MISTAKES FROM RUNNING REVIEW TEST B1-B2

Question 1

Prioritize findings is part of________________ phase of monitoring internal controls

Answer 1

assess and report phase

Question 2

Tone at the top is part of the______________________ of the integrated framework

Answer 2

control environment component

Question 3

Identify controls is a part of the ________________________component of the integrated framework

Answer 3

Control Activities

Question 4

Prioritize risks occurs in the _____________________ component of the integrated framework.

Answer 4

Risk Assessment

Question 5

Findings occur as a result of ________________________.

Answer 5

monitoring internal controls

Question 6

According to COSO’s enterprise risk mgmt framework:
A “commitment to core values” is an essential element and one of the principles underlying __________________ established as part of ERM.

Answer 6

governance and culture

Question 7

Which of the following is not a goal of an Enterprise Risk Management framework
(ERM)?
A. Avoid adverse publicity and damage to the entity’s reputation.
B. Achieve financial and performance targets.
C. Provide reasonable expectation that company objectives and goals are
achieved and problems and surprises are minimized.
D. Assess risks continuously and identify the steps to take and resources to
allocate to overcome or mitigate risk.

Answer 7

Choice “A” is correct. Avoiding adverse publicity and damage to the entity’s reputation is a public relations function, not a function of ERM.

Choice “B” is incorrect. ERM focuses on numerous goals including achievement of
financial and performance targets.
Choice “C” is incorrect. ERM focuses on numerous goals including providing reasonable
expectation that objectives and goals are achieved.
Choice “D” is incorrect. ERM focuses on numerous goals including risk assessment and mitigation

Question 8

Which of the following would be considered a detective control over standing data?

A. Access and authorization control
B. Change control
C. Reconciliation of changes to the data
D. Read-only rights

Answer 8

Choice “C” is correct. Periodic reconciliation of changes to the data is considered a
detective control because it reviews changes. This control helps to verify that any changes made to the data follow the established policies and procedures, including appropriate review and approval.

Choices “A”, “B”, and “D” are incorrect. All these controls are considered preventive
controls.

Question 9

According to COSO, which of the following identifies the group directly responsible for the implementation and development of the enterprise risk management framework?
A. External auditors
B. The board of directors
C. Management
D. Internal auditors

Answer 9

Choice “C” is correct. It is incumbent on management to determine how the inevitable risks that an entity faces must be balanced with the desire to grow stakeholder value. Management is responsible for developing and implementing the enterprise risk
management framework and process

Choice “A” is incorrect. External auditors will come in to evaluate the risk management process, along with internal controls and many other operational and reporting functions. External auditors are not tasked with developing and implementing an entity’s risk management framework.
Choice “B” is incorrect. The board of directors is responsible for the oversight of
management, which includes assessing the work it is doing from an enterprise risk
management standpoint and holding management accountable for its work.
Choice “D” is incorrect. Internal auditors are employees of an entity who serve to
operate similarly to external auditors from an evaluation standpoint; they are not
tasked with developing and implementing a risk management framework

Question 10

The ability of an entity to withstand the impact of large-scale events refers to:
A. Risk capacity.
B. Risk inventory.
C. Risk profile.
D. Organizational sustainability.

Answer 10

Choice “D” is correct. Organizational sustainability is the ability of an entity to
withstand the impact of large-scale events

Choice “A” is incorrect. Risk capacity is the
maximum amount of risk that an entity is able to absorb in the pursuit of strategy and business objectives
Choice “B” is incorrect. Risk inventory is all risk that could impact an entity
Choice “C” is incorrect. . Risk profile is the composite view of the risk assumed at a particular level of the entity or aspect of the business that positions management to consider the types, severity, and interdependencies of risk and how they may affect performance relative to the strategy and business objectives.

Question 11

Generally, an organization will not operate beyond the limits of its risk appetite. Risk
appetite has generally been exceeded when:
A. The likelihood and impact of positive events are significantly below residual
risk.
B. The likelihood and impact of positive events are within the residual risk.
C. The likelihood and impact of negative events significantly exceed residual
risks.
D. The likelihood and impact of negative events exceed residual risks.

Answer 11

Choice “C” is correct. Generally, an organization’s risk appetite has been exceeded when the combined likelihood and impact of negative events significantly exceed residual risk. Residual risk represents the risk that remains after management has taken actions to mitigate negative events. If the likelihood and impact of those negative events significantly exceed the residual risk, the operation is likely to exceed the organization’s risk appetite.

Question 12

COSO’s enterprise risk management framework encompasses each of the following,
except:
A. Enhancing risk response decisions.
B. Decreasing inherent risk appetite.
C. Seizing opportunities.
D. Improving deployment of capital.

