CMA Exam Support Package PDF

CMA Exam Support Package Table of Contents CMA Part 1 Examination Practice Questions page 2 CMA Part 2 Examination Practice Questions page 188 CMA Part 1 & 2 Practice Essays page 380 CMA Part 1 & 2 Practice Essay Answe...

CMA Exam Support Package Table of Contents CMA Part 1 Examination Practice Questions page 2 CMA Part 2 Examination Practice Questions page 188 CMA Part 1 & 2 Practice Essays page 380 CMA Part 1 & 2 Practice Essay Answers page 436 Additional Part 1 Practice Questions page 513 Additional Part 1 Practice Question Answers page 541 Additional Part 2 Practice Questions page 542 Additional Part 2 Practice Question Answers page 567 Additional Part 1 & 2 Practice Essays page 568 Additional Part 1 & 2 Practice Essay Answers page 574 Suggested Reading List page 579 CMA Exam Ratio Definitions page 584 Exam Test Taking Strategies page 588 Candidate Resources page 590 1 CMA Part 1 – Financial Planning, Performance, and Control Examination Practice Questions © Copyright 2019 Institute of Certified Management Accountants 2  CMA Part 1 – Financial Planning, Performance and Control Examination Practice Questions Section A: External Financial Reporting Decisions 1. CSO: 1A1a LOS: 1A1a The financial statements included in the annual report to the shareholders are least useful to which one of the following? a. Stockbrokers. b. Bankers preparing to lend money. c. Competing businesses. d. Managers in charge of operating activities. 2. CSO: 1A1a LOS: 1A1e When a fixed asset is sold for less than book value, which one of the following will decrease? a. Total current assets. b. Current ratio. c. Net profit. d. Net working capital. 3. CSO: 1A1a LOS: 1A1e On July 15, a company entered into a three-month agreement to rent a machine the company needed to complete a special order. The machine would be delivered on August 1, and rental payments are due on the first day of each rental month. The effect this event would have on the company’s July 31 financial statements would be to a. cause no change in assets, liabilities, or income. b. increase both assets and income. c. increase both assets and liabilities. d. increase liabilities and decrease income. 4. CSO: 1A1a LOS: 1A1d All of the following are limitations to the information provided on the statement of financial position except the a. quality of the earnings reported for the enterprise. b. judgments and estimates used regarding the collectability, salability, and longevity of assets. c. omission of items that are of financial value to the business such as the worth of the employees. d. lack of current valuation for most assets and liabilities. 3 5. CSO: 1A1a LOS: 1A1b A statement of financial position provides a basis for all of the following except a. computing rates of return. b. evaluating capital structure. c. assessing liquidity and financial flexibility. d. determining profitability and assessing past performance. 6. CSO: 1A1b LOS: 1A1b An income statement could be used by an external investor for all of the following purposes except to a. analyze the company’s performance compared to the budget. b. compare the company’s results to those of its competitors. c. assess the risk of the company achieving future profitability. d. predict the company’s future revenues. 7. CSO: 1A1b LOS: 1A1b The financial statement that provides a summary of the firm’s operations for a period of time is the a. income statement. b. statement of financial position. c. statement of shareholders’ equity. d. statement of retained earnings. 8. CSO: 1A1b LOS: 1A1e Bertram Company had a balance of $100,000 in Retained Earnings at the beginning of the year and $125,000 at the end of the year. Net income for this time period was $40,000. Bertram’s Statement of Financial Position indicated that Dividends Payable had decreased by $5,000 throughout the year, despite the fact that both cash dividends and a stock dividend were declared. The amount of the stock dividend was $8,000. When preparing its Statement of Cash Flows for the year, Bertram should show Cash Paid for Dividends as a. $20,000. b. $15,000. c. $12,000. d. $5,000. 4 9. CSO: 1A1b LOS: 1A1c All of the following are elements of an income statement except a. expenses. b. shareholders’ equity. c. gains and losses. d. revenue. 10. CSO: 1A1c LOS: 1A1b The statement of shareholders’ equity shows a a. reconciliation of the beginning and ending balances in shareholders’ equity accounts. b. listing of all shareholders’ equity accounts and their corresponding dollar amounts. c. computation of the number of shares outstanding used for earnings per share calculations. d. reconciliation of the beginning and ending balances in the Retained Earnings account. 11. CSO: 1A1d LOS: 1A1e Which one of the following items could be identified on the cash flow statement prepared using the indirect method? a. The payment of interest expense of $200,000. b. A change in unrealized holding gains of $50,000. c. A settlement of a lawsuit that was previously accrued. d. Depreciation related to buildings and equipment. 12. CSO: 1A1d CSO: 1A1d Consider the following financial data for a company that is preparing its cash flow statement. Amortization expense = $150,000 Cash dividends paid to common shareholders = $75,000 Net income = $1,500,000 Work-in-process inventory increase over the prior year = $300,000 Gain on sale of equipment = $50,000 Using the indirect method, cash flow from operating activities would be a. $1,225,000. b. $1,300,000. c. $1,350,000. d. $1,375,000. 5 13. CSO: 1A1d LOS: 1A1c Dividends paid to company shareholders would be shown on the statement of cash flows as a. operating cash inflows. b. operating cash outflows. c. cash flows from investing activities. d. cash flows from financing activities. 14. CSO: 1A1d LOS: 1A1c All of the following are classifications on the statement of cash flows except a. operating activities. b. equity activities. c. investing activities. d. financing activities. 15. CSO: 1A1d LOS: 1A1c The purchase of fixed assets should be accounted for on the statement of cash flows as a(n) a. operating activity. b. investing activity. c. financing activity. d. noncash investing and financing activity. 16. CSO: 1A1d LOS: 1A1c A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders? a. Financing, investing, operating. b. Investing, financing, operating. c. Operating, financing, investing. d. Operating, investing, financing. 17. CSO: 1A1d LOS: 1A1e Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli’s Statement of Cash Flows as a(n) a. financing activity. b. investing activity. c. operating activity. d. non-cash financing and investing activity. 6 18. CSO: 1A1d LOS: 1A1e Which one of the following should be classified as an operating activity on the statement of cash flows? a. A decrease in accounts payable during the year. b. An increase in cash resulting from the issuance of previously authorized common stock. c. The purchase of additional equipment needed for current production. d. The payment of a cash dividend from money arising from current operations. 