PTD11

Question 1

Strobel Company has a large amount of variable rate financing due in one year. Management is concerned about the possibility of increases in short-term rates. Which one of the following would be an effective way of hedging this risk?
Buy Treasury notes in the futures market.
Sell Treasury notes in the futures market.
Buy an option to purchase Treasury bonds.
Sell an option to purchase Treasury bonds.

Answer 1

Sell Treasury notes in the futures market.

This Answer is Correct
(Correct!) Selling Treasury notes futures contract would hedge the risk of increases in the short-term interest rates. If the interest rates increase, the value of the Treasury notes contract will decline, which would enable the firm to acquire the notes at the new lower value and sell them at the higher futures contract price, resulting in a gain. The gain would serve to offset the effects of an increase in short-term interest rates on the variable rate financing.

Question 2

In accounting for by-products, the value of the by-product may be recognized at the time of
Production
Sale
Yes
Yes
Yes
No
No
No
No
Yes

Answer 2

YES YES

The value of the by-products may be recognized at two points in time: (1) at the time of production, or (2) at the time of sale. Under the production method, the net realizable value of the by-products produced is deducted from the cost of the major products produced. Under the sale method, net revenue from by-products sold (gross revenue from by-product sales minus separable costs incurred) is deducted from the cost of the major products sold.

Question 3

Which of the following items often provides a significant risk with off-shore operations?
Cost of moving/restructuring operations.
Cultural/language issues.
Service is less specific to the needs of specialized processes.
Delivery is often less timely.

Answer 3

Cultural/language issues

Off-shore operations are especially vulnerable to cultural/language issues and difficulty protecting intellectual property rights.

Question 4

Which of the following is not a type of control under the control activity component of the COSO framework for internal control?
Supervisory controls.
Physical controls.
Monitoring controls.
Verifications.

Answer 4

Monitoring controls.

Monitoring is a separate component of internal control.

Question 5

Which of the following describes a normal yield curve?
Upward sloping.
Downward sloping.
Flat.
Humped.

Answer 5

Upward sloping.

This answer is correct. A normal yield curve is one in which short-term rates are lower than intermediate-term rates which are lower than long-term rates. Therefore, the curve is upward sloping.

Question 6

If management has a variable rate short-term loan and is concerned about the volatility of short-term interest rates, which of the following would not be an effective hedging strategy?
Purchase a short position in the Treasury bill futures market.
Enter into an interest rate swap.
Enter into a forward contract to sell Treasury bonds in the future.
Enter into a forward contract to purchase Treasury bills in the future.

Answer 6

Enter into a forward contract to purchase Treasury bills in the future.
This Answer is Correct
This answer is correct. Purchasing Treasury bills will put the firm at additional risk with respect to short-term interest rates.

Question 7

Which of the following production processes best describes lean manufacturing?
Making a small number of a high variety of unique products with relatively low-skilled labor.
Making a large number of standardized products with highly skilled labor.
Making small batches of a high variety of unique products with cross-trained labor.
Making a large number of standardized products with relatively low-skilled labor.

Answer 7

Lean manufacturing is accurately described as using small batches of a high variety of unique products with highly skilled, cross-trained labor.

Question 8

In the short run, a firm in perfect competition will cease to produce when which of the following conditions exists?
Price is less than average variable cost.
Price is less than average total cost, but greater than average variable cost.
Marginal revenue is less than average total cost, but greater than average variable cost.
Marginal revenue is greater than average total cost.

Answer 8

Price is less than average variable cost.

When the market price is less than a firm’s average variable cost, the firm should cease to produce and exit the market. At this price-to-cost relationship, each unit the firm produces does not cover the variable cost to produce the product and total losses increase with every unit produced.