Mock Exam MCQ's 7.30.23 Flashcards
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?
2.0.
2.7.
It cannot be determined from the data provided. None of the answers are correct.
5.0.
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).
Which of the following methods may the Federal Reserve use to reduce inflationary pressures?
Decrease the target interest rate.
Increase margin requirements.
Increase the money supply.
Decrease reserve requirements.
Increase margin requirements.
The Federal Reserve can reduce the inflationary pressures by tightening the money supply. One of the Federal Reserve’s tools to tighten the money supply is increasing margin requirements. Increasing margin requirements will require the investors to deposit more money into a brokerage account before purchasing securities. This takes money out of the economy and tightens the money supply. Decreasing the money supply increases the interest rates, which depresses investment spending by businesses. A fall in investment spending reduces aggregate demand, which decreases the price level and reduces inflation. The Federal Reserve has the power to increase margin requirements under Regulation T.
According to COSO, which component of enterprise risk management (ERM) addresses an entity’s operating structures and core values?
Review and revision.
Information, communication, and reporting.
Governance and culture.
Strategy and objective-setting.
Governance and culture.
The governance and culture component addresses board responsibilities, operating structures, and core values, among others.
Tuscan Bank is required to reserve $20 out of every $100 deposited, and it has $5,000,000 in deposits. What is the current money multiplier?
2,500
5
.5
.2
5
The money multiplier is the reciprocal of the reserve ratio (1 ÷ RR). The reserve ratio is 20% ($20 ÷ $100). Thus, the money multiplier is 5 (1.0 ÷ .2).
Which of the following is not a component of internal control?
Control risk.
The control environment.
Information and communication.
Monitoring.
Control risk.
The five components of internal control described in COSO’s Internal Control – Integrated Framework are control environment, risk assessment, control activities, information and communication, and monitoring.
The following information was taken from the income statement of Hadley Co.:
What is Hadley Co.’s inventory turnover?
5.7
4
5
3
4
Inventory turnover equals cost of good sold (COGS) divided by the average inventory. COGS equals $60,000 ($17,000 beginning inventory + $56,000 purchases – $13,000 ending inventory), and the average inventory equals $15,000 [($17,000 beginning inventory + $13,000 ending inventory) ÷ 2]. Thus, inventory turnover equals 4 ($60,000 COGS ÷ $15,000 average balance in inventory).
A company has budgeted sales for January and February of 20,000 and 25,000 units, respectively. The selling price is $5 per unit and the purchase price is $3 per unit. Budgeted ending inventory is 10% of the next month’s sales. What is the budgeted cost of purchases for January?
$61,500
$75,000
$60,000
$54,000
$61,500
Since ending inventory from the December of the previous year already contains 10% of January’s expected sales, purchases for January only includes 90% of its sales. Furthermore, the ending inventory for January must include 10% of February’s sales. Since the purchase price for inventory is $3 per unit, the budgeted cost of purchases for January is therefore $61,500 {[(90% × 20,000 expected January sales) + (10% × 25,000 expected February sales)] × $3 cost per unit}.
Which of the following can be discovered using a data-mining process?
Artificial intelligence.
Previously unknown information.
Standard query reporting.
Data structure.
Previously unknown information.
Data mining examines large amounts of data to discover patterns in the data (i.e., unexpected relationships among data). A classic example of the use of data mining is the discovery by convenience stores that diapers and beer often appear on the same sales transaction in the late evening. Thus, previously unknown information can be discovered using a data-mining process.
Under the balanced scorecard concept, employee satisfaction and retention are measures used under which of the following perspectives?
Learning and growth.
Internal business.
Customer.
Financial.
Learning and growth.
The level of employee satisfaction and retention directly relates to the learning and growth perspective.
Which of the following statements is correct regarding the variety and price of products produced under monopolistic competition as compared to production under perfect competition?
- The monopolistically competitive industry produces a smaller variety of products at a higher cost per unit.
- The monopolistically competitive industry produces a smaller variety of products at a lower cost per unit.
- The monopolistically competitive industry produces a greater variety of products at a higher cost per unit.
- The monopolistically competitive industry produces a greater variety of products at a lower cost per unit.
- The monopolistically competitive industry produces a greater variety of products at a higher cost per unit.
In monopolistic competition, products can be differentiated on a basis other than price, such as quality, brands, and styles. Firms in monopolistic competition sell differentiated products at a higher cost per unit.
