Practice Exam 6.23.23

Question 1

Wilkinson, Inc., which has a cost of capital of 12%, invested in a project with an internal rate of return (IRR) of 14%. The project is expected to have a useful life of 4 years, and it will produce net cash inflows as follows:

The initial cost of this project amounted to

A. $9,647
B. $7,483
C. $12,540
D. $11,000

Answer 1

B. $7,483

The IRR of a capital project is the rate at which the present value of net cash inflows equals initial investment (NPV = 0). To find this project’s initial cost, the net cash inflows should be discounted at the internal rate of return (14%):

Because the present value of net cash inflows equals initial investment at an IRR rate of 14%, initial cost of this project is $7,483.

Question 2

A company discovered incidents of unauthorized access to its internal system. Which of the following actions or practices is involved in implementation phase 5 of COBIT 2019?

A. Developing an action plan to create usernames and passwords for employees.
B. Creating a list of authorized employees who should be assigned usernames and passwords.
C. Identifying that the company lacks usernames and passwords for authorized employees.
D. Testing whether incidents of unauthorized access exist after implementing the plan.

Answer 2

B. Creating a list of authorized employees who should be assigned usernames and passwords.

Phase 5 (How do we get there?) of COBIT 2019 involves implementing the action plan to close the gap and establishing monitoring systems. Creating a list of authorized employees who should be assigned usernames and passwords is an action in implementing the action plan.

Question 3

If a payroll system continues to pay employees who have been terminated, control weaknesses most likely exist because

A. Input file label checking routines built into the programs were ignored by the operator.
B. Programmed controls such as limit checks should have been built into the system.
C. There were inadequate manual controls maintained outside the computer system.
D. Procedures were not implemented to verify and control the receipt by the computer processing department of all transactions prior to processing.

Answer 3

C. There were inadequate manual controls maintained outside the computer system.

The authorization to pay employees comes from outside the computer department. Thus, inadequate controls external to the computer processing department are most likely the cause of allowing the payments to terminated employees to continue without detection.

Question 4

A systems development approach used to quickly produce a model of user interfaces, user interactions with the system, and process logic is called

A. Application generation.
B. Neural networking.
C. Prototyping.
D. Reengineering.

Answer 4

C. Prototyping.

Prototyping produces the first model(s) of a new system. This technique usually employs a software tool for quick development of a model of the user interface (such as by report or screen), interaction of users with the system (for example, a menu-screen approach or data entry), and processing logic (the executable module). Prototyping stimulates user participation because the model allows for quick exploration of concepts and development of solutions with quick results.

Question 5

Hagar Company’s bank requires a compensating balance of 20% on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?

A. 8.40%
B. 8.75%
C. 7.00%
D. 5.83%

Answer 5

B. 8.75%

The effective interest rate on a loan with a compensating balance can be calculated as follows:

Note that the amount of the loan is not needed to calculate the effective rate.

Question 6

Which of the following represents the procedure managers use to identify whether the company has information that unauthorized individuals want, how these individuals could obtain the information, the value of the information, and the probability of unauthorized access occurring?

A. Systems assessment.
B. Disaster recovery plan assessment.
C. Risk assessment.
D. Test of controls.

Answer 6

C. Risk assessment.

The risk assessment forms the core of an organization’s contingency planning (business resiliency). A risk assessment involves assessing (1) the types of vulnerabilities to which each of the organization’s critical systems is subject, (2) the likelihood of each of the vulnerabilities being exploited, and (3) countermeasures to be taken, both preventive measures to stop the occurrence of breaches and corrective measures to compensate in the event of breaches.

Question 7

Which of the following are the components of a business information system (BIS)?

A. Input, output, processing, storage.
B. Hardware, data, software, network, people.
C. Hardware, software, data, system, people, procedures.
D. Hardware, data, software, people, processing, storage.

Answer 7

B. Hardware, data, software, network, people.

A BIS is any combination of the hardware, software, data, people, network, and procedures employed to pursue an organizational objective.

Question 8

Porter’s five forces analysis is

A. A framework for analyzing the level of competition within an industry and business strategy development.
B. An analysis of structured, semi-structured, and unstructured data that can be mined to reveal relationships and dependencies or predict outcomes and behaviors.
C. A structured planning method that evaluates the strengths, weaknesses, opportunities, and threats of a project or business venture.
D. A process that systematically surveys and interprets relevant data to identify external opportunities and threats.

Answer 8

A. A framework for analyzing the level of competition within an industry and business strategy development.

Porter’s five forces analysis is a framework that analyzes the level of competition within an industry and business strategy development.

