PATTS REVIEW CENTER

PATTS COLLEGE OF AERONAUTICS

Lombos Ave., San Isidro, Parañaque

ENGINEERING ECONOMICS
Reviewer: Engr. R. R. Renigen

Basic Economic Environment and Concept

Economics - is the study or science of the production, distribution and consumption of goods and
services
Economy - the cost or profit situation regarding a practical enterprise or project, as in economy
studies, engineering economy, project economy.
Engineering economy:
a. The discipline concerned with economic aspects of engineering; it involves the systematic
evaluation of the costs and benefits of proposed technical projects;
b. The application of engineering or mathematical analysis and synthesis to economic decisions;
c. A body of knowledge and concerned with the evaluation of the worth of commodities and
services;
d. The economic analysis of engineering alternatives.

Cost Terminology
Fixed costs - are those unaffected by changes in activity level over a feasible range of operations
for the capacity or capability available. Typical fixed costs include insurance and taxes on
facilities, general management and administrative salaries, license fees, and interest costs on
borrowed capital.

Variable costs - are those associated with an operation that varies in total with the quantity of
output or other measures of activity level. For example, the costs of material and labor used in a
product or service are variable costs – because they vary in total with the number of output units
– even though the costs per unit stay the same.

Incremental cost, or incremental revenue - is the additional cost, or revenue, that results from
increasing the output of a system by one (or more) units. Incremental cost is often associated
with “go/no go” decisions that involve a limited change in output or activity level.

Recurring costs - are those that are repetitive and occur when an organization produces similar
goods or services on a continuing basis. Variable costs are also recurring costs, because they
repeat with each unit of output. However, recurring costs are not limited to variable costs. A
fixed cost that is paid on a repeatable basis is a recurring cost. For example, in an organization
providing architectural and engineering services, office space for rental – which is a fixed cost –
is also a recurring cost.

Nonrecurring costs – are those that are not repetitive, even though the total expenditure may be
cumulative over a relatively short period of time. Typically, nonrecurring costs involve
developing or establishing a capability or capacity to operate. For example, the purchase cost for
real estate upon which a plant will be built is a nonrecurring cost, as is the cost of constructing
the plant itself.
Indirect costs – are those that are difficult to attribute or allocate to a specific output or work
activity. The term normally refers to type of costs that would involve too much effort to allocate
directly to a specific output. In this usage, they are costs allocated through a selected formula
(such as, proportional to direct labor hours, direct labor dollars, or direct material dollars to the
outputs or work activities. For example, the costs of common tools, general supplies, and
equipment maintenance in a plant are treated as indirect costs.

Overhead consists of plant operating costs that are not direct labor or direct material costs.
Examples of overhead include electricity, general repairs, property taxes, and supervision.

Standard costs – are representative costs per unit of unit of output that are established in advance
of actual production or service delivery. They are developed from the direct labor hours,
materials, and support functions (with their established costs per unit) planned for the production
or delivery process.

Cash cost – a cost that involves payment of cash (and results in a cash flow) to distinguish it
from one that does not involve a cash transaction and is reflected in the accounting system as a
noncash cost. This noncash cost is often referred to as a book cost.

Sunk cost – is one that has occurred in the past and has no relevance to estimates of future costs
and revenues related to an alternative course of action.

Opportunity cost – is the cost of the best rejected (i.e., foregone) opportunity and is often hidden
or implied. It is incurred because of the use of limited resources, such that the opportunity to use
those resources to monetary advantage in an alternative use is foregone. For example, suppose
that a project involves the use of vacant warehouse space presently owned by a company. The
cost for that space to the project should be the income or savings that possible alternative uses of
the space may bring to the firm. In other words, the opportunity cost for the warehouse space
should be the income derived from the best alternative use of the space.

Life-Cycle cost –this term refers to a summation of all costs, recurring and nonrecurring, related
to a product, structure, system, or service during its life span.

The General Economic Environment

There are numerous general economic concepts that must be taken into account in engineering
studies. In broad terms, economics deals with the interactions between people and wealth, and
engineering is concerned with the cost-effective use of scientific knowledge to benefit mankind.

Consumer and Producer Goods and Services

Consumer goods and services are those products or services that are directly used by people to
satisfy their wants. Food, clothing, homes, cars, television sets, haircuts, and medial services are
examples.

Producer goods and services are used to produce consumer goods and services or other producer
goods. Machine tools, factory building, buses, and farm machinery are example.

Measure of Economic Worth

Goods and services are produced and desired because directly or indirectly they have utility – the
power to satisfy human wants and needs. Thus, they may be used or consumed directly, or they
may be used to produce other goods or services that may, in turn, be use directly. Utility is most
commonly measured in terms of value, expressed in some medium of exchange as the price that
purchased in somewhat the same quantity even though the price varies considerably. Luxuries
are those products or services that are desired by humans and will be purchase if money is
available after the required necessities have been obtained. Obviously, these terms are relative,
because, for most goods and services, what one person considers a necessity may be considered a
luxury by another. For example, a person living in one community may find that an automobile
is a necessity to get to and from work. If the same person lived and worked in a different city,
adequate public transportation might be available, and an automobile would be a luxury. For all
goods and services, there is a relationship between the price that must be paid and the quantity
that will be demanded or purchased.
As the selling price per unit (p) is increased, there will be less demand (D) for the product, and as
the selling price is decreased, the demand will increase. The relationship between price and
demand can be expressed as linear function:

p = a – bD for 0 ≤ D ≤ a/b, a > 0, b > 0 Eqn. 1

where a is the intercept on the price axis and – b is the slope. Thus, b is the amount by which
demand increases for each unit decrease in p. Both a and b are constants. It follows that,

a - p
D= (b ≠ 0) Eqn. 2
b

Demand is the need, want or desire for a product backed by the money to purchase it. In
economic analysis, demand is always based on “willingness and ability to pay” for a product, not
merely want or need for the product.

The demand for a product is inversely proportional to its selling price, i.e., as the selling price is
increased, there will be less demand for the product; and as the selling price is decreased, the
demand will increase.

Supply is the amount of a product made available for sale.

If the selling price for a product is high, more producers will be willing to work harder and risk
more capital in order to reap more profit. However, if the selling price for a product declines,
capitalists will not produce as much because of the smaller profit they can obtain for their labor
and risk.

Therefore, the relationship between price and supply is that they are directly proportional, i.e.,
the bigger the selling price, the more supply; and the smaller the selling price, the less is the
supply.

THE LAW OF SUPPLY AND DEMAND

The law of supply and demand may be stated as follows:

“Under conditions of perfect competition, the price at which any given product will be supplied
and purchased is the price that will result in the supply and the demand being equal.”

Competition
Perfect competition occurs in a situation in which any given product supplied by a large number
of vendors and there is no restriction on additional vendors entering the market. Under such
conditions, there is assurance of complete freedom on the part of both buyer and seller. Perfect
competition may never occur in actual practice, because of a multitude of factors that impose
the vendor in terms of the availability and price of the product. Perfect monopolies rarely occur
in practice, because (1) few products are so unique that substitutes cannot be used satisfactorily,
and (2) governmental regulations prohibit monopolies if they are unduly restrictive.

