Practice Exam 6.21.23

Question 1

The following information pertains to three shipping terminals operated by Krag Corp.:

Krag’s internal auditor randomly selects one set of shipping documents, ascertaining that the set selected contains an error. The probability that the error occurred in the land terminal is

A. 2%
B. 25%
C. 10%
D. 50%

Answer 1

B. 25%

The probability of an error was 4% [(50% × 2%) + (40% × 4%) + (10% × 14%)]. Consequently, the probability that the error occurred in the land terminal is 25% [(50% × 2%) ÷ 4%].

Question 2

In accounting for by-products, the value of the by-product may be recognized at the time of

Answer 2

A. Yes Yes

Practice with regard to recognizing by-products in the accounts is not uniform. The most cost-effective method for the initial recognition of by-products is to account for their value at the time of sale as a reduction in the joint cost or as a revenue. The alternative is to recognize the net realizable value at the time of production, a method that results in the recording of by-product inventory.

Question 3

In theory, which of the following coefficients of correlation would eliminate unsystematic risk in an investment portfolio?

A. 1.0
B. 0.0
C. –1.0
D. No theoretical coefficient exists for the elimination of risk in a portfolio context.

Answer 3

C. –1.0

The correlation coefficient measures the degree to which any two variables, e.g., two stocks in a portfolio, are related. Perfect negative correlation (–1.0) means that the two variables always move in the opposite direction. Given perfect negative correlation, unsystematic risk is, in theory, eliminated.

Question 4

A company using EDI made it a practice to track the functional acknowledgments from trading partners and to issue warning messages if acknowledgments did not occur within a reasonable length of time. What risk was the company attempting to address by this practice?

A. Transactions that have not originated from a legitimate trading partner may be inserted into the EDI network.
B. EDI data may not be accurately and completely processed by the EDI software.
C. Transmission of EDI transactions to trading partners may sometimes fail.
D. There may be disagreement between the parties as to whether the EDI transactions form a legal contract.

Answer 4

C. Transmission of EDI transactions to trading partners may sometimes fail.

Tracking of customers’ functional acknowledgments, when required, will help to ensure successful transmission of EDI transactions. Some possible controls include (1) the provision of end-to-end acknowledgments, particularly when multiple, interconnected networks are involved, and (2) maintenance of a tickler file of outstanding functional acknowledgments, with issuance of warnings for those that are overdue.

Question 5

Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials quantity variance was $2,500 unfavorable and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?

A. $17,500 favorable.
B. $15,000 favorable.
C. $17,500 unfavorable.
D. $15,000 unfavorable.

Answer 5

A. $17,500 favorable.

The materials quantity (usage or efficiency) variance can be used to derive the standard price for materials as follows:

Question 6

Fact Pattern: Tucker Corporation had the following financial statements for the years ended December 31, Year 2, and December 31, Year 3:

The average collection period (using 360 days) for Tucker Corporation in Year 2 is

A. 20.88
B. 21.43
C. 21.73
D. 17.55

Answer 6

B. 21.43

The average collection period equals ending net accounts receivable divided by the quotient of the net sales over the days in the year. Thus, the average collection period is 21.43 days {$975 ÷ [($20,000 – $3,620) ÷ 360]}.

Question 7

Fact Pattern: An organization has collected data on the complaints made by computer users and has categorized the complaints in the Pareto diagram below.

The chart displays

A. The absolute frequency of each computer complaint.
B. The relative frequency of each computer complaint.
C. The median of each computer complaint.
D. The arithmetic mean of each computer complaint.

Answer 7

A. The absolute frequency of each computer complaint.

This Pareto diagram depicts the frequencies of complaints in absolute terms. It displays the actual number of each type of complaint.

Question 8

An increase in production levels within the relevant range would

A. Not change variable costs per unit.
B. Not change total variable costs.
C. Not change fixed costs per unit.
D. Change total fixed costs.

Answer 8

A. Not change variable costs per unit.

When production levels increase within a relevant range, the total costs will obviously increase. Although the total fixed costs will remain constant, the fixed costs per unit will decrease because more units are available to absorb the constant amount of total fixed costs. Furthermore, total variable costs will increase while unit variable costs will remain constant.