Question 9

A company’s gross profit for Year 2 and Year 1 was as follows:

Assuming that Year 2 selling prices were 15% lower than Year 1 selling prices, what was the decrease in gross profit caused by the selling price change?

A. $134,400
B. $167,718
C. $144,000
D. $142,560

Answer 9

B. $167,718

Given a 15% decrease in prices, Year 2 sales were 85% of Year 2 sales at Year 1 prices. Hence, Year 2 sales at Year 1 prices equal $1,118,118 ($950,400 ÷ 85%). Sales and gross profit were $167,718 ($1,118,118 – $950,400) lower because of the decrease in prices.

Question 10

A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company’s cash conversion cycle?

A. 15 days.
B. 75 days.
C. 45 days.
D. 105 days.

Answer 10

C. 45 days.

A firm’s cash conversion cycle is the amount of time that passes between the actual outlay of cash for inventory purchases and the collection of cash from the sale of that inventory. Accordingly, the cash conversion cycle is equal to the average collection period plus days’ sales in inventory minus the average payables period. Per the formula, the company’s cash conversion cycle is 45 days (15 days average collection period + 60 days’ sales in inventory – 30 days average payables period).

Question 11

For the year just ended, Abel Co. incurred direct costs of $500,000 based on a particular course of action during the year. If a different course of action had been taken, direct costs would have been $400,000. In addition, Abel’s fixed costs were $90,000. The incremental cost was

A. $190,000
B. $100,000
C. $90,000
D. $10,000

Answer 11

B. $100,000

Incremental cost is the difference in total cost between two decisions. Only the costs that will differ under the alternatives are relevant. Thus, Abel’s incremental cost is $100,000 ($500,000 – $400,000). The fixed costs of $90,000 are not relevant.

Question 12

Learning curves are most often used to predict

A. Unit direct labor costs.
B. Total unit costs.
C. Overhead variances.
D. Unit material costs.

Answer 12

A. Unit direct labor costs.

Learning curves reflect the increased rate at which people perform tasks as they gain experience. Thus, they are useful in predicting unit direct labor costs.

Question 13

If a firm borrows $500,000 at 10% and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?

A. 11.1%
B. 12.2%
C. 9.1%
D. 10.0%

Answer 13

A. 11.1%

At 10%, the interest on a $500,000 loan is $50,000 per year. However, the $500,000 loan is effectively reduced to $450,000 of usable funds by the compensating balance requirement. Thus, the borrower pays $50,000 of interest for a $450,000 loan, an effective rate of 11.1% ($50,000 ÷ $450,000).

Question 14

In a standard cost system, the materials price variance is obtained by multiplying the

A. Actual quantity purchased by the difference between standard price and actual price.
B. Standard quantity used by the difference between actual price and standard price.
C. Actual price by the difference between actual quantity used and standard quantity used.
D. Standard price by the difference between expected quantity and budgeted quantity.

Answer 14

A. Actual quantity purchased by the difference between standard price and actual price.

The materials price variance is the portion of the flexible budget variance attributable entirely to a difference in purchased input unit cost. If it is recognized at the time of purchase, it is calculated by multiplying the actual quantity purchased (AQP) by the difference between standard price (SP) and actual price (AP) [AQP × (SP – AP)].

Question 15

Which of the following represents the greatest exposure to the integrity of electronic funds transfer data transmitted from a remote terminal?

A. Poor physical access controls over the data center.
B. Network viruses.
C. Leased telephone circuits.
D. Poor system documentation.

Answer 15

C. Leased telephone circuits.

Leased telephone circuits represent a direct exposure to the risk of breached data integrity. They use public lines that can be easily identified and tapped.

Question 16

Which of the following best defines blockchain?

A. A public database storing digital information that is shared among multiple parties.
B. A distributed ledger using consensus mechanism to improve centralized controls over data.
C. A piece of digital information owned by miners within a distributed ledger.
D. A type of cryptocurrency designed to secure the transactions and verify the transfer of funds.

Answer 16

A. A public database storing digital information that is shared among multiple parties.

A blockchain is a type of digital database (or ledger) that provides proof of who owns what at any moment in time because each transaction has been added to the ledger. The ledger is a type of distributed ledger that is encrypted, public, and shared widely for anyone to view.

Question 17

A delivery company is implementing a system to compare the costs of purchasing and operating different vehicles in its fleet. Truck 415 is driven 125,000 miles per year at a variable cost of $0.13 per mile. Truck 415 has a capacity of 28,000 pounds and delivers 250 full loads per year. What amount is the truck’s delivery cost per pound?