Answer 12

Choice “B” is correct. Inherent risk is the risk that exists to an entity when management takes no action to alter the severity of the risk. Decreasing a company’s inherent risk appetite is not a component of ERM. Managing risk such that it aligns with risk appetite is an appropriate component of the framework.

Choice “A” is incorrect. Enhancing risk response decisions is a critical component of the enterprise risk management framework.
Choice “C” is incorrect. A company developing a framework that will allow it to take advantage of opportunities as they arise is included in an enterprise risk management framework.
Choice “D” is incorrect. Improving the deployment of capital, while taking into account potential risks, is a key component of the framework.

Question 13

According to the COSO, the presence of a written code of conduct provides for a
control environment that can:

A. Encourage teamwork in the pursuit of an entity’s objectives.
B. Override an entity’s history and culture.
C. Verify that information systems are providing persuasive evidence of the
effectiveness of internal controls.
D. Ensure that competent evaluators are implementing and monitoring internal
controls.

Answer 13

Choice “A” is correct. A written code of conduct helps management set the tone for the organization; its existence promotes (among other things) honest/ethical conduct, teamwork, compliance, and appropriate disclosure.

Choice “B” is incorrect. Overriding history and culture definitely is not the intent of
having a code of conduct.
Choice “C” is incorrect. Information systems are addressed independently, outside of a
written code of conduct.
Choice “D” is incorrect. A code of conduct will not help to ensure that a company has
competent evaluators implementing and monitoring internal controls.

Question 14

Using the statistical ranking methodology, how are the risks ordered?

Answer 14

From largest to smallest.

Note: Severity * likelihood % = item risk

Order from riskiest (largest #) to least risky (smallest #).

Question 15

A threat to an information system with a total potential dollar-loss impact of $7 million has been discovered. The risk of loss to the identified threat is currently 10 percent. The following four proposed controls are under consideration to mitigate the risk of loss:

Cntrl Nme / Rsk of Loss /Implementation Cost
W 8% 100,000
X 6% 250,000
Y 4% 350,000
Z 2% 500,000

Based on a cost-benefit analysis, which control provides the greatest net benefit?

A. Control W
B. Control Z
C. Control Y
D. Control X

Answer 15

Choice “C” is correct. In the Enterprise Risk Management framework, the assessment of the severity of risk is contained within the performance component. Assessing risk severity includes the likelihood of the risk occurring and the impact if it does occur.
Each of the four proposed controls identified in this question will help reduce the risk of loss from 10 percent to a lower number. The net benefit calculation involves comparing the benefit from a lower risk of loss to the cost associated with implementing the
control.
* Control W: $7 million × (10% − 8%) = $140,000 benefit
$140,000 benefit − $100,000 cost = $40,000 net benefit
* Control X: $7 million × (10% − 6%) = $280,000 benefit
$280,000 benefit − $250,000 cost = $30,000 net benefit
* Control Y: $7 million × (10% − 4%) = $420,000 benefit
$420,000 benefit − $350,000 cost = $70,000 net benefit
* Control Z: $7 million × (10% − 2%) = $560,000 benefit
$560,000 benefit − $500,000 cost = $60,000 net benefit
Of the options provided, Control Y provides the highest net benefit at $70,000.
Choice “A” is incorrect. Control W’s net benefit of $40,000 is not as high as the net
benefits for either Control Y or Control Z.
Choice “B” is incorrect. Control Z’s net benefit is not as high as the net benefit for
Control Y.
Choice “D” is incorrect. Control X’s net benefit is the lowest of the four options provided.

Question 16

Net benefit calculation for risk controls

Answer 16

total potential dollar-loss impact * (original risk of loss - new risk of loss) = benefit

Then:
Benefit - implementation cost of control = Net benefit.

Question 17

What are the steps for calculating effective interest rate for a loan when there is an interest bearing compensation balance?

Answer 17

Step 1: Calculate ACTUAL FINANCE CHARGE
Actual interest = (P x Rate x Time)
Ex/ $500,000 x 8% x 1yr = $40k

Step 2: Subtract any interest earned from compensating balance (if any) to get NET INTEREST COST:
Comp balance x rate x time = additional interest earned.
Ex/ Actual int earned $50k x .03 = $1500
NET INT COST = $40,000 [from step 1] - $1500 = $38,500

Step 3: Get EFFECTIVE INTEREST RATE by dividing Net interest cost by total loan proceeds.

formula:
NET INTEREST COST / TOTAL LOAN PROCEEDS = effective interest rate

Loan proceeds company has use of:
Usable proceeds = Total loan amount - required additional compensating balance.
Ex/ $500k - $50k = $450,000
Ex/ $38,500 / $450,000 = 8.555% = 8.56% periodic rate.

