + $20,000 rent + $9,000 furniture + $9,000 supplies + $80,000 insurance + $7,000 utilities) = $5,000. An economic profit is a significantly higher hurdle. It is not earned until the organization’s income exceeds not only costs as recorded in the accounting records, but the firm’s implicit costs as well. In this case, the most important implicit costs are Jennilyn’s forgone salary ($40,000) and the interest she could have earned by simply investing the inheritance instead of plowing it into the business ($100,000 × 6%). Since the combined implicit costs of $46,000 exceed the accounting profit of $5,000, Jennilyn would incur an accounting profit but an economic loss.

Question 3

Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow’s quick ratio is 0.8. Which of the following actions would increase Farrow’s quick ratio?

A. Implementing stronger procedures to collect accounts receivable at a faster rate.
B. Selling obsolete inventory at a loss.
C. Purchasing inventory through the issuance of a long-term note.
D. Paying an existing account payable.

Answer 3

B. Selling obsolete inventory at a loss.

Receiving cash from the sale of inventory, even at a loss, increases quick assets without affecting current liabilities.

Question 4

Which of the following is a key to successful total quality management (TQM)?

A. Training quality inspectors.
B. Creating appropriate hierarchies to increase efficiency.
C. Establishing a well-defined quality standard, then focusing on meeting it.
D. Focusing intensely on the customer.

Answer 4

D. Focusing intensely on the customer.

TQM emphasizes satisfaction of customers, both internal and external.

Question 5

Which of the following control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system?

A. Adequately safeguard assets.
B. Segregation of duties.
C. Ensure proper authorization of transactions.
D. Independently verify the transactions.

Answer 5

D. Independently verify the transactions.

Independent verification is an important compensating control in the absence of segregation of duties and reduced individual authorization of transactions. A third party performs the verification to ensure that the transactions were appropriately processed.

Question 6

The following information pertains to Roe Co.’s manufacturing operations for the month just ended:

Roe’s unfavorable variable overhead efficiency variance was

A. $0
B. $3,500
C. $1,500
D. $2,000

Answer 6

C. $1,500

Question 7

A manufacturer mass produces nuts and bolts on its assembly line. The line supervisors sample every nth unit for conformance with specifications. Once a nonconforming part is detected, the machinery is shut down and adjusted. The most appropriate tool for this process is a

A. Cost of quality report.
B. Statistical quality control chart.
C. ISO 9000 audit.
D. Fishbone diagram.

Answer 7

B. Statistical quality control chart.

Statistical quality control is a method of determining whether the shipment or production run of units lies within acceptable limits. It is also used to determine whether production processes are out of control. Statistical control charts are graphic aids for monitoring the status of any process subject to random variations.

Question 8

Which of the following ratios would be used to evaluate a company’s profitability?

A. Debt-to-total assets ratio.
B. Current ratio.
C. Inventory turnover ratio.
D. Gross margin ratio.

Answer 8

D. Gross margin ratio.

The gross margin ratio is the ratio of sales minus cost of goods sold to sales. It is a profitability ratio that measures the percentage of sales earned after incurring direct costs of goods and services.

Question 9

Selected information concerning the operations of a company for the year ended December 31 is as follows:

Work-in-process inventories at the beginning and end of the year were zero. What was the company’s finished goods inventory cost at December 31 under the variable (direct) costing method?

A. $17,000
B. $23,900
C. $14,400
D. $19,400

Answer 9

C. $14,400

Under variable (direct) costing, only variable production costs are capitalized in inventory. Thus, the ending finished goods inventory can be calculated as follows:

Question 10

Fact Pattern: The information below pertains to Devlin Company.

Devlin Company’s rate of return on assets for the year ended May 31, Year 2, was

A. 7.8%
B. 11.2%
C. 7.2%
D. 7.5%

Answer 10

D. 7.5%

The rate of return on assets equals net income divided by average total assets. Accordingly, the rate of return is 7.5% {$54 ÷ [($748 + $691) ÷ 2]}.