The Total Revenue Function

The total revenue, TR that will result from a business venture during a given period is the
product of the selling price per unit, p, and the number of units sold, D. Thus

TR = price X demand = p (D) Eqn. 3

If the relationship between price and demand as given in Eqn. 1 is used,

2
TR = (a - bD)D = aD - bD for ≤ D ≤ a/b, a > 0, b > 0 Eqn. 4

From calculus the demand, Ď that will produce maximum total revenue can be obtained by
solving

dTR
= a - 2bD = 0 Eqn. 5
dD

Thus
a
Ď= Eqn. 6
2b

To guarantee that Ď maximizes the total revenue, check the second derivative to be sure it is
negative.
2
d TR
= - 2b
2
dD

Cost, Volume, and Breakeven Point Relationships

Fixed costs remain constant over a wide range of activities as long as the business does not
permanently discontinue operations, but variable costs vary in total with the volume of output.
Thus, at any demand D, total cost is

CT = CF + CV Eqn. 7

Where:
CF = fixed costs
CV = variable costs

For the linear relationship assumed here,

CV = (Cν) (D) Eqn. 8

Where:
Cν = variable cost per unit
Scenario 1. When total revenue and total cost, as given in Eqns. 7 and 8 are combined, the
typical results as a function of demand are depicted. At breakeven point D’1, total revenue is
equal to total cost, and an increase in demand will result in a profit for the operation. Then at
optimal demand, D*, profit is maximized (Eqn. 10). At breakeven point D’2, total revenue and
total cost are again equal, but additional volume will result in an operating loss instead of a
profit. Obviously, the conditions for which breakeven and maximum profit occurs are our
primary interest. First, at any volume (demand), D,

Profit (loss) = total revenue - total costs

= (aD - bD2) - (CF + CνD)

2
= - CF + (a - Cν) D - bD for 0 ≤ D ≤ a/b Eqn. 9

In order for a profit to occur, and to achieve the typical results, two conditions must be
met:

1. (a – Cν) > 0; that is, the price per unit that will result in no demand has to be greater than
the variable cost per unit (this avoids negative demand).
2. Total revenue (TR) must exceed total cost (CT) for the period involved.

If these conditions are met, we can find the optimal de4mand at which maximum profit will
2
occur by taking the first derivative of profit = -CF + (a – Cν) D – bD with respect to D and it
equal to zero:

d (profit)
=0
dD

a - Cν
D* = Eqn. 10
2b
Where:

D* = optimal value of D that maximizes profit

To ensure that we have maximized profit (rather than minimized it); the sign of the second
derivative must be negative. Checking this, we find that
2
d (profit)
= - 2b
2
dD

which will be negative for b > 0 (as earlier specified). (Also, recall that in cost minimization
problems a positive signed second derivative is necessary to guarantee a minimum – valued
optimal cost solution).

An economic breakeven point for an operation occurs when total revenue equals total
cost. Then for total revenue and total cost, as used in the development of Eqns. 9 and 10 and at
 Total revenue = total cost (breakeven point)
2
aD – bD = CF + CνD

2
-bD + (a – Cν) D – CF = 0 Eqn. 11

Because Eqn. 11 is a quadratic equation with one unknown (D), we can solve for the breakeven
points D’1 and D’2 (the roots of the equation).

½
- (a – Cν) ± [(a – Cν)2 – 4(-b) (-CF)]
D’ = Eqn. 12
2(-b)

With the conditions for the profit satisfied (Eqn. 9), the quantity in the brackets of the numerator
(the discriminant) in Eqn. 12 will be greater than zero. This will ensure that D’1 and D’2 have
real positive and unequal values.
½
- (a – Cν) + [(a – Cν)2 – 4(-b) (-CF)]
D’1 =
2(-b)

and
½
- (a – Cν) - [(a – Cν)2 – 4(-b) (-CF)]
D’2 =
2(-b)

Scenario 2. When the price per unit (p) for a product or service can be represented more simply
as being independent of demand (versus being a linear function of demand, as assumed in Eqn.
1) and is greater than the variable cost per unit (Cν), a single breakeven points results. Then
under the assumption that demand is immediately met, total revenue TR = p (D).

Problems:

1. Find the demand, Ď that maximizes total revenue if the equation for price is given by
50,000- 200D?

Ans. Ď = 125 units

2. A company produces an electronic time switch that is used in consumer and commercial
products made by several other manufacturing firms. The fixed cost (CF) is $73,000 per
month, and the variable cost (Cν) is $83 per unit. The selling price per unit is p = $180 –
0.02D, based on Eqn 1. For this situation (a) determine the optimal volume for this
product and confirm that a profit occurs (instead of loss) at this demand; and (b) find the
volumes at which breakeven occurs; that is what is the range of profitable range?

Ans. (a) D* = 2,425 units per month (b) D’1 = 932 units per month, D’2 = 3,918 units
per month.
 Ans. (a) D* = 227 units per year
2
d (profit)
(b) = - 4.4
2
dD

4. A company produces circuit boards used to update outdated computer equipment. The
fixed cost is $42,000 per month and the variable cost is $53 per circuit board. The selling
price per unit is p = $150 – 0.02D. Maximum output of the plant is 4,000 units per
month.
(a) Determine optimum demand for this product
(b) What is the maximum profit per month?
(c) What is the company’s range of profitable demand?

Ans. (a) D* = 2425 circuit boards per month

(b) Max profit = $75,612.5 per month
(c) 480 to 4,369 circuit boards per month

5. A company has established that the relationship between the sales price for one of its
products and the quantity sold per month is approximately D = 780 – 10 p units (D is the
demand or quantity sold per month, and p is the price in dollars). The fixed cost is $800
per month, and the variable cost is $300 per unit produced. What number of units, D*,
should be produced per month and sold to maximize net profit? What is the maximum
profit per month related to the product?

Ans. D* = 240 units per month

Maximum profit = $4,960 per month

6. A company estimates that as it increases its sales volume by decreasing the selling price
2
of its product, revenue = aD – bD (where D represents the units of demand per month,
with 0 ≤ D ≤ a/b). The fixed cost is $1,000 per month, and the variable cost is $4 per unit.
If a = $6 and b = $0.001, determine the sales volume for maximum profit, and the
maximum profit per month.

Ans. D* = 1,000 units per month

Maximum profit = $0 per month

Principles of Money – Time Relationship

Capital – refers to wealth in the form of money or property that can be used to produce more
wealth.

Two basic categories of capital:

1. Equity capital – is that owned by individuals who have invested their money or property
in a business project or venture in the hope of receiving a profit.
2. Debt capital – often called borrowed capital, is obtained from lenders e.g., through the
sale of bonds) for investment.

SIMPLE INTEREST
Suppose a debtor loans money from a creditor. The debtor must pay the creditor the original
linear function over a period of time. This is usually used for short-term loans where the period
of the loan is measured in days rather than years. It can be calculated using the following
formula:

I = Pin Eqn. 13

where: P = principal/loan
I = interest
i = interest rate
n = period

The future amount of the principal may be calculated by adding the interest (I) to the principal
(P).

F=P+I
or:

F = P + Pin

Thus,

F = P(1+in) Eqn. 14

There are two types of simple interest namely, ordinary interest and exact simple interest.

Ordinary simple interest is based on one banker’s year. A banker year is composed of 12 months
of 30 days each which is equivalent to a total of 360 days in a year. The value of n that is used in
the preceding formulas may be calculated as

d
n= Eqn. 15
360

where: d = number of days the principal was invested

Exact simple interest is based on the exact number of days in a given year. A normal year has
365 days while a leap year (which occurs once every 4 years) has 366 days. Unlike the ordinary
simple interest, the number of days in a month is based on the actual number of days each month
contains in our Gregorian calendar.