Question 9

Fact Pattern: Presented are Valenz Company’s records for the current fiscal year ended November 30:

If Valenz Company uses variable costing, the inventoriable costs for the fiscal year are

A. $400,000
B. $490,000
C. $450,000
D. $530,000

Answer 9

C. $450,000

Under variable costing, the only costs that are capitalized are the variable costs of manufacturing. These include

Question 10

Benjamin invests $10,000 in a treasury note that matures in 6 years. The treasury note yields 2% per annum. How much will the treasury bill repay at maturity?

A. $11,200
B. $11,261
C. $8,880
D. $10,000

Answer 10

B. $11,261

The repayment amount is the future value of the investment. The maturity of the note is 6 years, and the interest rate is 2% per annum. The repayment times the present value of $1 at 2% equals the investment. Consequently, the repayment is $11,261 ($10,000 ÷ 0.8880).

Question 11

Which of the following is the best policy for the protection of a company’s vital information resources from computer viruses?

A. Prudent management procedures instituted in conjunction with technological safeguards.
B. Physical protection devices in use for hardware, software, and library facilities.
C. Existence of a software program for virus prevention.
D. Stringent corporate hiring policies for staff working with computerized functions.

Answer 11

A. Prudent management procedures instituted in conjunction with technological safeguards.

Acceptably safe computing can be achieved by carefully crafted policies and procedures used in conjunction with antivirus and access control software.

Question 12

The relationship of the total debt to the total equity of a corporation is a measure of

A. Profitability.
B. Creditor risk.
C. Liquidity.
D. Break even.

Answer 12

B. Creditor risk.

The debt-to-equity ratio is a measure of risk to creditors. It indicates how much equity is available to absorb losses before the interests of debt holders are impaired. The less leveraged the firm, the safer the creditors’ interests.

Question 13

A project’s net present value, ignoring income tax considerations, is normally affected by the

A. Carrying amount of the asset to be replaced by the project.
B. Proceeds from the sale of the asset to be replaced.
C. Amount of annual depreciation on the asset to be replaced.
D. Amount of annual depreciation on fixed assets used directly on the project.

Answer 13

B. Proceeds from the sale of the asset to be replaced.

To compute a project’s net present value, the initial investment is subtracted from the present value of the after-tax cash flows. The proceeds from the sale of the asset to be replaced reduce the initial investment.

Question 14

To facilitate the adoption of a new database and electronic data interchange (EDI) with its suppliers, an organization analyzed its current system and is considering scaling up its current computer system such that the system can handle transactional data more efficiently. The CEO, convinced by the system analyst, expects a 20% increase in data processing efficiency, primarily driven by the reduced time for each computer to process the same amount of data. Which of the following terms best depicts the type of system scaling the organization is considering?

A. Horizontal scalability.
B. Vertical scalability.
C. Top-down scalability.
D. Bottom-up scalability.

Answer 14

B. Vertical scalability.

Vertical scalability increases computing capacity by adding more power (e.g., RAM, processors, etc.) to the computers instead of adding computers (horizontal scalability). Thus, it reduces the time for each computer to process the same amount of data compared to an unscaled system or a horizontally scaled system.

Question 15

Fact Pattern:
Petro-Chem, Inc., is a small company that acquires high-grade crude oil from low-volume production wells owned by individuals and small partnerships. The crude oil is processed in a single refinery into Two Oil, Six Oil, and impure distillates. Petro-Chem does not have the technology or capacity to process these products further and sells most of its output each month to major refineries. There were no beginning inventories of finished goods or work-in-process on November 1. The production costs and output of Petro-Chem for November are shown in the next column.

The portion of the joint production costs assigned to Two Oil based upon the relative sales value of output is

A. $2,286,000
B. $4,000,000
C. $4,800,000
D. $2,500,000

Answer 15

B. $4,000,000

The total production costs incurred are $10,000,000, consisting of crude oil of $5,000,000, direct labor of $2,000,000, and overhead of $3,000,000. The total value of the output is as follows:

Because Two Oil composes 40% of the total sales value ($6,000,000 ÷ $15,000,000), it will be assigned 40% of the $10,000,000 of joint costs, or $4,000,000.