Question 11

Lon Co.’s budget committee is preparing its master budget on the basis of the following projections:

What are Lon’s estimated cash disbursements for inventories?

A. $1,760,000
B. $1,200,000
C. $1,040,000
D. $1,600,000

Answer 11

A. $1,760,000

Projected cost of sales is 60% of $2,800,000 of sales, which is $1,680,000. Projected purchases is the $1,680,000 cost of sales minus the $70,000 projected decrease in inventory, which is $1,610,000. Projected cash payments equal the projected purchases of $1,610,000 plus the $150,000 projected decrease in A/P, which is $1,760,000.

Question 12

Fact Pattern: Morton Company needs to pay a supplier’s invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.

Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

A. 13.20%
B. 13.48%
C. 13.33%
D. 12.00%

Answer 12

C. 13.33%

= $50,000 * .90 = $45,000
= $50,000 * .12 = $6,000
= $6,000/$45,000 = 13.33%

Question 13

In a comparison of Year 2 with Year 1, Baliol Co.’s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

A. Total asset turnover increased.
B. Cost of goods sold decreased.
C. Accounts receivable turnover increased.
D. Gross profit percentage decreased.

Answer 13

D. Gross profit percentage decreased.

The inventory turnover ratio equals cost of goods sold divided by the average balance in inventory. If inventory is unchanged, an increase in cost of goods sold increases the inventory turnover ratio. A decrease in the gross profit percentage [(sales – cost of goods sold) ÷ sales] signifies an increase in cost of goods sold given that the amount of sales is constant.

Question 14

The budget that is usually the most difficult to forecast is the

A. Production budget.
B. Expense budget.
C. Manufacturing overhead budget.
D. Sales budget.

Answer 14

D. Sales budget.

The budgeting process normally begins with the sales budget. Following the preparation of the sales budget, all other budgets are prepared based on the assumptions used in the sales budget. For this reason, the sales budget is the most difficult to prepare because there are no internal figures to use as a guide. Sales are based on the desires of consumers and the current business climate.

Question 15

Fact Pattern: The following information concerns Montero Corp.

Collections from Montero Corp.’s customers are normally 70% in the month of sale, and 20% and 9%, respectively, in the 2 months following the sale. The balance is uncollectible. Montero takes full advantage of the 2% discount allowed on purchases paid for by the 10th of the following month. Purchases for May are budgeted at $60,000, and sales for May are forecasted at $66,000. Cash disbursements for expenses are expected to be $14,400 for the month of May. Montero’s cash balance at May 1 was $22,000.

What are Montero’s expected cash disbursements for May?

A. $67,320
B. $52,920
C. $14,400
D. $68,400

Answer 15

A. $67,320

The expected cash disbursements for any month equal the previous month’s purchases minus the 2% discount, plus any cash disbursements for expenses in the current period.

Question 16

A U.S.-based company decides to invest capital in an emerging market operation that has a lower expected return rate compared to the expected return for an alternative domestic operation. Which of the following statements correctly supports this decision?

A. Management expects inflation to increase in the emerging market compared to the U.S. inflation rate.
B. Management expects the U.S. dollar to decline in value relative to the foreign location’s currency.
C. Management expects the U.S. dollar to strengthen in value relative to the foreign location’s currency.
D. Management expects inflation to decrease in the U.S. compared to the foreign location’s inflation rate.

Answer 16

B. Management expects the U.S. dollar to decline in value relative to the foreign location’s currency.

A decline in the U.S. dollar will increase the return on invested capital in the foreign market. Thus, management will invest capital in the emerging foreign market.

Question 17

A company is considering two mutually exclusive projects with the following projected cash flows:

If the company’s objective is to maximize shareholder wealth, which one of the following is the most valid reason for selecting one of the projects?

A. The internal rate of return of Project A is greater than the internal rate of return of Project B; therefore, select Project A.
B. The net present value of Project A is less than the net present value of Project B; therefore, select Project B.
C. The net present value of Project A is greater than the net present value of Project B; therefore, select Project A.
D. The internal rate of return of Project A is less than the internal rate of return of Project B; therefore, select Project B.

