Deck 2

Question 1

What are the four perspectives of a balanced scorecard?

Answer 1

Financial
Customer
Internal Processes
Learning & Innovation

Question 2

In macroeconomics, what does investment spending refer to?

Answer 2

How much market participants (individuals & businesses) spend on residential & non-residential construction, and business inventory & PPE.

Question 3

An enterprise resource planning system is designed to do what?

Answer 3

Integrate data from all aspects of an organization’s activities.

Question 4

Is a disadvantage of the NPV method of capital expenditure evaluation that it does not provide the true rate of return on investment?

Answer 4

Correct

The net present value (NPV) method of capital expenditure evaluation does not provide the true rate of return on investment. The NPV indicates whether or not an investment will earn the “hurdle rate” used in the NPV calculation. If the NPV is positive, the return on investment will exceed the hurdle rate. If the NPV is negative, the return on investment will be less than the hurdle rate. If the NPV is zero, the return on investment will be exactly equal to the hurdle rate.

Question 5

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 what?

Answer 5

Relative sales value at split off.

Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

Question 6

Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing?

Interest Rate Risk
Marginal Risk
Financial Risk
Business Risk

Answer 6

Business Risk

Business risk represents the risk associated with the unique circumstances of a particular company, as they might affect the shareholder value of that company. If an entity purely uses its own cumulative earnings in capitalizing its operations, it is exposed to the risks of its own unique circumstances.

Question 7

What is a limitation of the profitability index?

Answer 7

It requires detailed long-term forecasts of the project’s cash flows.

The profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment. The profitability ratio requires detailed long-term forecasts of project’s cash flows. For longer term projects, cash flow projections might be either unavailable or unreliable.

Question 8

For the items below, how would they be properly classified for reporting purposes (internal/ external/ both?

Job Costing
Process Costing
Activity Based Costing
Variable Costing

Answer 8

Job Costing - Both
Process Costing - Both
Activity Based Costing - Internal Only
Variable Costing - Internal Only

Question 9

What are some facts about the valuation of a bond?

Answer 9

When the market rate is less than the stated rate, that bond will sell at a premium.

When interest rates are rising, a discount bond will decrease in value. Also, when interest rates rise, the market value of a bond will decrease.

The shorter a bond’s maturity, the less it will change in market value.

Question 10

According to COSO, which components of the internal control integrated framework addresses an entity’s financial reporting objectives?

Answer 10

Risk Assessment

The risk assessment component of the internal control integrated framework includes principles such as financial reporting objectives, risks and fraud risk.

Question 11

If we look at 2 mutually exclusive investments determined using the internal rate of return (IRR) and the NPV method, when would the results of these be different?

Answer 11

The internal rate of return (IRR) is the expected rate of return of an investment, and the net present value (NPV) produces the expected dollar return on an investment. The two methods will in most cases produce the same investment decision, but they may differ if the projects have unequal lives and the size of the investment differs for each project.

Question 12

A firm develops an annual cash budget in order to do what?

Answer 12

Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.

The main reason for preparing a cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing.

Question 13

All of the following are inventory carrying costs except:

Opportunity cost on inventory investment
Inspections
Obsolescence and spoilage
Insurance

Answer 13

Inspections

Inspections are part of order costs, not carrying costs.

Question 14

A valuation estimation technique that can be adapted to start up companies an other situations where earnings are very low is:

Constant Growth (D/(r-g))
Price Sales Ratio
Price Earnings (P/E) ratio
Price Earnings Growth (PEG) ratio

Answer 14

Price Sales Ratio

The price sales ratio uses sales per share as a basis for valuation and can be used in start-up situations or under conditions where earnings data is not meaningful.

Question 15

Price discrimination is accomplished most effectively in markets with what type of characteristic?

Answer 15

Fairly distinct segments of customers

When customers are distinct, a seller can charge different prices to different groups by justifying that the products they are buying are unique to that specific group. There is also less power from the perspective of the customer because they cannot join together as easily and bargain with the seller.

Question 16

The demand curve for a product reflects what?

Answer 16

The impact that price has on the amount of a product purchased.

The demand curve illustrates the maximum quantity of a specific good that consumers are willing and able to purchase at each and every price, all else being equal. Thus, the demand curve reflects the impact that price has on the amount of a product purchased.

Question 17

What are the 5 focus areas identified by the IT Governance Institute for IT governance?

Answer 17

Strategic Alignment
Resource Management
Risk Management
Performance Measurement
Value Delivery

Question 18

Which metric equates the present value of a projects expected cash inflows to the present value of the projects expected cost?

Answer 18

IRR internal rate of return

Question 19

What would increase financial leverage?

Answer 19

Financial Leverage increases when the debt - to - equity ratio increases.

Using a higher percentage of debt (bonds) for future investments would increase financial leverage.

Question 20

When would a flexible budget be appropriate?

Answer 20

A flexible budget is a budget prepared at different levels of operating activity. It is appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since fixed costs do not vary with changes in the level of activity.

You could use a flexible budget for both a marketing budget and a direct material usage budget for example.

Question 21

The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face what?

Answer 21

Capacity constraints and labor shortages, which will put upward pressure on the overall price level.

Question 22

Under monopolistic competition, strategic plans focus on what?

Answer 22

Maintaining the market share and planning for enhanced product differentiation.

Question 23

When would an organization seek to identify events that might negatively or positively impact the achievement of goals?

Answer 23

After Objectives settings and before risk assessment.

Objectives must be known before events can be determined and only after events are determined can the assessment of the risk that they will occur be performed.

Question 24

What are the typical phases of a business cycle?

Answer 24

Expansion, Peak, Contraction, Trough

Question 25

Consider an economy with 1,000 people, 600 who holds jobs, 200 who are looking for work, and 100 who gave up looking for a job, and 100 who are retired or under the age of 16. What is the total labor force?

Answer 25

800 (600+200)

The labor force includes all individuals 16 years of age or older who are either actively working or actively seeking work.

Question 26

What are the three ways the federal reserve can increase the money supply?

Answer 26

1. Decrease the interest rate
2. Decrease the required reserve ratio
3. Purchase Government securities

To decrease the money supply:

1. Increase the interest rate
2. Increase the required reserve ratio
3. Sell Government securities

Question 27

In a free market economy, are resources limited or unlimited?

Answer 27

Limited

Resources are limited and scarce in any economic system. Resources include capital, labor, and natural resources.

Question 28

Related to segregation of duties, which activities should be separated?

Answer 28

The 3 main types of activities that should be separated are:

Authorizing
Recording (accounting)
Safeguarding resources

Question 29

Which of the following types of risk can be reduced by diversification:

High Interest Rates
Inflation
Labor Strikes
Recessions

Answer 29

Labor Strikes

High interest rates, inflation, and recessions are macro-economic terms and can’t be reduced by “diversification”. Labor strikes are on a smaller scale, usually within an industry or one company, and can thus be reduced by diversifying.

Question 30

How would you decide to use a forward or futures hedge?

Answer 30

Forward contracts tend to be used for larger groups of transactions (such as a large volume of accounts receivable), while futures contracts hedge a specific transaction. A futures contract to sell would be appropriate to mitigate the exchange rate risk associated with a single receivable.