Question 18

The CFO of Lang Inc. wants to earn a higher return on the company’s cash holdings. Which of the following comparable maturity marketable securities will earn Lang the highest expected return?

A. Banker’s acceptances.
B. U.S. Treasury Bills.
C. Negotiable CDs.
D. Commercial paper.

Answer 18

Choice D - Commercial Paper

Risk = Highest expected return

Order of Riskiest to Safest of these choices:
Commercial Paper (riskiest, no secondary market)
Banker’s Acceptance (has a lrg secondary market, multiple maturities, yield is higher than T bill)
Negotiable Cds
US Treasury Bills (safest aka lowest expected return)

Question 19

An issuer’s board of directors would ordinarily participate in each of the following activities, EXCEPT:

A. Supervising and monitoring the quality-control testing upon the installation of
a new information technology system.

B. Maintaining awareness of current technology used by the organization to
assure its efficiency and effectiveness for financial reporting.

C. Establishing long-term strategy and objectives to which their information
technology system should be aligned.

D. Ensuring that suitable information technology resources and skills are
available to meet the company’s strategic objectives.

Answer 19

Choice “A” is correct
SUPERVISION AND MONITORING OF QUALITY-CONTROL TESTING ARE TASKS MORE APPROPRIATELY ASSIGNED TO IT MANAGERS AND IT STAFF IN THE FIELD.

Establishing strategies and objectives, ensuring that appropriate resources and skills are in place, and maintaining awareness of current technology are
all appropriate responsibilities of the board.

Question 20

The control environment component of the Internal Control—Integrated Framework includes which of the following principles?

A. The identification and analysis of risks.
B. The selection and development of control activities.
C. The appropriate communication of internal control deficiencies.
D. The independence and oversight responsibilities of the board of directors.

Answer 20

Choice “D” is correct. The establishment of the board as a unit independent from
management and its responsibilities for overseeing the development/performance of internal controls is a principle within the control environment component of the
Integrated Framework.

Question 21

What is the formula for the discounted cash flow method?

Answer 21

K = D/P + G =

K - Cost of retained earnings
D - Dividend
P - Stock Price
G - Expected Growth Rate

Question 22

__________________ is a state of not knowing how or whether events may occur and the impact they may have on an organization if they do occur. Every entity exists to provide value to its individual stakeholders while managing inevitable ___________, which may create or erode value.

Answer 22

Uncertainty

Question 23

The commercial paper market advantages/disadvantages:

Answer 23

ADVANTAGES:
A. Avoids the expense of maintaining a compensating balance with a commercial
bank.

B. Provides a broad distribution for borrowing.

C. Accrues a benefit to the borrower because its name becomes more widely known.

DISADVANTAGE:
There are restrictions as to the type of corporation that can enter into the commercial paper market for short-term financing, since the use of the open
market is restricted to a comparatively small number of the most credit-worthy large corporations.

Question 24

A response to risk that involves the diversification of product offerings rather than elimination of product offerings is called _______________.

Answer 24

reduction

Question 25

Which one of the following is most relevant to a manufacturing equipment replacement
decision?

A. Disposal price of the old equipment.
B. A lump-sum write-off amount from the disposal of the old equipment.
C. Gain or loss on the disposal of the old equipment.
D. Original cost of the old equipment.

Answer 25

Choice “A” is correct. The disposal price of the old equipment is most relevant because it is an expected future inflow that will differ among alternatives. If this old equipment is replaced, there will be a cash inflow from the sale of the old equipment. If the old
equipment is kept, there will be no cash inflow from the sale of the old equipment.

Question 26

Insuring against losses or entering into joint ventures to address risk is known as ______________.

Answer 26

Risk Sharing

NOTE: Adjustments to the portfolio do NOT represent sharing.

Question 27

A response to risk that involves the disposal of a business unit, product line, or geographical segment is called _________________________.

Answer 27

Risk Avoidance

NOTE: Adjustments to the portfolio do NOT represent avoidance.

Question 28

According to Title III (Corporate Responsibility) of the Sarbanes Oxley Act of 2002, ______________________must certify that quarterly reports filed with the SEC fairly present the financial condition and results of operations. The audit committee chairperson does not have this responsibility.