Answer 17

C. The net present value of Project A is greater than the net present value of Project B; therefore, select Project A.

Question 18

The Alsner Company budgeted sales of $220,000 for June, $200,000 for July, $280,000 for August, $264,000 for September, $244,000 for October, and $300,000 for November. Approximately 75% of sales are on credit; the remainder are cash sales. Collection experience indicates that 60% of the budgeted credit sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. Which month has the highest budgeted cash receipts?

A. November.
B. October.
C. August.
D. September.

Answer 18

A. November.

Credit sales for September and October are $198,000 ($264,000 × 75%) and $183,000 ($244,000 × 75%), respectively. Cash sales for November are $75,000 [$300,000 × (1.00 – .75)]. The cash collections during November should therefore be $256,080.

Question 19

Ashwood Company manufactures three main products, F, G, and W, from a joint process. Joint costs are allocated on the basis of relative sales value at split-off. Additional information for June production activity follows:

Assuming that the 10,000 units of W were processed further and sold for $78,000, what was Ashwood’s gross profit on this sale?

A. $30,000
B. $21,000
C. $28,500
D. $36,000

Answer 19

A. $30,000

The relative sales-value at split-off method allocates joint costs in proportion to the relative sales value of the individual products. The total sales value at split-off is $750,000.

The joint cost allocated at split-off is thus $36,000. The units are processed further at a cost of $12,000 and sold for $78,000. The gross profit is thus $30,000 ($78,000 – $36,000 – $12,000).

Question 20

Of the following, the greatest advantage of a database (server) architecture is that

A. Multiple occurrences of data items are useful for consistency checking.
B. Conversion to a database system is inexpensive and can be accomplished quickly.
C. Data redundancy can be reduced.
D. Backup and recovery procedures are minimized.

Answer 20

C. Data redundancy can be reduced.

Question 21

Fact Pattern: Jorelle Company’s financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment’s life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return.

The net present value for the investment proposal is

A. $96,560
B. $106,160
C. $356,160
D. $(97,970)

Answer 21

B. $106,160

The NPV is the sum of the present values of all cash inflows and outflows associated with the proposal. If the NPV is positive, the proposal should be accepted. The NPV is determined by discounting each expected cash flow using the appropriate 12% interest factor for the present value of $1. Thus, the NPV is $106,160 [(.89 × $120,000) + (.80 × $108,000) + (.71 × $96,000) + (.64 × $84,000) + (.57 × $72,000) – (1.00 × $250,000)].

Question 22

A possible change in an entity’s production environment after a just-in-time (JIT) system is adopted is increased

A. Inspection cost.
B. Deliveries from suppliers.
C. Suppliers.
D. Lead time.

Answer 22

B. Deliveries from suppliers.

Question 23

Edwin Co., an insurance company, is deciding whether to develop its in-house systems or source from a cloud computing provider. Which of the following is not a reason to source from a cloud computing provider?

A. Edwin Co. wants to reduce upfront costs.
B. Program modifications are needed to satisfy customer needs.
C. Sales agents of Edwin Co. normally work off-site to solicit sales.
D. Edwin Co. has only two IT employees for IT infrastructure and system maintenance.

Answer 23

B. Program modifications are needed to satisfy customer needs.

Question 24

Which of the following is a characteristic of business process reengineering?

A. A change in the nature of the business itself.
B. The bottom-up revision of the way the organization carries out a particular business process.
C. Gradual, incremental streamlining of existing procedures.
D. The movement of manual processes to computers.

Answer 24

B. The bottom-up revision of the way the organization carries out a particular business process.

Business process reengineering (BPR) is the complete, bottom-up revision of the way an organization carries out a particular business process. Organizations undertaking BPR totally rethink how a particular business function should be carried out, without regard to how it is currently performed.

Question 25

Fact Pattern: Peterson Company’s records for the year ended December 31 show that no finished goods inventory existed at January 1 and no work was in process at the beginning or end of the year.