To determine the year whether leap year or not, one has to divide the year by 4. If it is exactly
divisible by 4, the year to be leap year otherwise it will be considered just a normal year with 365
days. However, if the year is a century year (ending with two zeros, e.g. 1700, 1800…), the year
must be divided by 400 instead of 4 to determine the year whether or not a leap year. Hence, year
1600 and year 2000 are leap years.

Under this method of computation of interest, it must be noted that under normal year, the month
of February has 28 days while during leap years it has 29 days. Again, the values of n to be used
in the preceding formulas are as follows:

d
n= for normal year Eqn 16
DISCOUNT
Consider the following cases where discount is involved:

CASE 1:
A person has a bond or financial security that is not due yet but payable in some future
date, desires to exchange it into an immediate cash. In the process, he will accept an amount in
cash smaller than the face value of the bond. The difference between the amount he receives in
cash (present worth) and the face value of the bond or financial security (future worth) is known
as discount. The process of converting a claim on a future amount of money in the present is
called discounting.

CASE 2:
In a bank loan, a person borrows P100 for 1 year with an interest of 10%. The interest as
computed is P10. The bank deducts the interest, which is P10 from the end of the year. The P10
that was deducted represent the interest paid in advance in this case, discount also represent the
difference between the present worth (i.e. P90) and the future worth (i.e. P100).

Discount = Future worth – present worth

The rate of discount is the discount on one unit of principal per unit time.

1
d=1- Eqn. 18
1+i

d
i= Eqn. 19
1–d

where: d = rate of discount

Problems:

1. If you borrow money from your friend with simple interest of 12%, find the present worth of
P20,000, which is due at the end of nine months.

Ans. P = P18,348.62

2. Mr. M. Dela Cruz borrowed money from a bank. He receives from the bank P1,340.00 and
promised to pay P1,500 at the end of 9 months. Determine the following:
A. Simple interest rate
B. The corresponding discount rate or often referred to as the “banker’s discount”

Ans. A. i = 15.92%
B. d = 13.73%

3. Susie buys a television set from a merchant who ask P1,250 at the end of 60 days.
Susie wishes to pay immediately and the merchant offers to compute the cash price on the
assumption that money is worth 8% simple interest. What is the cash price?

Ans. P = P1,233.55
5. Determine the exact simple interest on P5,000.00 invested for the period from January 15,
1996 to October 12, 1996, if the rate of interest is 18%.

Ans. I = P666.39

6. The exact simple interest of P5,000.00 invested from June 21, 1995 to December 25, 1995 is
P100.00. What is the rate of interest?

Ans. i = 3.90%

COMPOUND INTEREST
Compound interest is defined as the interest of loan or principal which is based not only on the
original amount of the loan or principal but the amount of loan or principal plus the previous
accumulated interest. This means that aside from the principal, the interest now earns interest as
well. Thus, the interest charges grow exponentially over a period of time.

Compound interest is frequently used in commercial practice than simple interest, more
especially if it is a longer period which spans for more than a year.

The future amount of the principal may be derived by the following tabulation:

Period Principal Interest Total Amount

1 P Pi P + Pi = P(1 + i)
2 P(1 + i) P(1 + i)i P(1 + i)(1 + i) = P(1 + i)2
3 P(1 + i)2 P(1 + i)2i P(1 + i)2(1 + i) = P(1 + i)3
n P(1 + i)n

The tabulation above shows that the future amount (total amount) is just the value P(1 +i) with
an exponent which is numerically equal to the period.

It is also observed that compound interest is based on the principles of geometric progression and
using such method, the total amount after each period are as follows:

First term, a1 = P(1 +i) Eqn. 20

Second term, a2 = P(1 +i)2 Eqn. 21

Third term, a3 = P(1 + i)3 and so on. Eqn. 22

Solving for the common ratio,

a2
r=
a1

P(1 + i)2
r =
P(1 + i)

r=1+i Eqn. 23
Using the formula for nth term of a Geometric Progression (G.P.)

an = a1rn-1

an = P(1 + i)(1 + i)n-1

an = P(1 + i)n Eqn. 24

a. FUTURE AMOUNT, F:

F = P(1 + i)n Eqn. 25

where: P = Principal
i = interest per period (in decimal)
n = number of interest periods
(1 + i)n = single payment compound amount factor

b. PRESENT WORTH, P:

F
P= Eqn. 26
(1 + i)n

1
where: = single payment present worth factor
(1 + i)n

CONTINUOUS COMPOUNDING
The concept of continuous compounding is based on the assumption that cash payments occur
once per year but compounding is continuous throughout the year.

The basic equation for future worth of compound interest is

F = P(1 + i)n

but for m periods per year

mN
NR
F=P 1+
m

m
let x =
NR
x(NR)N
1
F= P 1+
x
(NR)N
 x
1
but Lim 1+ = e
x ∞
x

Therefore,

F = Pe(NR)N Eqn. 27

where:
P = principal
e = 2.71828…
NR = nominal rate

e(NR)N = continuous compounding compound amount factor

The present worth of continuous compounding is

F
P= Eqn. 28
NR(N)
e

NOMINAL AND EFFECTIVE RATES OF INTEREST

Rate of interest is the cost of borrowing money. It also refers to the amount earned by a unit
principal per unit time.

There are two types of rates of interest, namely the nominal rate of interest and the effective rate
of interest.

Nominal rate of interest is defined as the basic annual rate of interest while effective rate of
interest is defined as the actual or the exact rate of interest earned on the principal during a one-
year period.

For example: A principal is invested at 5% compounded quarterly.

In this statement, the nominal rate is 5% while the effective is greater than 5% because of the
compounding which occurs four times a year. The following formula is used to determine the
effective rate of interest:

ER = (1 + i) m – 1 Eqn. 29
or
m
NR
ER = 1 + -1
m

where:
m = number of interest period per year
NR
i = interest per period =
m
Substituting the values of m and i:
4
0.05
ER = 1 + -1
4

ER = 0.0509

ER = 5.09%

So, the actual interest rate is not just 5% but 5.09%. However, the effective rate and nominal rate
are equal if the mode of compounding is per annum or annually.

Problems:

1. A credit plan charges interest rate of 36% compounded monthly. Find its effective rate.

Ans. ER = 42.57%

2. A master card compounds monthly and charges an interest of 1.5% per month. What is the
effective interest rate per year?

Ans. ER = 19.56%

3. A man expects to receive P20,000.00 in 10 years. If interest is computed at 6% compounded

quarterly, how much is it worth today?

Ans. P = P11,025.25

4. Suppose you borrow P8,000 now, promising to repay the loan principal plus accumulated
interest in four years at i = 10% per year. How much would you repay at the end of four years?

Ans. F = P11,713

5. An investor (owner) has an option to purchase a tract of land that will be worth P10,000 in six
years. If the value of the land increases at 8% per year, how much should the investor be
willing to pay now for his property?

Ans. P = P6,302

6. How long will it take money to triple itself if invested at 8% compounded annually?

Ans. n = 14.27 years

ANNUITY
Annuity is defined as a series of equal payments occurring at equal interval of time. When an
annuity has a fixed time span, it is known as annuity certain. The following are annuity certain.