Answer 28

corporate officials such as the CEO and CFO

Question 29

Internal controls are likely to fail for any of the following reasons, except:

A. They are designed and implemented properly, and their design changes as processes change.
B. They are designed and implemented properly, but their operation changes in some way.
C. They are designed and implemented properly as static controls, but the environment in which they operate changes.
D. They are not designed and implemented properly at the outset.

Answer 29

Choice “A” is correct. Internal controls that are designed and implemented properly, including the ability for their design to adapt as processes change, will have the lowest chance of failure.

Choice “B” is incorrect. If internal controls are designed and implemented properly but their operation changes in some way, there is a greater chance the controls may fail.
Choice “C” is incorrect. When internal controls are designed and implemented as static controls, any change in the operating environment will increase the likelihood of their failure.
Choice “D” is incorrect. Internal controls that are not designed or implemented properly at the outset will not function, with failure inevitable.

Question 30

The Enterprise Risk Management Integrated Framework states events can only be identified __________ the organizational objectives
are identified.

Answer 30

AFTER

Events will either favorably or unfavorably impact the achievement of objectives. Risks (negative events) are only identifiable within the context of the
objectives that they might impede.

Question 31

The Committee on Sponsoring Organizations prepared the Internal Control Integrated
Framework:

Answer 31

To help businesses assess internal control.

In 1992, the Committee on Sponsoring Organizations (COSO) issued Internal Control – Integrated Framework (the Framework) to assist organizations
in developing comprehensive assessments of internal control effectiveness. The Framework is widely regarded as an appropriate and comprehensive basis to document the assessment of internal controls over financial reporting.

Question 32

Under the discounted cash flow (DCF) method, the cost of equity is calculated as:

Answer 32

Cost of Equity = (Expected Dividend / Current Share Price) + Growth Rate

Question 33

A U.S. company is purchasing inventory components from a company in a foreign country. The price of the company’s routine inventory order is 100,000 foreign currency units (FCUs), and the exchange rate at the time of the last order was $1.45 per one FCU.
The exchange rate changes to $1.60 per one FCU, and the U.S. company orders half of its normal quantity. What is the invoice difference from the last order?

A. A decrease of $15,000.
B. An increase of $15,000.
C. An increase of $7,500.
D. A decrease of $65,000.

Answer 33

Choice D is Correct
(A decrease of $65,000)

Normal Quantity Total order = $1.45 x 100,000 = $145,000

New order size = 50,000
New exchange rate = $1.60
NEW ORDER COST = $50,000 x $1.60 = $80,000

New order - Normal Order =
$80,000 - $145,000 = (-$65,000)

Since the delta is $65,000 less (aka negative 65000), the new order is a decrease of $65k from the original order.

Question 34

Quick Grow, Inc. uses its bank to factor the company accounts receivable without recourse. The factored receivables average $100,000 per month and have an average collection period of 30 days. The bank immediately advances Quick Grow 90% of the
receivables at an annual rate of 18% and charges a handling fee of 1% on the accounts submitted. As a result of the factoring arrangement, Quick Grow is able to save $10,000 per year in clerical costs. Assuming a 360-day year, what is the net percentage cost of factoring to Quick Grow as a result of the arrangement?

A. 31.33%
B. 18.20%
C. 20.22%
D. 22.22%

Answer 34

Choice C is correct –> 20.22%

Receivables submitted: $100,000 per month x 1% fee x 12 months = $12,000

Amt advanced: $90,000 (30 day collection period) x 18% = $16,200

Cost of factoring = 12,000 + 16,200 = $28,200
Minus the clerical costs of $10,000
Therefore the Net Cost of factoring = $18,200

% cost of factoring = 18200/90000 = .2022 = 20.22%

Question 35

Describe how to use the discount payback method to determine the number of years to repay an investment (equipment)?

Answer 35

Step 1:
Use the Discount Factor for each year and multiply it by the cash inflow to get the PV of Cash Flow.

Step 2:
Add up the cash flows one by one to get a cumulative PV for each year.

Step 3:
Find the years in which the cumulative total becomes higher than the cost of the initial investment.

Step 4: Calculate the difference (Initial investment minus the cumulative PV just below it.)

This will give the difference.

The difference divided by the PV of Cash flow for that year is the fractional year. Add to prior years to get the total.

Example
Initial investment = $340,0000
Year 3 PV of Cash flow = 97,790
Year 3 cumulative = 305,360
Year 4 PV of Cash Flow = 94.050
Year 4 Cumulative = 399,410

340,000 - 305,360 = $34,640

34640 / 94050 = .37

3 years + .37 years = 3.37 years to recover investment using the discounted payback period method.