A. $0.58036 per pound.
B. $1.72000 per pound.
C. $0.00232 per pound.
D. $0.00163 per pound.

Answer 17

C. $0.00232 per pound.

The truck’s variable delivery cost per pound equals the total variable cost divided by the total pounds delivered by the truck. The truck’s mileage cost is $16,250 (125,000 miles × $0.13 per mile). The truck delivered 7,000,000 pounds (28,000 pounds × 250 loads). The truck’s variable delivery cost per pound is therefore $0.00232 per pound ($16,250 ÷ 7,000,000 pounds).

Question 18

Which of the following statements is true concerning the COBIT 5 framework?

A. Governance and management are synonyms for the activities of upper management.
B. Information and organizational structures are among the enablers identified in COBIT 5.
C. Minimization of risk and resource use are among the major goals of COBIT 5.
D. Information technology controls are most effectively designed and executed in isolation from other business processes.

Answer 18

B. Information and organizational structures are among the enablers identified in COBIT 5.

COBIT 5 describes seven categories of enablers that support comprehensive IT governance and management, among them information and organizational structures.

Question 19

A company has gathered the following information from a recent production run:

What is the company’s variable overhead spending variance?

A. $50 unfavorable.
B. $40 unfavorable.
C. $50 favorable.
D. $40 favorable.

Answer 19

C. $50 favorable.

The variable overhead spending variance is equivalent to the materials price, or labor rate variance. It equals the actual quantity times the difference between the standard and actual rates. The variable overhead spending variance is therefore $50 [25 hours × ($10 – $8)]. The variance is favorable because the actual rate is less than the standard rate.

Question 20

A company has an online order processing system. The company is in the process of determining the dollar amount of loss from user error. The company estimates the probability of occurrence of user error to be 90%, with evenly distributed losses ranging from $1,000 to $30,000. What is the expected annual loss from user error?

A. $13,050
B. $13,950
C. $13,500
D. $14,400

Answer 20

B. $13,950

The first step in calculating the expected annual loss from user error is determining the midpoint of the range of possible losses ($1,000 to $30,000). The midpoint of the range is $15,500 [($1,000 + $30,000) ÷ 2]. The expected annual loss from user error is thus $13,950 ($15,500 × 90%).

Question 21

Parity checks and echo checks are examples of

A. Access controls.
B. Hardware controls.
Answer (B) is correct.
Hardware controls are built into the equipment by the manufacturer. They ensure the proper internal handling of data as they are moved and stored. Hardware controls include parity checks, echo checks, read-after-write checks, and any other procedure built into the equipment to ensure data integrity.
C. Logical controls.
D. Environmental controls.

Answer 21

B. Hardware controls.

Hardware controls are built into the equipment by the manufacturer. They ensure the proper internal handling of data as they are moved and stored. Hardware controls include parity checks, echo checks, read-after-write checks, and any other procedure built into the equipment to ensure data integrity.

Question 22

Organizations that move to implement EDI often use value-added networks (VANs). Which of the following would not normally be performed by a VAN?

A. Store electronic purchase orders of one organization to be accessed by another organization.
B. Provide translations from clients’ computer applications to a standard protocol used for EDI communication.
C. Maintain a log of all transactions of an organization with its trading partner.
D. Provide common interfaces across organizations thereby eliminating the need for one organization to establish direct computer communication with a trading partner.

Answer 22

B. Provide translations from clients’ computer applications to a standard protocol used for EDI communication.

Companies must purchase their own software to translate their data to a national standard protocol for EDI purposes, either ANSI X.12 in the U.S. or EDIFACT in Europe and most of the rest of the world. Once the data are in the standard format, the VAN handles all aspects of the communication. VANs are privately owned telecommunications carriers that sell capacity to outside users. Among other things, a VAN provides a mailbox service permitting EDI messages to be sent, sorted, and held until needed in the recipient’s computer system.

Question 23

The imputed interest rate used in the residual income approach to performance evaluation can best be described as the

A. Target return on investment set by the company’s management.
B. Average lending rate for the year being evaluated.
C. Average return on investments for the company over the last several years.
D. Historical weighted-average cost of capital for the company.

Answer 23

A. Target return on investment set by the company’s management.

Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. The rate used ordinarily is set as a target return by management but is often equal to the weighted average cost of capital. Some entities prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI because the firm will benefit from expansion as long as residual income is earned.

Question 24

Which of the following statements is correct regarding information technology (IT) governance?