1. Ordinary annuity is a type of annuity where the payments are made at the end of each
period beginning from the first period.

Derivation of formula for the sum of ordinary annuity:

 a3 = A(1 + i)2

a4 = A(1 + i)3

Annuity is based on the principles of compound interest. Hence, computation of the sum
of annuity may be done using the formulas for geometric progression.

Solving for common ratio:

a2
r=
a1

A(1 + i)
r= = 1+i
A

Solving for the sum:

a1(rn – 1)
S=
r–1

A[(1 + i)4 - 1]
S=
1+i–1

A[(1 + i)4 - 1
S=
i

a. SUM OF ORDINARY ANNUITY:

A[(1 + i)n -1]

F= Eqn. 30
i

where: i = interest per period

n = number of periods
A = uniform payment

[(1 + i)n -1]

= uniform series compound amount factor
i

b. PRESENT WORTH OF ORDINARY ANNUITY:

Using compound sentence formula:

F
P=
(1 + i)n
 A[(1 + i)n - 1]
P= Eqn. 31
i(1 +i)n

where:
A[(1 + i)n - 1]
= uniform series present worth factor
n
i(1 +i)

2. Annuity due is a type of annuity where the payments are made at the beginning of each
period starting from the first period.

3. Deferred annuity is a type of annuity where the first payment dose not begin until some
later date in the cash flow.

When an annuity does not have a fixed time span but continues indefinitely, then it is referred to
as a perpetuity. The sum of a perpetuity is an infinite value.

PRESENT WORTH OF PERPETUITY:

A
P =
i
where:
i = interest per period
A = uniform payment

Problems:

1. An enterprising student is planning to have personal savings totaling P1,000,000 when she
retires at age 65. She is now 20 years old. If the annual interest rate will average 7% over the
next 45 years on her savings account, what equal end-of-year amount must she save to
accomplish her goal?

Ans. A = P3,500

2. Suppose that you have P10,000 cash today and can invest it at 8 % compound interest each
year. How many years will it take you to become a millionaire?

Ans. n = 60 years

3. If P500.00 is invested at the end of each year for 6 years, at an annual interest rate of 7%, what
is the total peso amount available upon the deposit of the sixth payment?

Ans. F = P3,576.64

4. How much money must you invest today in order to withdraw P1,000.00 per year for 10 years
if the interest rate is 12%?

Ans. P = P5,650.22
Depreciation Concepts and Terminology
Depreciation is the decrease in value of physical properties with the passage of time and use.
More specifically, depreciation is an accounting concept that establishes an annual deduction
against before-tax income such that the effect of time and use on an asset’s value can be reflected
in a firm’s financial statements. Annual depreciation deductions are intended to “match” the
yearly fraction of value used by an asset in the production of income over the asset’s actual
economic life. The actual amount of depreciation can never be established until the asset is
retired from service. Because depreciation is a noncash cost that affects income taxes, we must
consider it properly when making after-tax engineering economy studies.

Depreciable property is property for which depreciation is allowed under federal, state,
or municipal income tax laws and regulations. To determine if depreciation deductions can be
taken, the classification of various types of property must be understood. In general, property is
depreciable if it meets the following basic requirements:

1. It must be used in business or held to produce income.

2. It must have a determinable useful life, and the life must be longer than one year.
3. It must be something that wears out, decays, gets used up, becomes obsolete, or loses
value from natural causes.
4. It is not inventory, stock in trade, or investment property.

Depreciable property is classified as either tangible or intangible. Tangible property can be seen
or touched, and it includes two main types called personal property and real property. Personal
property includes assets such as machinery, vehicles, equipment, furniture, and similar items. In
contrast, real property is land and generally anything that is erected on, or attached to land. Land
itself, however, is not depreciable because it does not have a determinable life.

Intangible property is personal property as a copyright, patent, or franchise. Engineering

projects rarely include this class of property.
A company can begin to depreciate it owns when the property is placed in service for use
in the business or for the production of income. Property is considered to be placed in service
when it is ready and available for a specific use, even if it is not actually used yet. Depreciation
stops either when the cost of placing it in service has been recovered or it is retired from service.

Depreciation Methods and Related Time Periods

The depreciation methods permitted under the Internal Revenue Code have changed with time.
In general, the following summary indicates the primary methods used for property placed in
service during three distinct time periods.

The primary methods used were straight-line (SL), declining balance (DB), and sum-of-
the-digits (SYD). We will refer to these methods, collectively, as the classical or historical
methods of depreciation.

Adjusted (cost) basis – the original cost basis of the asset, adjusted by allowable increases or
decreases, is used to compute depreciation and depletion deductions. For example, the cost of
any improvement to a capital asset with a useful life greater than one year increases the original
cost basis, and a casualty or theft loss decreases it. If the basis is altered, the depreciation
deduction may need to be adjusted.

Basis, or cost basis – the initial cost of acquiring an asset (purchase price plus any sales taxes),
including transportation expenses and other normal costs of making the asset serviceable for its
remains invested in the property and must be recovered in the future through the accounting
process. The BV of a property may not be a useful measure of its market value.

Market value (MV) – the amount that will be paid by a willing seller for a property where each
has equal advantage and is under no compulsion to buy or sell. The MV approximates the
present value of what will be received through ownership of the property, including the time
value of money (or profit).

Recovery period – the number of years over which the basis of a property is recovered through
the accounting process. For the classical methods of depreciation, this period is normally the
useful life. Under the Modified Accelerated Cost Recovery System (MACRS), this period is the
property class for the General Depreciation System (GDS), and it is the class life for the
Alternative Depreciation System (ADS).

Recovery rate – a percentage (expressed in decimal form) for each year of the MACRS recovery
period that is utilized to compute an annual depreciation deduction.
Salvage value – the estimated value of a property at the end of its useful life. It is the expected
selling price of a property when the asset can no longer be used productively by its owner. The
term net salvage value is used when the owner will incur expenses in disposing of the property,
and these cash outflows must be deducted from the cash inflows to obtain a final net SV. When
the classical methods of depreciation are applied, an estimated salvage value is initially
established and used in the depreciation calculations. Under MACRS, the SV of depreciable
property is defined to be zero.

Useful life – the expected (estimated) period of time that a property will be used in a trade or
business or to produce income. It is not how long the property will last but how long the owner
expects to productively use it. Useful life is sometimes referred to as depreciable life. Actual
useful life of an asset, however, may be different than its depreciable life.

The Classical (Historical) Depreciation Method

This section describes and illustrates the straight-line, declining balance, and sum-of-the-years
digits methods of calculating depreciation deductions. These historical methods continue to
apply, directly and indirectly, to the depreciation of property.

Straight-Line (SL) Method

Straight-line depreciation is the simplest depreciation method. It asumes that a constant amount
is appreciated each year over the depreciable (useful) life of the asset. The following definitions
are used in the equations below. If we define

n = depreciable life of the asset in years

B = cost basis, including allowable adjustments
dK = annual depreciation deduction in year k (1 ≤ k ≤ n)
BVk = book value at end of year k
SVn = estimated salvage value at end of year n
dk* = cumulative depreciation through year k

then
dk = (B – SVn)/n Eqn. 32

dk* = kdk for 1 ≤ k ≤ n

= k(B – SV )/n Eqn. 33

Note for this method you must have an estimate of the final SV, which will also be the final book
value at the end of year n. In some cases, the estimated SVn may not equal an asset’s actual
terminal MV.

