Practice Exam 8.2.23

Question 1

The following data pertain to Canova, Inc., for the year ended December 31:

What was Canova’s rate of return on assets for the year?

A. 5%
B. 24%
C. 6%
D. 20%

Answer 1

C. 6%

Return on assets equals net income divided by average total assets, or 6% {$150,000 ÷ [($2,000,000 + $3,000,000) ÷ 2]}.

Question 2

Fact Pattern: The information below is for Casey Corporation.

Assuming operating income under variable costing is $1,800, Casey’s operating income under absorption costing is

A. $1,967
B. $2,000
C. $1,800
D. $2,167

Answer 2

B. $2,000

Assuming a fixed manufacturing overhead application rate of $1 per unit ($1,200 ÷ 1,200 units produced), ending inventory and operating income will be $200 greater under absorption than variable costing. Accordingly, absorption costing operating income is $2,000 ($1,800 variable costing operating income + $200).

Question 3

Devices that are used only to perform sequential file processing will not permit

A. Data to be edited on a real-time basis.
B. The use of a database structure.
C. Batch processing to be initiated from a terminal.
D. Data to be edited in an offline mode.

Answer 3

A. Data to be edited on a real-time basis.

In an online, real-time system, direct (random), not sequential, access to files is required. As each transaction is entered, it is edited (validated). Files can then be immediately updated to reflect that transaction. Sequential file access is typical of (but not required in) batch processing.

Question 4

A database has three record types: (1) for suppliers, a type that contains a unique supplier number, a supplier name, and a supplier address; (2) for parts, a type that contains a unique part number, a part name, a description, and a location; and (3) for purchases, a type that contains a unique supplier number referencing the supplier number in the supplier record, a part number referencing the part number in the part record, and a quantity. This database has a

A. Hierarchical structure.
B. Single flat-file structure.
C. Network structure.
D. Relational structure.

Answer 4

D. Relational structure.

A relational structure organizes data in conceptual tables. One relation (a table or file) can be joined with (related to) another by the DBMS without pointers or linked lists if each contains one or more of the same fields (also known as columns or attributes). This database has a relational structure because it includes no links that are not contained in the data records themselves.

Question 5

Which of the following phrases defines the internal rate of return on a project?

A. The number of years it takes to recover the investment.
B. The discount rate at which the net present value of the project equals zero.
C. The weighted-average cost of capital used to finance the project.
D. The discount rate at which the net present value of the project equals one.

Answer 5

B. The discount rate at which the net present value of the project equals zero.

The IRR is the discount rate at which the investment’s NPV equals zero. Accordingly, it is the rate that equates the present value of the expected cash inflows with the present value of the expected cash outflows.

Question 6

There are many ways that realtime accounts receivable systems differ from batch accounts receivable systems. Which one of the following is not correct?

Answer 6

Realtime Systems = Processing choices are menu-driven
Batch Systems = Processing is interactive

Realtime processing involves processing an input record and receiving the output soon enough to affect a current decision-making process. Such systems are often menu driven, providing the user with prearranged courses of actions. Batch processing, on the other hand, is the accumulation and grouping of transactions for processing on a delayed basis. Batch processing is thus not interactive, that is, the user does not receive immediate feedback from his or her input.

Question 7

Fact Pattern: The information below is for Casey Corporation.

Casey’s operating income under variable (direct) costing is

A. $2,300
B. $1,800
C. $2,000
D. $600

Answer 7

B. $1,800

Operating income under variable costing equals sales, minus all fixed costs, minus the contribution margin. No fixed costs are inventoried. Variable COGS was $5,500 (1,000 units × $5.50). Variable selling and administrative costs were $500 (1,000 units × $0.50). Total variable costs equaled $6,000, and the contribution margin was $4,000 ($10,000 sales – $6,000). Total fixed costs equaled $2,200 ($1,200 + $1,000). Operating income was $1,800 ($4,000 – $2,200).

Question 8

A company permits employees to work from home using company-owned laptops. Which of the following competitive advantages does the company most likely obtain as a result of this decision?

A. Availability.
B. Confidentiality.
C. Integrity.
D. Reliability.

Answer 8

A. Availability.

Availability is ensuring that the organization’s information systems are up and running so that employees and customers are able to access the data they need.