A. A primary goal of IT governance is to balance risk versus return over IT and its processes.
B. IT governance is an appropriate issue for organizations at the level of the board of directors only.
C. IT goals should be independent of strategic goals.
D. IT governance requires that the Control Objectives for Information and related Technology (COBIT) framework be adopted and implemented.

Answer 24

A. A primary goal of IT governance is to balance risk versus return over IT and its processes.

According to COBIT, IT governance has several focus areas, including resource management. Resource management is the optimal investment in and the proper management of critical IT resources. To maintain an optimal investment in IT resources, the return of the investment should be balanced against the associated risks of the investment.

Question 25

A company’s financial reporting system has a process management feature to provide workflow control. This feature allows the division accounting staff to input and review data and send the data to the company’s corporate office for final review and approval. What security access, if any, should be granted to the division accounting staff once the data has been sent to the corporate office for approval?

A. No access.
B. Read but not write.
C. Write but not read.
D. Both read and write.

Answer 25

B. Read but not write.

Division accounting staff should not be able to revise data that has been sent to the corporate office for review and approval. If errors are identified subsequently, they should be corrected through a separate data input and review process to ensure appropriate visibility for the changes made. But division accounting staff likely have a valid ongoing business need to read data for analytical and decision-making purposes.

Question 26

The following is information about three companies:

Which company would be considered least risky from a creditor’s viewpoint?

A. KLM, because the debt ratio is the highest.
B. XYZ, because the debt ratio is the lowest.
C. XYZ, because the debt ratio is the highest.
D. ABC, because the debt ratio is average.

Answer 26

B. XYZ, because the debt ratio is the lowest.

The debt ratio, or total debt ratio, is the ratio of total debt to total assets. The debt ratios of ABC, XYZ, and KLM are 40% ($44,000 ÷ $109,000), 33% ($150,000 ÷ $450,000), and 53% ($450,000 ÷ $850,000), respectively. Since XYZ Co. has the lowest debt ratio, it is considered the least risky.

Question 27

Actual sales values at the split-off point for joint products Y and Z are not known. For purposes of allocating joint costs to products Y and Z, the relative sales value at split-off method is used. An increase in the costs beyond split-off occurs for Product Z, while those of Product Y remain constant. If the selling prices of finished products Y and Z remain constant, the percentage of the total joint costs allocated to Product Y and Product Z will

A. Decrease for Product Y and Product Z.
B. Increase for Product Y and decrease for Product Z.
C. Increase for Product Y and Product Z.
D. Decrease for Product Y and increase for Product Z.

Answer 27

B. Increase for Product Y and decrease for Product Z.

The actual sales values of products Y and Z at the split-off point are not known. However, these values may be approximated by calculating the estimated net realizable values (Final sales values – Separable costs). Assuming constant selling prices and increasing costs for product Z, the net realizable value at split-off for Z must necessarily be decreasing. The relative sales value method allocates joint costs in accordance with the ratio of each joint product’s sales value at split-off to the total sales value at split-off for all joint products. Therefore, the costs allocated to Z must be decreasing, while the costs allocated to Y are increasing.

Question 28

Which of the following methods is best suited for evaluating the performance of a firm’s capital in any given year?

A. Payback.
B. Net present value.
C. Economic value-added.
D. Internal rate of return.

Answer 28

C. Economic value-added.

Economic value-added (EVA) is the formula for residual income adjusted for the opportunity cost of capital. EVA represents a business unit’s true economic profit primarily because it is determined by subtracting the cost of equity capital. The EVA method is therefore the best method for evaluating the performance of a firm’s capital in any given year.

Question 29

Mig Co., which began operations in the month just ended, produces gasoline and a gasoline by-product. The following information is available pertaining to sales and production for the month:

Mig accounts for the by-product at the time of production. What was Mig’s cost of sales for gasoline and the by-product?

Answer 29

C. $100,000 $0

If the by-product is accounted for at the time of production, by-product inventory is recorded at its selling price (or net realizable value in this case, given separable by-product costs) because by-products usually do not receive an allocation of joint costs. Thus, the by-product’s cost of sales is zero. Assuming sales of the by-product reduced joint costs, the cost of sales of the gasoline was $100,000 ($120,000 cost to split-off – $30,000 sales of the by-product + $25,000 additional by-product costs – $15,000 EI).

Question 30

Which one of the following correctly depicts the hierarchy of storage commonly found in computerized databases, from least complex to most complex?

A. Byte, field, record, file.
B. Byte, field, file, record.
C. Field, byte, record, file.
D. Field, byte, file, record.

Answer 30

A. Byte, field, record, file.

A byte is a group of bits (binary 1s and 0s). A field is a group of bytes. A record is a group of fields. A file is a group of records.

