1. Which of the following is an advantage of net present value modeling?

A. It is measured in time, not dollars.

B. It uses accrual basis, not cash basis accounting for a project.

C. It uses the accounting rate of return.

D. It accounts for compounding of returns.

2. Harvey Co. is evaluating a capital investment proposal for a new machine. The investment proposal
shows the following information:

Initial cost $500,000

Life 10 years
Annual net cash $200,000
inflows
Salvage value $100,000

If acquired, the machine will be depreciated using the straight-line method. The payback period for this
investment is
A. 3.25 years B. 2.67 years.

C. 2.5 years. D. 2 years.

3. Warren, Inc. is considering a number of methods to evaluate investment projects. Management of

Warren is primarily concerned with maximizing shareholder value. Which of the following techniques
would probably be the best method for management of Warren to select?

A. Payback

B. Net present value.

C. Discounted payback.

D. Accounting rate of return.

4. Which of the following changes would result in the highest present value?

A. A $100 decrease in taxes each year for four years.

B. A $100 decrease in the cash outflow each year for three years.

C. A $100 increase in disposal value at the end of four years.

D. A $100 increase in cash inflow each year for three years.

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5. If the net present value profiles for two mutually exclusive capital projects are shaped as in the graph
below, which of the following statements is true?

A. Project 2 has a higher internal rate of return than Project 1.

B. Project 1 has a higher internal rate of return than Project 2.

C. Project 1 has a higher net present value than Project 2.

D. Project 2 has a higher net present value than Project 1.

6. A downward-sloping yield curve depicting the term structure of interest rates implies that

A. Interest rates have declined over recent years.

B. Interest rates have increased over recent years.

C. Prevailing short-term interest rates are lower than prevailing long-term interest rates.

D. Prevailing short-term interest rates are higher than prevailing long-term interest rates.

7. In statistical analysis, a weighted-average using probabilities as weights is the

A. Standard deviation.
B. Expected value.
C. Coefficient of variation.
D. Objective function.

8. In an interest rate swap the first company

A. Sells its right to low interest rate financing at a financial institution to the second company that is
seeking to borrow funds.
B. Agrees to service the debt of the second company by making interest payments directly to the
bank of the second company, while the second company agrees in exchange to make interest payments to
the bank of the first company.
C. Buys the outstanding public debt of the second company and swaps the interest payments it
receives on that debt for the interest payments it must make on its own debt.
D. Agrees to exchange with the second company the difference between the interest charges on its
own borrowings and the interest charges on the borrowings of the second company.

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9. A company is considering exchanging an old asset for a new asset. Ignoring income tax
considerations, which of the following is economically relevant to the decision?

Original cost Fair market value

of old asset of old asset
A. Yes Yes
B. Yes No
C. No Yes
D. No No
10. Net present value as used in investment decision-making is stated in terms of which of the following
options?

A. Net income. B. Earnings before interest, taxes, and depreciation.

C. Earnings before interest and taxes. D. Cash flow.

11. Which of the following scenarios would encourage a company to use short-term loans to retire its ten-
year bonds that have five years until maturity?

A. The company expects interest rates to increase over the next five years.
B. Interest rates have increased over the last five years.
C. Interest rates have declined over the last five years.
D. The company is experiencing cash flow problems.

12. Essex Corporation is evaluating a lease that takes effect on March 1, 2008. The company must make
eight equal payments, with the first payment due on March 1, 2008. The concept most relevant to the
evaluation of the lease is

A. The present value of an annuity due B. The present value of an ordinary annuity.
C. The future value of an annuity due. D. The future value of an ordinary annuity.

13. In portfolio analysis a measure that is used to express the extent of the relationship among a set of
investments is the

A. Standard deviation. B. Expected return.

C. Coefficient of correlation. D. Percentage return.

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

A. Accounting rate of return. B. Payback period.

C. Internal rate of return. D. Cost-benefit ratio.

15. Which of the following describes an option?

A. A standardized contract to take delivery of a specified quantity of a financial instrument in the

future.
B. A contract that allows the holder to purchase a specified quantity of a financial instrument at a
specified price.
C. A negotiated contract to purchase a specified quantity of a financial instrument in the future.
D. An agreement to swap a stream of cash flows.

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

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

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

17. Which of the following statements is correct regarding financial decision making?

A. Opportunity cost is recorded as a normal business expense.

B. The accounting rate of return considers the time value of money.
C. A strength of the payback method is that it is based on profitability.
D. Capital budgeting is based on predictions of an uncertain future.

18. Which of the following factors does not affect the variance of a portfolio?

A. The percentage of the portfolio invested in each asset.

B. The variance of the returns on each individual asset.
C. The expected market rate.
D. The covariance among the returns of assets in the portfolio.

19. Use the following information to answer question 19.

Investment project Cash outlay Present value of cash inflows

A $1,100,000 $ 980,000
B 250,000 600,000
C 1,400,000 1,830,000
D 650,000 790,000

The company has $2,000,000 of financing available for new investment projects. If only one project may
be selected, which should the company undertake?

20. Which of the following is not a financial intermediary?

A. Commercial bank. B. Mutual fund.

C. Investment banker. D. A commercial business.

21. Axel Corp. is planning to buy a new machine with the expectation that this investment should earn a
discounted rate of return of at least 15%. This machine, which costs $150,000, would yield an estimated
net cash flow of $30,000 a year for 10 years, after income taxes. In order to determine the net present
value of buying the new machine, Axel should first multiply the $30,000 by which of the following
factors?

A. 20.304 (Future amount of an ordinary annuity of $1).

B. 5.109 (Present value of an ordinary annuity of $1).
C. 4.046 (Future amount of $1).
D. 0.247 (Present value of $1).

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22. The variance of an individual investment captures

A. Only systematic risk.

B. Only unsystematic risk.
C. Both systematic risk and unsystematic risk.
D. Neither systematic nor unsystematic risk.

23. It is assumed that cash flows are reinvested at the rate earned by the investment in which of the
following capital budgeting techniques?
Internal rate of return Net present value
A. Yes Yes
B. Yes No
C. No No
D. No Yes

24. According to the expectations theory of the term structure of interest rates, if inflation is expected to
increase, the yield curve is

A. Humped, with an upward slope that peaks and then turns downward.
B. Downward sloping.
C. Upward sloping.
D. Flat

25. What is an internal rate of return?

A. A net present value.

B. An accounting rate of return.
C. A payback period expected from an investment.
D. A time-adjusted rate of return from an investment.

26. An efficient portfolio is one that

A. Has no risk. B. Has measurable risk.

C. Has the highest return. D. One that meets the investor's tradeoff between risk and return.

27. Use the following information to answer question 27.

Investment project Cash outlay Present value of cash inflows

A $1,100,000 $ 980,000
B 250,000 600,000
C 1,400,000 1,830,000
D 650,000 790,000

The company has $2,000,000 of financing available for new investment projects. The investment project
with the highest excess profitability index is

28. The zero-coupon method is used to determine the fair value of

A. Stocks. B. Options.
C. Interest rate swaps. D. Foreign currency contracts.

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29. The discount rate (hurdle rate of return) must be determined in advance for the

A. Internal rate of return method.

B. Net present value method.
C. Payback period method.
D. Time adjusted rate of return method.

30. 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?

A. Purchase a short position in the Treasury bill futures market.

B. Enter into an interest rate swap.

C. Enter into a forward contract to sell Treasury bonds in the future.

D. Enter into a forward contract to purchase Treasury bills in the future.

31. Assume that management of Trayco has generated the following data about an investment project that
has a five-year life:

Initial investment $100,000

Additional investment in working capital 5,000
Cash flows before income taxes for years 1 through 5 30,000
Yearly depreciation for tax purposes 20,000
Terminal value of machine 0
Cost of capital 8%

Present value of $1 received after 5 years discounted at 8% .681

Present value of an ordinary annuity of $1 for 5 years at 8% 3.993

Assume that Trayco’s marginal tax rate is 30% and all cash flows come at the end of the year.

In evaluating the decision how is the additional investment in working capital considered?