The New Wave Co. is considering a new method for allocating overhead to its two products, regular and premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are also available:
What is the total cost per pound for the premium coffee using the new activity-based costing method?
$5.00
$7.75
$5.75
$9.75
$9.75
Under ABC, indirect costs are assigned to cost pools and then allocated to end products. The total cost for separating and roasting the beans is $3,500. This amount is allocated to products based on machine hours. Production of premium coffee uses 550 of 700 total machine hours, so the separating and roasting cost allocated to it is $2,750 [$3,500 × (550 MH ÷ 700 MH)]. Packing and shipping costs are allocated based on pounds of coffee. Because the amounts in pounds of regular and premium coffee are the same, each is allocated $750 ($1,500 × 50%) of packing and shipping costs. Thus, the total overhead cost for the premium coffee is $3,500 ($2,750 + $750). The overhead cost per pound is $7 ($3,500 ÷ 500 pounds). Given a direct cost per pound of $2.75 ($1.25 direct labor + $1.50 direct materials), the total cost per pound is $9.75 ($7 + $2.75).
An overall description of a database, including the names of data elements, their characteristics, and their relationship to each other, is defined by using a
Data manipulation language.
Data definition language.
Data control language.
Data command interpreter language.
Data definition language.
The data definition language defines the database structure and content, especially the schema (the description of the entire database) and subschema (logical views of the database). The schema specifies characteristics such as the names of the data elements contained in the database and their relationship to each other. The subschema defines the logical data views required for applications, which limits the data elements and functions available to each application.
A firm desires a finished goods ending inventory equal to 25% of the following month’s budgeted sales. January sales are budgeted at 10,000 units and February at 12,000 units. Each unit requires 2 pounds of Material X, which costs $4 per pound. The company has a just-in-time system and materials are delivered daily just prior to use, so no raw materials inventories are maintained. Materials are paid for in the month following purchase. The January 1 finished goods inventory is 2,500 units. In February, what amount should the company expect to pay as a cash outflow for raw materials?
$42,000
$84,000
$21,000
$40,000
$84,000
The firm will need 10,000 units for January sales plus 3,000 (12,000 × 25%) for ending inventory. The production quota for January is therefore 10,500 (13,000 needed – 2,500 beginning inventory). Each unit requires 2 pounds of materials, or 21,000 pounds. At $4 per pound, the materials will cost $84,000, which will be paid in February.
According to the COSO, benefits of effective enterprise risk management include each of the following except
Improving resource deployment.
Increasing the range of opportunities.
Decreasing inherent risk appetite.
Enhancing enterprise resilience.
Decreasing inherent risk appetite.
Effective enterprise risk management can increase the range of opportunities, identify and manage risk entity-wide, increase positive outcomes and advantages while reducing negative surprises, reduce performance variability, improve resource deployment, and enhance enterprise resilience. However, risk appetite consists of the amount and types of risk the organization is willing to accept in pursuit of value. Each organization considers its mission, vision, culture, prior strategies, and risk capacity to set its risk appetite. Decreasing inherent risk appetite is therefore not a benefit of effective enterprise risk management.
Who is required to make special certification statements regarding the establishment of internal control systems on Form 10-K?
- Both the principal executive officer and the principal financial officer.
- The principal executive officer, but not the principal financial officer.
- Neither the principal financial officer nor the principal executive officer.
- The principal financial officer, but not the principal executive officer.
- Both the principal executive officer and the principal financial officer.
Under the Sarbanes-Oxley Act of 2002, both the chief executive officer and the chief financial officer are required to certify on Form 10-K (annual report) that internal controls have been established and maintained.
When documenting internal control, the independent accountant sometimes uses process mapping, which can best be described as a
- Graphic illustration of the flow of operations that is used to replace the accountant’s internal control questionnaire.
- Pictorial presentation of the flow of instructions in a client’s internal computer system.
- Symbolic representation of a system or series of sequential processes.
- Diagram that clearly indicates an organization’s internal reporting structure.
- Symbolic representation of a system or series of sequential processes.
Visual depictions are helpful in understanding business processes and how they are integrated into the business model. They identify potential improvements of processes and document and confirm appropriate internal controls. Process mapping is a simple form of flowcharting used to depict a business process.
General controls in an information system include each of the following except
Software acquisition.
Security management.
Logic tests.
Information technology infrastructure.
Logic tests.