Question 31

Which of the following is the final step before placing the system in live operation?

A. Phased conversion.
B. User acceptance testing.
C. Dynamic testing.
D. Static testing.

Answer 31

B. User acceptance testing.

IT must demonstrate to the user department that the system performs the desired functionality. Once the user department is satisfied with the new system, they acknowledge formal acceptance and implementation begins. Thus, user acceptance testing is the final step before placing the system in live operation.

Question 32

The technique that measures the estimated performance of a capital investment by dividing the project’s annual after-tax net income by the average investment cost is called the

A. Internal rate of return method.
B. Bail-out payback method.
C. Accounting rate of return method.
D. Profitability index method.

Answer 32

C. Accounting rate of return method.

The accounting rate of return (also called the unadjusted rate of return or book value rate of return) measures investment performance by dividing the accounting net income by the average investment in the project. This method ignores the time value of money.

Question 33

The system that permits the computers in a distributed network to share the use of another end-user’s application program is

A. Executive support system.
B. Interactive processing.
C. Cooperative processing.
D. Electronic data interchange.

Answer 33

C. Cooperative processing.

Cooperative processing is a system whereby computers in a distributed network can share the use of application programs belonging to another end user. The system assigns different machines the functions they perform best in executing a transaction-based application program. For example, a personal computer might be used to enter and validate data for the application, and a server might handle file input and output.

Question 34

Which of the following formulas should be used to calculate the economic rate of return on common stock?

A. Market price per share divided by earnings per share.
B. (Dividends + change in price) divided by beginning price.
C. (Net income – preferred dividend) divided by common shares outstanding.
D. Dividends per share divided by market price per share.

Answer 34

B. (Dividends + change in price) divided by beginning price.

The economic rate of return on common stock is calculated by (1) adding the dividends received over the period of ownership to the change in the stock price during the period of ownership and (2) dividing this amount by the original price paid for the stock.

Question 35

Which of the following statements, if included as the description of a data attribute, describes the nature of the elements in the attribute?

A. “The size of the warehouse is the amount of type A inventory that may be stored.”
B. “Volume is measured in cubic meters.”
C. “Sales data include transactions occurring between 1/1/20X0 and 12/31/20X0.”
D. “The data is retrieved from the 20X0 government census report.”

Answer 35

A. “The size of the warehouse is the amount of type A inventory that may be stored.”

The nature of a data element (attribute) is how the data attribute relates to the event or instance and what each attribute means. Defining the size of a warehouse as the amount of type A inventory that may be stored describes the nature of the data field.

Question 36

A manufacturing firm has certain peak seasons, namely the Christmas season, the summer season, and the last 2 weeks of February. During these periods of increased output, the firm leases additional production equipment and hires additional temporary employees. Which of the following budget techniques would best fit this firm’s needs?

A. Static budgeting.
B. Project budgeting.
C. Flexible budgeting.
D. Zero-based budgeting.

Answer 36

C. Flexible budgeting.

A flexible budget is a series of several budgets prepared for many levels of sales. It is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results. A firm with peak seasons may prefer flexible budgeting because of its difficulties in predicting the activity level.

Question 37

An important function of a database administrator is

A. Reviewing database output for errors and omissions.
B. Redefining and restructuring the database.
C. Scheduling daily database operations.
D. Evaluating internal controls for hardware.

Answer 37

B. Redefining and restructuring the database.

The database administrator is the individual with overall responsibility for developing and maintaining the database. (S)he uses data definition language to define, create, redefine, and restructure the database. The database administrator also establishes controls over the integrity of the database.

Question 38

Fact Pattern: Over a 3-year period, a corporation expects sales of 300 units. To avoid the problems associated with employee turnover, it decided to produce 100 units each year, even though sales are expected to increase. The best estimate of sales is 80 units in Year 1, 100 units in Year 2, and 120 units in Year 3. Variable production costs are $50 per unit, and fixed costs are $1,000 per year (even if production is zero).

In Year 2, by how much will ending inventory increase under absorption costing?

A. $0
B. $120
C. $60
D. $6,000

Answer 38

A. $0

Sales equals production in Year 2, so inventory does not change.

Question 39

A value-added network (VAN) is a privately owned network that performs which of the following functions?

A. Provide services to send marketing data to customers.
B. Route data within a company’s multiple networks.
C. Provide additional accuracy for data transmissions.
D. Route data transactions between trading partners.