A. Ignored because it will be recovered at the end of the investment.

B. As an adjustment to annual cash flows.

C. As an additional initial investment that will be recovered at the end of year 5.

D. As a deduction from the cost of the investment.

32. Which of the following techniques consistently gives the best answer when evaluating investment
projects that are mutually exclusive?

A. The internal rate of return. B. Net present value.

C. The payback method. D. The accounting rate of return.

33. Which of the following events would decrease the internal rate of return of a proposed asset purchase?

A. Decrease tax credits on the asset. B. Decrease related working capital requirements.

C. Shorten the payback period. D. Use accelerated, instead of straight-line depreciation.

34. Which of the following statements about investment decision models is true?

A. The discounted payback rate takes into account cash flows for all periods.

B. The payback rule ignores all cash flows after the end of the payback period.

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 C. The net present value model says to accept investment opportunities when their rates of return
exceed the company’s incremental borrowing rate.

D. The internal rate of return rule is to accept the investment if the opportunity cost of capital is
greater than the internal rate of return.

35. How are the following used in the calculation of the net present value of a proposed project? Ignore
income tax considerations.
Depreciation expense Salvage value
A. Include Include
B. Include Exclude
C. Exclude Include
D. Exclude Exclude

36. What accounts for the difference between the stated rate and the effective annual rate of a loan?

A. The rate of inflation.

B. The risk of the borrower.

C. The frequency of compounding.

D. The risk-free interest rate.

37. The profitability index is a variation on which of the following capital budgeting models?

A. Internal rate of return. B. Economic value-added.

C. Net present value. D. Discounted payback.

38. Which of the following is a disadvantage of the internal rate of return as a method of evaluating
investments?

A. Does not adjust for the time value of money.

B. Does not consider the profitability of the project.

C. Has limitations when evaluating mutually exclusive investments.

D. Its results are not intuitive.

39. Theoretically, the proceeds from the sale of a bond will be equal to

A. The sum of the face amount of the bond and the periodic interest payments.

B. The face amount of the bond.

C. The face amount of the bond plus the present value of the interest payments made during the life
of the bond discounted at the prevailing market rate of interest.

D. The present value of the principal amount due at the end of the life of the bond plus the present
value of the interest payments made during the life of the bond, each discounted at the prevailing market
rate of interest.

40. Which of the following is necessary in order to calculate the payback period for a project?

A. Useful life. B. Minimum desired rate of return.

C. Net present value. D. Annual cash flow.

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41. Which of the following describes the derivative risk that relates to the possibility of loss from
regulatory action?

A. Market risk. B. Legal risk. C. Basis risk. D. Credit risk.

42. Which of the following does investment’s beta measure?

A. The investment's systematic risk. B. The investment's unsystematic risk.

C. The investment's default risk. D. The investment's interest rate risk.
43. Which of the following limitations is common to the calculations of payback period, discounted cash
flow, internal rate of return, and net present value?

A. They do not consider the time value of money.

B. They require multiple trial and error calculations.
C. They require knowledge of a company’s cost of capital.
D. They rely on the forecasting of future data.

44. A multiperiod project has a positive net present value. Which of the following statements is correct
regarding its required rate of return?

A. Less than the company's weighted-average cost of capital.

B. Less than the project's internal rate of return.
C. Greater than the company's weighted-average cost of capital.
D. Greater than the project's internal rate of return.

45. Which of the following statements is true regarding the payback method?

A. It does not consider the time value of money.

B. It is the time required to recover the investment and earn a profit.
C. It is a measure of how profitable one investment project is compared to another.
D. The salvage value of old equipment is ignored in the event of equipment replacement.

46. The calculation of depreciation is used in the determination of the net present value of an investment
for which of the following reasons?

A. The decline in the value of the investment should be reflected in the determination of net present
value.
B. Depreciation adjusts the book value of the investment.
C. Depreciation represents cash outflow that must be added back to net income.
D. Depreciation increases cash flow by reducing income taxes.

47. A company is arranging financing for the purchase of a new piece of equipment that has a five-year
expected useful life. Which of the following alternative financing arrangements has the lowest effective
annual percentage rate if each has a quoted nominal rate of 9.5%?

A. A five-year term loan with interest compounded annually.

B. A ten-year term loan with interest compounded semiannually.
C. A five-year term loan with interest compounded quarterly.
D. A ten-year term loan with interest compounded monthly.

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48. Which of the following best describes sensitivity analysis?

A. A technique that explores the importance of assumptions underlying a forecast.

B. A technique that explores the effect of simultaneous changes in a group of variables.
C. A technique that recognizes the multiple decisions that are involved in implementing a project.
D. A technique that views an investment as purchasing an option.

49. Net present value (NPV) and internal rate of return (IRR) differ in that

A. NPV assumes reinvestment of project cash flows at the cost of capital while IRR assumes
reinvestment of project cash flows at the internal rate of return.
B. NPV and IRR make different accept or reject decisions for independent projects.
C. IRR can be used to rank mutually exclusive investment projects but NPV cannot.
D. NPV is expressed as a percentage while IRR is expressed as a dollar amount.

50. Which of the following describes a normal yield curve?

A. Upward sloping. B. Downward sloping. C. Flat. D. Humped.

51. A client wants to know how many years it will take before the accumulated cash flows from an
investment exceed the initial investment, without taking the time value of money into account. Which of
the following financial models should be used?

A. Payback period. B. Discounted payback period.

C. Internal rate of return. D. Net present value.
52. Which of the following characteristics represent an advantage of the internal rate of return technique
over the accounting rate of return technique in evaluating a project?

I. Recognition of the project's salvage value.

II. Emphasis on cash flows.
III. Recognition of the time value of money.

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

53. Using absorption costing, manufacturing overhead costs are best described as

A. Direct period costs. B. Indirect period costs. C. Direct product costs. D. Indirect
product costs.

54. Which of the following would be most impacted by the use of the percentage of sales forecasting
method for budgeting purposes?

A. Accounts payable. B. Mortgages payable. C. Bonds payable. D. Common stock.

55. “Committed costs” are costs that

A. Were capitalized and amortized in prior periods.

B. Are responsive to management's attention.
C. Management decides to incur in the current period that do not have a clear cause and effect
relationship between inputs and outputs.
D. Establish the present level of operating capacity and cannot be altered in the short run.

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56. The CPA reviewed the minutes of a board of directors’ meeting of LQR Corp., an audit client. An
order for widget handles was outsourced to SDT Corp. because LQR could not fill the order. By having
SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been
lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was
completed. Which of the following statements is correct regarding LQR’s action?

A. The use of resource markets outside of LQR involves opportunity cost.

B. Accounting profit is total revenue minus explicit costs and implicit costs.
C. Implicit costs are not opportunity costs because they are internal costs.
D. Explicit costs are opportunity costs from purchasing widget handles from resource market.

57. Breakeven analysis assumes over the relevant range that

A. Total costs are linear. B. Fixed costs are nonlinear.

C. Variable costs are nonlinear. D. Selling prices are nonlinear.

58. Which of the following statements is correct regarding absorption costing and variable costing?

A. Overhead costs are treated in the same manner under both costing methods.
B. If finished goods inventory increases, absorption costing would result in higher income.
C. Variable manufacturing costs are lower under variable costing.
D. Gross margins are the same under both costing methods.

59. Which of the following costing methods provide(s) the added benefit of usefulness for external
reporting purposes?

I. Variable. II. Absorption.

A. I only. B. II only. C. Both I and II. D. Neither I nor II.

60. The budgeting tool or process where estimates of revenues are prepared for each product beginning
with the product’s research and development phase and traced through to its customer support phase is
a(n)

A. Master budget B. Activity-based budget. C. Zero-based budget. D. Life-cycle

budget.

61. Which of the following statement(s) is(are) true regarding the relationship between absorption costing
net income and variable costing income?
I. When production exceeds sales, variable costing income exceeds absorption costing net income.
II. When sales exceeds production, absorption costing income exceeds variable costing net income.