Example no.1: A new electric saw for cutting small pieces of lumber in a furniture
manufacturing plant has a cost basis of P4,000 and a 10-year depreciable life. The estimated SV
of the saw is zero at the end of 10 years. Determine the annual depreciation amounts using the
straight-line method. Tabulate the annual depreciation amounts and the book value of the saw at
the end of each year.

SOLUTION:

The depreciation amount, cumulative depreciation, and book value for each year are obtained by
applying Equations 32, 33 and 34. Sample calculations for year five are shown below.

P 4,000 – 0
d5 = = P 400
10

5 (P4,000 – 0)
d5 = = P 2,000
10

5 (P4,000 – 0)
BV5 =P 4,000 - = P2,000
10

The depreciation and book value amounts for each year are shown below.

EOY, k dk BVk
0 ------- P4,000
1 P400 3,600
2 400 3,200
3 400 2,800
4 400 2,400
5 400 2,000
6 400 1,600
7 400 1,200
8 400 800
9 400 400
10 400 0

Declining Balance (DB) Method

In the declining balance method, sometimes called the constant percentage method or the
Matheson formula, it is assumed that the annual cost of depreciation is a fixed percentage of the
BV at the beginning of the year. The ratio of the depreciation in any one year to the BV at the
beginning of the year is constant throughout the life of the asset and is designated by R
(0↙R↙1). In this method, R= 2/ n when a 200% declining balance is being used (i.e., twice the
straight line rate of 1/n), and n equals the depreciable (useful) life of an asset. If the 150%
declining balance method is specified, then R= 1.5/n. The following relationships hold true for
the declining balance method:
 BVk = B (1-R) k Eqn. 38

BVn = B (1-R) n Eqn. 39

Example no. 2: Rework Example 1 with the declining balance method when (a)R = 2/n (200%
declining balance method) and (b) R = 1.5/n (150% declining balance method). Again, tabulate
the annual depreciation amount and book value for each year.

Solution:

Annual depreciation, cumulative depreciation, and book value are determined by using
Equations 36, 37, and 38, respectively. Sample calculations for year six are shown below.

(a) R = 2/n = 2/10 = 0.2

d6 = P4,000 (1- 0.2)5 (0.2) = P262.14
d6* = P4,000 [1 – (1 – 0.2)6] = P2,951.42
BV6 = P4,000 (1 – 0.2)6 = P1,048.58

(b) R = 1.5/n = 1.5/10 = 0.15

d6 = P4,000 (1- 0.15)5 (0.15) = P266.22
d6* = P4,000 [1 – (1 – 0.15)6 ] = P2,491.40
BV6 = P4,000 (1 – 0.15)6 = P1,508.60

The depreciation and book value amounts for each year, when R = 2/n = 0.2, are shown below:

200% Declinng Balance Method Only

EOY, k dk BVk
0 ------- P4,000
1 P800 3,200
2 640 2,560
3 512 2,048
4 409.60 1,638.40
5 327.68 1,310.72
6 262.14 1,048.58
7 209.72 838.86
8 167.77 671.09
9 134.22 536.87
10 107.37 429.50

Sum-of-the-Years-Digits (SYD) Method

To compute the depreciation deduction by the SYD method, the digits corresponding to the
number for each permissible year of life are first listed in reverse order. The sum of these digits
is then determined. The depreciation factor for any year is the number from the reverse-ordered
listing for that year divided by the sum of the digits. For example, for a property having a
depreciable (useful) life of five years, SYD depreciation factors are as follows:

Number of the
Year in SYD
Reverse Order Depreciation
Year (digits) Factor
1 5 5/15
The depreciation for any year is the product of the SYD depreciation factor for that year and the
difference between the cost basis (B) and the estimated final SV. The general expression for the
annual cost of depreciation for any year k, when N equals the depreciable life of an asset, is

2(n- k + 1)
dk = (B – SVn) Eqn. 40
n (n + 1)

The book value at the end of the year k is

2 (B – SVn) (B –SVn)
BVk = B - k+ k (k+1) Eqn. 41
n n(n + 1)

and the cumulative depreciation through the kth year is simply

dk* = B – BVk Eqn. 42

Example no. 3: Rework example 1 using the sum-of-the-years-digits method. Tabulate the
annual depreciation mount and book value for each year.

Solution:

With Equations 40, 41, and 42, respectively, the annual depreciation, book value, and cumulative
depreciation amounts are obtained. Sample calculations for year four are given below

2(10- 4 + 1)
d4 = P4,000 = P509.09
10(10 + 1)

2 (P4,000) (P4,000)
BV4 = P4,000 - 4+ 4(5) = P1,527.27
10 10(10 +1)

d4* = P4,000 - P1,527.27 = P,472.73

Depreciation and book value amounts for each year are shown below.

EOY, k dk BVk
0 ------- P4,000
1 P727.27 3,272.73
2 654.55 2,618.18
3 581.82 2,036.36
4 509.09 1,527.27
5 436.36 1,090.91
6 363.64 727.27
7 290.91 436.36
8 219.18 218.18
9 145.45 72.73
MULTIPLE CHOICE QUESTIONS

1. The paper currency issued by the central Bank, which forms part of the country’s money
supply.

A. Bank note *
B. Check
C. Coupon
D. T-bills

2. Reduction in the level of national income and output usually accompanied by the fall in the
general price level.

A. Deflation *
B. Depreciation
C. Devaluation
D. Inflation

3. It is a series of equal payments occurring at equal interval of time.

A Amortization
B. Annuity *
C. Dept
D. Deposit

4. The place where buyers and sellers come together.

A. Business
B. Buy and sell section
C. Market *
D. Recreation center

5. A market whereby there is only one buyer of an item for which there are no goods substitute.

A. Monopoly
B. Monopsony *
C. Oligopoly
D. Oligopsony

6. It is a series of equal payments occurring at equal interval of time where the first payment is
made after several periods, after the beginning of the payment.

A. Annuity due
B. Deferred annuity *
C. Ordinary annuity
D. Perpetuity

7. The total income equals the total operating cost.

A. Balanced sheet
B. Break even – no gain no loss *
C. Check and balance
8. Kind of obligation which has no condition attached.

A. Analytic
B. Gratuitous *
C. Private
D. Pure

9. Direct labor costs incurred in the factory and direct material costs are the costs of all
materials that go into production. The sum of these two direct costs is known as

A. GS and A expenses
B. Operating and maintenance costs
C. O and M costs
D. Prime cost *

10. An index of short term paying ability is called

A. acid-test ratio *
B. current ratio
C. profit margin ratio
D. receivable turn-over

11. An artificial expenses that spreads the purchase price of an asset or another property over a
number of years.

A. Amnesty
B. Bond
C. Depreciation *
D. Sinking fund

12. Estimated value at the end of the useful life.

A. Book value
B. Fair value
C. Market value
D. Salvage value *

13. Consists of the actual counting or determination of the actual quantity of the materials on
hand as of a given date.

A. Material count
B. Material update
C. Physical inventory *
D. Technological assessment

14. Additional information of prospective bidders on contact documents issued prior to bidding
date.

A. Bid bulletin *
B. Delict
C. Escalatory
D. Technological assessment
15. A series of uniform accounts over an infinite period of time.