Answer 39

D. Route data transactions between trading partners.

Value-added networks (VANs) are private networks that provide their customers with reliable, high-speed, secure transmission of data. To compete with the Internet, these third-party networks add value by providing their customers with error detection and correction services, electronic mailbox facilities for EDI purposes, EDI translation, and security for email and data transmissions.

Question 40

At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of $40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What amount would the company recognize as income for April using variable costing?

A. $36,000
B. $44,000
C. $45,000
D. $35,000

Answer 40

A. $36,000

The difference between variable costing and absorption costing is the treatment of fixed costs. Under absorption costing, the fixed portion of manufacturing overhead is included in the cost of each product. Under variable costing, product cost includes only variable manufacturing costs and fixed costs are treated as period costs. The rate for assigning fixed overhead costs is $2 per unit ($600,000 budgeted fixed overhead costs ÷ 300,000 budgeted production units). Because the ending inventory in April is 2,000 units greater than the beginning inventory, the company produced more units than it sold. In April, under absorption costing, $4,000 ($2 fixed overhead rate per unit × 2,000 units produced and not sold) of fixed manufacturing overhead costs were still embedded in ending inventory and were not expensed. Under variable costing, these fixed manufacturing overhead costs of $4,000 were expensed. Therefore, the operating income under the absorption costing is $4,000 greater than under the variable costing. Therefore, operating income under variable costing is $36,000 ($40,000 – $4,000).

Question 41

Which of the following is the most effective user account management control in preventing the unauthorized use of a computer system?

A. An account manager is responsible for authorizing and issuing new accounts.
B. The passwords and usernames of failed log-in attempts are logged and documented in order to cite attempted infiltration of the system.
C. Employees are required to renew their accounts semiannually.
D. Management encourages employees to save passwords on their desktops to prevent them from forgetting or entering the wrong passwords.

Answer 41

C. Employees are required to renew their accounts semiannually.

Management’s network security policy should include measures to ensure that old and unused accounts are removed promptly. If employees’ accounts expire semiannually, reasonable assurance is provided that accounts in use by unauthorized employees do not exist.

Question 42

Which of the following areas experienced an increase in risk as personal computers replaced mainframe environments?

A. I, II, and III.
B. II only.
C. I only.
D. II and III.

Answer 42

A. I, II, and III.

Answer (A) is correct.
Personal computer users may be unaware of the need to make frequent file back-ups or lack the expertise or hardware to do so. Personal computer use also usually results in an increase in security concerns. Another increased risk pertains to copyright violations. Making unauthorized copies of software is fairly easy and sometimes may be an informally accepted method of reducing software costs for personal computer systems.

Question 43

A company has a static budget at 10,000 units of production, which shows direct material cost of $80,000, direct labor cost of $60,000, and factory overhead costs of $37,000. Factory overhead costs are 40% fixed. At 6,000 units of production, a flexible budget would include which of the following amounts as total production costs?

A. $112,120
B. $106,200
C. $115,080
D. $121,000

Answer 43

A. $112,120

A flexible budget is prepared for various levels of production or sales and can be used for any component of the budget process that varies with the level of activity. The flexible budget is prepared based on the actual output sold (produced) during the period and uses the same drivers as those used to prepare the master budget. The fixed factory overhead costs are $14,800 ($37,000 × 40%). Moreover, the unit direct material cost, unit direct labor cost, and unit variable factory overhead cost are $8 ($80,000 ÷ 10,000 units), $6 ($60,000 ÷ 10,000 units), and $2.22 ($37,000 × 60% ÷ 10,000 units), respectively. Therefore, at 6,000 units of production, a flexible budget would include total production costs of $112,120 {[($8 + $6 + $2.22) × 6,000 units] + ($37,000 × 40%)}.

Question 44

If the present value of expected cash inflows from a project equals the present value of expected cash outflows, the discount rate is the

A. Internal rate of return.
B. Accounting rate of return.
C. Net present value rate.
D. Payback rate.

Answer 44

A. Internal rate of return.

The IRR is the discount rate at which the NPV of a project’s cash flows equals zero.

Question 45

If a firm is considering the use of learning curve analysis in the determination of labor cost standards for a new product, it should be advised that this technique ordinarily is most relevant to situations in which the production time per unit decreases as additional units are produced and the unit cost

A. Does not change.
B. Decreases.
C. Increases slightly.
D. Increases or decreases in an unpredictable manner.

Answer 45

B. Decreases.

The learning curve is a cost function showing that the time required for production and therefore the average cost per unit decrease as production rises.