19. CSO: 1A1d LOS: 1A1b When using the statement of cash flows to evaluate a company’s continuing solvency, the most important factor to consider is the cash a. balance at the end of the period. b. flows from (used for) operating activities. c. flows from (used for) investing activities. d. flows from (used for) financing activities. 20. CSO: 1A1d LOS: 1A1c The most commonly used method for calculating and reporting a company’s net cash flow from operating activities on its statement of cash flows is the a. direct method. b. indirect method. c. single-step method. d. multiple-step method. 21. CSO: 1A1d LOS: 1A1c The presentation of the major classes of operating cash receipts (such as receipts from customers) less the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the a. direct method of calculating net cash provided or used by operating activities. b. cash method of determining income in conformity with generally accepted accounting principles. c. format of the statement of cash flows. d. indirect method of calculating net cash provided or used by operating activities. 7 22. CSO: 1A1d LOS: 1A1e Which one of the following would result in a decrease to cash flow in the indirect method of preparing a statement of cash flows? a. Amortization expense. b. Decrease in income taxes payable. c. Proceeds from the issuance of common stock. d. Decrease in inventories. 23. CSO 1A1d LOS 1A1b The information reported in the statement of cash flows should help investors, creditors, and others to assess all of the following except the a. company’s ability to pay dividends and meet obligations. b. company’s ability to generate future cash flows. c. management with respect to the efficient and profitable use of the firm’s resources. d. cash and noncash investing and financing transactions during the period. 24. CSO: 1A1d LOS: 1A1g Larry Mitchell, Bailey Company’s controller, is gathering data for the Statement of Cash Flows for the most recent year end. Mitchell is planning to use the indirect method to prepare this statement, and has made the following list of cash inflows for the period. Net income of $100,000. Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000. Proceeds from the issuance of additional company stock totaling $10,000. The correct amount to be shown as net cash provided by operating activities is a. $100,000. b. $135,000. c. $225,000. d. $235,000. 25. CSO: 1A1d LOS: 1A1e During the year, Deltech Inc. acquired a long-term productive asset for $5,000, and also borrowed $10,000 from a local bank. These transactions should be reported on Deltech’s Statement of Cash Flows as a. Outflows for Investing Activities, $5,000; Inflows from Financial Activities, $10,000. b. Inflows from Investing Activities, $10,000; Outflows for Financing Activities, $5,000. c. Outflows for Operating Activities, $5,000; Inflows from Financing Activities, $10,000. d. Outflows for Financing Activities, $5,000; Inflows from Investing Activities, $10,000. 8 26. CSO: 1A1d LOS: 1A1e Atwater Company has recorded the following payments for the current period. Purchase Trillium stock $300,000 Dividends paid to Atwater shareholders 200,000 Repurchase of Atwater Company stock 400,000 The amount to be shown in the Investing Activities Section of Atwater’s Cash Flow Statement should be a. $300,000. b. $500,000. c. $700,000. d. $900,000. 27. CSO: 1A1d LOS: 1A1e Carlson Company has the following payments recorded for the current period. Dividends paid to Carlson shareholders $150,000 Interest paid on bank loan 250,000 Purchase of equipment 350,000 The total amount of the above items to be shown in the Operating Activities Section of Carlson’s Cash Flow Statement should be a. $150,000. b. $250,000. c. $350,000. d. $750,000. 28. CSO: 1A1d LOS: 1A1e Barber Company has recorded the following payments for the current period. Interest paid on bank loan $300,000 Dividends paid to Barber shareholders 200,000 Repurchase of Barber Company stock 400,000 The amount to be shown in the Financing Activities Section of Barber’s Cash Flow Statement should be a. $300,000. b. $500,000. c. $600,000. d. $900,000. 9 29. CSO: 1A1d LOS: 1A1e Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in accounts receivable 300,000 Decrease in inventory 100,000 Increase in accounts payable 200,000 Depreciation expense 400,000 Cash received from the issue of common stock 800,000 Cash paid for dividends 80,000 Cash paid for the acquisition of land 1,500,000 Kristina’s cash flow from financing activities for the year is a. $(80,000). b. $720,000. c. $800,000. d. $3,520,000. 30. CSO: 1A1d LOS: 1A1c An accountant with Nasbo Enterprises Inc. has gathered the following information in order to prepare the Statement of Cash Flows for the current year. Net income of $456,900 includes a deduction of $45,600 for depreciation expense. The company issued $300,000 of dividends this year and purchased one new building for $275,000. The balance sheets from the current period and prior period included the following balances. Prior Year Current Year Accounts receivable, net $ 56,860 $ 45,300 Accounts payable 12,900 10,745 Inventory 186,700 194,320 Using the indirect method, what is the amount of cash provided by operating activities? a. $202,500. b. $405,205. c. $504,285. d. $521,405. 10 31. CSO: 1A1d LOS: 1A1e For the fiscal year just ended, Doran Electronics had the following results. Net income $920,000 Depreciation expense 110,000 Increase in accounts payable 45,000 Increase in accounts receivable 73,000 Increase in deferred income tax liability 16,000 Doran’s net cash flow from operating activities is a. $928,000. b. $986,000. c. $1,018,000. d. $1,074,000. 32. CSO: 1A1d LOS: 1A1e Three years ago, James Company purchased stock in Zebra Inc. at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the Investing Activities Section of James’ Statement of Cash Flows as a. Zero. b. $50,000. c. $100,000. d. $150,000. 11 33. CSO: 1A1d LOS: 1A1e Madden Corporation’s controller has gathered the following information as a basis for preparing the Statement of Cash Flows. Net income for the current year was $82,000. During the year, old equipment with a cost of $60,000 and a net carrying value of $53,000 was sold for cash at a gain of $10,000. New equipment was purchased for $100,000. Shown below are selected closing balances for last year and the current year. Last Year Current Year Cash $ 39,000 $ 85,000 Accounts receivable net 43,000 37,000 Inventories 93,000 105,000 Equipment 360,000 400,000 Accumulated depreciation - equipment 70,000 83,000 Accounts payable 22,000 19,000 Notes payable 100,000 100,000 Common stock 250,000 250,000 Retained earnings 93,000 175,000 Madden’s cash inflow from operating activities for the current year is a. $63,000. b. $73,000. c. $83,000. d. $93,000. 34. CSO: 1A1e LOS: 1A1j A leading manufacturer of electric vehicles has accumulated customer driving interaction data through its unique pilot driver-assist program. This data will be used to further develop more advanced autonomous features that the company plans to implement in the near future on its most popular model. In integrated reporting, the system used to accumulate and analyze the driving data is best categorized as a. human capital. b. intellectual capital. c. natural capital. d. manufactural capital. 