A. I only. B. II only. C. Both I and II. D. Neither I nor II.

62. Which one of the following is the best characteristic concerning the capital budget? The capital
budget is a(n)

A. Plan to insure that there are sufficient funds available for the operating needs of the company.
B. Exercise that sets the long-range goals of the company including the consideration of external
influences caused by others in the market.
C. Plan that coordinates and communicates a company's plan for the coming year to all departments
and divisions.
D. Plan that assesses the long-term needs of the company for plant and equipment purchases.

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63. Under a standard cost system, the material price variances are usually the responsibility of the

A. Production manager. B. Cost accounting manager. C. Sales manager. D. Purchasing

manager.

64. Which of the following statements is true regarding opportunity cost?

A. Opportunity cost is recorded in the accounts of an organization that has a full costing system.
B. The potential benefit is not sacrificed when selecting an alternative.
C. Idle space that has no alternative use has an opportunity cost of zero.
D. Opportunity cost is representative of actual dollar outlay.

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

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

66. If a manufacturing company uses responsibility accounting, which one of the following items
is least likely to appear in a performance report for a manager of an assembly line?

A. Materials. B. Repairs and maintenance.

C. Direct labor. D. Equipment depreciation.

67. Comparing actual results with a budget based on achieved volume is possible with the use of a

A. Monthly budget. B. Master budget. C. Rolling budget. D. Flexible budget.

68. In the contribution margin approach to pricing, the price at which the income remains constant is
equal to the price that covers

A. Prime costs. B. Variable costs. C. Fixed costs. D. Fixed and

variable costs plus the desired profit.

69. Which of the following cycles does not have accounting information that is recorded into the general
ledger reporting system?

A. Expenditure. B. Production. C. Planning. D. Revenue.

70. All else being equal, the breakeven point in units will be higher if

A. Sales revenue is higher. B. Fixed costs are lower.

C. Unit variable costs are higher. D. More units are sold.

71. Which of the following inputs would be most beneficial to consider when management is developing
the capital budget?

A. Supply/demand for the company's products. B. Current product sales prices and costs.

C. Wage trends. D. Profit center equipment requests.

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72. An unfavorable direct labor efficiency variance could be caused by a(n)

A. Unfavorable variable overhead spending variance. B. Unfavorable material usage

variance.

C. Unfavorable fixed overhead volume variance. D. Favorable variable overhead spending

variance.

73. The production volume variance is due to

A. Inefficient or efficient use of direct labor hours.

B. Efficient or inefficient use of variable overhead.

C. Difference from the planned level of the base used for overhead allocation and the actual level
achieved.

D. Excessive application of direct labor hours over the standard amounts for the output level actually
achieved.

74. Multiple regression differs from simple regression in that it

A. Provides an estimated constant term. B. Has more dependent variables.

C. Allows the computation of the coefficient of determination . D. Has more independent
variables.

75. The cash receipts budget includes

A. Funded depreciation. B. Operating supplies.

C. Interest expense. D. Loan proceeds.

76. After the goals of the company have been established and communicated, the next step in the planning
process would be the development of the

A. Production budget. B. Direct materials budget.

C. Selling and administrative budget. D. Sales budget.

77. Which of the following is a characteristic of a flexible budget?

A. Provides budgeted numbers for various activity levels.

B. Allows for modification during the budgeted period.
C. Isolates the impact of variable costs on the overall budget.
D. Can be utilized by several product divisions.

78. A large manufacturing company has several autonomous divisions that sell their products in perfectly
competitive external markets as well as internally to the other division of the company. Top management
expects each of its divisional managers to take actions that will maximize the organization’s goals as well
as their own goals. Top management also promotes a sustained level of management effort of all of its
divisional managers. Under these circumstances, for products exchanged between divisions, the transfer
price that will generally lead to optimal decisions for the manufacturing company would be a transfer
price equal to the

A. Full cost of the product. B. Full cost of the product plus a markup.
C. Variable cost of the product plus a markup . D. Market price of the product.

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79. A favorable material price variance coupled with an unfavorable material usage variance
would most likely result from

A. Machine efficiency problems.

B. The purchase and use of higher than standard quality material.

C. Labor efficiency problems.

D. The purchase of lower than standard quality material.

80. Segmented statements, prepared in a responsibility accounting reporting format, can be useful in
performance evaluation and in operational decision making. An outline of a segmented income statement
prepared in responsibility accounting format and segmented by product line is presented below.

Total Product line A Product line

company B
Revenue from sales $xxx $xxx $xxx
Variable production costs xxx xxx xxx
Margin I $xxx $xxx $xxx
Variable selling and administrative costs xxx xxx xxx
Margin II $xxx $xxx $xxx
Traceable discretionary fixed costs xxx xxx xxx
Margin III $xxx $xxx $xxx
Traceable committed (infrastructure) fixed xxx xxx xxx
costs
Margin IV $xxx $xxx $xxx
Common fixed costs xxx
Margin V $xxx --

The common fixed costs which appear on this segmented income statement refer to costs which
A. Are due to the production of finished goods.
B. Are incurred by each of the individual segments in the conduct of normal business.
C. Are incurred at one level for the benefit of two or more segments.
D. Can be influenced by a single segment manager over a short-term time period.

81. Which of the following forecasting methods relies mostly on judgment?

A. Time series models. B. Econometric models.

C. Delphi. D. Regression.

82. When comparing absorption costing to variable costing, which of the following statements
is not true?

A. Absorption costing enables managers to increase operating profits in the short run by increasing
inventories.
B. When sales volume is more than production volume, variable costing will result in higher
operating profit.
C. A manager who is evaluated based on variable costing operating profit would be tempted to
increase production at the end of a period in order to get a more favorable review.
D. Under absorption costing, operating profit is a function of both sales volume and production
volume.
83. Which of the following budgets provides information for preparation of the owner’s equity section of
a budgeted balance sheet?

A. Sales budget. B. Cash budget.

C. Capital expenditures budget. D. Budgeted income statement.

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84. A company is analyzing the performance of responsibility centers. Controllable costs would be
included in the performance reports of which of the following types of responsibility centers?

Investment centers Profit centers

A. No No
B. No Yes
C. Yes Yes
D. Yes No

85. Under a standard cost system, the material efficiency variances are the responsibility of

A. Production and industrial engineering. B. Purchasing and industrial engineering.

C. Purchasing and sales. D. Sales and industrial engineering.
86. Which of the following attributes of a management report has the greatest impact on management's
ability to make effective decisions?

A. Summarization. B. Exception orientation.

C. Relevance. D. Conciseness.

87. Which one of the following is a sales forecasting technique that can be utilized in preparing the annual
profit plan?

A. Linear programming. B. Exponential smoothing.

C. Queuing theory. D. Program Evaluation and Review Technique (PERT).
88. The difference between standard hours at standard wage rates and actual hours at standard wage rates
is referred to as which of the following types of variances?

A. Labor rate. B. Labor usage. C. Direct labor spending. D. Indirect labor spending.

89.In responsibility accounting, a center’s performance is measured by those costs which are
controllable. Controllable costs are best described as including

A. Direct material and direct labor, only.

B. Only those costs that the manager can influence in the current time period.
C. Only discretionary costs.
D. Those costs about which the manager is knowledgeable and informed.

90. The process of developing plans for a company’s expected operations and controlling the operations
to help carry out those plans is known as

A. Preparing a period budget. B. Preparing a master budget.

C. Budgetary control. D. Preparing a fixed budget.
91. Which of the following is a disadvantage of participative budgeting?

A. It is more time-consuming. B. It decreases motivation.

C. It decreases acceptance. D. It is less accurate.
92. When production levels are expected to decline within a relevant range, and a flexible budget is used,
what effect would be anticipated with respect to each of the following?

Variable costs per unit Fixed costs per unit

A. No change No change
B. Increase No change
C. No change Increase
D. Increase Increase

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93. The ratio of fixed costs to the contribution margin is

A. Breakeven point. B. Profit margin.

C. Operating profit. D. Contribution margin ratio.
94. Fargo Mfg., a small business, is developing a budget for next year. Which of the following steps
should Fargo perform first?