Question 36

The factor for present value of an annuity for five years at 10% is 3.791. The factor for
present value of $1 for five years at 10% is 0.621. The factor for future value of $1 at 10%
for five years is 1.611. The factor for future value of an annuity for five years at 10% is
6.1053.

Given a 10% discount rate with cash inflows of $3,000 at the end of each year for five years
and an initial investment of $11,000, what is the net present value?

A. $(9,500)
B. $370
C. $4,000
D. $11,370

Answer 36

Choice “B” is correct.

The present value of the cash inflows of $3,000 per year for five years at 10% is $3,000 × 3.791 = $11,373. The original investment is $11,000. The net
present value (NPV) is the difference of $373. The closest answer is $370.

Question 37

What is the relationship between the allowance for doubtful accounts and working capital?

Answer 37

When bad debts expense is recorded for the period, working capital decreases.

A company that records bad debt expense for a period also recognizes an increase in the contra-account, allowance for doubtful accounts. When
this occurs, the company’s net realizable value on outstanding accounts receivables
declines, lowering its current assets. Because working capital is current assets less
current liabilities, the company’s working capital decreases for the period.

AKA: Bad debt recorded—–>net realizable value on accts receivable down—->Assets down——->WC down

Question 38

Which of the following is not a goal of an Enterprise Risk Management framework (ERM)?

A. Achieve financial and performance targets.

B. Assess risks continuously and identify the steps to take and resources to allocate to overcome or mitigate risk.

C. Provide reasonable expectation that company objectives and goals are achieved and problems and surprises are minimized.

D. Avoid adverse publicity and damage to the entity’s reputation.

Answer 38

Choice “D” is correct.
Avoiding adverse PUBLICITY and damage to the entity’s reputation is a PUBLIC RELATIONS function, NOT a function of ERM.

Choice “A” is incorrect. ERM focuses on numerous goals including achievement of financial and performance targets.

Choice “B” is incorrect. ERM focuses on numerous goals including risk assessment and mitigation.

Choice “C” is incorrect. ERM focuses on numerous goals including providing reasonable expectation that objectives and goals are achieved.

Question 39

Cost of credit formula for a payment question?
Ex 3/15, net 60

Answer 39

Cost of Credit Discount = Days in the year / (Total pay period - Discount Period) * Discount % / (100% - Discount %)

Question 40

Which of the following statements is most accurate regarding principles and components within the Internal Control—Integrated Framework?

A. Communication of deficiencies falls within information and communication.
B. Specifying objectives falls within the control environment.
C. Policy and procedure deployment falls within (existing) control activities.
D. Identifying and assessing changes falls within monitoring activities.

Answer 40

Choice “C” is correct. Creating policies and procedures related to internal controls and
then subsequently deploying them is a principle that falls under the (existing) control
activities component.

Choice “A” is incorrect. Communication of deficiencies falls within the monitoring
activities component.
Choice “B” is incorrect. Specifying objectives falls within the risk assessment
component.
Choice “D” is incorrect. Identifying and assessing changes falls within the risk
assessment component.

Question 41

An example of a carrying cost is:

A. Handling costs.
B. Disruption of production schedules.
C. Obsolescence.
D. Quantity discounts lost.

Answer 41

Choice “C” is correct.
Obsolescence is an example of a carrying cost

Question 42

Weighted-average and first in, first out (FIFO) equivalent units would be the same in a
period when which of the following occurs?

A. No ending inventory exists.
B. Beginning inventory equivalent units are less than 50% complete.
C. No beginning inventory exists.
D. Beginning inventory equivalent units exceed 50% complete.

Answer 42

Choice “C” is correct. FIFO and weighted average produce the same equivalent units when there is no beginning inventory. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is
consideration of beginning inventory amounts by FIFO.

Question 43

MCQ-04044
When a company offers credit terms of 2/10, net 30, the annual interest cost, based on a 360-day year, is:

A. 36.0 percent.
B. 35.3 percent.
C. 36.7 percent.
D. 24.0 percent.

Answer 43

CHOICE C IS CORRECT

FORMULA:
360 / (Total Pay period - Discount period)
x (multiplied by)
Discount % / (100% - Discount %)

360 / (30-10)
x
2/(100% - Discount %)

= 18 * .02040816327

= .3673 = 36.7%

Question 44

Equation for cost of a credit policy is:

Answer 44

360 / (Total Pay period - Discount period)
x (multiplied by)
Discount % / (100% - Discount %)

Question 45

MCQ-03953
Alex Company had the following inventories at the beginning and end of the month of January.