35. CSO: 1A1e LOS: 1A1h Which one of the following statements regarding an integrated report is correct? a. It only contains financial information. b. It only focuses on the creation of value over the long term. c. It should include material matters, both positive and negative. d. It must be included as a prominent and accessible part of another report. 12 36. CSO: 1A2a LOS: 1A2a A change in the estimate for bad debts should be a. treated as an error. b. handled retroactively. c. considered as an extraordinary item. d. treated as affecting only the period of the change. 37. CSO: 1A2a LOS: 1A2c Finer Foods Inc., a chain of supermarkets specializing in gourmet food, has been using the average cost method to value its inventory. During the current year, the company changed to the first-in, first-out method of inventory valuation. The president of the company reasoned that this change was appropriate since it would more closely match the flow of physical goods. This change should be reported on the financial statements as a a. cumulative-effect type accounting change. b. retroactive-effect type accounting change. c. change in an accounting estimate. d. correction of an error. 38. CSO: 1A2a LOS: 1A2l Best Billiard Company owns 40% of Supreme Table Company’s stock at a historical cost of $300,000. Supreme Table recently reported their earnings for the prior year. Best Billiard’s proportional share of Supreme Table’s prior year net income was $10,000. Best Billiard also received $15,000 in dividends from Supreme Table in the prior year. Best Billiard uses the equity method as the accounting treatment for this investment. Based on the information presented, the proper presentation of this investment would result in Best Billiard reporting a. a decrease in the book value of their investment in Supreme Table. b. an increase in the book value of their investment in Supreme Table. c. their investment in Supreme Table at the original cost. d. consolidated financial statements with Supreme Table. 39. CSO: 1A2a LOS: 1A2k Under U.S. GAAP, which one of the following statements best describes the effects on the financial statements resulting from a change in the accounting classification for a security from available-for- sale to held-to-maturity? a. Comprehensive income will be impacted in the future by unrealized gains/losses. b. Net income will not be impacted in the future by unrealized gains/losses. c. The balance sheet will be impacted by unrealized gains/losses. d. No change will occur regarding the accounting treatment for unrealized gains/losses. 13 40. CSO: 1A2b LOS: 1A2q A company has $100 million of debt that is due in March Year 3. In December Year 2, the company entered into a non-cancelable agreement with its lender to refinance the debt with the same interest rate, and the full principal is due in December Year 5. How should the debt be classified on the December Year 2 balance sheet of the company? a. Classified as a current liability. b. Classified as a long-term liability. c. Considered as an off-balance sheet liability. d. Classified as a contingent liability. 41. CSO: 1A2c LOS: 1A2dd Which one of the following transactions would affect retained earnings but not additional paid-in capital? a. Declaration of a small stock dividend. b. Decrease in the value of an available-for-sale investment. c. Impairment of a long-term asset. d. Purchase of treasury stock using the cost method. 42. CSO: 1A2d LOS: 1A2nn During the month of October, a company purchased 1,000 units of inventory for $500 per unit and sold 900 of these units which represented 10% of the company’s annual sales budget in units. The company also incurred administrative costs of $300,000 during October. By applying the matching principle, the total amount of the company’s expenses on its October income statement is a. $750,000. b. $800,000. c. $810,000. d. $860,000. 14 43. CSO: 1A2d LOS: 1A2jj A consulting company won a $20.8 million three-year contract. The contract requires software development, hosting, and maintenance over three years. The total estimated cost of the project is $17 million, with $10 million expected in year one, $5 million in year two, and $2 million in year three. The billing schedule shows that $5 million will be billed upon start of the work, and then $5 million at each year end. At the end of the first year, the actual cost incurred is $9 million, and total estimated costs are unchanged at $17 million. Using the percentage-of-completion method, how much revenue should be recognized at the end of the first year? a. $11 million. b. $10 million. c. $5 million. d. No revenue. 44. CSO: 1A2d LOS: 1A2jj At the beginning of the year, a company entered into a long-term contract to build a facility for $40 million. Half of the construction would be completed each year for the next two years. At the beginning of the following year, the company received a second contract to construct a second facility for $80 million. This project will last four years with 30%, 25%, 25%, and 20% of the facility completed during the four years, respectively. If the company recognized revenue of $40 million in the second year, the method it used to account for long-term contracts was the a. completed-contract method under IFRS. b. completed-contract method under U.S. GAAP. c. percentage-of-completion method under IFRS. d. percentage-of-completion method under U.S. GAAP. 45. CSO: 1A2e LOS: 1A2ss A company is preparing its financial statements in accordance with U.S. GAAP. Listed below are select financial data for the company. Net income = $950,000 Depreciation = $40,000 Investment by owners = $60,000 Unrealized gain on available-for-sale securities = $90,000 Foreign currency translation loss = $20,000 What is the amount that would be reported as comprehensive income? a. $970,000. b. $1,020,000. c. $1,060,000. d. $1,120,000. 15 46. CSO: 1A2f LOS: 1A2uu A fundamental difference between U.S. GAAP and IFRS is that a. reversal of inventory write-downs is permitted under IFRS; however, reversal of inventory write- downs is prohibited under U.S. GAAP. b. distribution costs are included in cost of sales under U.S. GAAP; however, distribution costs are excluded from cost of sales under IFRS. c. inventory is generally valued at the lower of cost or market under IFRS; however, inventory is generally valued at the lower of cost or net realizable value under U.S. GAAP. d. marketing costs are included in cost of sales under U.S. GAAP; however, marketing costs are excluded from cost of sales under IFRS. 16  Answer for Section A: External Financial Reporting Decisions 1. Correct answer d. The annual report to shareholders is prepared in accordance with generally accepted accounting principles and is designed to provide information that is pertinent to investors and other external users. Managers responsible for operating activities use internal reports designed to provide information about various aspects of internal functions that measure the effectiveness and efficiency of operations. 2. Correct answer c. The sale of a fixed asset for less than book value will decrease net profit, as the loss on the sale will be recognized on the Income Statement. 3. Correct answer a. Cash has not yet been paid and no expense was incurred before the machine arrived. A recordable transaction has therefore not yet occurred. 