A. Forecast Fargo’s sales volume.

B. Determine the price of Fargo’s products.
C. Identify costs of Fargo’s forecasted sales volume.
D. Compute the dollar amount of Fargo’s forecasted sales.

95. In the cost of quality, which of the following is an example of an “internal failure”?

A. Cost of inspecting products on the production line by quality inspectors.

B. Labor cost of product designers whose task is to design components that will not break under
extreme temperature conditions.
C. Cost of reworking defective parts detected by the quality assurance group.
D. Cost of parts returned by customers.

96. Management uses a number of techniques to achieve its strategies. The balanced scorecard is
primarily designed to

A. Develop strategies. B. Measure performance.

C. Measure product quality. D. Decrease cost.

97. Management has identified a relationship between customer satisfaction and return on
investment. This relationship could be depicted in a

A. Strategy map. B. Value chain.

C. Customers perspectives chart. D. Strategic initiatives list.

98. Which of the following balanced scorecard perspectives examines a company’s success in targeted
market segments?

A. Financial. B. Customer. C. Internal business process. D. Learning and growth.

99. Which of the following is not a limitation on the use of ROI as a performance measure?

A. It could cause managers to postpone critical expenditures.

B. It could cause managers to not accept projects that would be advantageous to the firm.
C. It could be affected arbitrarily by allocation of indirect costs.
D. It is unrelated to shareholder value.
100. Minon, Inc. purchased a long-term asset on the last day of the current year. What are the effects
of this purchase on return on investment and residual income?

Return on investment Residual income

A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase

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101. A strategy map in the balanced scorecard framework is

A. A statement of what the strategy must achieve and what is critical to its success
B. Key action programs required to achieve strategic objectives.
C. Diagrams of the cause-and-effect relationships between strategic objectives.
D. The level of performance or rate of improvement needed in the performance measure.
102. The management of a company would do which of the following to compare and contrast its
financial information to published information reflecting optimal amounts?

A. Budget.
B. Forecast.
C. Benchmark.
D. Utilize best practices.
103. Which of the following terms represents the residual income that remains after the cost of all capital,
including equity capital, has been deducted?

A. Free cash flow. B. Market value-added.

C. Economic value-added. D. Net operating capital.

104. A tool which indicates how frequently each type of defect occurs is a

A. Control chart. B. Pareto diagram.

C. Cause-and-effect diagram. D. Fishbone diagram.

105. In the cost of quality, spoilage is an example of

A. Prevention costs. B. Appraisal costs.

C. Internal failure costs. D. External failure costs.

106. The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The
company currently offers customers terms of 3/10, net 30. Which of the following strategies would most
likely improve the company’s accounts receivable turnover ratio?

A. Pledging the accounts receivable to a finance company.

B. Changing customer terms to 1/10, net 30.
C. Entering into a factoring agreement with a finance company.
D. Changing customer terms to 3/20, net 30.

107. Which of the statements best describes the concept of six-sigma quality?

A. 10 defects per million. B. 3.4 defects per million.

C. 6.0 defects per million. D. 100 defects per million.

108. A strategy initiative in the balanced scorecard framework is

A. A statement of what the strategy must achieve and what is critical to its success.
B. A key action program required to achieve strategic objectives.
C. A diagram of the cause-and-effect relationships between strategic objectives.
D. The level of performance or rate of improvement needed in the performance measure.

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109. Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and
retention are measures used under which of the following perspectives?

A. Customer. B. Internal business.

C. Learning and growth. D. Financial.

110. Which of the following is not a profitability ratio?

A. Price/earnings ratio. B. Return on assets.

C. Gross margin. D. Operating profit margin.

111. The balanced scorecard generally uses performance measures with four different
perspectives. Which of the following performance measures would be part of those used for the internal
business processes perspective?

A. Cycle time. B. Employee satisfaction.

C. Hours of training per employee. D. Customer retention.

112. In the balanced scorecard framework, the hours of training of employees would appear in which
perspective?

A. Financial. B. Customer.
C. Internal business processes. D. Learning and growth.

113. An investor has been given several financial ratios for a company but none of the financial
reports. Which combination of ratios can be used to derive return on equity?

A. Market to book value ratio and total debt to total assets.

B. Price to earnings ratio, earnings per share, and net profit margin.
C. Price to earnings ratio and return on assets.
D. Return on sales and asset turnover.

114. In the balanced scorecard framework, number of defective units produced would appear in which
perspective?

A. Financial. B. Customer.
C. Internal business processes. D. Learning and growth.

115. In the cost of quality, liability claims are examples of

A. Prevention costs. B. Appraisal costs.

C. Internal failure costs. D. External failure costs.

116. In the cost of quality, costs incurred in detecting individual units of product that do not conform to
specifications are

A. Prevention costs. B. Appraisal costs.

C. Internal failure costs. D. External failure costs.

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117. Which of the following would illustrate vertical financial statement analysis?

A. Interest expense as a percentage of net sales.

B. Gross profit compared to industry averages.
C. Net sales over time.
D. Earnings per share as compared to the prior year.

118. Which of the following is not one of the four perspectives of the balanced scorecard?

A. Customer perspective. B. Learning and growth perspective.

C. Internal business processes perspective. D. Research and development perspective.

119. Which of the following steps in the strategic planning process should be completed first?

A. Translate objectives into goals. B. Determine actions to achieve goals.

C. Develop performance measures. D. Create a mission statement.
120. Which of the following topics is the focus of managerial accounting?

A. Financial statements and other financial reports.

B. Historical cost principles.
C. The needs of creditors.
D. The needs of the organization’s internal parties.

121. What is the primary disadvantage of using return on investment (ROI) rather than residual income
(RI) to evaluate the performance of investment center managers?

A. ROI is a percentage, while RI is a dollar amount.

B. ROI may lead to rejecting projects that yield positive cash flows.
C. ROI does not necessarily reflect the company's cost of capital.
D. ROI does not reflect all economic gains.

122. If the dollar price of the euro rises, which of the following will occur?

A. The dollar depreciates against the euro.

B. The euro depreciates against the dollar.
C. The euro will buy fewer European goods.
D. The euro will buy fewer US goods.

123. In the short run, a severe hurricane creates an immediate strong increase in demand for
roofers. Some roofers in other parts of the country are then attracted to the disaster area. Assume that in
the long run the increase in demand still exceeds the increase in supply. Incorporating these facts in an
analysis, the price for roofers in the short run increases, while in the long run the price will

A. Decrease below the original price. B. Return to the original price.

C. Decrease, but remain above the original price. D. Continue to increase.

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124. When analyzing a country’s balance of payments accounts, the

A. "Current account" refers only to merchandise exports and imports.

B. "Current account" and "trade balances" are the same.
C. "Capital account" refers to the transactions related to the international movement of financial
capital.
D. Country will be in financial jeopardy unless each component in the balance of payments accounts
balances at the end of the year.

125. Assuming that the real rate of interest is the same in both countries, if country A has a higher
nominal interest rate than country B, then the currency of country A will likely be selling at a

A. Forward discount relative to the currency of country B.

B. Forward premium relative to the currency of country B.
C. Spot discount relative to the currency of country B.
D. Spot premium relative to the currency of country B.

126. When maximizing utility in economics, what is being maximized?

A. Profits. B. Satisfaction. C. Costs. D. Elasticity.

127. A city ordinance that freezes rent prices may cause

A. The demand curve for rental space to fall.

B. The supply curve for rental space to rise.
C. Demand for rental space to exceed supply.
D. Supply of rental space to exceed demand.
128. Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing?

A. Financial risk. B. Business risk C. Interest rate risk. D. Marginal risk.

129. All of the following are components of the formula used to calculate gross domestic product except:

A. Household income. B. Foreign net export spending.

C. Government spending. D. Gross investment.

130. Which competition form describes an industry that has a relatively large number of firms operating
noncollusively and producing differentiated products?

