Practice Exam 8.4.23

Question 1

A computer program processes payrolls. The program is a(n)

A. Application program.
B. Utility program.
C. Operating system.
D. Report generator.

Answer 1

A. Application program.

Application programs are written to solve specific user problems; that is, they perform the ultimate computer functions required by system users. Thus, a program designed to process payroll is an application program.

Question 2

The significance of hardware controls is that they

A. Ensure the proper execution of machine instructions.
B. Ensure accurate programming of operating system functions.
C. Ensure that run-to-run totals in application systems are consistent.
D. Reduce the incidence of user input errors in online systems.

Answer 2

A. Ensure the proper execution of machine instructions.

Hardware controls are built into the equipment by the manufacturer to detect and control errors arising from the use of the equipment. Examples include parity checks, read-after-write checks, and echo checks.

Question 3

Multiple regression analysis involves the use of

Answer 3

A. Dependent Variables = One
Independent Variables = More than one

Improved accuracy of forecasts may often be achieved by regressing the dependent variable on more than one independent variable. The usual multiple regression equation is linear and is in the following form:
y = a + bx1 + bx2 + … + e

Question 4

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system

A. Will produce a more accurate set of financial statements.
B. Eliminates the need to reconcile control accounts and subsidiary ledgers.
C. Does not require as stringent a set of internal controls.
D. Will be more efficient at producing financial statements.

Answer 4

D. Will be more efficient at producing financial statements.

Computer processing permits consistent application of predefined business rules and the performance of complex calculations in high volume. Hence, computer processing of the accounting transactions reported in financial statements is more efficient than in a manual system.

Question 5

Which of the following costs would decrease if production levels were increased within the relevant range?

A. Fixed costs per unit.
B. Total fixed costs.
C. Variable costs per unit.
D. Total variable costs.

Answer 5

A. Fixed costs per unit.

The relevant range defines the limits within which per-unit variable costs are stable and fixed costs are not changeable. Fixed costs in total remain unchanged in the short run regardless of production level. Fixed costs per unit, however, vary inversely with the activity level. Thus, an increase in production levels would decrease fixed costs per unit.

Question 6

A transaction processing system allows an authorized individual to select a quantity of items from the company’s online inventory. It is also possible to trace back to a copy of the purchase order to see when the items were ordered and who authorized the order. Which of the following features does this system have?

A. An inventory tracking system.
B. An audit trail.
C. Real-time inventory auditing.
D. Automated order processing.

Answer 6

B. An audit trail.

An audit trail is a record by which accounting measurements, details of a trade, or other financial data can be traced back to its source. Audit trails can be used to verify and track transactions. Since the transaction processing system is able to trace back to a copy of the purchase order to see when the items were ordered and who authorized the order, it provides certain audit trails for transactions processed.

Question 7

Business intelligence (BI) has all of the following characteristics except

A. Providing advice and answers to top management from a knowledge-based system.
B. Giving immediate information about an organization’s critical success factors.
C. Displaying information in graphical format.
D. Focusing on strategic objectives.

Answer 7

A. Providing advice and answers to top management from a knowledge-based system.

BI serves the needs of top management for managerial control and strategic planning. BI focuses on strategic (long-range) objectives and gives immediate information about a firm’s critical success factors. BI is not a program for providing top management with advice and answers from a knowledge-based (expert) system.

Question 8

A company’s common stock has a market value of $45. The company’s most recent annual earnings per share (EPS) is $3.60 and the company pays an annual dividend of $1.50 per share. What is the company’s price-earnings (PE) ratio?

A. 12.50
B. 21.43
C. 12.08
D. 8.82

Answer 8

A. 12.50

The PE ratio equals market price per share divided by EPS. The company’s market price per share is $45 and its EPS is $3.60. Thus, its PE ratio is 12.50 ($45 ÷ $3.60).

Question 9

A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company’s residual income would be which of the following amounts?