4. Correct answer a. The quality of the earnings reported for the enterprise cannot be determined from the Income Statement and is therefore a limitation of that statement. All of the other characteristics listed refer to limitations of the Statement of Financial Position. 5. Correct answer d. The Income Statement is used to determine a firm’s profitability and past performance can be evaluated using prior period income statements. All of the other characteristics listed can be determined from the Statement of Financial Position. 6. Correct answer a. An external user would not have access to the company’s budgeted numbers. 7. Correct answer a. The purpose of the Income Statement is to provide a summary of a firm’s operating activities for a period of time. 8. Correct answer c. Bertram’s Cash Paid for Dividends is $12,000 as calculated below. $100,000 + $40,000 - $8,000 + $5,000 – X = $125,000 $137,000 – X = $125,000 X = $12,000 9. Correct answer b. Shareholders’ Equity is presented on the Statement of Financial Position (Balance Sheet) while all the other elements listed are components of the Income Statement. 10. Correct answer a. Firms are required to present reconciliations of the beginning and ending balances of their shareholder accounts; this is accomplished by presenting a Statement of Shareholders’ Equity. 11. Correct answer d. D is correct as depreciation is shown on both the income statement and the statement of cash flows. A and C would be shown in the income statement and B is not shown in either these statements as it is unrealized. 12. Correct answer b. Net income + Amortization expense – inventory increase - Gain on sale of equipment a. $1,500,000 + 150,000 - 300,000 - 50,000 - 75,000 = $1,225,000 b. $1,500,000 + 150,000 - 300,000 - 50,000 = $1,300,000 17  c. $1,500,000 + 150,000 - 300,000 = $1,350,000 d. $1,500,000 + 150,000 - 300,000 - 50,000 + 75,000 = $1,375,000 13. Correct answer d. The payment of dividends is a financing activity and should be presented as a cash outflow in that section of the Cash Flow Statement. 14. Correct answer b. The Cash Flow Statement does not have an “equity activities” section; equity transactions are presented as financing activities. 15. Correct answer b. The purchase of fixed assets is considered as an investing activity on the statement of cash flows. 16. Correct answer d. The order in which cash activities should be listed on the Cash Flow Statement is Operating Activities, Investing Activities, and Financing Activities. 17. Correct answer d. This transaction would be presented as a non-cash financing and investing activity as the full amount of the acquisition cost was mortgaged. 18. Correct answer a. Changes in current assets and current liabilities are presented as operating activities on the Cash Flow Statement. The other transactions listed are investing or financing activities. 19. Correct answer b. A company’s solvency is best represented by the amount of cash that can be generated internally rather than having to borrow from outside sources. This is shown on the Cash Flow Statement as flows from operating activities. 20. Correct answer b. The two methods used to calculate the cash flow from operating activities are the direct method and the indirect method. The indirect method is used more frequently than the direct method. 21. Correct answer a. The direct method of calculating cash flow from operating activities presents major classes of operating cash receipts less major classes of operating cash disbursements. 22. Correct answer b. Decreases in current liabilities such as accounts payable and income taxes payable are deducted from net income when determining cash flow indicating that cash was used to decrease the balances in these accounts. 23. Correct answer c. The statement of cash flows report cash inflows, outflows, and net changes in cash resulting from operating, investing and financing activities. This can also include certain noncash activities. The statement of cash flows does not provide sufficient information to evaluate the performance of management with respect to the uses of the firm’s resources. 24. Correct answer a. Bailey’s net income of $100,000 is a cash flow from operating activities. The sale of investment securities for $125,000 is an investing activity while the issuance of company stock is a financing activity. 25. Correct answer a. Deltech’s $5,000 acquisition of a productive asset is an outflow for investing activities, while the bank loan is an inflow for financing activities. 18 26. Correct answer a. Atwater’s cash flow for investing activities is $300,000 for the purchase of Trillium stock. Both the payment of dividends and the repurchase of Atwater stock are financing activities. 27. Correct answer b. The interest paid on the bank loan ($250,000) should be included as an operating activity on Carlson’s cash flow statement. The dividend payment is a financing activity and the equipment purchase is an investment activity. 28. Correct answer c. The Financing Section of Barber’s Cash Flow Statement should include the dividend payment and the repurchase of Barber’s stock for a total of $600,000. 29. Correct answer b. Kristina’s cash flow from financing activities should be $720,000 ($800,000 inflow from the issuance of common stock less the $80,000 payment of dividends). 30. Correct answer c. Net income $ 456,900 Depreciation on fixed assets 45,600 Decrease in accounts receivable, net 11,560 Increase in inventory (7,620) Decrease in accounts payable (2,155) Cash provided by operating activities $ 504,285 31. Correct answer c. Doran’s net cash flow from operating activities is $1,018,000 as shown below. Net income $ 920,000 Depreciation expense + 110,000 Increase in payables + 45,000 Increase in receivables - 73,000 Increase in tax liability + 16,000 Cash flow $1,018,000 32. Correct answer d. James should include the total value of the sale ($150,000) in the Investing Activities Section of the Cash Flow Statement. 33. Correct answer c. Madden’s net cash flow from operating activities is $83,000 as shown below. Net income $82,000 Decrease in receivables + 6,000 Increase in inventory -12,000 Depreciation expense +20,000 Decrease in payables - 3,000 Gain on equipment sale -10,000 Cash flow $83,000 19 34. Correct answer b. Intellectual capital represents the intangibles critical to the organization, it includes resources such as patents, copyrights, intellectual property and organizational systems. 35. Correct answer is c. An integrated report should include all material matters, both positive and negative, in a balanced way and without material error. “a”, An integrated report contains relevant information, both financial and other. “b” An integrated report should disclose information affect the organization’s ability to create value over the short, medium and long term. “d” An integrated report may be either a standalone report or be part of another report or communication. 36. Correct answer d. A change in estimate for bad debts should be treated as affecting only the period of the change. Changes in estimates are viewed as normal recurring corrections and retrospective treatment is prohibited. 