What is Peterson’s finished goods inventory cost at December 31 under the variable costing method?

A. $90,000
B. $104,000
C. $135,000
D. $105,000

Answer 25

A. $90,000

Variable costing considers only variable manufacturing costs as product costs. Fixed manufacturing costs are considered period costs. The total variable manufacturing cost is given as $630,000. For the 70,000 units produced, unit cost was $9.00 ($630,000 ÷ 70,000 units). If EI is 10,000 units (70,000 produced – 60,000 sold), total cost of FG inventory is $90,000 (10,000 units × $9).

Question 26

A company changed from a traditional manufacturing operation with a job-order costing system to a just-in-time operation with a backflush costing system. What are the expected effects of these changes on the company’s inspection costs and recording detail of costs tracked to jobs in process?

Answer 26

A. Inspection Costs = Decrease
Detail of Costs Tracked to Jobs = Decrease

In a JIT system, materials go directly into production without being inspected. The assumption is that the vendor has already performed all necessary inspections. The minimization of inventory reduces the number of suppliers, storage costs, transaction costs, etc. Backflush costing eliminates the traditional sequential tracking of costs.

Question 27

Kelly Corporation needs an internal communication network that provides high speed communication among nodes. Which of the following is appropriate for Kelly?

A. File server.
B. Value-added network (VAN).
C. Local area network (LAN).
D. Wide area network (WAN).

Answer 27

C. Local area network (LAN).

Local area networks are privately owned networks that provide high-speed communication among nodes. They are usually restricted to limited areas, such as a particular floor of an office building.

Question 28

A firm uses the net present value method to evaluate capital projects. The firm’s required rate of return is 10%. The firm is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of 4 years. The projected after-tax cash flows associated with these projects are as follows:

Assuming adequate funds are available, which of the following project options would you recommend that the firm’s management undertake?

A. Project Y only.
B. Project X only.
C. Projects X and Y.
D. Neither project.

Answer 28

B. Project X only.

The net present value of Project X can be determined using the present value factor for an annuity (3.170) because the cash flows are even over the life of the project. An ordinary annuity of $40,000 discounted at 10% for the next 4 years has a present value of $126,800 ($40,000 × 3.170). The cash inflows of Project Y are uneven and so must be discounted with individual factors for each of the 4 years as follows:

Because the projects are mutually exclusive, the one with the higher net present value is the best choice.

Question 29

The following information pertains to a by-product called Moy:

Inventory of Moy was recorded at net realizable value (NRV) when produced in the previous month. No units of Moy were produced in the month just ended. What amount should be recognized as profit on Moy’s sales?

A. $0
B. $30,000
C. $10,000
D. $20,000

Answer 29

A. $0

Net realizable value is selling price minus selling and disposal costs, which means there is no (zero) profit when sold. The product’s NRV and recorded inventory cost is equal to $4 per unit ($6 selling price per unit – $2 selling cost per unit). Therefore, when the units are sold, the company will record revenue of $30,000 ($6 × 5,000 units), cost of goods sold of $20,000 ($4 × 5,000 units), and selling costs of $10,000 ($2 × 5,000 units). This leads to the company breaking even on the transaction and not recognizing any profits on Moy’s sales ($30,000 – $20,000 – $10,000).

Question 30

Product-quality-related costs are part of a total quality control program. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n)

A. Prevention cost.
B. Opportunity cost.
C. Appraisal cost.
D. External failure cost.

Answer 30

C. Appraisal cost.

Quality-related costs can be subdivided into four categories: external failure costs, internal failure costs, prevention costs, and appraisal costs. Appraisal costs embrace such activities as statistical quality control programs, inspection, and testing. Thus, the cost of detecting nonconforming individual products is an appraisal cost.

Question 31

Fact Pattern: Calculation of ratios and the determination of other factors are considered important in analysis of financial statements. Prior to the independent events described below, the corporation concerned had current and quick ratios in excess of one to one and reported a net income (as opposed to a loss) for the period just ended. Income tax effects are to be ignored. The corporation had only one class of shares outstanding.