A. $640
B. $0
C. $900
D. $260

Answer 9

A. $640

The company’s total residual income can be calculated as follows:
Residual income

Question 10

The preparation of a comprehensive master budget culminates with the preparation of the

A. Production budget.
B. Capital investment budget.
C. Cash budget.
D. Strategic budget.

Answer 10

C. Cash budget.

Apart from the pro forma balance sheet and statement of cash flows, the cash budget is the culmination of the master budget process.

Question 11

A favorable direct labor rate variance, if due to hiring less-skilled labor, will most likely result in a ______ sales volume or sales price variance.

A. Unfavorable.
B. None of the answers are correct.
C. Neutral.
D. Favorable.

Answer 11

A. Unfavorable.

Using less-skilled labor often results in lower quality products, less demand, and a decrease in actual unit sales. The effect is an unfavorable sales volume variance. If the seller wants to maintain the same sales level, the price must be reduced, resulting in an unfavorable sales price variance.

Question 12

The current generation of ERP software (ERP II) may include an advanced planning and scheduling system that

A. Connects the organization with other members of a joint venture.
B. Determines the location of retail outlets.
C. Controls the flow of a manufacturer’s materials and components through the supply chain.
D. Permits tracking of orders by customers.

Answer 12

C. Controls the flow of a manufacturer’s materials and components through the supply chain.

An advanced planning and scheduling system may be an element of a supply chain management application for a manufacturer. It controls the flow of materials and components within the chain. Schedules are created given projected costs, lead times, and inventories.

Question 13

A company predicted that it would manufacture 10,000 units of finished goods during March. The direct labor standards indicated that each unit of finished goods requires 2.4 direct labor hours at a standard wage of $20 per hour, totaling $48.00 per finished good unit. During March, the company actually made 9,000 units of finished goods. Production used 2.5 labor hours per finished unit, and the company actually paid $21 per hour, totaling $52.50 per unit of finished product. What amount is the company’s direct labor rate variance for March?

A. $22,500
B. $40,500
C. $25,000
D. $18,000

Answer 13

A. $22,500

The direct labor rate variance equals the actual number of hours worked times the difference between (1) the standard hourly wage rate and (2) the actual hourly wage rate. The actual number of hours worked equals 22,500 (2.5 labor hours per unit that were actually used times the 9,000 units that were actually finished). Thus, the direct labor rate variance is $22,500 [($20 SP – $21 AP) × 22,500 AQ] unfavorable.

Question 14

Real-time processing is most appropriate for which of the following bank transactions?

A. Purchases of fixed assets.
B. Expiration of prepaid liability insurance.
C. Credit authorizations for consumer loan applicants.
D. Biweekly payroll for bank employees.

Answer 14

C. Credit authorizations for consumer loan applicants.

In real-time systems, having the latest information available at all times is crucial so that users can make immediate decisions. Therefore, if the bank needs to immediately provide credit authorizations for consumer loan applicants, real-time processing is the most appropriate system.

Question 15

Dawn Corp. uses a standard cost system. During the year, both the labor rate variance and the labor efficiency variance were unfavorable. Dawn wrote the variances off directly to cost of goods sold. If Dawn had allocated the variances to work in process, finished goods, and cost of goods sold instead, what would have been the effects on current ratio and net income?

Answer 15

C. Current ratio = Increases
Net income = Increases

By reallocating a portion of cost of goods sold (COGS) to work-in-process and finished goods inventory, the overall expenses of the company are reduced as a portion of the expense is reclassified as a current asset (inventory). The reduction in expenses will increase net income. Additionally, the increase in current assets without an increase in current liabilities will result in an increase in the current ratio.

Question 16

The total quality management process identifies each of the following as a cost of quality, except

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

Answer 16

D. Investment costs.

The total quality management process identifies four costs of quality: (1) prevention costs, (2) appraisal costs, (3) internal failure costs, and (4) external failure costs. Investment costs are not a cost of quality.