37. Correct answer b. Finer Foods’ change in inventory method should be presented on a retrospective basis to maintain consistency and comparability. 38. Correct answer a. 300,000+10,000-15,000=295,000 book value of investment decreased by $5,000 39. Correct answer b. Unrealized gains/losses on debt securities classified as available-for-sale securities are recognized in comprehensive income, whereas they are not recognized in either net income or comprehensive income if the debt security is classified as a held-to-maturity security. Therefore, in this case the recognition of unrealized gains/losses in other comprehensive income will discontinue, which means the balance sheet will no longer be impacted as well. Option “a” is not correct because net income is not impacted by unrealized gains/losses on held-to-maturity securities. Option “c” is not correct because unrealized gains/losses will no longer be recognized in other comprehensive income, so the balance sheet is not impacted. Option “d” is not correct because a change will take place (no further recognition of the changes in fair value in other comprehensive income). 40. The debt should be classified as long-term because the Company has the intent and ability to refinance the debt and the agreement was entered into prior to the end of Year 2. Since no principal payments are due until Year 5 when there will be a lump-sum payment, the entire amount should be classified as long-term. 41. Correct answer c. a. This decreases retained earnings and increases stock dividends distributable, part of paid-in capital, so both retained earnings and paid-in capital are affected. b. This is recorded as an unrealized loss and is shown in other comprehensive income, affecting neither retained earnings nor paid-in capital. c. This results in a loss on the income statement that would reduce retained earnings but not affect paid-in capital. d. Treasury stock is its own account, directly affecting neither retained earnings nor paid-in capital, shown as a deduction from paid-in capital and retained earnings. 20 42. Correct answer a. a. (900 x $500) + 300,000 b. (1,000 x $500) + 300,000 c. (300,000 x 12 months)/(900/.10) = $400/unit; ($500 + 400) x 900 d. (300,000 x 12 months)/(900/.10) = $400/unit; ($500 x 1,000) + ($400 x 900) 43. Correct answer a When trying to compute revenue in any given year for a particular contract, under percentage completion project, there are four main steps to follow: ❖ Estimate total cost of the project $17.0M. ❖ Compute % of project completed 52.9% = Total cost to date $9.0M /total estimated cost of contract $17.0M. ❖ Compute life to date revenue earned $10.6M = Total project revenue $20.8M X % completed 52.9%. ❖ Deduct life to date revenue recognized prior month (which is zero since this is the first year) from $11.0M. 44. Correct answer b. a. IFRS does not allow the completed-contract method. b. $40 million for the completion of the first contract c. $40 million/2 years + $80 million/4 years assuming revenue claimed evenly over all years, or ($40 x 50% ) + ($80 x 25% from wrong year), but revenue under percentage-of-completion would be ($40 million x 50%) + ($80 x 30%), or $44 million d. See “c”. 45. Correct answer b. Top Golf Products’ comprehensive income = Net Income + Unrealized gain on available for sale securities - Foreign currency translation loss 950,000 + 90,000 – 20,000 = 1,020,000 46. Correct answer a. b. and d. are not the differences between U.S. GAAP and IFRS. c. inventory is generally valued at the lower of cost or market under U.S. GAAP; however, inventory is generally valued at the lower of cost or net realizable value under IFRS. 21 Section B: Planning, Budgeting and Forecasting 1. CSO: 1B1a LOS: 1B1d The management of a food-processing company is analyzing its internal strengths and weaknesses as part of its strategic planning process. Which one of the following is most likely considered a strategic internal variable for the company? a. Changes in the legal code for food processors. b. The economic forces that regulate the local labor supply. c. Technological changes in food-processing methods. d. The culture at the company’s food-processing plant. 2. CSO: 1B1b LOS: 1B1e A company is in the process of developing its mission statement. Which one of the following is least appropriate for a company’s mission statement? a. Defining the purpose of the company. b. Identifying what product or service the company is providing. c. Promoting a common shared goal on the part of employees. d. Explaining the tactics for increasing market share in a specific region. 3. CSO: 1B1c LOS: 1B1h A company sells a product that is aimed at the broad mass market but is perceived as unique throughout its industry. The company is earning above average returns on the product. Which one of the following is the most appropriate term for the competitive strategy followed by the company? a. Market focus. b. Financial leadership. c. Cost focus. d. Differentiation. 4. CSO: 1B1d LOS: 1B1i The concurrent action of basic competitive forces as defined by Porter’s 5 forces model determines the a. strategy that a firm should follow to achieve its objectives. b. rivalry inside the industry. c. entrance barriers that potential players must face to get into the industry. d. long-term profitability and the competitive intensity of the industry. 22 5. CSO: 1B1d LOS: 1B1i After leading the market for the past decade, the growth of product ABC is slowing down. In this stage of its life cycle, the product is still generating significant amounts of cash flows that cover the company’s investment into new product innovations. According to the BCG Growth-Share Matrix, product ABC is most likely an example of a a. star. b. cash cow. c. question mark. d. dog. 6. CSO: 1B2a LOS: 1B2a The major objectives of budgeting are to a. foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among the organization’s segments. b. foster the planning of operations, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. c. define responsibility centers, provide a framework for performance evaluation, and promote communication and coordination among the organization’s segments. d. define responsibility centers, facilitate the identification of blame for missed budget predictions, and ensure goal congruence between superiors and subordinates. 7. CSO: 1B2a LOS: 1B2c The management of a company has just completed a thorough review of its strategic goals and formulated the company’s long-term plan and short-term objectives. The most appropriate next step for the company is the development of a a. financial budget. b. operating budget. c. capital budget. d. master budget. 23 8. CSO: 1B2a LOS: 1B2b Cerawell Products Company is a ceramics manufacturer that is facing several challenges in its operations due to economic and industry conditions. The company is currently preparing its annual plan and budget. Which one of the following is subject to the least control by the management of Cerawell in the current fiscal year? a. A new machine that was purchased this year has not helped reduce Cerawell’s unfavorable labor efficiency variances. b. A competitor has achieved an unexpected technological breakthrough that has given them a significant quality advantage, and has caused Cerawell to lose market share. c. Vendors have asked that the contract price for the goods they supply to Cerawell be renegotiated and adjusted for inflation. d. Experienced employees have decided to terminate their employment with Cerawell and go to work for the competition. 