General controls are the umbrella under which the IT function operates. They affect the organization’s entire processing environment and include controls over (1) data center and network operations; (2) systems software acquisition, change, and maintenance; (3) access security; and (4) application system acquisition, development, and maintenance. General controls sustain the conditions under which application controls can function properly. A logic test is a type of application control that confirms that the input value is appropriate (e.g., a letter cannot appear in a field that should be a number).
Mighty, Inc., processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2, and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?
$480,000
$200,000
$120,000
$400,000
$480,000
Given no additional processing costs, white breast meat has a sales value of $200,000 (100,000 pounds × $2), and legs have a sales value of $50,000 (50,000 pounds × $1). Thus, the joint costs allocated to white breast meat based on relative sales value is $480,000 [$600,000 × ($200,000 ÷ $250,000)].
Which of the following is the primary advantage of using a value-added network (VAN)?
- It provides increased security for data transmissions.
- It provides confidentiality for data transmitted over the Internet.
- It enables the company to obtain trend information on data transmissions.
- It is more cost effective for the a company than transmitting data over the Internet.
- It provides increased security for data transmissions.
VANs are private networks that provide their customers with reliable, high-speed, secure transmission of data.
Of the following reasons to establish internal control, which is the most comprehensive?
- Safeguard the resources of the organization.
- Ensure the accuracy, reliability, and timeliness of information.
- Encourage compliance with organizational objectives.
- Provide reasonable assurance that the objectives of the organization are achieved.
- Provide reasonable assurance that the objectives of the organization are achieved.
The COSO model broadly defines internal control as a “process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.”
A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?
It will hurt all U.S. business.
It will benefit U.S. importers.
It will benefit U.S. exporters.
It will make foreign goods cheaper for U.S. consumers.
It will benefit U.S. exporters.
A decline in the exchange rate of the U.S. dollar means that the U.S dollar can be exchanged for fewer units of a foreign currency. U.S. exporters will benefit because they sell their goods for foreign currency. This foreign currency can now be exchanged for more units of the U.S. dollar because of the dollar’s decline in value.
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.
Compute DQZ’s expected rate of return, under the capital asset pricing model (CAPM).
7.20%
12.20%
12.00%
9.20%
9.20%
The market return (RM), given as 12%, minus the risk-free rate (RF), given as 5%, is the market risk premium. It is the rate at which investors must be compensated to induce them to invest in the market. The beta coefficient (β) of an individual stock, given as .60, is the correlation between volatility (price variation) of the stock market and the volatility of the price of the individual stock. Consequently, the expected rate of return is 9.20% [RF + β (RM – RF) = .05 + .6(.12 – .05)].
Which of the following documents would most likely contain specific rules for the management of a business corporation?
Shareholders’ agreement.
Bylaws.
Certificate of authority.
Articles of incorporation.
Bylaws.
Bylaws govern the internal structure and operation of a corporation. Initial bylaws are adopted by the incorporators or the board. They may contain any provision for managing the business and regulating the affairs of the corporate entity not in conflict with the law or the articles of incorporation.
Which of the following is not an element of the completeness and accuracy criterion the Assurance Services Executive Committee (ASEC) uses to define a set of data?
The level of precision of the data.
The unit used to measure the data.
The margin of error of the data.
The intended use of the data.
The intended use of the data.
Identifying the intended use of the data belongs to the criterion identifying the purpose of the data but not the completeness and accuracy criterion.
Fact Pattern:
The state of the economy has a strong effect on the expected returns for Techspace, Inc., as shown below:
Given that the standard deviation (σ) of Techspace returns is 15.36% and the expected rate of return is 8%, the coefficient of variation is
1.92
1.23
1.0
2.36
1.92
The coefficient of variation is useful when the rates of return and standard deviations of two investments differ. It measures the risk per unit of return.
A company uses a process costing system to record inventory costs. Data at the end of the month are as follows:
The company uses the weighted-average method to compute the costs. Its total costs for the month are $10,000 for direct materials and $19,600 for conversion costs. What is the total conversion cost per equivalent unit?
$19.60
$24.50
$20.00
$30.00
$20.00
EUP are calculated by the sum of total units completed and transferred out in the current period plus the proportion of completed ending WIP (Ending WIP × Percent completed). Thus, EUP of conversion costs is 980 [900 + (100 × 80%)]. The cost per EUP under the weighted-average method is calculated as beginning WIP costs plus current-period costs divided by EUP. Because conversion costs totaled $19,600 for the month, and no beginning WIP existed, conversion costs per EUP is $20 ($19,600 current period costs ÷ 980 EUP).