January 1 January 31
Finished Goods $125,000 $117,000
Work-in-process 235,000 251,000
Direct materials 134,000 124,000

The following additional manufacturing data was available for the month of January.
Direct materials purchased $189,000
Purchase returns and allowances 1,000
Transportation in 3,000
Direct labor 300,000
Actual factory overhead 175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and
any overapplied or underapplied factory overhead is deferred until the end of the year,
December 31.

Alex Company’s total manufacturing cost for January was:

A. $671,000
B. $669,000
C. $679,000
D. $681,000

Answer 45

Choice “D” is correct $681,000

NOTE: Actual overhead is irrelevant for calculating total manufacturing costs until over/underapplications handled in December, therefore we are only using the 60% of DL in our calculations.

Step 1
Calculation of Direct Materials used in January:

Beginning inventory, direct materials 134,000
+
Purchases during January 189,000
-
Less: purchase returns and allowances (1,000)
+
Add: transportation in 3,000
= Total direct materials available $ 325,000
-
Less: ending inventory, direct materials (124,000)
Direct Materials used in January = Total DM available minis DM ending inventory—-> aka 325,000 - 124,000

Therefore Direct Materials used during January = $201,000

STEP 2
CALCULATE MFC. COST

Direct Materials Used $201,000 [from step 1]
+
Direct Labor $300,000 [given]
+
Factory Overhead $180,000 [calculated by taking 60% of $300k which was given DL]

201000 + 300000 + 180000 = $681,000

Question 46

Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment?

Answer 46

ANSWER: WACC

The weighted-average cost of capital is frequently used as the hurdle rate within capital budgeting techniques. Investments that provide a return that
exceeds the weighted-average cost of capital should continuously add to the value of the firm.

Question 47

MCQ-03361

For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for 2 years is $1.74. What is the lease’s after-tax present value using a 10% discount factor?

A. $11,310
B. $9,570
C. $4,350
D. $2,610

Answer 47

PV of cash inflow:
$7500 x 1.74 = $13,050

PV of cash outflow for tax:
($7500 - $5000 per annum tax basis lease amort) x 40% tax rate x 1.74 = (-1740)

Inflow - Outflow = 13050 - 1740 = $11310

Question 48

MCQ-07014
Which of the following is necessary to be an audit committee financial expert, according to the criteria specified in the Sarbanes-Oxley Act of 2002?

A. Experience in the preparation of tax returns.
B. Education and experience as a certified financial planner.
C. Experience with internal accounting controls.
D. A limited understanding of generally accepted auditing standards.

READ CAREFULLY

Answer 48

Choice “C” is correct. The financial expert serving on the audit committee of an issuer must have experience with internal controls. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity.

Question 49

MCQ-07795 SAFETY STOCK

Jill’s Custom Bags manufacturers and sells 12,000 customer designer bags per year, each requiring three yards of a specially manufactured fabric. These bags are sold evenly throughout the year. The materials for these bags require two months lead time. Jill desires to maintain a safety stock of sufficient material to meet one month’s demand. What is Jill’s reorder point?

A. 12,000
B. 6,000
C. 3,000
D. 9,000

Answer 49

Choice “D” is correct. Jill uses an average of 3,000 yards of fabric per month (12,000
units per year / 12 months × 3 yards per unit). Jill must order at 9,000 yards so that by the
time the order arrives, she has used up 6,000 yards, leaving her with exactly the desired safety stock.

Each month required 3000 yards

The ordering lead time takes 2 months —-> 2 months * 3000 = 6000 yards to account for the lead time.
Plus 3000 more yards to acct for safety stock.

Bottom line: Every 3 months Jill is ordering 9000 yards of fabric (probably from a sweat shop in Sheng Zen)

Question 50

MCQ-03638

Kore Industries is analyzing a capital investment proposal for new equipment to
produce a product over the next eight years. The analyst is attempting to determine the
appropriate “end-of-life” cash flows for the analysis. At the end of eight years, the
equipment must be removed from the plant and will have a net book value of zero, a tax
basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000.
Kore’s effective tax rate is 40 percent.

What is the appropriate “end-of-life” cash flow
related to these items that should be used in the analysis?

A. $12,000
B. $(18,000)
C. $27,000
D. $(30,000)

Answer 50

Choice “A” is correct. $12,000 “end-of-life” cash flow.
The $75,000 loss on disposal is a non-cash reduction in taxable income that will reduce taxes paid by $30,000 (75,000 × 40%).
The cost to remove the equipment is a cash expense that will reduce taxable income by $40,000 and reduce taxes paid by $16,000 (40,000 × 40%), resulting in a net cash expense of $24,000 ($40,000 minus $16,000, or $40,000 × 60%).
The $10,000 salvage value will increase after-tax cash flow by $6,000 (10,000 × 60%).