A. Annuity
B. Depreciation
C. Inflation
D. Perpetuity *

16. The quantity of a certain commodity that is offered for sale at a certain price at a given place
and time.

A. Demand
B. Goods
C. Stocks
D. Supply *

17. Work-in process is classified as

A. an asset *
B. an expenses
C. An owner’s equity
D. a liability

18. What is the highest position in the corporation?

A. Board of Directors
B. Chairman of the Board *
C. President
D. Stockholders

19. Type of ownership in business where individuals exercise and enjoy the right in their own
interest.

A. Equitable
B. Public
C. Private *
D. Pure

20. Decrease in the value of a physical property due to the passage of time.

A. Depletion
B. Depreciation *
C. Inflation
D. Recession

21. An association of two or more individuals for the purpose of operating a business as
co-owners for profit.

A. Company
B. Corporation
C. Partnership *
D. Sole proprietorship
22. We may classify an interest rate, which specifies the actual rate of interest on the principal
for one year as

A. effective rate *
B. exact interest rate
C. nominal rate
D. rate of return

23. It is defined to be the capacity of a commodity to satisfy human want.

A. Discount
B. Luxury *
C. Necessity
D. Utility

24. It is the amount which a willing buyer will pay to a willing seller for a property where each
has equal advantage and is under no compulsion to buy or sell.

A. Book value
B. Fair value
C. Market value *
D. Salvage value

25. This occurs in a situation where a commodity or service is supplied by a number of vendors
and there is nothing to prevent additional vendors entering the market.

A. Elastic demand
B. Monopoly
C. Oligopoly
D. Perfect competition *

26. These are products or services that are desired by human and will be purchased if money is
available after the required necessities have been obtained.

A. Luxuries *
B. Necessities
C. Product goods and services
D. Utilities

27. These are products or services that are required to support human life and activities that will
be purchased in somewhat the same quantity even though the price varies considerably.

A. Luxuries
B. Necessities *
C. Product goods and services
D. Utilities

28. A condition where only few individuals produce a certain product and that any action of one
will lead to almost the same action of the others.

A. Monopoly
B. Oligopoly *
29. Grand total of the assets and operational capability of a corporation.

A. Authorized capital *
B. Investment
C. Money market
D. Subscribed capital

30. The worth of the property equals to the original cost less depreciation.

A. Book value *
B. Face value
C. Market value
D. Scrap value

31. Money paid for the use of borrowed capital.

A. Credit
B. Interest *
C. Discount
D. Profit

32. Liquid assets such as cash and other assets that can be converted quickly into cash, such as
accounts receivable and merchandise are called

A. current assets *
B. Fixed assets
C. total assets
D. None of the above

33. The length of time which the property may be operated at a point.

A. Economic life *
B. Operating life
C. Physical life
D. All of the above

34. The provision in the contract that indicates the possible adjustment of material cost and
labor cost.

A. Contingency clause
B. Escalatory clause *
C. Main clause
D. Secondary clause

35. The present worth of all depreciation over the economic life of the item is called

A. book value
B. capital recovery
C. depreciation recovery *
D. sinking fund

36. Gross profit, sales less cost of goods sold, as percentage of sale is called
37. Worth of the property as shown in the accounting records of an enterprise.

A. Book value *
B. Fair value
C. Market value
D. Salvage value

38. Those funds that are required to make the enterprise or project a going concern.

A. Current accounts
B. Initial investment
C. Substantial capital
D. Working capital *

39. A market situation where there is only one seller with many buyer.

A. Monopoly *
B. Monopsony
C. Oligopoly
D. Oligopsony

40. A market situation where there are few sellers and few buyers.

A. Bilateral oligopoly *
B. Bilateral oligopsony
C. Oligopoly
D. Oligopsony

41. A market situation where there is one seller and one buyer.

A. Bilateral monopoly *
B. Bilateral monopsony
C. Monopoly
D. Monopsony

42. A market situation where there are only two buyers with many sellers.

A. Duopoly
B. Duopsony *
C. Oligopoly
D. OLigopsony

43. The cumulative effect of elapsed time on the money value of an event, based on the earning
power of equivalent invested funds capital should or will earn.

A. Interest rate
B. Present worth factor
C. Time value of money *
D. Yield

44. Defined as the future value minus the present value.

45. The flow back of profit plus depreciation from a given project is called

A. cash flow *
B. capital recovery
C. earning value
D. economic return
46. The profit derived from a project or business enterprise without consideration of obligations
to financial contributors or claims of other based on profit.

A. Earning value
B. Economic return *
C. Expected yield
D. Yield

47. The payment for the use of borrowed money is called

A. interest *
B. loan
C. maturity value
D. principal

48. The interest rate at which the present work of the cash flow on a project is zero of the
interest earned by an investment.

A. Effective rate
B. Nominal rate
C. Rate of return *
D. Yield

49. The ratio of the interest payment to the principal for a given unit of time and usually
expressed as a percentage of the principal.

A. Interest
B. Interest rate *
C. Investment
D. All of the above

50. The true value of interest rate computed by equations for compound interest for a 1 year
period is known as

A. effective interest *
B. expected return
C. interest
D. nominal interest

51. The intangible item of value from the exclusive right of a company to provide a specific
product or service in a stated region of the country.

A. Book value
B. Franchise value *
C. Goodwill value
D. Market value
52. The recorded current value of an asset is known as

A. book value *
B. present value
C. salvage value
D. scrap value

53. Scrap value of an asset is sometimes known as

A. book value
B. future value
C. replacement value
D. salvage value *

54. Sometimes called second hand value.

A. Book value
B. Going value
C. Salvage value *
D. Scrap value

55. An intangible value which is actually operating concern has due to its operation.

A. Book value
B. Fair value
C. Going value *
D. Goodwill value

56. The value which a disinterested third party, different from the buyer and seller, will
determine in order to establish a price acceptable to both parties.

A. Fair value *
B. Franchise value
C. Goodwill value
D. Market value

57. A type of annuity where the payments are made at the end of each payment period starting
from the first period.

A. Annuity due
B. Deferred annuity
C. Ordinary annuity *
D. Perpetuity

58. It is a series of equal payments occurring at equal intervals of time where the first payment
is made after several periods, after the beginning of the payment.

A. Deferred annuity *
B. Delayed annuity
C. Progressive annuity
D. Simple annuity
59. A type of annuity where the payments are made at the start of each period, beginning from
the first period.

A. Annuity due *
B. Deferred annuity
C. Ordinary annuity
D. Perpetuity

60. Which is NOT an essential element of an ordinary annuity?

A. the amounts of all payments are equal.

B. The payments are made at equal interval of time.
C. The first payment is made at the beginning of each period. *
D. Compound interest is paid on all amounts in the annuity.

61. A is a periodic payment and I is the interest rate, then present worth of a perpetuity =

A. Ai
B. Ain
C. An/i
D. A/i *

62. A mathematical expression also known as the present value of an annuity of one called

A. demand factor
B. load factor
C. present worth factor*
D. sinking fund factor

63. As applied to a capitalized asset, the distribution of the initial cost by a periodic changes to
operation as in depreciation or the reduction of a dept by either periodic or irregular
prearranged program is called

A. amortization*
B. annuity
C. annuity factor
D. capital recovery

64. The reduction of the value of an asset due to constant use and passage of time.

A. Book value
B. Depletion
C. Depreciation *
D. Scrap value

65. A method of computing depreciation in which the annual charge is a fixed percentage of the
depreciated book value at the beginning of the year to which the depreciation applies.