9. CSO: 1B2a LOS: 1B2e All of the following are advantages of the use of budgets in a management control system except that budgets a. force management planning. b. provide performance criteria. c. promote communication and coordination within the organization. d. limit unauthorized expenditures. 10. CSO: 1B2b LOS: 1B2e When properly developed and administered, budgets provide the following advantages to the organization except to a. provide a structure for measuring performance. b. motivate managers and other employees. c. ensure that the organization makes a profit. d. promote the efficient allocation of resources. 11. CSO: 1B2b LOS: 1B2e In developing the budget for the next year, which one of the following approaches would most likely result in a successful budget with the greatest amount of positive motivation and goal congruence? a. Permit the divisional manager to develop the goal for the division that in the manager’s view will generate the greatest amount of profits. b. Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met. c. Have the divisional and senior management jointly develop goals and objectives while constructing the corporation’s overall plan of operation. d. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan. 24 12. CSO: 1B2b LOS: 1B2e Which one of the following statements concerning approaches for the budget development process is correct? a. The authoritative approach to budgeting discourages strict adherence to strategic organizational goals. b. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year. c. With the information technology available, the role of budgets as an organizational communication device has declined. d. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget. 13. CSO: 1B2b LOS: 1B2e Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of a. historical financial data. b. input from several levels of management. c. top management support. d. adherence to rigid budgets during the year. 14. CSO: 1B2b LOS: 1B2e All of the following are disadvantages of authoritative budgeting as opposed to participatory budgeting, except that it a. may result in a budget that is not possible to achieve. b. may limit the acceptance of proposed goals and objectives. c. reduces the communication between employees and management. d. reduces the time required for budgeting. 15. CSO: 1B2d LOS: 1B2m All of the following statements concerning standard costs are correct except that a. time and motion studies are often used to determine standard costs. b. standard costs are usually set for one year. c. standard costs can be used in costing inventory accounts. d. standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis. 25 16. CSO: 1B2d LOS: 1B2o One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers, the immediate supervisors for whom the standards are being developed, and the accountants and engineers, before the standards are accepted by top management. This approach would best be characterized as a(n) a. imposed approach. b. authoritative approach. c. engineering approach. d. participative approach. 17. CSO: 1B2d LOS: 1B2n When compared with ideal standards, practical standards a. produce lower per-unit product costs. b. result in a less desirable basis for the development of budgets. c. incorporate very generous allowances for spoilage and worker inefficiencies. d. serve as a better motivating target for manufacturing personnel. 18. CSO: 1B2d LOS: 1B2q Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $36.45 per unit. It is expected that the component’s cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit depending on the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the a. current actual cost plus the forecasted 10% price increase. b. lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range. c. highest price in the anticipated range to ensure that there are only favorable purchase price variances. d. price agreed upon by the purchasing manager and the appropriate level of company management. 19. CSO: 1B2d LOS: 1B2m Which one of the following will allow a better use of standard costs and variance analysis to help improve managerial decision-making? a. Company A does not differentiate between variable and fixed overhead in calculating its overhead variances. b. Company B uses the prior year’s average actual cost as the current year’s standard. c. Company C investigates only negative variances. d. Company D constantly revises standards to reflect learning curves. 26 20. CSO: 1B2d LOS: 1B2m After performing a thorough study of Michigan Company’s operations, an independent consultant determined that the firm’s labor standards were probably too tight. Which one of the following facts would be inconsistent with the consultant’s conclusion? a. A review of performance reports revealed the presence of many unfavorable efficiency variances. b. Michigan’s budgeting process was well-defined and based on a bottom-up philosophy. c. Management noted that minimal incentive bonuses have been paid in recent periods. d. Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid, sustained declines. 21. CSO: 1B2d LOS: 1B2t A company pays its production manager an annual bonus based on how well the manager performs against the production department’s annual budgets. The production manager has been overestimating budgeted costs the past few years in order to obtain a higher bonus payment. The production manager’s actions are best described as a. motivating employee effort. b. building budgetary slack. c. balancing production costs. d. setting budgeted performance. 27 22. CSO: 1B3a LOS: 1B3b An international nonprofit organization finances medical research. The majority of its revenue and support comes from fund-raising activities, investments, and specific grants from an initial sponsoring corporation. The organization has been in operation for over 15 years, and has just finished a major fund-raising event that raised $500 million for the current fiscal period. The following are selected data from recent financial statements (in millions of dollars). Current Year Past Year Revenue $500 $425 Investments (average balances) 210 185 Investment income 16 20 Administrative expense 10 8 A financial analyst wants to determine if the change in investment income during the current year was due to changes in investment strategy, changes in portfolio mix, or other factors. Which one of the following techniques should be used? a. Ratio analysis that compares changes in the investment portfolio on a monthly basis. b. Multiple regression analysis that includes independent variables associated with the nature of the investment portfolio and market conditions. c. Best practice analysis that compares the investment income as a percentage of total assets to a competitor’s investment income as a percentage of total assets. d. Simple linear regression that compares investment income changes over the past five years to determine the nature of the changes. 