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Flashcards in Problem Areas Deck (27):
1

Central Winery manufactured two products, A and B. The estimated demand for product A was 10,000 bottles, and for product B, 30,000 bottles. The estimated sales price per bottle for A was $6.00, and for B, $8.00. The actual demand for product A was 8,000 bottles, and for product B, 33,000 bottles. The actual price per bottle for A was $6.20, and for B, $7.70.
What amount would be the total selling price variance for Central Winery?

A. $3,700 unfavorable.
B. $8,300 unfavorable.
C. $3,700 favorable.
D. $14,100 favorable.

B. $8,300 unfavorable.

The total selling price variance is determined by taking the difference between the actual and estimated selling prices for each product and multiplying the difference by the actual sales volume for the product. It is calculated as follows:
Product A price variance = ($6.20 - $6.00) * 8,000 = $1,600 Favorable
Product B price variance = ($7.70 - $8.00) & 33,000 = $9,900 Unfavorable
Total price variance = $1,600 Favorable + $9,900 Unfavorable = $8,300 Unfavorable

C - Not Correct - This is the total variance for the two products and includes both the price variance and the sales volume variance.

2

According to the 17 COSO control principles, change management primarily relates to which fundamental component of internal control:
A. Control activities.
B. Control environment.
C. Risk assessment.
D. Monitoring.

C. Risk assessment.

According to the COSO principles, risk assessment primarily relates to organizational objectives, risk assessment, fraud, and change management.

D. Not Correct - According to the COSO principles, monitoring primarily relates to establishing ongoing and periodic evaluations, and addressing control deficiencies.

3

Which of the following is most likely to increase aggregate demand?

A. Increased savings by consumers.
B. Increased spending on imported goods.
C. Increasing tax rates and tax revenues.
D. Increased business investment.

B. Increased spending on imported goods.

An increase in spending on imported goods is not likely to increase aggregate demand, but to decrease aggregate demand. To the extent that consumers and businesses buy goods from abroad, other things being equal, aggregate demand in the domestic economy will decrease.

4

Which of the following standard costing variances would be least controllable by a production supervisor?

A. Overhead volume.
B. Overhead efficiency.
C. Labor efficiency.
D. Material usage.

A. Overhead volume.

The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget. The variance can be broken down into the following:
(master budget production volume - actual production volume)(PF)(SQ),
where PF is the predetermined overhead rate for fixed overhead based on direct labor hours, and SQ is the standard quantity of direct labor hours per unit.

The production supervisor has less control over the actual production volume than the factors underlying the other variances listed, because actual production is strongly influenced by sales demand, a factor not under the control of the production supervisor. The supervisor has some responsibility for the volume level, however, when the volume falls below required levels due to maintenance and other internal problems. But typically, the volume variance is not one of the variances that is considered controllable by the production supervisor.

The overhead efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the variable overhead rate per hour.
Although this variance is only partially controllable by the production supervisor, it is considered somewhat more controllable than the overhead volume variance. The supervisor is responsible for assigning workers to jobs based on skill level, for example, and thus, can have some effect on the overhead efficiency variance.

5

In which of the following implementation approaches are users divided into smaller groups and trained on the new system, one group at a time?

A. Parallel.
B. Cold Turkey.
C. Phased.
D. Pilot.

D. Pilot.

Users are divided into groups and are trained on the new system one group at a time.

6

According to the 17 COSO control principles, risk reduction primarily relates to which fundamental component of internal control:

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

A. Control activities.

According to the COSO principles, control activities primarily relate to risk reduction, technology controls, and policies.

7

In a perfect monopoly, which of the following describes the relationship between the marginal revenue curve and the demand curve?

A. The marginal revenue curve is the demand curve.
B. The marginal revenue curve is above the demand curve and the curves diverge as the quantity increases.
C. The marginal revenue curve is below the demand curve and the curves diverge as the quantity increases.
D. The marginal revenue curve is below and parallel to the demand curve.

C. The marginal revenue curve is below the demand curve and the curves diverge as the quantity increases.

In a perfect monopoly market structure, the marginal revenue curve is below the demand curve and the curves diverge as the quantity increases. The basic reason for the relationship is that, facing a downward-sloping demand curve, the firm must continuously lower its selling price in order to sell more units; therefore, marginal revenue must be below demand.

8

Indirect labor is a
A. Prime cost.
B. Conversion cost.
C. Period cost.
D. Nonmanufacturing cost.

B. Conversion cost.

Conversion cost is the sum of direct labor and overhead. It is so named because this is the cost of the efforts that convert raw material into finished goods. Indirect labor is included in overhead and, thus, is part of conversion cost.

9

Which of the following types of exchange risk derives from changes in currency exchange rates that alter the value of future transactions?

