PTB2 Flashcards
In the COSO framework, each of the following is a control objective except
Compliance.
Monitoring.
Operations.
Reporting.
Monitoring is correct because it is not a control objective in the COSO framework.
Which of the following is considered an application input control?
Run control total.
Edit check.
Report distribution log.
Exception report.
This Answer is Correct
An edit check is an application input control. Therefore, this is the best answer to this question.
Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow’s quick ratio is 0.8. Which of the following actions would increase Farrow’s quick ratio?
Purchasing inventory through the issuance of a long-term note.
Implementing stronger procedures to collect accounts receivable at a faster rate.
Paying an existing account payable.
Selling obsolete inventory at a loss.
This Answer is Correct
Selling obsolete inventory at a loss (or at a gain) would increase Farrow’s quick ratio. The quick ratio (also known as the acid test ratio) measures the number of times that cash and assets that can be converted quickly to cash cover current liabilities. It is calculated as: (Cash + Current Receivables + Marketable Securities)/Current Liabilities. Selling obsolete inventory would increase cash, in the numerator, without changing current liabilities, the denominator, which would increase the quick ratio.
An investment in a new product will require an initial outlay of $20,000. The cash inflow from the project will be $4,000 a year for the next six years. The payment will be received at the end of each year. What is the net present value of the investment at 8% using the correct factor from below?
Present value of $1 to be received after six periods 0.63017
Present value of an ordinary annuity of $1 per period for six periods 4.62288
Present value of an ordinary annuity due of $1 per period for six periods 4.99271
Future value of $1 at the end of six periods 1.58687
($4,875.92)
($1,508.48)
($ 29.16)
$18,084.88
This Answer is Correct
The net present value is ($1,508.48). The projected $4,000 annual cash inflow for 6 years is discounted using the present value of an ordinary annuity of 4.62288. Thus, the present value of the cash inflows is $4,000 x 4.62288 = $18,491.52. Since the cash outflow is $20,000 (at present value), the net present value is: $18,491.52 - $20,000.00 = ($1,508.48); the parenthesis indicates that the net cash flow is negative. PV of cash outflows exceeds PV of cash inflows. The present value of an ordinary annuity due is not used because the cash inflow payments will be received at the end of each year, not at the beginning of each year.
Alpha Company learns that it may have an opportunity to acquire a large quantity of its raw material in the near future at a significant discount. If the opportunity materializes, it would require that Alpha make an immediate decision and that it pay for the inventory at that time. Which one of the following would Alpha most likely employ in anticipation of such an opportunity so that funds would be available when needed?
Execute a short-term note.
Arrange to issue additional shares of authorized common stock.
Arrange a line of credit.
Execute documents to enable it to issue bonds.
Arranging a line of credit would provide “stand-by” financing that could be used if and when the opportunity to acquire the inventory materializes. Such an arrangement would avoid incurring interest cost and other costs unless and until the credit is actually used.
Kelly, Inc. is considering establishing an enterprise risk management system. Which of the following is not a limitation of such a system?
Business objectives are not usually articulated.
The system may break down.
Collusion among two or more individuals can result in system failure.
Enterprise risk management is subject to management override.
Business objectives are not usually articulated.
An enterprise risk management system assumes that objectives have been set as a part of the strategic planning process.
As the price for a particular product changes, the quantity of the product demanded changes according to the following schedule:
Total quantity demanded Price per unit 100 $50 150 45 200 40 225 35 230 30 232 25 Using the arc method, the price elasticity of demand for this product when the price decreases from $50 to $45 is
(This question is CMA adapted)
0.2
10
0.1
3.8
Price elasticity using the arc method is calculated by dividing the percentage change in quantity demanded by the percentage change in price, using the average changes. In this case, price elasticity is calculated below.
(150 − 100) ÷ [(150 + 100) ÷ 2] = 3.8
($50 − $45) ÷ [($50 + $45) ÷ 2]
The law of diminishing marginal utility states that
(This question is CMA adapted)
Marginal utility will decline as a consumer acquires additional units of a specific product.
Total utility will decline as a consumer acquires additional units of a specific product.
Declining utilities causes the demand curve to slope upward.
Consumers’ wants will diminish with the passage of time.
Marginal utility will decline as a consumer acquires additional units of a specific product.
The law states that marginal utility declines as consumers acquire more of a good.
The Federal Reserve Board most directly influences a corporation’s decision of whether or not to issue debt or equity financing when it revises the
(This question is CMA adapted)
Corporate income tax rate.
Prime rate at which the Federal Reserve Bank lends money to member banks.
Discount rate at which the Federal Reserve Bank lends money to member banks.
Discount rate at which member banks lend money to their customers.
Discount rate at which the Federal Reserve Bank lends money to member banks.
The Board sets the discount rate at which the Federal Reserve Bank lends money to member banks, which directly influences the rates that commercial banks charge their customers. The rates charged by commercial banks would, in turn, determine the cost of using debt for financing purposes.
If a $1,000 bond sells for $1,125, which of the following statements is(are) correct?
I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
II. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.
(This question is CMA adapted)
I and IV.
I and V.
II and IV.
III and V.
II and IV.
Item I is not correct because if the bond sells at a premium the market rate is less than the coupon rate. Item III is not correct because the coupon rate is higher than the market rate. Item V is incorrect because the bond sells at a premium not a discount. Therefore, II and IV are the only two correct characteristics.
Keller Company has implemented an enterprise risk management system and has responded to a particular risk by adding internal controls. Such a response is characterized by COSO’s Enterprise Risk Management Framework as: Avoidance. Sharing. Acceptance. Reduction.
Reduction.
This Answer is Correct
This answer is correct. Reduction involves reducing the likelihood or impact by implementing controls or managing the risk.
Book Co. uses the activity-based costing approach for cost allocation and product costing purposes. Printing, cutting, and binding functions make up the manufacturing process. Machinery and equipment are arranged in operating cells that produce a complete product, starting with raw materials. Which of the following are characteristic of Book’s activity-based costing approach?
I. Cost drivers are used as a basis for cost allocation.
II. Costs are accumulated by department or function for purposes of product costing.
III. Activities that do not add value to the product are identified and reduced to the extent possible.
I only.
I and II.
I and III.
II and III.
I and III.
This Answer is Correct
This answer is correct because an activity-based costing system allocates costs to products by determining which activities performed by the entity drive the costs. An activity-based costing approach differs from traditional costing methods, which accumulate costs by department or function. Activity-based costing accumulates costs by the specific activities being performed—printing, cutting, and binding in this case. By analyzing the activities of the entity, activities that do not add value to the product can be identified and reduced or eliminated.
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
The client is a single-product manufacturer.
Most of the client’s costs currently are classified as direct costs.
The client produced products that heterogeneously consume resources.
The client produced many different products that homogeneously consume resources.
The client produced products that heterogeneously consume resources.
This Answer is Correct
This answer is correct. When the company produces products that heterogeneously consume resources, an activity-based costing system improves costing.