A. Declining balance method *

B. Sinking fund method
C. Straight line method
D. SYD method
66. A method of depreciation whereby the amount to recover is spread uniformly over the
estimated life of the asset in terms of the periods or units of output.

A. Declining balance method

B. Sinking fund method
C. Straight line method *
D SYD method

67. Which of the following depreciation methods cannot have a salvage value of zero?

A. Declining balance method *

B. Sinking fund method
C. Straight line method
D. SYD method

68. A method of depreciation where a fixed sum of money is regularly deposited at compound
interest in a real or imaginary fund in order to accumulate an amount equal to the total
depreciation of an asset at the end of the asset’s estimated life.

A. Declining balance method

B. Sinking fund method *
C. Straight line method
D. SYD method

69. The function of interest rate and time that determines the cumulative amount of a sinking
fund resulting from specific periodic deposits.

A. Capacity factor
B. Demand factor
C. Present worth factor
D. Sinking fund factor *
70. The first cost of any property includes

A. the original purchase price and freight and transportation charges

B. installation expenses
C. initial taxes and permits fee
D. all of the above *

71. In SYD method, the sum of years digit is calculated using which formula with n = number
of useful years of the equipment.

A. n(n-1)
2
B. n(n+1) *
2
C. n(n+1)

D. n(n-1)

72. Capitalized cost of any property is equal to the

A. annual cost
73. The lessening of the value of an asset due to the decrease in the quantity available
(referring to the natural resources, coal, oil, etc).

A. Depletion *
B. depreciation
C. Incremental cost
D. Depreciation

74. Is the simplest form of business organization.

A. Corporation
B. Enterprise
C. Partnership
D. Sole proprietorship *

75. An association of two or more persons for a purpose of engaging in a profitable business.

A. Corporation
B. Enterprise
C. Partnership *
D. Sole proprietorship

76. A distinct legal entity which can practically transact any business transaction which a real
person could do.

A. Corporation *
B. Enterprise
C. Partnership
D. Sole proprietorship

77. Double taxation is a disadvantage of which business organization?

A. Corporation *
B. Enterprise
C. Partnership
D. Sole proprietorship

78. Which is NOT a type of business organization?

A. Corporation
B. Enterprise *
C. Partnership
D. Sole proprietorship

79. What is the minimum number of incorporators in order that be organized?

A. 3
B. 5 *
C. 10
D. 7

80. In case of bankruptcy of a partnership,

81. Which is TRUE about partnership?

A. It has a perpetual life.

B. It will be dissolved if one of the partners ceases to be connected with the partnership. *
C. It can be handed down from one generation of partners to another.
D. Its capitalization must be equal for each partner.

82. Which is TRUE about corporation?

A. It is not the best form of business organization.

B. The minimum number of incorporators to start a corporation is three.
C. Its life is dependent on the lives of the incorporators.
D. The stockholders of the corporation are only liable to the extent of their investments. *

83. Represent ownership, and enjoys certain preferences than ordinary stock.

A. Authorized capital stock

B. Common stock
C. Incorporator’s stock
D. Preferred stock *

84. Represent the ownership of stockholders who have a residual claim on the assets of the
corporation after all other claims have been settled.

A. Authorized capital stock

B. Common stock *
C. Incorporator’s stock
D. Preferred stock

85. The amount of company’s profits that the board of directors of the corporation decides to
distribute to ordinary shareholders.

A. Dividend *
B. Par value
C. Return
D. Share stock

86. A certificate of indebtness of a corporation usually for a period not less than 10 years and
guaranteed by a mortgage on certain assets of the corporation.

A. Bond *
B. Common stock
C. Preferred stock
D. T-bill

87. A form of fixed-interest security issued by central or local government, companies, banks or
other institutions. They are usually a form of long-term security, buy may be irredeemable,
secured or unsecured.

A. Bonds *
B. Certificate of deposit
C. T-bills
88. A type of bond where the corporation pledges securities which it owns (i.e., stocks, bonds of
its subsidiaries).

A. Collateral trust bond *

B. Coupon bond
C. Mortgage bond
D. Registered bond

89. A type of bond which does not have security except a promise to pay by the issuing
corporation.

A. Collateral trust bond

B. Debenture bond *
C. Mortgage bond
D. Registered bond

90. A type of bond issued jointly by two or more corporations.

A. Collateral trust bond

B. Debenture bond
C. Joint bond *
D. Registered bond

91. A type of bond whose guaranty is in lien on railroad equipments.

A. Debenture bond
B. Equipment obligations bond *
C. Infrastructure bond
D. Registered bond

92. If the security of the bond is a mortgage on certain specified asset of a corporation, this bond
is classified as

A. coupon bond
B. joint bond
C. mortgage bond *
D. registered bond
93. A type of bond where the corporation’s owners name are recorded and the interest is paid
periodically to the owners with their asking for it.

A. Incorporated bond
B. Preferred bond
C. Registered bond *
D. All of these
94. Bond to which are attached coupons indicating the interest due and the date when such
interest is to be paid.

A. Collateral trust bond

B. Coupon bond *
C. Mortgage bond
D. Registered bond
96. The 72 rule of thumb is use to determine

A. how many years money will triple

B. how many years of money will double *
C. how many years to amass 1 million
D. how many years to quadruple the money

97. To triple the principal, one must use

A. derivatives
B. implicit functions
C. logarithms *
D. integration

98. A currency traded in a foreign exchange market for which the demand is consistently high in
relation to its supply

A. Certificate of deposit
B. Hard currency *
C. Money market
D. Treasury bill

99. Everything a company owns and which has a money value is classified as an asset. Which of
the following is classified as an asset?

A. Fixed assets
B. Intangible assets
C. Trade investments
D. All of these *

100. Which an example of an intangible asset?

A. Cash
B. Furnitures
C. Investment in subsidiary companies
D. Patents *

101. Lands, buildings, plant and machinery are examples of

A. current assets
B. fixed assets *
C. intangible assets
D. trade investments

102. An increase in the value of a capital asset is called

A. capital expenditure
B. capital gain*
C. capital stock
D. profit

103. The reduction in the money value of a capital asset is called

104. It is a negotiable claim issued by a bank in lieu of a term deposit.

A. Bond
B. Capital gain
C. Certificate of deposit *
D. Time deposit

105. Any particular raw material or primary product (e.g. cloth, wood, flour, coffee…) is called
A. commodity *
B. necessity
C. stock
D. utility

106. It denotes the fall in the exchange rate of one currency in terms of others. The term usually
applies to floating exchange rates.

A. Currency appreciation
B. Currency devaluation
C. Currency depreciation *
D. Currency float

107. The deliberate lowering of the price of a nation’s currency in terms of the accepted standard
(Gold, American dollar or the British pound).

A. Currency appreciation
B. Currency devaluation *
C. Currency depreciation
D. Currency float

108. The residual value of a company’s assets after all outside liabilities (shareholders excluded)
have been allowed for.

A. Dividend
B. Equity *
C. Par value
D. Return

109. A saving which takes place because goods are not available for consumption rather than the
consumer really want to save.