The effect of recording a 2-for-1 stock split is to

A. Leave working capital unaffected, decrease earnings per share, and decrease book value per share.
B. Leave working capital unaffected, decrease earnings per share, and decrease the debt-to-equity ratio.
C. Decrease the current ratio, decrease working capital, and decrease book value per share.
D. Leave inventory turnover unaffected, decrease working capital, and decrease book value per share.

Answer 31

A. Leave working capital unaffected, decrease earnings per share, and decrease book value per share.

A 2-for-1 stock split involves an increase in shares outstanding with no increase in the capital stock account. Thus, the par or stated value of the shares is adjusted so that the total is unchanged. It has no effect on assets, liabilities, working capital, or total equity. Thus, the current ratio, the working capital, and the debt-to-equity ratio are unaffected. EPS and book value per share decline because more shares are outstanding.

Question 32

Peters Company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if

A. The company sold merchandise on open account that earned a normal gross margin.
B. The company wrote off an uncollectible receivable.
C. A previously declared stock dividend were distributed.
D. The company purchased inventory on open account.

Answer 32

A. The company sold merchandise on open account that earned a normal gross margin.

The current ratio is current assets divided by current liabilities. Thus, an increase in current assets or a decrease in current liabilities, by itself, increases the current ratio. The sale of inventory at a profit increases current assets without changing liabilities. Inventory decreases, and receivables increase by a greater amount. Thus, total current assets and the current ratio increase.

Question 33

Which of the following effects would a lockbox most likely provide for receivables management?

A. Minimized collection float.
B. Maximized collection float.
C. Maximized disbursement float.
D. Minimized disbursement float.

Answer 33

A. Minimized collection float.

Lockboxes are firm-maintained mailboxes, often throughout the country, that are checked by banks several times a day. Any funds received are immediately deposited into the firm’s account, which hastens the availability of the funds by bypassing the firm’s accounting department and reducing time in the postal system. All of this combines to minimize the collection float time.

Question 34

Which one of the following provides a spontaneous source of financing for a firm?

A. Accounts payable.
B. Accounts receivable.
C. Debentures.
D. Mortgage bonds.

Answer 34

A. Accounts payable.

Trade credit is a spontaneous source of financing because it exists automatically as part of a purchase transaction. Because of its ease in use, trade credit is the largest source of short-term financing for many firms, both large and small.

Question 35

Determining the appropriate level of working capital for a firm requires

A. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
B. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt.
C. Changing the capital structure and dividend policy for the firm.
D. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.

Answer 35

D. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.

A company must maintain a level of working capital sufficient to pay bills as they come due. Failure to do so is technical insolvency and can result in involuntary bankruptcy. Unfortunately, holding current assets for purposes of paying bills is not profitable for a company because they usually offer a low return compared with longer-term investments. Thus, the skillful management of working capital requires a balancing of a firm’s desire for profit with its need for adequate liquidity.

Question 36

North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit. Belle’s quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle’s creditworthiness?

A. Belle may need to liquidate its inventory to meet its long-term obligations.
B. Increasing market prices for Belle’s inventory may adversely affect the ratio.
C. Belle may need to sell its available-for-sale investments to meet its current obligations.
D. Fluctuating market prices of short-term investments may adversely affect the ratio.

Answer 36

D. Fluctuating market prices of short-term investments may adversely affect the ratio.

The quick ratio equals current assets minus inventory and prepaid expenses, divided by current liabilities. Because short-term marketable securities are included in the numerator, fluctuating market prices of short-term investments may adversely affect the ratio if Belle holds a substantial amount of such current assets.

Question 37

Clay Corporation follows an aggressive financing policy in its working capital management while Lott Corporation follows a conservative financing policy. Which one of the following statements is correct?

A. Clay has a low current ratio while Lott has a high current ratio.
B. Clay’s interest charges tend to be higher than Lott’s interest charges.
C. Clay has a low ratio of short-term debt to total debt while Lott has a high ratio of short-term debt to total debt.
D. Clay has less liquidity risk while Lott has more liquidity risk.