A. Pure competition. B. Pure monopoly.

C. Monopolistic competition. D. Oligopoly.

131. The local video store’s business increased by 12% after the movie theater raised its prices from
$6.50 to $7.00. Thus, relative to movie theater admissions, videos are

A. Substitute goods. B. Superior goods.

C. Complementary goods. D. Public goods.

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132. In the law of comparative advantage, the country which should produce a specific product is
determined by

A. Opportunity costs. B. Profit margins.

C. Economic order quantities. D. Tariffs.

133. Companies can reduce the potential loss from host-government expropriation of their foreign
subsidiaries by

A. Financing the subsidiary with local-country capital.

B. Structuring operations so that the subsidiary has value as a stand-alone company.
C. Reducing the cost of capital to reflect political risk when assessing foreign investment
opportunities.
D. Selling products in the local country.

134. The two main variables that contribute to increases in a nation’s real gross domestic product (GDP)
are labor productivity and

A. Definition of the labor force. B. Inflation rate.

C. Quality of output. D. Total worker hours.

135. If both the supply and the demand for a good increase, the market price will

A. Rise only in the case of an inelastic supply function.

B. Fall only in the case of an inelastic supply function.
C. Not be predictable with only these facts.
D. Rise only in the case of an inelastic demand function.

136. The real risk-free rate

A. Includes a default premium.

B. Assumes that inflation is expected.
C. Includes a liquidity premium.
D. Is the basic component of interest.

137. Which of the following instruments of monetary policy is the most important means by which the
money supply is controlled?

A. Changing the reserve ratio. B. Open market operations.

C. Manipulation of government spending. D. Changing the discount rate.

138. Which of the following activities involves collecting data about all segments of the firm’s general
environment to understand the effects of economic changes on the firm’s industry?

A. Monitoring. B. Assessing. C. Forecasting. D. Scanning.

139. Some economic indicators lead the economy into a recovery or recession, and some lag it. An
example of a lag variable would be

A. Average duration of unemployment. B. Orders for consumer and producer goods.

C. Housing starts. D. Consumer expectations.

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140. Marginal revenue is

A. Equal to price in monopolistic competition.

B. The change in total revenue associated with increasing prices.
C. Greater than price in pure competiiton.
D. The change in total revenue associated with producing and selling one more unit.

141. For a given level of tax collections, prices, and interest rates, a decrease in government purchases
will result in a(n)

A. Increase in aggregate demand. B. Increase in aggregate supply.

C. Decrease in aggregate demand. D. Decrease in aggregate supply.

142. Which of the following is not accurate about product differentiation?

A. Differentiation can only be perceived by the consumer based on brand name.

B. Differentiation can be based on service.
C. Differentiation can be achieved by market segmentation.
D. Differentiation is always related to the cost of producing the product.

143. If a group of consumers decide to boycott a particular product, the expected result would be

A. An increase in the product price to make up lost revenue.

B. A decrease in the demand for the product.
C. An increase in product supply because of increased availability.
D. That demand for the product would become completely inelastic.

144. If a government were to use only fiscal policy to stimulate the economy from a recession, it would

A. Raise consumer taxes and increase government spending.

B. Lower business taxes and government spending.
C. Increase the money supply and increase government spending.
D. Lower consumer taxes and increase government spending.
145. Which of the following individuals would be most hurt by an unanticipated increase in inflation?

A. A retiree living on a fixed income.

B. A borrower whose debt has a fixed interest rate.
C. A union worker whose contract includes a provision for regular cost-of-living adjustments.
D. A saver whose savings was placed in a variable-rate savings account.

146. An expansionary <List A> policy will have <List B> effect on net exports.

List A List B
A. Fiscal A negative
B. Fiscal No
C. Monetary A negative
D. Monetary No

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147. An individual receives an income of $3,000 per month, and spends $2,500. An increase in income
of $500 per month occurs, and the individual spends $2,800. The individual’s marginal propensity to
save is

A. 0.2 B. 0.4 C. 0.6 D. 0.8

148. The distinguishing characteristic of oligopolistic markets is

A. A single seller of a homogeneous product with no close substitute.

B. A single seller of a heterogeneous product with no close substitute.
C. Lack of entry and exit barriers in the industry.
D. Mutual interdependence of firm pricing and output decisions.

149. A short-term speculative rise in the worldwide value of domestic currency could be moderated by a
central bank decision to

A. Sell domestic currency in the foreign exchange market.

B. Buy domestic currency in the foreign exchange market.
C. Sell foreign currency in the foreign exchange market.
D. Increase domestic interest rates.

150. If the US dollar declines in value relative to the currencies of many of its trading partners, the likely
result is that

A. Foreign currencies will depreciate against the dollar.

B. The US trade deficit will worsen.
C. US exports will tend to increase.
D. US imports will tend to increase.

151. In the long run, a firm may experience increasing returns due to

A. Law of diminishing returns. B. Opportunity costs.

C. Comparative advantage. D. Economies of scale.

152. X and Y are complementary products. If the price of product Y increases, the immediate impact on
product X is that its

A. Price will decrease.

B. Quantity demanded will decrease.
C. Quantity supplied will decrease.
D. Price, quantity demanded, and supplies will remain unchanged.

153. Lyle Corporation has sold a large quantity of goods to a Japanese company on a 90-day account
payable in Japanese yen. If management of Lyle is concerned about the transaction risk related to
changes in the value of the yen, how might management hedge this risk?

A. Sell yen using a forward contract for delivery in 90 days.

B. Buy yen using a forward contract for delivery in 90 days.
C. Lend yen for repayment in 90 days.
D. Purchase a long position in the futures market for delivery of yen in 90 days.

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154. The law of diminishing marginal utility states that

A. Marginal utility will decline as a consumer acquires additional units of a specific product.
B. Total utility will decline as a consumer acquires additional units of a specific product.
C. Declining utilities cause the demand curve to slope upward.
D. Consumers' wants diminish with the passage of time.

155. A supply curve illustrates the relationship between

A. Price and quantity supplied. B. Price and consumer tastes.

C. Price and quantity demanded. D. Supply and demand.

156. The discount rate of the Federal Reserve System is

A. The specified percentage of a commercial bank's deposit liabilities that must be deposited in the
central bank.
B. The rate that the central bank charges for loans granted to commercial banks.
C. The rate that commercial banks charge for loans granted to the public.
D. The ratio of excess reserves to legal reserves that are deposited in the central bank.
157. Freely fluctuating exchange rates perform which of the following functions?

A. They automatically correct a lack of equilibrium in the balance of payments.

B. They make imports cheaper and exports more expensive.
C. They impose constraints on the domestic economy.
D. They eliminate the need for foreign currency hedging.
158. Which of the following characteristics would indicate that an item sold would have a high price
elasticity of demand?

A. The item has many similar substitutes.

B. The cost of the item is low compared to the total budget of the purchasers.
C. The item is considered a necessity.
D. Changes in the price of the item are regulated by governmental agency.

159. In a purely competitive market

A. There are a small number of sellers who make interdependent pricing and output decisions.
B. There are a relatively large number of sellers who produce differentiated products.
C. The firm is the industry.
D. A very large number of firms produce a standardized product.

160. Disposable income is calculated as

A. Gross national product minus capital cost allowance.

B. Net national product minus indirect business taxes.
C. Personal income minus transfer payments.
D. Personal income minus personal taxes.

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161. What is the effect when a foreign competitor’s currency becomes weaker compared to the US dollar?

A. The foreign company will have an advantage in the US market.

B. The foreign company will be disadvantaged in the US market.
C. The fluctuation in the foreign currency’s exchange rate has no effect on the US company’s sales
or cost of goods sold.
D. It is better for the US company when the value of the US dollar strengthens.

162. If the exchange rate has changed from 1 US dollar being worth 1.00 Swiss francs to a rate of 1 US
dollar being worth 1.10 Swiss francs,

A. The US dollar has appreciated by 10%.

B. The US dollar has depreciated by 10%.
C. The French franc has appreciated by 10%.
D. The French franc has depreciated by 20%.

163. Tower Inc. sells a product that is a close substitute for a product offered by Westco. Historically,
management of Tower has observed a coefficient of cross-elasticity of 1.5 between the two products. If
management of Tower anticipates a 5% increase in price by Westco, how would this action by Westco’s
management be expected to affect the demand for Tower’s product?