Question 9

Performance of the general manager of the Industrial Product Division is measured using the residual income method. The general manager is reviewing the following forecasted information for the division for next year:

If the imputed interest charge is 15% and the general manager wants to achieve a residual income target of $2,000,000, what will costs (cost of goods sold and other operating expenses) have to be in order to achieve the target?

A. $25,150,000
B. $25,690,000
C. $10,800,000
D. $9,000,000

Answer 9

A. $25,150,000

Residual income is the excess of operating income over a targeted amount equal to an imputed interest charge on invested capital. If a manager has $19,000,000 of invested capital ($17,200,000 of plant and equipment + $1,800,000 of working capital), a 15% imputed interest charge equals $2,850,000. Adding $2,000,000 of residual income to the imputed interest results in a target profit of $4,850,000. This profit can be achieved if costs are $25,150,000 ($30,000,000 revenue – $4,850,000 profit).

Question 10

A review of the system activity log kept by the operating system would reveal which of the following problems in the processing of the inventory?

A. In recording the transaction an inventory purchase was inadvertently recorded as an inventory usage.
B. The dollar amount of an inventory purchase transaction had two of the digits transposed.
C. An inventory purchase was recorded twice on the transaction file to be used in updating the master file.
D. The inventory master file scheduled to be updated every Friday was updated on Sunday.

Answer 10

D. The inventory master file scheduled to be updated every Friday was updated on Sunday.

The activity log records the time each job is started and finished as well as the resources consumed. Consequently, the delayed update would be detected by a review of the log.

Question 11

Total quality management (TQM) in a manufacturing environment follows a series of steps in its implementation. Which of the following is the correct order of the steps?

A. Begin with external customer requirements, find suppliers who can satisfy them, and subcontract to those suppliers.
B. Begin with external customer requirements, identify customer-supplier relationships and requirements, and establish requirements for external suppliers.
C. Begin with external suppliers, proceed through the firm and find ways to use available supplies, and convince customers to use the products.
D. Begin with internal competencies, find external customers that need these skills, and establish requirements for external suppliers.

Answer 11

B. Begin with external customer requirements, identify customer-supplier relationships and requirements, and establish requirements for external suppliers.

TQM is customer focused, and requirements flow through the entity from the customers to the supplier.

Question 12

Which of the following are objectives for performing tests during system development?

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

Answer 12

D. I, II, III, and IV.

Testing is performed during system development with the intent of identifying errors or other defects. The job of testing is an iterative process as when one error is corrected, it can illuminate other errors or even create new ones. All of the objectives listed are objectives for performing tests during system development.

Question 13

What approach is used to implement the cybersecurity framework in the context of COBIT 2019?

A. Inclusive approach.
B. Rapid approach.
C. Radical approach.
D. Incremental approach.

Answer 13

D. Incremental approach.

The CSF can be implemented in phases or across the entire organization simultaneously. In the context of COBIT 2019, the CSF is implemented incrementally in seven steps.

Question 14

Avionics Industrials reported at year end that operating income before taxes for the year equaled $2,400,000. The firm’s weighted-average cost of capital (WACC) is 7.24%. The carrying amount of debt is $1,300,000, and the carrying amount of equity capital is $8,800,000. The income tax rate for Avionics is 30%. What is the economic value added (EVA)?

A. $731,240
B. $1,668,760
C. $1,680,000
D. $948,760

Answer 14

D. $948,760

EVA equals after-tax operating income minus the product of the weighted-average cost of capital (WACC) and the investment base. After-tax operating income equals operating income multiplied by 1 minus the tax rate, or $1,680,000 [$2,400,000 × (1 – .3)]. The investment base is $10,100,000, consisting of $1,300,000 of debt and $8,800,000 of equity. Thus, EVA equals $948,760 [$1,680,000 – ($10,100,000 × 0.0724)].

Question 15

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is

A. Activity-based costing.
B. Cycle-time costing.
C. Direct costing.
D. Variable costing.

Answer 15

A. Activity-based costing.

An activity-based costing (ABC) system identifies the causal relationship between the incurrence of cost and the underlying activities that cause those costs. Under an ABC system, costs are applied to products on the basis of resources consumed (drivers).

Question 16

In inventory management, the safety stock will tend to increase if the

A. Cost of running out of stock decreases.
B. Carrying cost increases.
C. Variability of the lead time increases.
D. Variability of the usage rate decreases.