Answer 37

A. Clay has a low current ratio while Lott has a high current ratio.

A conservative working capital management financing policy uses permanent capital to finance permanent asset requirements and also some or all of the firm’s seasonal demands. Thus, Lott’s current ratio (current assets/current liabilities) will be high since its current liabilities will be relatively low. An aggressive policy entails financing some fixed assets and all the current assets with short-term capital. This policy results in a lower current ratio.

Question 38

A firm has current assets of $50,000, a current ratio (working capital ratio) of 2:1, and pays a short-term loan listed under current liabilities for $10,000 using existing cash. What is the firm’s current ratio after the loan is paid?

A. 5.0.
B. It cannot be determined from the data provided. None of the answers are correct.
C. 2.7.
D. 2.0.

Answer 38

C. 2.7.

If current assets equal $50,000 and the current ratio (current assets ÷ current liabilities) is 2:1, current liabilities equal $25,000 ($50,000 ÷ 2). If current assets and current liabilities are both reduced by $10,000, current assets equal $40,000 and current liabilities equal $15,000. The current ratio is then 2.7 (rounded) ($40,000 ÷ $15,000).

Question 39

Fact Pattern: Depoole Company is a manufacturer of industrial products that uses a calendar year for financial reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after the transaction described. Further assume that Depoole has positive profits during the year and a credit balance throughout the year in its retained earnings account.

Obsolete inventory of $125,000 was written off by Depoole during the year. This transaction

A. Decreased the current ratio.
B. Decreased the quick ratio.
C. Increased net working capital.
D. Increased the quick ratio.

Answer 39

A. Decreased the current ratio.

Writing off obsolete inventory reduced current assets, but not quick assets (cash, receivables, and marketable securities). Thus, the current ratio was reduced and the quick ratio was unaffected.

Question 40

The current ratio of a company is 1.5. Which of the following transactions will cause the current ratio to increase?

A. Payment on accounts payable.
B. Cash received from an account receivable.
C. Purchase of equipment for cash.
D. Purchase of inventory on account.

Answer 40

A. Payment on accounts payable.

The current (working capital) ratio equals current assets divided by current liabilities. It is the most common measure of liquidity. The payment on accounts payable (debit a current liability and credit cash, a current asset) results in an equal decrease of the numerator and denominator. A current ratio above one indicates that the denominator is less than the numerator. The same dollar change therefore causes a greater percentage decrease in the denominator than the numerator. The numerator then is larger in proportion to the denominator after the payment and the current ratio increases.

Question 41

A benefit of using computer-aided software engineering (CASE) technology is that it can ensure that

A. No obsolete data fields occur in files.
B. All programs are optimized for efficiency.
C. Data integrity rules are applied consistently.
D. Users become committed to new systems.

Answer 41

C. Data integrity rules are applied consistently.

CASE is an automated technology (at least in part) for developing and maintaining software and managing projects. A benefit of using CASE technology is that it can ensure that data integrity rules, including those for validation and access, are applied consistently across all files.

Question 42

An entity has the following invoices in a batch:

Which of the following numbers represents the record count?

A. 810
B. 1
C. 4
D. 900

Answer 42

C. 4

Input controls in batch computer systems are used to determine that no data are lost or added to the batch. A record count establishes the number of source documents and reconciles it to the number of output records. The total number of invoices processed is an example of a record count. In this case, the record count is 4.

Question 43

Management would like to calculate return on investment (ROI) for the current year. The following information is available:

What percentage amount is the ROI?

A. 9%
B. 10%
C. 11%
D. 19%

Answer 43

B. 10%

Question 44

The relevance of a particular cost to a decision is determined by

A. Potential effect on the decision.
B. Amount of the cost.
C. Number of decision variables.
D. Riskiness of the decision.

Answer 44

A. Potential effect on the decision.

Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant costs are expected future costs that vary with the action taken. All other costs are constant and therefore have no effect on the decision.

