NEW BEC REVIEW 9/22/23 Mistakes from B1-B3 A LOT OF THEM REVIEW THIS Flashcards
MCQ-06450
Which of the following is not a goal of an Enterprise Risk Management framework (ERM)?
A. Provide reasonable expectation that company objectives and goals are achieved and problems and surprises are minimized.
B. Avoid adverse publicity and damage to the entity’s reputation.
C. Assess risks continuously and identify the steps to take and resources to allocate to overcome or mitigate risk.
D. Achieve financial and performance targets.
Choice “B” 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 providing reasonable
expectation that objectives and goals are achieved.
Choice “C” is incorrect. ERM focuses on numerous goals including risk assessment and
mitigation.
Choice “D” is incorrect. ERM focuses on numerous goals including achievement of
financial and performance targets.
Gray Co. and Seas Co. have the following items on their balance sheet at the end of the
current year:
Current Assets / Current Liabilities
Gray Co. $2,500,000 / $1,000,000
Seas Co. 5,000,000 / 3,000,000
Which of the following statements best describes the liquidity position of the two companies in relation to each other?
A. Gray is more liquid because it has a larger current ratio than Seas
.
B. Seas is more liquid because it carries a larger amount of current assets than Gray.
C. Gray is more liquid because it carries a smaller amount of current liabilities than Seas.
D. Seas is more liquid because it has working capital greater than Gray.
The current ratio is liquidity.
Current Assets / Current Liabilities
The higher the better
Choice “A” is correct. The best way to measure the liquidity position of a company is by using the current ratio, which reflects a firm’s ability to generate cash to meet its short-term obligations. The current ratio divides current assets by current liabilities. A higher ratio represents a stronger liquidity position.
For Gray, the current ratio is equal to 2.5 ($2,500,000 / $1,000,000).
For Seas, the current ratio is equal to 1.67 ($5,000,000 / $3,000,000).
Based on the current ratio output, gray is more liquid because it has a larger current ratio than Seas
MCQ-03639
Which one of the following is most relevant to a manufacturing equipment replacement
decision?
A. Gain or loss on the disposal of the old equipment.
B. A lump-sum write-off amount from the disposal of the old equipment.
C. Original cost of the old equipment.
D. Disposal price of the old equipment.
Rule: Relevant costs are only those costs that will differ among many alternatives.
Choice “D” 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.
MCQ-15053
Rena is part of the management team at Brock Supplies, and she has been tasked with implementing controls over all expense accounts. Which of the following would be a
detective supervisory and monitoring control that would allow her to ensure ongoing monitoring of performance of expenses?
A. Expense budgets
B. Clear organizational hierarchy charts
C. Regular backups of data
D. Input validation
Choice “A” is correct. Budgets and forecasts are detective supervisory and monitoring controls. Comparing budgets and forecasts to actual results can assist in detecting
anomalies in business processes.
Choice “B” is incorrect. Organizational charts are a preventive supervisory and monitoring control as opposed to detective.
Choice “C” is incorrect. Regular backups are a preventive standing data control to ensure that data is not lost.
Choice “D” is incorrect. Input validation is a preventive processing control focused on ensuring that all appropriate items have been processed
MCQ-12455
According to the Sarbanes-Oxley Act of 2002, an issuer must disclose whether or not it has adopted a code of ethics for which of the following?
A. All employees of the issuer.
B. The audit committee.
C. The issuer’s senior financial officers, but not for other employees of the issuer.
D. Audit staff.
Choice “C” is correct. Per Title IV (Enhanced Financial Disclosures) of the SarbanesOxley Act of 2002, issuers must disclose whether they have adopted a code of conduct
(ethics) for senior officers (e.g., CEO, CFO, controller, etc.). If a code of conduct has not been adopted, the issuer must disclose the reasons.
MCQ-03924
A cost that bears an observable and known relationship to a quantifiable activity base
is a(n):
A. Fixed cost.
B. Engineered cost.
C. Indirect cost.
D. Target cost
Choice “B” is correct. An engineered cost bears an observable and known relationship to a quantifiable activity base.
Choice “A” is incorrect. Fixed costs are all those organization and plant costs that continue to be incurred and cannot be reduced without damaging the organization’s
ability to meet long-range goals.
Choice “C” is incorrect. Indirect costs (overhead costs) are all manufacturing costs other than direct material and direct labor.
Choice “D” is incorrect. A target cost is carefully predetermined standard cost that should be attained.
MCQ-04187
An example of a carrying cost is:
A. Disruption of production schedules.
B. Obsolescence.
C. Handling costs.
D. Quantity discounts lost
Choice “B” is correct.
Obsolescence is an example of a carrying cost.
MCQ-03878
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to analyze the source of potential problems
and their locations within a process is called a:
A. Value Chain Analysis.
B. Control Chart.
C. Fishbone Diagram.
D. Pareto Diagram.
Choice “C” is correct. A fishbone diagram describes a process, the contributions to the process, and the potential problems that could occur at each phase of a process. The process is represented by a single horizontal line while the contributions to the process
are represented by diagonal lines that create the image of a fishbone. Fishbone diagrams provide a framework for managers to analyze the problems that contribute to
the occurrence of defects.
Choice “A” is incorrect. A value chain analysis is a macro level flowchart that shows the relationship between broad functional areas, the product delivered by the organization,
and manner in which value is added at each link in the chain.
Choice “B” is incorrect. A control chart shows the performance of a particular process in relation to acceptable upper and lower limits of deviation. Performance within the
limits is termed statistical control. Processes are designed to ensure that performance consistently falls within the acceptable range of error.