Question 17

A sales budget shows quarterly sales for the next year as follows:

Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter’s sales. Budgeted production for the second quarter of the next year would be

A. 7,200 units.
B. 8,000 units.
C. 8,400 units.
D. 8,800 units.

Answer 17

D. 8,800 units.

The finished units needed for sales (8,000), plus the units desired for ending inventory (12,000 units to be sold in the third quarter × 20% = 2,400), minus the units in beginning inventory (8,000 units to be sold in the second quarter × 20% = 1,600) equals budgeted production for the second quarter of 8,800 units.

Question 18

Which of the following decision-making models equates the initial investment with the present value of the future cash inflows?

A. Cost-benefit ratio.
B. Internal rate of return.
C. Payback period.
D. Accounting rate of return.

Answer 18

B. Internal rate of return.

The internal rate of return is a convenient tool for assessing capital budgeting projects that involves determining the rate of return at which the present value of all the net cash flows equals $0.

Question 19

The relationship between online, real-time database systems and batch processing systems is that

A. A firm will always prefer an online, real-time processing system because batch processing is slow.
B. A firm will have only one processing mode because a single computer cannot do both.
C. A firm may use both processing modes concurrently.
D. A firm will not use batch processing if it has a large computer.

Answer 19

C. A firm may use both processing modes concurrently.

Firms may find it beneficial to incorporate both processing modes into one system. A database may be established for information that must be obtained quickly, for instance, a sales processing system in which credit information must be available to sales personnel on an ongoing basis. However, other processing requirements may take advantage of the speed and control provided in a batch processing system. For example, payroll transactions may be processed quickly and efficiently in a batch mode.

Question 20

Nextgen, Inc., installed an access management application to assess sensitive access and segregation-of-duty risks and conflicts during the development of security roles and the assignment of those roles to end users. To achieve this purpose, which of the following features should the application include?

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

Answer 20

C. I, II, and III.

The application should have the ability to define restrictions, prevent access in accordance with restrictions, and recommend a mitigating control activity if granting access would override a restriction.

Question 21

A distinguishing feature of a futures contract is that

A. Performance is delayed.
B. The parties know each other.
C. It is a hedge, not a speculation.
D. The price is marked to market each day.

Answer 21

D. The price is marked to market each day.

A characteristic of futures contracts is that their prices are marked to market every day at the close of the day. Thus, the market price is posted at the close of business each day. A mark-to-market provision minimizes a futures contract’s chance of default because profits and losses on the contracts must be received or paid each day through a clearinghouse.

Question 22

The capital budgeting technique known as internal rate of return uses

Answer 22

C. Cash Flow overEntire Life of Project = Yes
Time Valueof Money = Yes

The internal rate of return is a capital budgeting technique that equates the present value of future cash flows with the initial cost of the investment. It incorporates the time value of money by determining the compound interest rate of an investment.

Question 23

The IT steering committee typically includes

A. All of the answers are correct.
B. Executive management from each division.
C. The head of systems development from the IT function.
D. The Chief Information Officer.

Answer 23

A. All of the answers are correct.

The IT steering committee typically includes the Chief Information Officer, the head of systems development from the IT function, and executive management from each division.

Question 24

Clifford Co. calculates the net present value (NPV) of a potential project for different discount rates. Based on the following results, what is the approximate internal rate of return (IRR) of the project?

A. 5.1%
B. 7.1%
C. 6.1%
D. 8.1%

Answer 24

C. 6.1%

The IRR of a project is the discount rate at which the investment’s NPV equals zero. The sign of the NPV changes from positive to negative between the discount rates of 6% and 7%. Consequently, the IRR of the project must be between 6% and 7%.

Question 25

A company has in place an authentication system that requires users to enter a logon name and password. In an effort to strengthen this method of authentication, the company’s chief information officer (CIO) asked the technology steering committee to recommend a biometric control for the authentication process. Which of the following committee recommendations best meets the requirement of the CIO?