A. A 5% increase. B. A 5% decrease. C. A 7.5% increase. D. A 7.5% decrease.

164. To address the problem of a recession, the Federal Reserve Bank most likely would take which of
the following actions?

A. Lower the discount rate it charges to banks for loans.

B. Sell US government bonds in open-market transactions.
C. Increase the federal funds rate charged by banks when they borrow from one another.
D. Increase the level of funds a bank is legally required to hold in reserve.

165. If the value of the US dollar in foreign currency markets changes from $1 = 95 yen to $1 = 90 yen,

A. The Japanese yen has depreciated against the dollar.

B. Japanese imported products in the US will become more expensive.
C. US tourists in Japan will find their dollars will buy more Japanese products.
D. US exports to Japan should decrease.

166. What does the consumer price index measure?

A. Cost of capital.
B. Average household income.
C. Rate of inflation.
D. Prime rate of interest.
167. Which of the following Federal Reserve policies would increase money supply?

A. Change the multiplier effect.

B. Increase reserve requirements.
C. Reduce the discount rate.
D. Sell more US Treasury bonds.

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168. Which of the following may provide a leading indicator of a future increase in gross domestic
product?

A. A reduction in the money supply.

B. A decrease in the issuance of building permits.
C. An increase in the timliness of delivery by vendors.
D. An increase in the average hours worked per week of production workers.

169. In a competitive market for labor in which demand is stable, if workers try to increase their wage,

A. Employment must fall.

B. Government must set a maximum wage below the equilibrium wage.
C. Firms in the industry must become smaller.
D. Product supply must decrease.

170. Which of the following actions is the acknowledged preventive measure for a period of deflation?

A. Increasing interest rates. B. Increasing the money supply.

C. Decreasing interest rates. D. Decreasing the money supply.

171. Implementation of a government’s monetary policy in most major industrial countries is managed by

A. The central bank. B. The national government.

C. Commercial banks. D. Bond market traders.

172. The trough of a business cycle is generally characterized by

A. Shortages of essential raw materials and rising costs.

B. Increasing purchasing power and increasing capital investments.
C. Rising costs and an unwillingness to risk new investments.
D. Unused productive capacity and an unwillingness to risk new investments.

173. An economy is at the peak of the business cycle. Which of the following policy packages is the most
effective way to dampen the economy and prevent inflation?

A. Increase government spending, reduce taxes, increase money supply, and reduce interest rates.
B. Reduce government spending, increase taxes, increase money supply, and increase interest rates.
C. Reduce government spending, increase taxes, reduce money supply and increase interest rates.
D. Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.

174. Greater barriers to collusion exist for oligopolistic firms when

A. The firms' costs are more similar.

B. There are fewer firms in the industry.
C. General economic conditions are recessionary.
D. The firms' products are standardized.

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175. Under which of the following conditions is the supplier most able to influence or control buyers?

A. When the supplier's products are not differentiated.

B. When the supplier does not face the threat of substitute products.
C. When the industry is controlled by a large number of companies.
D. When the purchasing industry is an important customer to the supply industry.

176. Exchange rates are determined by

A. Each industrial country's government.

B. The International Monetary Fund.
C. Supply and demand in the foreign exchange market.
D. Exporters and importers of manufactured goods.
177. Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the
value of the euro relative to the dollar will drop before the payment is received. What should Platinum do
to reduce the risk?

A. Buy 30,000 euros now.

B. Enter into an interest rate swap contract for 30 days.
C. Enter into a forward contract to sell 30,000 euros in 30 days.
D. Platinum cannot effectively reduce this risk.

178. A period of rising inflation

A. Increases the price level, which benefits those who are entitled to receive specific amounts of
money.
B. Enhances the positive relationship between the price level and the purchasing power of money.
C. Will not be affected by contracts that include the indexing of payments.
D. Increases the price level, which is negatively related to the purchasing power of money.

179. Which of the following segments of the economy will be least affected by the business cycle?

A. Commercial construction industry. B. Machinery and equipment industry.

C. Residential construction industry. D. Health care industry.

180. Which of the following management techniques would likely be most important to a firm in a purely
competitive market?

A. Competitor analysis. B. Target market analysis.

C. Supply chain management. D. Price-elasticity analysis.
181. Which of the following strategies would the Federal Reserve most likely pursue under an
expansionary policy?

A. Purchase federal securities and lower the discount rate.

B. Reduce the reserve requirement while raising the discount rate.
C. Raise the reserve requirement and lower the discount rate.
D. Raise the reserve requirement and raise the discount rate.

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182. Which of the following statements is correct if there is an increase in the resources available within
an economy?

A. More goods and services will be produced in the economy.

B. The economy will be capable of producing more goods and services.
C. The standard of living in the economy will rise.
D. The technological efficiency of the economy will improve.
183. Which of the following is correct regarding the consumer price index (CPI) for measuring the
estimated decrease in a company’s buying power?

A. The CPI is measured only once every 10 years.

B. The products a company buys should differ from what a consumer buys.
C. The CPI measures what consumers will pay for items.
D. The CPI is skewed by foreign currency translations.

184. Which of the following is not a characteristic of a purely competitive market?

A. Differentiated products.
B. No significant control over product price exerted by individual firms.
C. No barriers to entry for new firms.
D. A very large number of producing firms.

185.Which of the following is a direct effect of imposing a protective tariff on an imported product?

A. Lower domestic prices on the imported item.

B. Lower domestic consumption of the item.
C. Reduced domestic production of the item.
D. Higher sales revenues for foreign producers of the item.

186. Economic markets that are characterized by monopolistic competition have all of the following
characteristics except

A. One seller of the product. B. Economies or diseconomies of scale.

C. Advertising. D. Heterogeneous products.

187. Gross domestic product includes which of the following measures?

A. The size of a population that must share a given output within one year.
B. The negative externalities of the production process of a nation within one year.
C. The total monetary value of all final goods and services produced within a nation in one year.
D. The total monetary value of goods and services including barter transactions within a nation in
one year.

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188. Which of the following changes would create pressure for the Japanese yen to appreciate relative to
the US dollar?

A. An increase in incomes in Japan.

B. A change in US tastes in favor of Japanese goods.
C. A decrease in US incomes.
D. A change in Japanese tastes in favor of US goods.

189. Which on of the following is not a key assumption of perfect competition?

A. Firms sell a homogeneous product.

B. Customers are indifferent about which firm they buy from.
C. The level of a firm's output is small relative to the industry's total output.
D. Each firm can price its product above the industry price.

190. All of the following are complementary goods except

A. Margarine and butter. B. Cameras and rolls of film.

C. VCRs and video cassettes. D. Razors and razor blades.

191. The movement along the demand curve from one price-quantity combination to another is called a(n)

A. Change in demand. B. Shift in the demand curve.

C. Change in the quantity demanded. D. Increase in demand.

192. The rate of unemployment caused by changes in the composition of employment opportunities over
time is referred to as the

A. Frictional unemployment rate. B. Cyclical unemployment rate.

C. Structural unemployment rate. D. Full employment unemployment rate.

193. Which of the following types of merger is most likely to contribute to the formation of an oligopoly?

A. Horizontal. B. Conglomerate. C. Divestiture. D. Vertical.

194. A multinational company operates a production facility in country A and a distribution outlet in
country B. The tax rates are 40% in country A and 50% in country B. The production facility sells the
goods to the distribution outlet, both of which are wholly owned by the multinational company. The
internal sale of goods occurs at a “transfer” price set by the multinational company. Assuming no nontax
considerations and no interference from the tax authorities of the two countries, the company should

A. Maximize the transfer price.

B. Minimize the transfer price.
C. Establish a transfer price that results in the same profit margin for both operations.
D. Use a transfer price based on the market price for the product that other producers charge.

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195. The US dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation
to other currencies, the

A. Trade account in the US balance of payments is neither in a deficit nor in a surplus because of the
floating exchange rates.
B. Capital account in the US balance of payments is neither in a deficit nor in a surplus because of
the floating exchange rates.
C. Fall in the dollar's value cannot be expected to have any effect on the US trade balance.
D. Cheaper dollar helps US exporters of domestically produced goods.