23. CSO: 1B3a LOS: 1B3a For cost estimation simple regression differs from multiple regression in that simple regression uses only a. one dependent variable, while multiple regression uses all available data to estimate the cost function. b. dependent variables, while multiple regression can use both dependent and independent variables. c. one independent variable, while multiple regression uses more than one independent variable. d. one dependent variable, while multiple regression uses more than one dependent variable. 28 24. CSO: 1B3a LOS: 1B3a A company has accumulated data for the last 24 months in order to determine if there is an independent variable that could be used to estimate shipping costs. Three possible independent variables being considered are packages shipped, miles shipped, and pounds shipped. The quantitative technique that should be used to determine whether any of these independent variables might provide a good estimate for shipping costs is a. flexible budgeting. b. linear programming. c. linear regression. d. variable costing. 25. CSO: 1B3a LOS: 1B3c In order to analyze sales as a function of advertising expenses, the sales manager of Smith Company developed a simple regression model. The model included the following equation, which was based on 32 monthly observations of sales and advertising expenses with a related coefficient of determination of.90. S = $10,000 + 2.50A S = sales A = advertising expenses If Smith Company’s advertising expenses in one month amounted to $1,000, the related point estimate of sales would be a. $2,500. b. $11,250. c. $12,250. d. $12,500. 26. CSO: 1B3a LOS: 1B3c The results of regressing Y against X are as follows. Coefficient Intercept 5.23 Slope 1.54 When the value of X is 10, the estimated value of Y is a. 6.78. b. 8.05. c. 20.63. d. 53.84. 29 27. CSO: 1B3b LOS: 1B3d Which one of the following techniques would most likely be used to analyze reductions in the time required to perform a task, as experience with that task increases? a. Regression analysis. b. Learning curve analysis. c. Sensitivity analysis. d. Normal probability analysis. 28. CSO: 1B3b LOS: 1B3e Aerosub Inc. has developed a new product for spacecraft that includes the manufacturing of a complex part. The manufacturing of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. If an 80% learning curve is used and eight units are produced, the cumulative average direct labor hours required per unit of the product will be a. 5,120 hours. b. 6,400 hours. c. 8,000 hours. d. 10,000 hours. 29. CSO: 1B3b LOS: 1B3d A manufacturing firm plans to bid on a special order of 80 units that will be manufactured in lots of 10 units each. The production manager estimates that the direct labor hours per unit will decline by a constant percentage each time the cumulative quantity of units produced doubles. The quantitative technique used to capture this phenomenon and estimate the direct labor hours required for the special order is a. cost-profit-volume analysis. b. the Markov process. c. linear programming analysis. d. learning curve analysis. 30 30. CSO: 1B3b LOS: 1B3e A manufacturing company has the opportunity to submit a bid for 20 units of a product on which it has already produced two 10-unit lots. The production manager believes that the learning experience observed on the first two lots will continue for at least the next two lots. The direct labor required on the first two lots was as follows. 5,000 direct labor hours for the first lot of 10 units 3,000 additional direct labor hours for the second lot of 10 units The learning rate experienced by the company on the first two lots of this product is a. 40.0%. b. 60.0%. c. 62.5%. d. 80.0%. 31. CSO: 1B3b LOS: 1B3e Aerosub Inc. has developed a new product for spacecraft that includes the manufacture of a complex part. The manufacturing of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. If an 80% learning curve is used, the cumulative direct labor hours required for producing a total of eight units would be a. 29,520 hours. b. 40,960 hours. c. 64,000 hours. d. 80,000 hours. 31 32. CSO: 1B3b LOS: 1B3e Propeller Inc. plans to manufacture a newly designed high-technology propeller for airplanes. Propeller forecasts that as workers gain experience, they will need less time to complete the job. Based on prior experience, Propeller estimates a 70% cumulative learning curve and has projected the following costs. Cumulative number Manufacturing Projections of units produced Average cost per unit Total costs 1 $20,000 $20,000 2 14,000 28,000 If Propeller manufactures eight propellers, the total manufacturing cost would be a. $50,660. b. $54,880. c. $62,643. d. $112,000. 33. CSO: 1B3b LOS: 1B3e Martin Fabricating uses a cumulative average-time learning curve model to monitor labor costs. Data regarding two recently completed batches of a part that is used in tractor-trailer rigs is as follows. Batch Number Cumulative Average Number of Units Hours Per Unit 1 50 20 2 50 16 If the same rate of learning continues for the next several batches produced, which of the following best describes (1) the type (i.e., degree) of learning curve that the firm is experiencing and (2) the average hours per unit for units included in the 201-400 range of units produced (i.e., the last 200 units)? Type (Degree) of Average Hours Per Learning Curve Unit for Units 201-400 a. 20% 10.24. b. 80% 10.24. c. 80% 7.68. d. 20% 3.84. 32 34. CSO: 1B3b LOS: 1B3e Propeller Inc. plans to manufacture a newly designed high-technology propeller for airplanes. Propeller forecasts that as workers gain experience, they will need less time to complete the job. Based on prior experience, Propeller estimates a 70% cumulative learning curve and has projected the following costs. Cumulative number Manufacturing Projections of units produced Average cost per unit Total costs 1 $20,000 $20,000 2 14,000 28,000 If Propeller produces eight units, the average manufacturing cost per unit will be a. $1,647. b. $6,860. c. $9,800. d. $14,000. 35. CSO: 1B3b LOS: 1B3e In competing as a subcontractor on a military contract, Aerosub Inc. has developed a new product for spacecraft that includes the manufacturing of a complex part. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. Accordingly, management estimates an 80% learning curve would apply to this unit. The overall contract will call for supplying eight units. Production of the first unit requires 10,000 direct labor hours. The estimated total direct labor hours required to produce the seven additional units would be a. 30,960 hours. b. 40,960 hours. c. 56,000 hours. d. 70,000 hours. 36. CSO: 1B3b LOS: 1B3e A manufacturing company required 800 direct labor hours to produce the first lot of four units of a new motor. Management believes that a 90% learning curve will be experienced over the next four lots of production. How many direct labor hours will be required to manufacture the next 12 units? a. 1,792. b. 1,944. c. 2,016. d. 2,160. 