Choice “D” is incorrect. A Pareto diagram represents an individual and cumulative
graphical analysis of errors by type. Individual error types are represented on a
histogram (bar graph), while the cumulative number of errors is presented on a line
graph. The Pareto diagram is used to prioritize process improvement efforts.
MCQ-05782
Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment?
A. Long-term rate on U.S. Treasury bonds.
B. Weighted-average cost of capital.
C. Prime rate of interest.
D. Short-term rate on U.S. Treasury bonds.
Choice “B” is correct. 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.
Choice “A” is incorrect. The long-term rate on U.S. Treasury bonds represents a risk-free rate of return and would not necessarily consider the risk-specific return required for a
particular company’s IRR and would not be appropriate as a hurdle rate.
Choice “C” is incorrect. The prime rate of interest represents the rate offered by banks to their most credit worthy debtors. The prime rate of return would not necessarily
consider the risk-specific return required for a particular company’s IRR and would not be appropriate as a hurdle rate.
Choice “D” is incorrect. The short-term rate on U.S. Treasury bonds represents the risk-free rate of return and would not be appropriate for use as a hurdle rate, in most instances.
MCQ-00625
As a control activity, variance analysis will likely be used by management to do all of the following, except comparing:
A. Actual performance year over year.
B. Budgeted financial performance to actuals.
C. Year-over-year asset locations to inventory records.
D. Operating results to preestablished standards.
Choice “C” is correct. Comparing the actual locations of physical assets to what is maintained in inventory records is a critical control activity, as a company needs to ensure that it is safeguarding its physical assets. However, variance analysis is unlikely to be used for comparing year-over-year actual locations to recorded locations.
Choice “A” is incorrect. Variance analysis can certainly be used to compare actual performances year over year.
Choice “B” is incorrect. Variance analysis is often used to compare budgeted numbers
to actual numbers; in particular, for financial measures.
Choice “D” is incorrect. Comparing actual operating results to preestablished standards is typically performed using variance analysis.
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. No, producing a loss of $140,000 per year.
B. No, producing a loss of $60,000 per year.
C. No, producing a loss of $20,000 per year.
D. Yes, producing savings of $60,000 per year.
Formulate Investment Income:
Investmnt Income =
(collection time saved / # of days in year) * Annual Sales * cost of capital
In this case
(3/360) * $90 million * .08
= $60,000
Investment Income $60,000
minus
Cost of box $80,000
= -$20,000
AKA.
NO LOCKBOX. This sh*t would create a $20k hit
Choice “C” is correct. No, do not use the lock-box system, which produces a loss of $20,000 per year.
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. 2 percent
B. 7 percent
C. 8 percent
D. 13 percent
NOTE: The problem gives us QUARTERLY dividend
hoice “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
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. 150 units.
C. 250 units.
D. 100 units.
EOQ represents the order quantity
In a “standard” system divide EOQ by 2 to get the Avg Inventory
EOQ/2 = 200 / 2 = 100 = Avg Inventory Excluding Safety Stk
100 + 50 safety stk. = 150 Avg Inventory INCLIUDING S Stock
MCQ-12461
A company has a capital project with before-tax cash inflows in real dollars that are expected to be $200,000 within two years. The inflation rate is expected to be 6 percent each year during that period. What is the before-tax cash inflow expressed in nominal
dollars?
A. $224,720
B. $178,571
C. $224,000
D. $177,999
Choice “A” is correct. Nominal dollars are equal to the inflation rate applied to real dollars. If $200,000 is the amount expected in two years expressed in real dollars, the
inflation rate of 6 percent needs to be applied each year for the next two years to derive
the nominal amount.
$200,000 × 1.06 × 1.06 = $224,720.
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. $27,000
B. $(30,000)
C. $(18,000)
D. $12,000
Choice “D” 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%)
In plain english:
Step 1
40% of the tax base amt is pure savings because it is a NON-cash reduction in taxable income. Pure savings is an inflow.
So the first part of the equation is:
40% of $75,000 = +$30,000 [inflow]
straight savings with respect to end of life cashflow
Step 2
The cost to remove will be based on the net since it’s a CASH EXPENSE, therefore the amount leftover after taxes is an outflow
So you figure out the aftertax burden as $40,000 - (40,000 * the tax rate of .40)
= $40,000 [outflow] - $16,000 [tax savings is an infow] = $24,000 [net outflow]
remember. This is an outflow cause its CASH.
Salvage value is considered an INFLOW since it increases, but wait. We have to account for the tax rate to get the correct number for the benefit amt.
$10,000 * (1 - tax rate)
= $10,000 (.6)
= $6000 [Inflow]
Now take all the inflows and outflows and formulate to get the answer:
+30,000 [straight inflow because it’s reflected Per Tax but NOT Per Books]
-24,000 [outflow is netted cause it’s per tax and per books]
+6000 [inflow it’s netted because it’s also per tax and per books]
30000-240000+6000 = 12000
MCQ-04329
According to COSO, which of the following is included in the assess-and-report phase
of an effective approach to monitoring internal controls?
A. Prioritize risks.
B. Tone at the top.
C. Identify controls.
D. Prioritize findings.
Choice “D” is correct.
Findings occur as a result of monitoring internal controls. Once
those findings occur, they must be prioritized in order to help management and the organization address the most critical issues associated with their internal controls.
Risk prioritization occurs in the _______________component of the integrated framework.
Risk Assessment