NEED TO ADD CHART TO THIS

Question 51

Of the following, which is a spontaneous source of financing for a company?

A. Preferred stock.
B. Accounts payable.
C. Debentures.
D. Accounts receivable.

Answer 51

Choice “B” is correct. Accounts payable provide a spontaneous source of financing for a firm.

Question 52

In a large public corporation, evaluating internal control procedures should be the responsibility of:

A. Accounting management staff who report to the CFO.

B. Operations management staff who report to the chief operations officer.

C. Security management staff who report to the chief facilities officer.

D. Internal audit staff who report to the board of directors.

Answer 52

Choice “D” is correct.

In a large public corporation, evaluating internal control procedures should be the responsibility of an organizationally independent internal audit function that reports to the governing body of the corporation.

Choice “A” is incorrect. Evaluation of the effectiveness of the internal control
procedures by accounting management that report to the CFO would likely be subject
to bias and lack objectivity since the controls are likely designed and at least partially
implemented by that staff. Use of the accounting management that report to the CFO
would not be appropriate.
Choice “B” is incorrect. Operations management staff reporting to the chief operations
officer would likely lack the depth of knowledge of financial controls that extend
beyond operations necessary to evaluate the internal control procedures of a large
public corporation. Use of operations management staff would not be appropriate.
Choice “C” is incorrect. Securities management staff reporting to the chief facilities
officers would likely lack the expertise necessary to evaluation the internal control
procedures in a large public corporation. Use of securities management staff would not
be appropriate.

Question 53

MCQ-03350
The Moore Corporation is considering the acquisition of a new machine. The machine
can be purchased for $90,000; it will cost $6,000 to transport to Moore’s plant and
$9,000 to install. It is estimated that the machine will last 10 years, and it is expected to
have an estimated salvage value of $5,000. Over its 10-year life, the machine is
expected to produce 2,000 units per year with a selling price of $500 and combined
material and labor costs of $450 per unit. Federal tax regulations permit machines of
this type to be depreciated using the straight-line method over 5 years with no
consideration for salvage value. Moore has a marginal tax rate of 40 percent.
What is the net cash flow for the third year that Moore Corporation should use in a
capital budgeting analysis?

A. $47,400
B. $53,700
C. $64,200
D. $68,400

Answer 53

Choice “D” is correct. $68,400 net cash flow for the third year.

ANNUAL DEPRECIATION CALCULATION:
(90k + 6k + 9k )/5 = 105000 / 5 = $21,000 tax depreciation

Alternate Computation:
Cash flow: 1,000,000 − 900,000 = 100,000 × (1 − .4) = $60,000 After-tax cash flow
PLUS
Depreciation tax shield: 21,000 × 40% = 8,400 Tax shield

$68,400 After-tax cash flow

Question 54

MCQ-04193

Edwards Manufacturing Corporation uses the standard Economic Order Quantity (EOQ) model. If the EOQ for Product A is 200 units and Edwards maintains a 50-unit safety stock for the item, what is the average inventory of Product A?

A. 125 units.
B. 250 units.
C. 100 units.
D. 150 units.

Answer 54

Choice “D” is correct. 150 units is the average inventory including a 50-unit safety stock.

Reorder Quant —> 200

Divide 200 by 2 to calculate avg inventory –> 100

Avg Inventory excluding safety stk –> 100
+PLUS
Safety Stock —> 50

100 + 50 = 150 <– AVG inventory INCLUDING safety stock

Therefore D is the answer.

Question 55

MCQ-03644
Kimbeth Manufacturing uses a process cost system to manufacture dust density
sensors for the mining industry. The following information pertains to operations for the
month of May:
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May 100,000
Completed production during May 92,000
Ending work-in-process inventory, May 31 24,000
The beginning inventory was 60 percent complete for materials and 20 percent
complete for conversion costs. The ending inventory was 90 percent complete for
materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and
factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880;
and factory overhead, $391,160.
Using the weighted average method, the equivalent unit cost of materials for May is:
A. $4.50
B. $4.60
C. $5.03
D. $5.46

Question 56

MCQ-05180
A company issued common stock and preferred stock. Projected growth rate of the
common stock is 5 percent. The current quarterly dividend on preferred stock is $1.60.
The current market price of the preferred stock is $80 and the current market price of
the common stock is $95. What is the expected rate of return on the preferred stock?
A. 7 percent
B. 2 percent
C. 8 percent
D. 13 percent

Answer 56

Choice “C” is correct.
The preferred stock pays dividends of $1.60 per quarter, or $6.40 per year. $6.40 annual dividends / $80 current market price = 8 percent.