A. Translation exchange risk.
B. Economic exchange risk.
C. Transaction exchange risk.
D. Investment exchange risk.

B. Economic exchange risk.

Economic exchange risk derives from changes in currency exchange rates that alter the value of future revenues or costs. Exchange rate changes may make future foreign revenues convert to fewer units of a domestic currency (or other currency) or make future costs convert to more units of a domestic currency (or other currency). These types of changes may reduce the financial viability of future transactions between entities for which the currency exchange rate has changed.

Transaction exchange risk does not derive from changes in currency exchange rates that alter the value of future revenues or costs. Transaction exchange risk derives from the unfavorable impact of changes in currency exchange rates on balances from prior transactions denominated in a foreign currency, including accounts receivable, accounts payable, and other accounts to be settled in a foreign currency. Economic exchange risk derives from changes in currency exchange rates that alter the value of future revenues or costs.

10

The requirements definition document is signed at this stage:
A. Planning and feasibility.
B. Analysis.
C. Design and development.
D. Implementation.

B. Analysis.

Systems analysts work with end users to understand and document business processes and system requirements at this stage. All parties sign off on the requirements definition to signify their agreement with the projects goals and processes at this stage.

11

In an accounting system, a header can be used to

A. Help format a word processing document.
B. Identify data records.
C. Identify file folders.
D. All of the above.

B. Identify data records.

Headers are used to identify data records in an accounting system file.

12

Allen has the following schedule of marginal utility for slices of pizza and bottles of beer:

Pizza...Marginal...Beer...Marginal
Utility Utility

1 100 1 60
2 80 2 50
3 60 3 30
4 50 4 20

If Allen maximizes his total utility by consuming 3 slices of pizza and 3 bottles of beer, which one of the following is the ratio of the price of a slice of pizza to the price of a bottle of beer?

A. 1:1
B. 1:2
C. 2:1
D. 2:2

C. 2:1

Since total utility is achieve when 3 slices of pizza and 3 bottles of beer are consumed, the marginal unit per dollar must be equal at those quantities of pizza and beer. For that to be true, the price of a slice of pizza must be twice that of the price of a bottle of beer, as computed by the marginal utility of beer divided into the marginal utility of pizza. That calculation would be 60/30, which is 2:1.

13

Which one of the following named risks cannot be mitigated through diversification of investments?

A. Unsystematic risk.
B. Systematic risk.
C. Firm-specific risk.
D. Company unique risk.

A. Unsystematic risk.

Unsystematic risk, also called diversifiable risk, can be mitigated or eliminated through diversification of investments.

14

Which of the following statements regarding monopolistic competition is correct?

A. All products are homogeneous.
B. There are barriers to entry into the market.
C. Firms can make normal profits in the short run.
D. Firms can make normal profits in the long run.

C. Firms can make normal profits in the short run.

In monopolistic competition, firms can make a normal profit in the short run. They will do so if their average total cost is less than the market price for the good or service. In the long run, however, more firms will enter the market, resulting in a lower demand curve for each firm, such that each firm just breaks even.

15

In evaluating the economic feasibility of a capital project, the discount rate (or hurdle rate of return) must be determined in advance when using the:

A. Payback period method.
B. Accounting rate of return method.
C. Net present value method.
D. Internal rate of return method.

C. Net present value method.

The net present value method of evaluating capital projects uses a discount rate (also called hurdle rate or cost of capital rate) to discount future cash flows (or savings) to their present value. Thus, the discount rate or hurdle rate must be established in advance of using the method.
The present value of future cash inflows (or savings) is then subtracted from the cost (present values) of the project.
If the net present value is positive, the project is economically feasible.

16

In computing return on total assets, interest expense has to be added back to net income.
True
False

True

17

The price-earnings ratio is computed only for common stock.
True
False

True

18

If an entity's price-earnings ratio declines, it likely reflects that investors believe the entity's growth potential has declined.
True
False

True

19

If net income increases while assets invested remains constant, the return on assets will decrease.
True
False

False

If net income increases while assets invested remains constant, the return on assets will INCREASE.

(Net Income + Interest Expense) / Avg Assets

20

The earnings per share ratio is computed only for common stock.
True
False

True

21

Return on owners' equity uses both common and preferred shareholders' equity in the denominator.
True
False

True

22

In computing the dividend payout rate for common shareholders, the dividends received by common shareholders is divided by total net income.
True
False

False

Dividend payout rate = Dividends received by CS / Net income TO COMMON SHAREHOLDER

23

In computing return on common stock equity, all preferred dividends in arrears must be subtracted from net income in the numerator.
True
False

False

Only dividends for CURRENT year (whether paid or not)

24

Profitability ratios typically are computed using some measure of revenue or dividends.
True
False

True

25

In computing earnings per share, an amount equal to preferred dividends for the current period must be subtracted from net income in the numerator.
True
False

True

26

The rate of return earned by common shareholders is measured by the common stock yield.
True
False

True

27

In computing return on common stock equity, only common stockholders' equity at year-end should be used.
True
False

False

Avg of beginning and ending