A. The installation of fingerprint scanners on all workstations.
B. The use of a number-generating token that generates a different seven-digit number every 30 seconds to allow system entry.
C. The use of a picture selection screen in which a user must choose a matching photo to one that was selected when the system was first implemented.
D. The use of a voice-to-text converter on user workstations that allows users to speak their user name and password.

Answer 25

A. The installation of fingerprint scanners on all workstations.

Biometric technologies are automated methods of establishing an individual’s identity using physiological or behavioral traits. These characteristics include fingerprints, retina patterns, hand geometry, signature dynamics, and keystroke dynamics. Therefore, installing fingerprint scanners on all workstations meets the requirement of the CIO.

Question 26

Which of the following is least affected by the use of the percentage-of-sales forecasting method for budgeting?

A. Accounts receivable.
B. Inventory.
C. Bonds payable.
D. Accounts payable.

Answer 26

C. Bonds payable.

The percentage-of-sales method is widely used for sales forecasting. It adjusts the current level of sales by a specified percentage increase or decrease. This method is based on the assumptions that (1) most items directly correlate with sales, and (2) the current levels of all assets are optimal for the current sales level. Inventory is sold, accounts receivable result from sales, and accounts payable are amounts owed to suppliers of what is sold (or its elements). They are operating items that correlate directly with sales. Thus, they are more affected by the use of the percentage-of-sales forecasting method than bonds payable. These noncurrent obligations result from financing, not operating, activities.

Question 27

A manufacturer located in the Philippines has sold computer components to a Japanese electronics firm. The invoice amount is due in 60 days, and the Japanese firm has sufficient economic clout to require that the invoice be denominated in yen. Which of the following strategies will the Filipino firm most likely pursue to hedge the transaction exposure inherent in this situation?

A. Purchase yen in the spot market.
B. Sell pesos in the 60-day forward market.
C. Purchase pesos in the spot market.
D. Sell yen in the 60-day forward market.

Answer 27

D. Sell yen in the 60-day forward market.

The Filipino company knows that it will be receiving a given number of yen in 60 days. The firm wants to be sure that it will be able to sell these yen at that time for a certain number of pesos. The Filipino firm thus hedges by selling yen in the 60-day forward market. The company is buying a guarantee that it will be able to sell a definite number of yen in 60 days and receive a definite number of pesos in return, regardless of fluctuations in the exchange rate in the meantime.

Question 28

Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?

A. Economic value-added.
B. Free cash flow.
C. Market value-added.
D. Net operating capital.

Answer 28

A. Economic value-added.

Economic value-added equals after-tax operating income minus the cost-of-capital-weighted investment base.

Question 29

A national retailer required more detailed data to help stock its stores with the right products and to increase its turnover. Such data amounted to several gigabytes per day from each store. A new high-speed company-wide network was needed to transmit and analyze the data. The company wanted the features, functionality, and control of a sophisticated voice and data network without the cost of the components or the staff to maintain it. Which of the following options would be most suitable?

A. Value-added network.
B. Local area network.
C. Private wide-area network.
D. Virtual private network.

Answer 29

D. Virtual private network.

A virtual private network is a carrier-provided service in which the public switched network provides capabilities similar to those of dedicated private lines but at a lower cost. In effect, an unlimited number of virtual networks can be created from the single common physical network. Virtual networks are made possible by intelligent networking technology, which provides the means for routing telephone calls over the best paths without dedicated lines.

Question 30

Fact Pattern: A start-up firm has the following data:

In a period of rising price, the firm wants to report the highest income. Which inventory method should the firm choose?

A. Replacement cost.
B. LIFO.
C. FIFO.
D. Weighted average.

Answer 30

C. FIFO.

Units sold equals 235 (375 – 140). FIFO (first-in, first-out) expenses the first items purchased. The inventory method under which the firm has the lowest cost of goods sold (COGS) will generate the highest income. COGS under FIFO is computed as follows:
COGS = (100 × $2) + [(235 – 100) × $3] = $605