Answer 16

C. Variability of the lead time increases.

A firm maintains safety stock to protect itself against the losses caused by stockouts. These can take the form of lost sales or lost production time. Safety stock is necessary because of the variability in lead time and usage rates. As the variability in lead time increases, a firm tends to carry larger safety stock.

Question 17

Which of the following is a password security problem?

A. Users select passwords that are not listed in any online dictionary.
B. Users copy their passwords on note paper, which is kept in their wallets.
C. Users are assigned passwords when accounts are created but do not change them.
D. Users have accounts on several systems with different passwords.

Answer 17

C. Users are assigned passwords when accounts are created but do not change them.

Proper user authentication by means of a password requires password-generating procedures to assure that valid passwords are known only by the proper individuals. If passwords are assigned, users should change passwords frequently so that they are the only persons with access under those identifiers.

Question 18

As part of a benchmarking process, a company’s costs of quality for the current month have been identified as follows:

What amount is the company’s prevention cost for the current month?

A. $57,000
B. $165,000
C. $175,500
D. $39,500

Answer 18

A. $57,000

Prevention attempts to avoid defective output. These costs include preventive maintenance and employee training as well as review of equipment design and evaluation of suppliers. Accordingly, the total prevention costs equal $57,000 ($20,000 employee training + $19,500 preventive maintenance + $17,500 supplier education expense).

Question 19

All of the following are characteristics associated with direct cutover conversion except

A. Safe.
B. Risky.
C. Inexpensive.
D. Time-saving.

Answer 19

A. Safe.

Direct cutover conversion involves simultaneously shutting down the old system and having the new one take over processing immediately. Direct cutover is the least expensive and time-consuming strategy, but it is also the riskiest.

Question 20

Catherine & Co. has extra cash at the end of the year and is analyzing the best way to invest the funds. The company should invest in a project only if the

A. Return on investments of comparable risk exceeds the expected return on the project.
B. Return on investments of comparable risk equals the expected return on the project.
C. Expected return on the project is equal to the return on investments of comparable risk.
D. Expected return on the project exceeds the return on investments of comparable risk.

Answer 20

D. Expected return on the project exceeds the return on investments of comparable risk.

Investment risk is analyzed in terms of the probability that the actual return on an investment will be lower than the expected return. Comparing a project’s expected return with the return on an asset of similar risk helps determine whether the project is worth investing in. If the expected return on a project exceeds the return on an asset of comparable risk, the project should be pursued.

Question 21

Which of the following are effects of imposing tariffs on imported goods?

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

Answer 21

D. I, II, and IV only.

Tariffs are taxes imposed on imported goods. Tariffs cause reduced competition in the home market and thus increase domestic price and output. Workers are shifted from relatively efficient export industries into less efficient protected industries. As a result, real wages decline and world output decreases.

Question 22

Suppose a company begins bar coding raw materials and production, implements electronic data interchange (EDI) with suppliers and customers, and invests in new automated equipment for production. A risk associated with these changes is that

A. Employees may fail to modify their efforts consistent with the new approaches.
B. The company will be less able to respond to customers’ inquiries about their orders.
C. Having less raw materials inventory will increase the likelihood of stock-outs.
D. The company will be less responsive to customers because it has less finished goods inventory.

Answer 22

A. Employees may fail to modify their efforts consistent with the new approaches.

The risk is dysfunctional behavior; e.g., machine operators may persist in maximizing throughput rather than producing high quality products to order. The changes may be overwhelming if careful attention is not given to managing both their technical and behavioral aspects, including involving employees in planning for the change.

Question 23

Which one of the following represents a lack of internal control in a computer-based system?

A. Provisions exist to ensure the accuracy and integrity of computer processing of all files and reports.
B. The design and implementation is performed in accordance with management’s specific authorization.
C. Programmers have access to change programs and data files when an error is detected.
D. Any and all changes in application programs have the authorization and approval of management.

Answer 23

C. Programmers have access to change programs and data files when an error is detected.

A functional separation of computer activities is necessary for internal control. A programmer designs program flowcharts and writes the computer programs as required by the system. Once the program has been debugged and the documentation has been prepared, the programmer should have no further access to it or to data files. A librarian is responsible for permitting only computer operators, not programmers, to have access to programs.