The target capital structure of Traggle Co. is 50% debt, 10% preferred equity, and 40% common equity. The interest rate on debt is 6%, the yield on the preferred equity is 7%, the cost of common equity is 11.5%, and the tax rate is 40%. Traggle does not anticipate issuing any new stock. What is Traggle’s weighted-average cost of capital?
6.50%
8.30%
7.10%
6.77%
7.10%
A firm’s weighted-average cost of capital is a single, composite rate of return on its combined components of capital. The component cost of debt is the after-tax interest rate on the debt because the interest payments are tax deductible. The after-tax cost of debt is 3.6% [6% × (1.0 – .40)]. The weighted-average cost of capital is calculated as follows:
A company wants to approximate the 12% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?
2.00%, 15, net 45.
1.00%, 15, net 45.
0.50%, 10, net 30.
0.75%, 10, net 30.
1.00%, 15, net 45.
Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows:
Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this equipment, which has an average value of $100,000?
35%, $3,600
$3,600, 35%
$2,000, 20%
20%, $2,000
20%, $2,000
Operating income is equal to $20,000 ($80,000 – $45,000 – $15,000), invested capital is equal to $100,000, and the target return on invested capital is equal to $18,000 ($100,000 × 18%). Therefore, the ROI on this equipment is 20% ($20,000 operating income ÷ $100,000 average invested capital) and the RI is $2,000 ($20,000 – $18,000).
According to the capital asset pricing model (CAPM), which of the following statements is true regarding the required rate of return for a security with a beta of 1?
The required rate of return is lower than the risk-free rate.
The required rate of return is equal to the risk-free rate.
The required rate of return is higher than the market return.
The required rate of return is equal to the market return.
The required rate of return is equal to the market return.
The CAPM quantifies the required rate of return on a security by relating the security’s level of risk to the average return available in the market. When beta equals 1, the required rate of return is equal to the market return, as shown below:
Standards for a product of Acme Mfg. Co. was 10,000 units of raw materials at a price of $20 per unit. The product’s actual usage of materials was 11,200 units at $18.50 per unit. What was Acme’s materials price variance?
$16,800 favorable.
$24,000 unfavorable.
$7,200 unfavorable.
$15,000 favorable.
$16,800 favorable.
The materials price variance equals the actual quantity of materials purchased (in this question the assumption is that the amount used and purchased is the same) times the difference between the standard price and the actual price.
Buff Co. is considering replacing an old machine with a new machine. Which of the following items is economically relevant to Buff’s decision? (Ignore income tax considerations.)
Carrying Amount of Old Machine = No
Disposal Value of New Machine = Yes
In a capital budgeting decision, the manager considers only the costs relevant to the investment decision. The key variable is relevant costs, not total costs. Past costs, including the book value of old equipment, are irrelevant because they are sunk costs. However, opportunity costs, disposal values of new equipment, and the fair value of an old machine are all economically relevant costs.
DJ Co. has a job-order cost system. The following debits (credits) appeared in the work-in-process account for the month of March:
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?
$2,500
$2,250
$4,725
$4,250
$4,250
*The direct labor cost is multiplied by 90% in determining the total overhead applied to all jobs to calculate the direct labor cost associated with the project; the overhead is divided by 90%.
A company uses a standard costing system. The production budget for Year 1 was based on 200,000 units of output. Each unit requires 2 standard hours of manufacturing labor for completion. Total overhead was budgeted at $900,000 for the year, and the budgeted fixed overhead rate was $1.50 per direct manufacturing labor hour. Both variable and fixed overheads are allocated to the product based on direct manufacturing labor hours. The actual data for Year 1 are as follows:
What is the amount of unfavorable variable overhead efficiency variance?
$55,000
$21,750
$33,250
$43,500
$21,750
The variable overhead efficiency variance is the difference between the standard hours allowed for actual production and the actual quantity of hours used, times the standard variable overhead (VOH) rate. In this case, the standard hours allowed for the actual production is 396,000 hours (198,000 units produced × 2 standard hours of manufacturing labor per unit). The total budgeted variable overhead cost for Year 1 is $300,000 [$900,000 total budgeted overhead costs – (200,000 × 2 × $1.50) total budgeted fixed overhead cost]. Thus, the VOH rate is $0.75 [$300,000 total budgeted variable overhead cost ÷ (200,000 × 2) total budgeted variable overhead hours]. The unfavorable variable overhead efficiency variance is $21,750 [(396,000 standard hours allowed for the actual production – 425,000 actual quantity of hours used) × $0.75 VOH rate].