Question 45

Rolling Wheel purchases bicycle components in the month prior to assembling them into bicycles. Assembly is scheduled 1 month prior to budgeted sales. Rolling Wheel pays 75% of component costs in the month of purchase and 25% of the costs in the following month. Component costs included in budgeted cost of sales are

What is Rolling Wheel’s budgeted cash payments for components in May?

A. $7,750
B. $8,000
C. $6,750
D. $5,750

Answer 45

A. $7,750

Because the components are purchased 1 month prior to assembly and assembled 1 month prior to sale, there is a total of 2-month lag time. In April, Rolling Wheel purchases June materials. Thus, it needs to pay 75% of the June cost in April and 25% of the June cost in May. In May, Rolling Wheel purchases July material. Thus, it needs to pay 75% of the July cost (for the materials purchased for production in July) in May and 25% of the July cost in June. Therefore, the budgeted cash payments in May = 25% × $7,000 + 75% × $8,000 = $7,750

Question 46

Fact Pattern: Folsom Fashions sells a line of women’s dresses. Folsom’s performance report for November follows.
The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.

The effect of the sales quantity variance on Folsom’s contribution margin for November is

A. $30,000 unfavorable.
B. $15,000 unfavorable.
C. $18,000 unfavorable.
D. $20,000 unfavorable.

Answer 46

D. $20,000 unfavorable.

The sales quantity variance is the difference between the actual and budgeted units, times the budgeted unit CM.

Question 47

A company uses the internal rate of return (IRR) method to evaluate capital projects. The company is considering four independent projects with the following IRRs:

The company’s cost of capital is 13%. Which one of the following project options should the company accept based on IRR?

A. Projects I and II only.
B. Projects III and IV only.
C. Project IV only.
D. Projects I, II, III and IV.

Answer 47

B. Projects III and IV only.

When sufficient funds are available, any capital project whose IRR exceeds the company’s cost of capital should be accepted.

Question 48

Yola Co. manufactures one product with a standard direct labor cost of 4 hours at $12.00 per hour. During June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was

A. $1,200
B. $1,220
C. $820
D. $400

Answer 48

A. $1,200

The labor efficiency variance is the difference between the standard hours and the actual hours worked, times the standard wage rate.
Labor efficiency variance =

Question 49

After a company implements electronic data interchange (EDI) to communicate with its customers, an appropriate control for ensuring authenticity of the electronic orders it receives is to

A. Verify the identity of senders and determine whether orders correspond to contract terms.
B. Perform reasonableness checks on quantities ordered before filling orders.
C. Acknowledge receipt of electronic payments with a confirming message.
D. Encrypt sensitive messages such as electronic payments for raw materials received.

Answer 49

A. Verify the identity of senders and determine whether orders correspond to contract terms.

An EDI system is subject not only to the usual risk exposures for computer systems but also to those arising from the potential ineffectiveness of control on the part of the trading partner and the third-party service provider. Accordingly, authentication of users and messages received is a major security concern.

Question 50

Capital budgeting is concerned with

A. Scheduling office personnel in office buildings.
B. Decisions affecting only capital intensive industries.
C. Analysis of short-range decisions.
D. Analysis of long-range decisions.

Answer 50

D. Analysis of long-range decisions.

Capital budgeting is concerned with long-range decisions, such as whether to add a product line, to build new facilities, or to lease or buy equipment. Any decision regarding cash inflows and outflows over a period of more than 1 year probably needs capital budgeting analysis.

Question 51

Given the income statement provided below, what is the times-interest-earned ratio for V Corp.?

A. 3.0
B. 1.2
C. 10.0
D. 2.0

Answer 51

A. 3.0

The times-interest-earned ratio equals income (earnings) before interest expense (interest) divided by interest expense (EBIT ÷ Interest expense). EBIT equals operating income. The times-interest-earned ratio therefore is 3.0 ($1,800,000 operating income ÷ $600,000 interest expense).