Question 16

Fact Pattern:
Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next 5 months are as follows:

Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy’s policy is to manufacture 1.5 times the coming month’s projected sales every other month, starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month’s projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months.

Daffy Tunes’ dollar production budget for toy rabbits for February is

A. $113,500
B. $327,000
C. $390,000
D. $127,500

Answer 16

D. $127,500

The units to be produced in February equal 50% of March sales, or 16,500 units (33,000 × .5). The unit variable cost is $7.00 ($3.50 + $1.00 + $2.00 + $.50), so total variable costs are $115,500 (16,500 × $7). Thus, the dollar production budget for February is $127,500 ($115,500 VUC + $12,000 FC).

Question 17

The basic difference between a master budget and a flexible budget is that a master budget is

A. Reporting the costs that should have been incurred given the achieved level of production.
B. Prepared before the period begins, while a flexible budget is prepared after it ends.
C. For an entire production facility, but a flexible budget is applicable to single departments only.
D. Based on a fixed standard, but a flexible budget allows management latitude in meeting goals.

Answer 17

B. Prepared before the period begins, while a flexible budget is prepared after it ends.

The master budget, prepared before the next accounting period, is management’s best estimate of sales, production levels, and costs. The flexible budget, prepared after actual output is known, consists of the costs that should have been incurred based on the actual level of production.

Question 18

The director of sales asks for a count of customers grouped in descending numerical rank by (1) the number of orders they place during a single year and (2) the dollar amounts of the average order. The visual format of these two pieces of information is most likely to be a

A. Fishbone diagram.
B. Pareto diagram.
C. Cost of quality report.
D. Kaizen diagram.

Answer 18

B. Pareto diagram.

A Pareto diagram displays the values of an independent variable such that managers can quickly identify the areas most in need of attention.

Question 19

Data regarding Rombo Company’s budget are shown below.

Rombo Company’s production budget will show total units to be produced of

A. 4,000
B. 4,300
C. 4,600
D. 3,700

Answer 19

D. 3,700

Rombo’s required production for the year can be calculated as follows:

Question 20

Which of the following indicates that market-based transfer prices would be preferable to cost-based transfer prices?

A. The market is imperfectly competitive for the intermediate product, and the selling division has no unused capacity.
B. The market is perfectly competitive for the intermediate product, and the selling division has ample unused capacity.
C. The market is imperfectly competitive for the intermediate product, and the selling division has ample unused capacity.
D. The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity.

Answer 20

D. The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity.

In a perfectly competitive market, firms are unable to control the market price of their product. If the selling division has no unused capacity, there is no threat of displaced external sales.

Question 21

A company has $10,000 in cash and $150,000 in merchandise inventory on March 31. The desired cash and merchandise inventory balances on June 30 are $20,000 and $250,000, respectively. Sales for the quarter are expected to be $300,000, all in cash. Gross margin is 40% of sales. Cash operating expenses are expected to be $50,000. All merchandise inventory purchases are paid for in cash at the time of purchase. What amount of financing will the company need during the quarter?

A. $20,000
B. $40,000
C. $50,000
D. $30,000

Answer 21

B. $40,000

The quarterly amount of purchases is

Question 22

Ral Co.’s target gross margin is 60% of the selling price of a product that costs $5.00 per unit. The product’s selling price per unit should be

A. $17.50
B. $12.50
C. $8.33
D. $7.50

Answer 22

B. $12.50

The gross margin is [1 – (the unit cost ÷ the unit selling price)]. Manipulating the equation, the unit selling price is [unit costs ÷ (1 – gross margin)]. Thus, the unit selling price is $12.50 [$5.00 ÷ (1 – .60)].

Question 23

A digital signature is used primarily to determine that a message is

A. Received by the intended recipient.
B. Unaltered in transmission.
C. Sent to the correct address.
D. Not intercepted en route.

Answer 23

B. Unaltered in transmission.

A digital signature is a means of authenticating an electronic document, such as a purchase order, acceptance of a contract, or financial information. Because digital signatures use public-key encryption, they are a highly secure means of ensuring security over the Internet.