Question 24

Compared with static budgets, flexible budgets

A. Encourage managers to use fewer fixed cost items and more variable cost items that are under their control.
B. Provide a better understanding of the capacity variances during the period being evaluated.
C. Offer managers a more realistic comparison of budget and actual revenue and cost items under their control.
D. Offer managers a more realistic comparison of budget and actual fixed cost items under their control.

Answer 24

C. Offer managers a more realistic comparison of budget and actual revenue and cost items under their control.

A flexible budget provides managers with the revenues and costs that should have been earned and incurred given the actual level of production achieved. This information is far more useful than the static budget prepared before the fiscal period began when the production level was uncertain.

Question 25

In a large firm, custody of an entity’s data is most appropriately maintained by which of the following personnel?

A. Systems analyst.
B. Computer programmer.
C. Computer operator.
D. Data librarian.

Answer 25

D. Data librarian.

Librarians maintain control over and accountability for documentation, programs, and data storage media.

Question 26

Brown Company estimates that monthly sales will be as follows:

Historical trends indicate that 40% of sales are collected during the month of sale, 50% are collected in the month following the sale, and 10% are collected two months after the sale. Brown’s accounts receivable balance as of December 31 totals $80,000 ($72,000 from December’s sales and $8,000 from November’s sales). The amount of cash Brown can expect to collect during the month of January is

A. $84,000
B. $133,000
C. $108,000
D. $76,800

Answer 26

C. $108,000

November’s sales are collected over three months: 40% are collected in November (the month of the sales), 50% are collected in December (the month following the sales), and 10% are collected in January (two months after the sales). Therefore, as of December 31, 90% (40% + 50%) of November sales have already been collected, and the remaining 10% uncollected November sales will be collected in January. Because Brown’s December 31 accounts receivable balance from November’s sales are $8,000, the entire $8,000 will be collected in January for November sales.
December’s sales are collected over three months: 40% are collected in December, 50% are collected in January, and 10% are collected in February. Therefore, as of December 31, 40% of December sales have already been collected. The remaining 60% of uncollected December sales equals $72,000 (the accounts receivable balance as of December 31 for December sales). Therefore, total December sales = $72,000 ÷ 60% = $120,000. Because 50% of December sales will be collected in January, $60,000 ($120,000 × 50%) will be collected in January for December sales.

Because 40% of sales are collected in the month of sale, $40,000 ($100,000 × 40%) are collected during January on January sales.

Therefore, total January collections on receivables are expected to be $108,000 ($8,000 + $60,000 + $40,000).

Question 27

Which of the following is not an advantage of business-to-business (B2B)?

A. Reduced information technology costs.
B. Reduced purchasing costs.
C. Increased market efficiency.
D. Decreased inventory levels.

Answer 27

A. Reduced information technology costs.

Instituting a B2B system requires large initial outlays for equipment, software, and training.

Question 28

A client communicates sensitive data across the Internet. Which of the following controls will be most effective to prevent the use of the information if it were intercepted by an unauthorized party?

A. A firewall.
B. An access log.
C. Encryption.
D. Passwords.

Answer 28

C. Encryption.

Encryption technology converts data into a code. Encoding data before transmission over communications lines makes it more difficult for someone with access to the transmission to understand or modify its contents.

Question 29

Which of the following types of control plans is particular to a specific process or subsystem, rather than related to the timing of its occurrence?

A. Preventive.
B. Detective.
C. Application.
D. Corrective.

Answer 29

C. Application.

Application controls are built into each computer application. They are designed to ensure that only correct, authorized data enter the system, and that the data are processed properly.

Question 30

The following information is available for the month of July:

The sales volume variance for the month of July would be

A. $6,800 unfavorable.
B. $200 favorable.
C. $400 unfavorable.
D. $1,800 unfavorable.

Answer 30

D. $1,800 unfavorable.

It equals budgeted unit contribution margin (UCM) times the difference between budgeted and actual units sold. Given expected sales of 4,000 units and revenue of $60,000, unit price is $15. Variable costs are $16,000 for manufacturing and $8,000 for selling, and unit variable cost is $6 ($24,000 ÷ 4,000 units). The UCM is $9 ($15 – $6). Because actual sales were 200 units fewer than budgeted (4,000 – 3,800), the lost contribution margin was $1,800 (200 × $9). This variance is unfavorable because actual sales were less than budgeted.