Question 52

As a result of technological developments facing businesses and CPAs,

A. System boundaries are becoming less distinct.
B. Better controls have resulted in a reduction in threats.
C. Computer programmers and operators have eliminated the need for accountants.
D. Internet use has spread, and e-business control over user interaction has been simplified.

Answer 52

A. System boundaries are becoming less distinct.

Organizational system boundaries are becoming indistinct as electronic interactions with suppliers, customers, partners, and associates increase. Thus, CPAs have more difficulty in giving assurance about security, control, and privacy.

Question 53

Which of the following ratios should be used in evaluating the effectiveness with which the company uses its assets?

Answer 53

B. Receivables Turnover = Yes
Dividend Payout Ratio = No

The dividend payout ratio is not useful in evaluating the effectiveness with which the company uses its assets.

Question 54

Roger Co. implemented activity-based costing in the current year. To select the appropriate driver for Cost Pool A, Roger performed regression analyses for two independent variables, Driver 1 and Driver 2, using monthly operating data. The monthly levels of Cost Pool A were the dependent variables in both regressions. Output results from the regression analyses were as follows:

At the budgeted production level for next month, the levels of Driver 1 and Driver 2 are expected to be 5,880 and 7,000, respectively. Based on this information, what is the budgeted amount for Cost Pool A for next month?

A. $2,624
B. $3,464
C. $3,280
D. $3,785

Answer 54

C. $3,280

The coefficient of determination, also known as R squared, is a measure of fit between the independent and dependent variable(s).The closer the coefficient is to 1.0, the more useful the independent variable is in explaining or predicting the variation in the dependent variable. Accordingly, Driver 2 is more useful in predicting the cost behavior of Cost Pool A. Using the information provided, the regression equation for Driver 2 can be derived to be

X equals the expected production levels of Driver 2, and y equals the total expected cost. Given an expected monthly production level of 7,000 for Driver 2, the total expected costs are $3,280 [($0.33 × 7,000) + $970].

Question 55

A decrease in direct materials costs often results in a(n)

A. Unfavorable sales price variance.
B. Favorable sales volume variance.
C. Unfavorable sales volume variance.
D. None of the answers are correct.

Answer 55

D. None of the answers are correct.

The sales volume variance is the change in contribution margin attributable solely to the difference between the actual and budgeted unit sales (if contribution margin is constant). A decrease in direct materials costs will not change standard price, actual unit sales, or budgeted unit sales unless the materials are defective, unsuitable, or otherwise of poor quality. Thus, a decrease in direct materials costs will not result in a sales volume variance. The sales price variance is the change in contribution margin attributable solely to the change in selling price (if quantity is constant). A simple decrease in direct materials costs will not change actual unit sales, actual price, or standard price. Thus, a decrease in direct materials costs usually will not result in a sales price variance. However, a favorable materials cost decrease due to poor quality materials may affect sales.

Question 56

The capital budgeting technique known as the accounting rate of return uses

Answer 56

D. Revenue overLife of Project = Yes
DepreciationExpense = Yes

The accounting rate of return is a capital budgeting technique that ignores the time value of money. It is calculated by dividing the increase in average annual accounting net income by the required investment. Thus, both an average of annual revenues over the life of the project and annual expenses are relevant.

Question 57

Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30:

If 500,000 complete units were to be manufactured during the fiscal year by Paradise Company, the number of units of direct materials to be purchased is

A. 1,020,000 units.
B. 1,010,000 units.
C. 1,000,000 units.
D. 990,000 units.

Answer 57

B. 1,010,000 units.

Because two units of direct material are needed to produce each unit of finished product and 500,000 complete units were to be manufactured, the total materials needed for production will be 1,000,000 units (500,000 units × 2 units of materials). Because Paradise Company planned to have beginning direct materials inventory (July 1) of 40,000 units and ending direct materials inventory (June 30) of 50,000 units, materials inventory is expected to increase by 10,000 units. The balances in work-in-process and finished goods inventory are irrelevant because the question asks the number of units of direct materials to be purchased, not sold. Thus, materials purchases will be 1,010,000 units.