Question 24

To measure inventory management performance, a company monitors its inventory turnover ratio. Listed below are selected data from the company’s accounting records:

Beginning finished goods inventory for the current year was 15% of the prior year’s annual sales, and ending finished goods inventory was 22% of the current year’s annual sales. What was the company’s inventory turnover at the end of the current period?

A. 1.82
B. 2.31
C. 3.47
D. 2.73

Answer 24

C. 3.47

Inventory turnover equals cost of goods sold divided by the average balance in inventory. Both cost of goods sold and average inventory must be calculated before the inventory ratio can be determined. In the current year, the gross profit percentage is 40%, meaning that the annual sales are multiplied by 60% to calculate cost of sales: $2,525,000 × .60 = $1,515,000. The current year’s average inventory equals the total of the beginning and ending finished goods inventory amounts, divided by 2. The beginning finished goods inventory equals 15% of the prior-year’s annual sales, or $318,750 ($2,125,000 × 15%). The ending finished goods inventory equals 22% of the current-year’s annuals sales, or $555,500 ($2,525,000 × 22%). Thus, the current year’s average inventory equals $437,125 [($318,750 + $555,500) ÷ 2]. The company’s inventory turnover at the end of the current period equals 3.47 ($1,515,000 ÷ $437,125).

Question 25

Which of the following options lists the correct sequence for preparing budgets?

A. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.
B. Sales budget, production budget, budgeted balance sheet, budgeted income statement.
C. Material purchases budget, production budget, cost of goods sold budget, cash receipts budget.
D. Cost of goods sold budget, sales budget, budgeted income statement, budgeted balance sheet.

Answer 25

A. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.

The components of the operating budget are prepared in the following order: sales (revenue) budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, ending finished goods inventory budget, cost of goods sold budget, and nonmanufacturing budget. Later in the budgeting process, the budgeted income statement is prepared and is followed by the cash budget and capital budget. Only after that is the budgeted balance sheet prepared.

Question 26

For the purposes of cost accumulation, which of the following are identifiable as different individual products before the split-off point?

Answer 26

B. No No

In a joint production process, at the split-off point, neither by-products nor joint products are separately identifiable as individual products. Joint costs up to the split-off point are usually related to both joint products and by-products. After split-off, additional (separable) costs can be traced and charged to the individual products. By-products usually do not receive an allocation of joint costs.

Question 27

Ryan Co. projects the following monthly revenues for next year:

Ryan’s terms are net 30 days. The company typically receives payment on 80% of sales the month following the sale, and 17% is collected 2 months after the sale. Approximately 3% of sales are deemed bad debt. What amount represents the expected cash collection in the second calendar quarter of next year?

A. $1,450,000
B. $1,234,250
C. $1,325,000
D. $1,393,750

Answer 27

D. $1,393,750

April collections will total 17% of February sales, or $85,000 ($500,000 × 17%), and 80% of March sales, or $340,000 ($425,000 × 80%). May collections will total 17% of March sales, or $72,250 ($425,000 × 17%), and 80% of April sales, or $360,000 ($450,000 × 80%). Finally, June collections will total 17% of April sales, or $76,500 ($450,000 × 17%), and 80% of May sales, or $460,000 ($575,000 × 80%). The total cash collected during the second calendar quarter of next year will equal $1,393,750 ($85,000 + $340,000 + $72,250 + $360,000 + $76,500 + $460,000).

Question 28

Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell’s inventory turnover and inventory as a percentage of total assets reported on Bell’s balance sheet?

Answer 28

C. Increase Decrease

A JIT system is intended to minimize inventory. Inventory should be delivered or produced just in time to be used. Thus, JIT increases inventory turnover (cost of sales ÷ average inventory) and decreases inventory as a percentage of total assets.

Question 29

The Matthew Nichols Company budgeted sales of $200,000 for July, $280,000 for August, $198,000 for September and $200,000 for October. 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% will be collected the second month, and 4% will be uncollectible. The cash receipts budgeted for October equal

A. $244,400
B. $214,700
C. $164,700
D. $200,000

Answer 29

B. $214,700

Credit sales for August and September are $210,000 ($280,000 × 75%) and $148,500 ($198,000 × 75%), respectively. Cash sales for October are $50,000 [$200,000 × (1.00 –.75)]. The cash collections during October should therefore be $214,700.