Question 57

MCQ-10335

Barclay Corporation invested $600,000 in a capital project, including $40,000 in installation charges. The project had a useful life of 12 years with no salvage value and generated cash flows of $150,000 each year. Assuming a 30% tax rate and straight-line
depreciation for tax purposes, Barclay’s after-tax cash flows per year would have been equal to:

A. $140,000
B. $150,000
C. $120,000
D. $105,000

Answer 57

Choice C is correct

Pre tax cash flows = $150,000
minus taxes calculated at 30% (-$45000)
=$105,000

DONT FORGET THE TAX PROTECTION ON DEPRECIATION

Capital price of $600,000 divided by a 12 year useful life with NO salvage value = $50,000 of depreciation per year.

The depreciation gives you a tax shield which adds to your “After-tax cash flows”.

$50,000 depreciation * 30% tax rate = $15,000 annual tax shield.

105,000 + 15,000 = $120,000

Question 57

MCQ-10363

The Carters signed an agreement with an effective annual interest rate of 7.74%. Interest is payable semi-annually. What was the stated rate?

A. 7.50
B. 7.60
C. 15.48
D. 7.70

Answer 57

Choice “B” is correct. The effective annual interest rate is equal to one plus the stated interest rate divided by the interest periods raised the power of the compounding periods. For semi-annual interest, divide the stated interest rate expression by 2 and
square it. Subtract 1 and arrive at the effective annual rate. To work backwards, in this
instance, add one to the effective annual rate (arrive at 1.0774), take the square root to
arrive at 1.038, subtract one to arrive at the semi-annual rate and multiply by 2 to arrive
at the stated rate as follows:

Question 58

MCQ-15779
Macro Corp. issues $3 million of $10,000 face amount debenture bonds with a coupon
rate of 9 percent and an effective interest rate of 8 percent. With interest payable
semiannually, what total amount will be disbursed on each interest payment date?

A. $135,000
B. $270,000
C. $240,000
D. $120,000
Explanation

Answer 58

Choice “A” is correct. The amount of cash disbursed on each interest payment date is
equal to the face amount of the bonds multiplied by the coupon rate and then adjusted
for the frequency of payment.
With $3 million as the face amount for the bonds, an annual coupon rate of 9 percent,
and semiannual payments, the cash disbursement on each interest payment date is
equal to $3 million × 9% × ½ (to represent 6 months in a year) = $135,000.
Choice “B” is incorrect. This answer choice represents the annual amount of interest
disbursed, but the question asks for the amount to be disbursed on each interest
payment date.
Choice “C” is incorrect. This answer choice uses the effective interest rate of 8 percent
rather than the coupon rate of 9 percent to calculate interest payments. Also, the
question asks for the amount to be disbursed on each payment date (every six months),
not the annual amount.
Choice “D” is incorrect. This answer choice uses the effective interest rate of 8 percent
rather than the coupon rate of 9 percent to calculate interest payments

Question 59

MCQ-03907
Which of the following is true regarding inventoriable costs?

A. Inventoriable costs are regarded as assets before the products are sold.
B. Inventoriable costs include only the prime costs of manufacturing a product.
C. Inventoriable costs include only the conversion costs of manufacturing a
product.
D. Inventoriable costs exclude fixed factory overhead.

Answer 59

Choice “A” is correct. Inventoriable costs are assets until sold, when they become “cost of goods sold.”

Choice “B” is incorrect. Prime costs include direct materials and direct labor, but not
factory overhead.

Choice “C” is incorrect. Conversion costs are direct labor and overhead, but exclude
direct material.

Choice “D” is incorrect. Fixed factory overhead is capitalized as part of inventoriable
costs.

Question 60

Assuming a 360 day year, what is the formula for investment income.

Answer 60

(# of days collection reduction / 360 days) * Annual sales

Question 61

MCQ-04038

Foster Inc. is considering implementing a lock-box collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lock-box system will reduce collection time by 3 days. If Foster can invest funds at 8 percent, should it use the lockbox system? Assume a 360-day year.

A. Yes, producing savings of $60,000 per year.
B. No, producing a loss of $60,000 per year.
C. No, producing a loss of $20,000 per year.
D. No, producing a loss of $140,000 per year.

Answer 61

Choice “C” is correct. No, do not use the lock-box system, which produces a loss of $20,000 per year.

$80,000 Lockbox cost

= (-20,000)

which means it’s a $20,000 LOSS

• 60,000 = (3 days / 360 days) × $90,000,000 × .08