196. A company has a foreign-currency-dominated trade payable, due in 60 days. In order to eliminate
the foreign exchange risk associated with the payable, the company could

A. Sell foreign currency forward today.

B. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time.
C. Buy foreign currency forward today.
D. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the
funds in a domestic bank deposit until the invoice payment date.

197. An increase in the market supply of beef would result in a(n)

A. Increase in the price of beef. B. Decrease in the demand for beef.

C. Increase in the price of pork. D. Increase in the quantity of beef demanded.

198. Which of the following is assigned to goods that were either purchased or manufactured for resale?

A. Relevant cost. B. Period cost. C. Opportunity cost. D. Product cost.

199. Which of the following non-value-added costs associated with manufactured work in process
inventory is most significant?

A. The cost of materials that cannot be traced to any individual product.

B. The cost of labor that cannot be traced to any individual product.
C. The cost of moving, handling, and storing any individual product.
D. The cost of additional resources consumed to produce any individual product.

200. Three commonly employed systems for product costing are job order costing, operations costing,
and process costing. Match the type of production environment with the costing method used.

Job order costing Operations costing Process costing

A. Auto repair Clothing manufacturing Oil refining
B. Loan processing Drug manufacturing Custom printing
C. Custom printing Paint manufacturing Paper manufacturing
D. Engineering design Auto assembly Motion picture production

201. Typical product-costing systems synchronize the recording of accounting-system entries with the
physical sequence of purchases and production. The alternative (which is normally used in high-speed
automated environments) of delaying journal entries until after the physical sequences have occurred is
referred to as

A. Backflush costing . B. Direct costing.

C. Operation costing. D. Process costing.

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202.A company with three products classifies its costs as belonging to five functions: design, production,
marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to
the three products. The direct costs of each of the five functions are traced directly to the three
products. The indirect costs of each of the five business functions are collected into five separate cost
pools and then assigned to the three products using appropriate allocation bases. The allocation base that
would most likely be the best for allocating the indirect costs of the distribution function is

A. Number of customer phone calls. B. Number of shipments.

C. Number of salespersons. D. Dollar sales volume.
203. Weighted-average and first-in, first-out (FIFO) equivalent units would be the same in a period when
which of the following occurs?

A. No beginning inventory exists.

B. No ending inventory exists.
C. Beginning inventory units equal ending inventory units.
D. Both a beginning and an ending inventory exist but are not necessarily equal.

204. Unlike the traditional full-absorption cost system, activity-based costing (ABC) assigns

A. Costs to individual products based only on nonfinancial variables.

B. Costs to individual products based on various activities involved.
C. Overhead to individual products based on some common measure of production volume.
D. Only costs which can be directly traced to individual products.

205. In a job-order cost system, the use of indirect materials would usually be reflected in the general
ledger as an increase in

A. Stores control. B. Work in process control.

C. Factory overhead control. D. Factory overhead applied.

206. For purposes of allocating joint costs to joint products, the sales price at point of sale reduced by cost
to complete after split-off is assumed to be equal to the

A. Relative sales value at split-off.

B. Sales price less a normal profit margin at point of sale.
C. Joint costs.
D. Total costs.

207. In developing a variable factory overhead application rate for use in a process costing system, which
of the following could be used in the denominator?

A. Estimated direct manufacturing labor hours.

B. Actual direct manufacturing labor hours.

C. Estimated factory overhead.

D. Actual factory overhead.

208. The method for allocating service department costs that best recognizes the mutual services rendered
to other service departments is the

A. Dual-rate allocation method. B. Direct allocation method.

C. Step-down allocation method. D. Reciprocal allocation method.

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209. When using the first-in, first-out method of process costing, total equivalent units of production for a
given period of time is equal to the number of units

A. In work in process at the beginning of the period times the percent of work necessary to complete
the items, plus the number of units started during the period, less the number of units remaining in work
in process at the end of the period times the percent of work necessary to complete the items.

B. In work in process at the beginning of the period, plus the number of units started during the
period, plus the number of units remaining in work in process at the end of the period times the percent of
work necessary to complete the items.

C. Started into process during the period, plus the number of units in work in process at the
beginning of the period.

D. Transferred out during the period, plus the number of units remaining in work in process at the
end of the period times the percent of work necessary to complete the items.

210. In the computation of manufacturing cost per equivalent unit, the weighted-average method of
process costing considers

A. Current costs only.

B. Current costs plus cost of ending work in process inventory.

C. Current costs plus cost of beginning work in process inventory.

D. Current costs less cost of beginning work in process inventory.

211. A major justification for investments in computer integrated manufacturing (CIM) projects is

A. Reduction in the costs of spoilage, reworked units, and scrap.

B. Lower book value and depreciation expense for factory equipment.

C. Increased working capital.

D. Stabilization of market share.

212. The variable portion of the semivariable cost of electricity for a manufacturing plant is a

Conversion cost Period cost

A. Yes No
B. Yes Yes
C. No Yes
D. No No

213. Which of the following types of costs are prime costs?

A. Direct materials and direct labor.

B. Direct materials and overhead.

C. Direct labor and overhead.

D. Direct materials, direct labor, and overhead.

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214. A basic assumption of activity-based costing (ABC) is that

A. All manufacturing costs vary directly with units of production.

B. Products or services require the performance of activities, and activities consume resources.

C. Only costs that respond to unit-level drivers are product costs.

D. Only variable costs are included in activity cost pools.

215. A manufacturing company properly classifies and accounts for one product as a by-product rather
than as a main product because it

A. Can never be developed into a main product by this or any other manufacturer.

B. Has no sales value to the manufacturing company.

C. Has low physical volume when compared to the other main products.

D. Has low sales value when compared to the main products.

216. Which of the following statements about activity-based costing is not true?

A. Activity-based costing is useful for allocating marketing and distribution costs.

B. Activity-based costing is more likely to result in major differences from traditional costing
systems if the firm manufactures only one product rather than multiple products.

C. In activity-based costing, cost drivers are what cause cost to be incurred.

D. Activity-based costing differs from traditional costing systems in that products are not cross-
subsidized.

217. A management accountant performs a linear regression of maintenance cost vs. production using a
computer spreadsheet. The regression output shows an “intercept” value of $322,897. How should the
accountant interpret this information?

A. Y has a value of $322,897 when X equals zero.

B. X has a value of $322,897 when Y equals zero.

C. The residual error of the regression is $322,897.

D. Maintenance cost has an average value of $322,897.

218. 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.

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

219. Accounting for factory overhead costs involves averaging in

Job-order costing Process costing

A. Yes No
B. Yes Yes
C. No Yes
D. No No

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220. Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost
situations?

A. Sales value at split-off.

B. Flexible budget amounts.

C. Physical measures such as weights or volume.

D. Constant gross margin percentage net realizable value method.

221. For a manufacturing company, which of the following is an example of a period rather than a
product cost?

A. Depreciation on factory equipment. B. Wages of salespersons.

C. Wages of machine operators. D. Insurance on factory equipment.

222. 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:

A. Avoidance. B. Sharing. C. Acceptance. D. Reduction.

223. An important benefit of an enterprise risk management system is

A. Alignment of shareholder returns with management returns.

B. Alignment of management risk taking with employee risk appetite.

C. Alignment of management risk taking with shareholder risk appetite.

D. Alignment of management risk taking with creditor risk appetite.

224. Which of the following factors is not included in the control environment component of internal
control?

A. Commitment to competence. B. Organizational structure.

C. Integrity and ethical values D. Information and communication.

225. Which of the following bodies has developed a framework for enterprise risk management?

A. The Committee of Sponsoring Organizations (COSO).

B. The American Institute of Certified Public Accountants (AICPA)

C. The Public Company Accounting Oversight Board (PCAOB).

D. The Institute of Risk Management Professionals (IRMP).

226. Under the Sarbanes-Oxley Act, which of the following officers must certify to the accuracy and
truthfulness of the periodic financial reports of an issuer company?