Question 46

A computer operator responsible for a particular job needed to know whether the job had already been run that day. The computer operator examined the

A. Master run book.
B. Job queue.
C. Data control log.
D. Console log.

Answer 46

D. Console log.

During processing, the operating system records in the console log the activities of the computer system and the actions taken by the computer operator. It should therefore contain entries for the work performed and provide a control over operator intervention.

Question 47

In a business information system, which of the following types of computer files most likely would be a master file?

A. Payroll transactions.
B. Inventory subsidiary.
C. Cash receipts.
D. Cash disbursements.

Answer 47

B. Inventory subsidiary.

A master file is permanent information that is updated for the effects of transactions. In online processing, it is immediately updated. In batch processing, transactions are accumulated in a sorted transaction file, with periodic updating to create a new master file. Thus, an inventory subsidiary account is recorded in a master file.

Question 48

In the economic theory of production and cost, the short run is defined to be a production process

A. That is subject to economies of scale.
B. That spans a time period of less than 1 year in length.
C. That always produces economic profits.
D. In which there is insufficient time to vary the amount of all inputs.

Answer 48

D. In which there is insufficient time to vary the amount of all inputs.

The short run is defined as a period so brief that a firm has insufficient time to vary the amount of all inputs. Thus, the quantity of one or more inputs is fixed. The long run is a period long enough that all inputs, including plant capacity, can be varied.

Question 49

If a U.S. firm can buy £20,000 for $100,000, the rate of exchange for the pound is

A. $50
B. $5
C. $20
D. $.20

Answer 49

B. $5

An exchange rate of $5 to the pound is produced by dividing $100,000 by £20,000.

Question 50

Nonfinancial performance measures are important to engineering and operations managers in assessing the quality levels of their products. Which of the following indicators can be used to measure product quality?

A. I and II only.
B. I, II, and III.
C. II and III only.
D. I and III only.

Answer 50

A. I and II only.

Nonfinancial performance measures, such as product quality, are useful for day-to-day control purposes. Examples (indicators) of nonfinancial performance measures include the following: outgoing quality level for each product line, returned merchandise, customer report card, competitive rank, and on-time delivery.

Question 51

Fact Pattern: The selected data pertain to Tilghman Company at December 31:

Assuming no prepaid expenses are included in current assets, Tilghman Company’s inventory balance at December 31 is

A. $72,000
B. $231,111
C. $187,200
D. $282,857

Answer 51

A. $72,000

Inventory is equal to the difference between current assets and quick assets. The current ratio is equal to current assets divided by current liabilities. The acid-test ratio is equal to quick assets divided by current liabilities. Thus, current liabilities equal the $208,000 of quick assets divided by the 2.6 acid-test ratio. Hence, current liabilities equal $80,000. Accordingly, multiplying the current liabilities of $80,000 by the current ratio of 3.5 gives current assets of $280,000. Subtracting the $208,000 of quick assets from the $280,000 of current assets results in an inventory balance of $72,000.

Question 52

Management has reviewed the standard cost variance analysis and is trying to explain an unfavorable labor efficiency variance of $8,000. Which of the following is the most likely cause of the variance?

A. The maintenance of machinery has been inadequate for the last few months.
B. The quality of raw materials has improved greatly.
C. The new labor contract increased wages.
D. The department manager has chosen to use highly skilled workers.

Answer 52

A. The maintenance of machinery has been inadequate for the last few months.

The labor efficiency variance is the difference between the standard number of hours and the actual number worked, times the standard hourly wage. An unfavorable labor efficiency variance may have many causes, for example, (1) improper or inadequate maintenance, (2) use of unskilled workers, (3) poor scheduling, (4) use of low-grade materials, or (5) unrealistic standards. Inadequate maintenance of machinery might cause machines to work inefficiently and even lead to breakdowns. This would result in additional unplanned labor hours and worker downtime.

Question 53

The term structure of interest rates is depicted by a yield curve. What variables are plotted on the horizontal axis and on the vertical axis?

A. Years to maturity and the real risk-free rate, respectively.
B. Years to maturity and the interest rates, respectively.
C. Real risk-free rate and the inflation rate, respectively.
D. Interest rates and the inflation rates, respectively.

Answer 53

B. Years to maturity and the interest rates, respectively.

The term structure of interest rates is the relationship between long- and short-term interest rates. The term structure is graphically depicted by a yield curve. The interest rate is plotted on the vertical axis, and the years to maturity is plotted on the horizontal axis. The yield curve may change in both slope and position over time.

Question 54

A firm’s target or optimal capital structure is consistent with which one of the following?