A. Compulsory saving
B. Consumer saving
C. Forced saving *
D. All of these

110. A document that shows proof of legal ownership of a financial security.

A. Bank note
B. Bond
C. Check
D. Coupon *
112. It is the profit obtained by selling stocks at a higher price than its original purchase price.

A. Capital gain *
B. Debenture
C. Goodwill
D. Internal rate of return

113. The quantity of a certain commodity that is offered for sale at a certain price at a given time
and place.

A. Demand
B. Market
C. Supply *
D. Utility

114. The quantity of a certain commodity that is bought at a certai8n price at a given time and
place.

A. Demand *
B. Market
C. Supply
D. Utility

115. “When one of the factors of production is fixed in quantity or is difficult to increase,
increasing the other factors of production will result in a less than proportionate increase in
output”.

A. Law of demand
B. Law of diminishing return *
C. Law of supply
D. Law of supply and demand

116. “When free competition exists, the price of a product will be that value where supply is
equal to the demand”.

A. Law of demand
B. Law of diminishing return
C. Law of supply
D. Law of supply and demand *

117. An accounting term that represents an inventory account adjustment.

A. Cost of good sold *

B. Overhead
C. Payback
D. Variance

118. The simplest economic order quantity (EOQ) model is based on which of the following
assumptions?

A. Shortages are not allowed.

B. Demand is constant with respect to time.
119. In economics, a “short-term” transaction usually has a lifetime of

A. 3 months or less
B. 1 year or less
C. 5 years or less *
D. 10 years or less

120. In the cash flow, expenses incurred before time = 0 is called

A. disbursements
B. first costs
C. receipts
D. sunk costs *

121. An imaginary cost representing what will not be received if a particular strategy is rejected.

A. Initial cost
B. Opportunity cost *
C. Replacement cost
D. Sunk cost

122. In replacement studies, the existing process or piece of equipment is known as

A. asset
B. challenger
C. defender *
D. liability

123. In replacement studies, the new process or piece of equipment being considered for
purchase is known as

A. asset
B. challenger *
C. defender
D. liability

124. ______ means that the cost of the asset is divided into equal or unequal parts, and only one
of these parts is taken as an expense each year.

A. Artificial expense
B. Capitalizing the asset *
C. Depreciating the asset
D. Expensing the asset

125. Indicate the CORRECT statement about depreciation.

A. The depreciation is not the same each year in straight line method.
B. The declining balance method can be used even if the salvage value is zero.
C. The sum-of-years’ digit method (SYD), the digits 1 to (n + 1) is summed.
D. Double declining balance depreciation is independent of the salvage value. *

126. An artificial deductible operating expense designed to compensate mining organizations for
127. The change in cost per unit variable change is known as

A. fixed cost
B. incremental cost *
C. semi-variable cost
D. sunk cost

128. What type of cost increases step-wise?

A. Direct labor cost

B. Operating and maintenance cost
C. Semi-variable cost *
D. Supervision cost

129. Which of the following is NOT a variable cost?

A. Cost of miscellaneous supplies

B. Income taxes
C. Insurance cost *
D. Payroll benefit costs

130. Which of the following is NOT a fixed cost?

A. Depreciation expenses
B. Janitorial service expenses
C. Rent
D. Supervision costs *

131. The annual costs that are incurred due to the functioning of a piece of equipment is known
as

A. General, selling and administrative expenses

B. Operating and maintenance costs *
C. Prime cost
D. Total cost

132. The sum of the direct labor cost and the direct material cost is known as

A. indirect manufacturing expenses

B. marketing cost
C. prime cost *
D. total cost

133. Research and development costs and administrative expenses are added to the factory cost
to give the ___________ of the product.

A. manufacturing cost *
B. marketing cost
C. prime cost
D. total cost

134. The sum of the prime cost and the indirect manufacturing cost is known as
135. The manufacturing cost plus selling expenses or marketing expanses equals

A. administrative cost
B. indirect production cost
C. miscellaneous cost
D. total cost *

136. Which of the following is NOT a direct labor expense?

A. Assembly
B. Inspection
C. Supervision *
D. Testing

137. All are administrative expense EXCEPT:

A. Accounting
B. Data processing
C. Marketing *
D. Office supplies

138. On of the following is NOT a selling or marketing expense. Which one?

A. Advertising
B. Commission
C. Insurance *
D. Transportation

139. Research and development expenses includes all EXCEPT one. Which one?

A. Drafting
B. Laboratory *
C. Prototype
D. Testing

140. Which is not a factory overhead expense?

A. Expediting
B. Pension, medical, vacation benefits
C. Quality control and inspection
D. Testing *

141. Bookkeeping consists of two steps, namely recording the transactions and categorization of
transactions. Where are the transactions (receipts and disbursements) recorded?

A. Columnar
B. Journal *
C. Ledger
D. Statement of account

142. The following are ledger accounts EXCEPT:

143. The journal and the ledger together are known simply as _____________ of the company.

A. accounting system
B. balance sheet
C. bookkeeping system
D. the books *

144. The basic accounting equation is

A. Assets = Liability + Owner’s equity *

B. Liability = Assets + Owner’s equity
C. Owner’s equity = Assets + Liability
D. Owner’s equity = Liability – Assets

145. The ability to convert assets to cash quickly is known as

A. insolvency
B. leverage
C. liquidity *
D. solvency

146. The ability to meet debts as they become due is known as

A. insolvency
B. leverage
C. liquidity
D. solvency *

147. What is considered as an index of short-term paying ability?

A. Acid test ratio

B. Current ratio *
C. Gross margin
D. Return of investment

148. An acid test ratio is a ratio of

A. gross profit to net ratio

B. net income before taxes to net sales
C. net income to owner’s equity
D. quick assets to current liabilities *

149. The ratio of the net income to the owner’s equity is known as

A. gross margin
B. price-earning ratio
C. Profit margin ratio
D. return of investment *

150. Payback period is the ratio of

151. A secondary book of accounts, the information of which is obtained from the journal.

A. Balance sheet
B. Ledger *
C. Trial balance
D. Worksheet

152. The present worth of cost associated with an asset for an infinite period of time is referred
to as

A. annual cost
B. capitalized cost *
C. increment cost
D. operating cost

153. A stock of a product which is held by a trade or government as a means of regulating the
price of that product.

A. Buffer stock *
B. Hoard stock
C. Stock pile
D. Withheld stock

154. A negotiable claim issued by a bank in lieu of a term deposit is called

A. Certificate of deposit *
B. Cheque
C. Currency
D. T-bills

155. A form of business firm which is owned and run by a group of individuals for their mutual
benefit.

A. Cooperative *
B. Corporation
C. Enterprise
D. Partnership

156. A document which shows the legal ownership of financial security and entitled to payments
thereon.

A. Bond
B. Consol
C. Contract
D. Coupon *

157. A government bond which have an indefinite life rather than a specific maturity.

A. Debenture
B. Consol *
C. Coupon
158. Refers to the order quantity that minimizes the inventory cost per unit time.

A. Economic order quantity *

B. Private order quantity
C. Public order quantity
D. Social order quantity

159. What is referred to as an individual who organizes factors of production to undertake a

venture with a view to profit?

A. Agent
B. Commissioner
C. Entrepreneur *
D. Salesman

160. The money that is inactive and does not contribute to productive effort in an economy is
known as

A. frozen asset
B. hard money
C. idle money *
D. soft money