A. The corporate treasurer. B. The corporate controller.

C. The chief financial officer. D. The corporate secretary.

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227. If internal control is properly designed, the same employee should not be permitted to

A. Sign checks and cancel supporting documents.

B. Receive merchandise and prepare a receiving report.

C. Prepare disbursement vouchers and sign checks.

D. Initiate a request to order merchandise and approve merchandise received.

228. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO)
in the professional standards includes the reliability of financial reporting, compliance with applicable
laws and

A. Effectiveness and efficiency of operations.

B. Effectiveness of prevention of fraudulent occurrences.

C. Incorporation of ethical business practice standards.

D. Safeguarding of entity assets.

229. Which of the following can be the most effective monitoring device for effective corporate
governance?

A. The audit committee of the board of directors. B. Stock analysts.

C. Shareholders. D. The SEC.

230. Which of the following is not a response to a risk as identified by COSO’s Enterprise Risk
Management Framework?

A. Avoidance. B. Reduction. C. Sharing. D. Delaying.

231. Which of the following is not a component of COSO’s enterprise risk management framework?

A. Information and communication. B. Monitoring.

C. Risk Assessment. D. Risk elimination.

232. Which of the following components of internal control encompass policies and procedures that
ensure that management’s directives are carried out?

A. The control environment. B. Monitoring.

C. Control activities. D. Information and communication.

233. Which of the following tasks would be included in a document flowchart for processing cash
receipts?

A. Compare control and remittance totals. B. Record returns and allowances.

C. Authorize and generate an invoice. D. Authorize and generate a voucher.

234. Which of the following is not a responsibility that should be assigned to the audit committee of the
board of directors?

A. Determining the incentive compensation of top management.

B. Appointing the external auditor.

C. Mediating differences of opinions regarding accounting matters between the external auditor and
management.

D. Determining the compensation of the external auditor.

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235. Which of the following is not an advantage of the employment of an enterprise risk management
(ERM) system?

A. Helps an organization seize opportunities.

B. Allows an organization to eliminate all risks.

C. Improves the deployment of capital.

D. Reduces operational surprises.

236. Which of the following is not a factor included in the control environment?

A. Board of directors or audit committee participation.

B. Commitment to competence.

C. Monitoring.

D. Organizational structure.

237. Which of the following is not a limitation of an enterprise risk management system?
A. Risk relates to the future that is uncertain.

B. Collusion among two or more individuals can result in enterprise risk management failure.

C. Companies cannot avoid risk.

D. Enterprise risk management is subject to management override.

238. Which of the following is the least effective device for monitoring management behavior?

A. The audit committee of the board of directors. B. The external auditor.

C. The internal auditor. D. Security analysts.

239.Which of the following executives of an issuer corporation must certify to the accuracy and
truthfulness of financial reports filed with the SEC?
A. Only the chief financial officer.

B. The chief executive officer and the chief risk officer.

C. The chief risk officer and the chief financial officer.

D. The chief executive officer and the chief financial officer.

240. From a corporate governance standpoint which of the following best describes the main goal of a
form of executive compensation?

A. Adequately compensate executives.

B. Align the incentives of executives with those of the corporate shareholders.

C. Motivate management to engage in activities that have the prospect of maximizing corporate
profits.

D. Keep management from shirking.

241. Which of the following controls is best at addressing the risk of sales to customers who are not able
to pay for them?

A. Match shipping documents with sales invoices.

B. An individual not involved with the order filling process checks shipments for accuracy.

C. Independent credit approval process.

D. Independent sales department prepares sales orders.

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242. A financial statement audit performed under the requirements of the Sarbanes-Oxley Act of 2002
must include an examination and report upon

A. Internal control. B. Indirect effect illegal acts.

C. Inherent risk. D. Forecasted financial i nformation.

243. The COSO definition of internal control considers control activities a(n):

A. Component of internal control. B. Control objective.

C. Element of the control environment. D. Portion of information and communication.

244. Which of the following components of internal control are characterized by ongoing activities and
separate evaluations?

A. The control environment. B. Risk assessment.

C. Monitoring. D. Information and communication.

245. Which of the following is not required by the Sarbanes-Oxley Act of 2002?

A. It requires the principal executive and financial officers to disclose all significant internal control
deficiencies to the company's auditors and audit committee.

B. It requires management to provide an assessment of the effectiveness of internal control.

C. It requires management to certify that the financial statements fairly present, in all material
respects, the financial condition and results of operations of the company.

D. It requires management to certify that the company has violated no major laws.

246. Layton Company has implemented an enterprise risk management system and has responded to a
particular risk by purchasing insurance. Such a response is characterized by COSO’s Enterprise Risk
Management Framework as:

A. Avoidance. B. Sharing. C. Acceptance. D. Reduction

247. Which of the following forms of compensation is more likely to result in shirking by management?

A. Fixed compensation. B. Base salary and bonus.

C. Base salary and stock options. D. Base salary and stock grants.

248. Which of the following committees of the board of directors generally has the responsibility of
overseeing CEO succession?

A. The audit committee. B. The nominating/corporate governance committee.

C. The compensation committee. D. The investment committee.

249. Which of the following internal control components includes the factor of management’s philosophy
and operating style?

A. Control activities. B. The control environment. C. Risk assessment. D. Monitoring.

250. Which statement is not one of the objectives of internal control as included in the definition of
internal control developed by the Committee of Sponsoring Organizations (COSO)?

A. Asset safeguarding . B. Compliance.

C. Financial reporting. D. Operations.

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 SUGGESTED ANSWER

1 D 51 A 101 C 151 D 201 A

2 C 52 C 102 C 152 B 202 B
3 B 53 D 103 C 153 A 203 B
4 A 54 A 104 B 154 A 204 C
5 A 55 D 105 C 155 A 205 C
6 D 56 A 106 C 156 B 206 A
7 B 57 A 107 B 157 A 207 A
8 D 58 B 108 B 158 A 208 D
9 C 59 B 109 C 159 D 209 A
10 D 60 D 110 A 160 D 210 C
11 C 61 D 111 A 161 A 211 A
12 A 62 D 112 D 162 A 212 A
13 C 63 D 113 D 163 C 213 A
14 C 64 C 114 C 164 A 214 B
15 B 65 D 115 D 165 B 215 D
16 A 66 D 116 B 166 C 216 C
17 D 67 D 117 A 167 C 217 A
18 C 68 B 118 D 168 D 218 C
19 C 69 C 119 D 169 A 219 B
20 D 70 C 120 D 170 B 220 B
21 B 71 D 121 B 171 A 221 B
22 C 72 B 122 A 172 D 222 D
23 B 73 C 123 C 173 C 223 C
24 C 74 D 124 C 174 C 224 D
25 D 75 D 125 A 175 D 225 A
26 D 76 D 126 B 176 C 226 C
27 B 77 A 127 C 177 C 227 C
28 C 78 D 128 B 178 D 228 A
29 B 79 D 129 A 179 D 229 A
30 D 80 C 130 C 180 C 230 D
31 C 81 C 131 A 181 A 231 D
32 B 82 C 132 A 182 B 232 C
33 A 83 D 133 A 183 B 233 A
34 B 84 C 134 D 184 A 234 A
35 C 85 A 135 C 185 B 235 B
36 C 86 C 136 D 186 A 236 C
37 C 87 B 137 B 187 C 237 C
38 C 88 B 138 D 188 B 238 D
39 D 89 B 139 A 189 D 239 D
40 D 90 C 140 D 190 A 240 B
41 B 91 A 141 C 191 C 241 C
42 A 92 C 142 D 192 C 242 A
43 D 93 A 143 B 193 A 243 A
44 B 94 A 144 D 194 A 244 C
45 A 95 C 145 A 195 D 245 D
46 D 96 B 146 A 196 C 246 B
47 A 97 A 147 B 197 D 247 A
48 A 98 B 148 D 198 D 248 B
49 A 99 D 149 A 199 C 249 B
50 A 100 B 150 C 200 A 250 A

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