A. Minimum weighted-average cost of capital.
B. Minimum risk.
C. Maximum earnings per share.
D. Minimum cost of debt.

Answer 54

A. Minimum weighted-average cost of capital.

Ideally, a firm will have a capital structure that minimizes its weighted-average cost of capital. This requires a balancing of both debt and equity capital and their associated risk levels.

Question 55

Which of the following is a true statement regarding data owners and data stewards?

A. Data owners ensure the safeguards for the data assets, and data stewards ensure that the data are used and adopted properly.
B. Data owners ensure that data assets are used and adopted properly, and data stewards ensure the IT controls for the data.
C. Data owners make decisions about the data, and data stewards ensure the safeguards for the data.
D. Data owners make decisions about the data, and data stewards ensure the data are used and adopted properly.

Answer 55

D. Data owners make decisions about the data, and data stewards ensure the data are used and adopted properly.

Data owners make decisions about data as well as their business definitions, e.g., forecasting sales using current sales data. Data stewards ensure that data assets are used and adopted properly, e.g., ensuring that sales data used for forecasting are accurate and authorizing who can access the sales data.

Question 56

Fact Pattern: The management and employees of We Move You, a large household goods moving company, decided to adopt total quality management (TQM) and continuous improvement (CI). They believed that, if their company became nationally known as adhering to TQM and CI, one result would be an increase in the company’s profits and market share.

Quality is achieved more economically if We Move You focuses on

A. Prevention costs.
B. Internal failure costs.
C. External failure costs.
D. Appraisal costs.

Answer 56

A. Prevention costs.

Prevention attempts to avoid defective output. Prevention costs include preventive maintenance, employee training, review of equipment design, and evaluation of suppliers. Prevention is less costly than detection and correction of defective output.

Question 57

Most client-server applications operate on a three-tiered architecture consisting of which of the following layers?

A. Desktop server, software, and hardware.
B. Desktop client, software, and hardware.
C. Desktop server, application, and database.
D. Desktop client, application, and database.

Answer 57

D. Desktop client, application, and database.

A client-server system divides processing of an application between a client machine on a network and a server. This division depends on which tasks each is best suited to perform. User interaction is ordinarily restricted to the client part of the application. This portion normally consists of the user interface, data entry, queries, and receipt of reports. Moreover, many applications, e.g., word processing and spreadsheet software, reside on the client computer (a desktop, workstation, or laptop). The server customarily manages peripheral hardware and controls access to shared databases. Thus, a client-server application must be designed as separate software components that run on different machines but appear to be one application.

Question 58

A company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years.

What is the IRR of the project?

A. 9%
B. 7%
C. 8%
D. 6%

Answer 58

A. 9%

To determine the IRR:

Comparing the payback period with the PV factors given, a payback period of 6.418 years corresponds with an IRR of 9%.

Question 59

There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?

A. It includes required material purchases.
B. It includes required direct labor hours.
C. It is calculated from the desired ending inventory and the sales forecast.
D. It summarizes all discretionary costs.

Answer 59

C. It is calculated from the desired ending inventory and the sales forecast.

A production budget is based on sales forecasts, in units, with adjustments for beginning and ending inventories. It is used to plan when items will be produced. After the production budget has been completed, it is used to prepare materials purchases, direct labor, and factory overhead budgets.

Question 60

Zig Corp. provides the following information:

What of the following represents Zig’s year-end economic value-added amount?
A. $180,000,000
B. $120,000,000
C. $0
D. $72,000,000

Answer 60

D. $72,000,000

Zig’s economic value added can be calculated as follows:

Question 61

Chan Co. purchased equipment for $55,500 on January 1, Year 2, the first day of the fiscal year. The equipment has an estimated useful life of 3 years and an estimated residual value of $3,000. The average tax rate is 30%, and the discount rate is 10%. What is the total straight-line depreciation tax shield during the life of the equipment measured at December 31, Year 2?

A. $15,182
B. $15,750
C. $14,361
D. $13,056

Answer 61

C. $14,361

The periodic tax benefit (shield) relating to a fixed asset equals periodic depreciation expense times the applicable tax rate. Annual depreciation of the equipment is $17,500 [($55,500 – $3,000) ÷ 3], and the annual depreciation tax shield is $5,250 ($17,500 × 30%). The depreciation tax shields are a stream of cash savings (an annuity) for 3 years. Because measurement and the cash savings occur at year end, they are an annuity due. (The first is not discounted.) The total depreciation tax shield during the life of the equipment measured on December 31, Year 2, is $14,361 ($5,250 × 2.7355 annuity due present value factor).