33 37. CSO: 1B3b LOS: 1B3e Propeller Inc. plans to manufacture a newly designed high-technology propeller for airplanes. Propeller forecasts that as workers gain experience, they will need less time to complete the job. Based on prior experience, Propeller estimates a 70% cumulative learning curve and has projected the following costs. Cumulative number Manufacturing Projections of units produced Average cost per unit Total costs 1 $20,000 $20,000 2 14,000 28,000 The estimated cost of an order for seven additional propellers, after completing production of the first propeller, would be a. $34,880. b. $54,880. c. $92,000. d. $98,000. 38. CSO: 1B3c LOS: 1B3g Johnson Software has developed a new software package. Johnson’s sales manager has prepared the following probability distribution describing the relative likelihood of monthly sales levels and relative income (loss) for the company’s new software package. Monthly Sales In Units Probability Income (Loss) 10,000.2 $(4,000) 20,000.3 10,000 30,000.3 30,000 40,000.2 60,000 If Johnson decides to market its new software package, the expected value of additional monthly income will be a. $23,200. b. $24,000. c. $24,800. d. $25,000. 34 39. CSO: 1B3c LOS: 1B3g According to recent focus sessions, Norton Corporation has a “can’t miss” consumer product on its hands. Sales forecasts indicate either excellent or good results, with Norton’s sales manager assigning a probability of.6 to a good results outcome. The company is now studying various sales compensation plans for the product and has determined the following contribution margin data. Contribution Margin If sales are excellent and Plan 1 is adopted $300,000 Plan 2 is adopted 370,000 If sales are good and Plan 1 is adopted 240,000 Plan 2 is adopted 180,000 On the basis of this information, which of the following statements is correct? a. Plan 2 should be adopted because it is $10,000 more attractive than Plan 1. b. Plan 1 should be adopted because it is $8,000 more attractive than Plan 2. c. Plan 1 should be adopted because of the sales manager’s higher confidence in good results. d. Either Plan should be adopted, the decision being dependent on the probability of excellent sales results. 40. CSO: 1B3c LOS: 1B3g Denton Inc. manufactures industrial machinery and requires 100,000 switches per year in its assembly process. When switches are received from a vendor they are installed in the specific machine and tested. If the switches fail, they are scrapped and the associated labor cost of $25 is considered lost productivity. Denton purchases “off the shelf” switches as opposed to custom-made switches and experiences quality problems with some vendors’ products. A decision must be made as to which vendor to buy from during the next year based on the following information. Percentage expected Vendor Price per switch to pass the test P $35 90% Q 37 94% R 39 97% S 40 99% Which vendor should Denton’s controller recommend to management? a. Vendor P. b. Vendor Q. c. Vendor R. d. Vendor S. 35 41. CSO: 1B3c LOS: 1B3g Scarf Corporation’s controller has decided to use a decision model to cope with uncertainty. With a particular proposal, currently under consideration, Scarf has two possible actions, invest or not invest in a joint venture with an international firm. The controller has determined the following. Action 1: Invest in the Joint Venture Events and Probabilities: Probability of success = 60%. Cost of investment = $9.5 million. Cash flow if investment is successful = $15.0 million. Cash flow if investment is unsuccessful = $2.0 million. Additional costs to be paid = $0 Costs incurred up to this point = $650,000. Action 2: Do Not Invest in the Joint Venture Events Costs incurred up to this point = $650,000. Additional costs to be paid = $100,000. Which one of the following alternatives correctly reflects the respective expected values of investing versus not investing? a. $300,000 and $(750,000). b. $(350,000) and $(100,000). c. $300,000 and (100,000). d. $(350,000) and $(750,000). 42. CSO: 1B3c LOS: 1B3g Allbee Company has three possible investment opportunities. The controller calculated the payoffs and probabilities, as follows. Probabilities Payoffs Investment A Investment B Investment C $(20,000).3.2.3 (10,000).1.2.1 30,000.3.2.2 70,000.2.2.3 100,000.1.2.1 The cost of investments A, B, and C are the same. Using the expected-value criterion, which one of the following rankings of these investments, from highest payoff to lowest payoff, is correct? a. A, B, C. b. B, A, C. c. C, A, B. d. B, C, A. 36 43. CSO: 1B3c LOS: 1B3g The sales manager of Serito Doll Company has suggested that an expanded advertising campaign costing $40,000 would increase the sales and profits of the company. He has developed the following probability distribution for the effect of the advertising campaign on company sales. Sales increase (units) Probability 15,000.10 30,000.35 45,000.10 60,000.25 75,000.20 The company sells the dolls at $5.20 each. The cost of each doll is $3.20. Serito’s expected incremental profit, if the advertising campaign is adopted, would be a. $6,500. b. $46,500. c. $53,000. d. $93,000. 44. CSO: 1B3c LOS: 1B3g Stock X has the following probability distribution of expected future returns. Expected Probability Return.10 -20%.20 5%.40 15%.20 20%.10 30% The expected rate of return on stock X would be a. 10%. b. 12%. c. 16%. d. 19%. 37 45. CSO: 1B3c LOS: 1B3g Which one of the following four probability distributions provides the highest expected monetary value? Alternative #1 Alternative #2 Alternative #3 Alternative #4 Cash Cash Cash Cash Prob. Inflows Prob. Inflows Prob. Inflows Prob. Inflows 10% $50,000 10% $50,000 10% $50,000 10% $150,000 20% 75,000 20% 75,000 20% 75,000 20% 100,000 40% 100,000 45% 100,000 40% 100,000 40% 75,000 30% 150,000 25% 150,000 30% 125,000 30% 50,000 a. Alternative #1. b. Alternative #2. c. Alternative #3. d. Alternative #4. 46. CSO: 1B3c LOS: 1B3g A company is developing its budget for the upcoming month. The financial planning department has developed the following range of sales activity and the associated probabilities for each level of budgeted sales. Sales Estimate Probability $120,000 25% 170,000 40% 200,000 35% The company’s cost of goods sold averages 80% of sales, and the relationship is expected to remain consistent in the next fiscal year. What is the expected value of the company’s budgeted cost of goods sold? a. $134,400. b. $136,000. c. $168,000. d. $170,000. 38 47. CSO: 1B3c LOS: 1B3g The Lions Club is planning to sell pretzels at a local football game and has estimated sales demand as follows. Sales demand 8,000 10,000 12,000 15,000 Probability 10% 40% 30% 20% The cost of the pretzels varies with the quantity purchased as follows. Purchase quantity 8,000 10,000 12,000 15,000 Cost per unit $1.25 $1.20 $1.15 $1.10 Any unsold pretzels would be donated to the local food bank. The calculated profits at the various sales demand levels and purchase quantities are as follows. Expected Profits at Various Purchase Quantity Levels Sales Demand 8,000 10,000 12,000 15,000 8,000 $6,000 $4,000 $ 2,200 $ (500) 10,000 6,000 8,000 6,200 3,500 12,000 6,000 8,000 10,200 7,500 15,000 6,000 8,000 10,200 13,500 Which one of the following purchase quantities would you recommend to the Lions Club? a. 8,000. b. 10,000. c. 12,000. d. 15,000. 39 48. CSO: 1B4a LOS: 1B4g StoniBrook Industries produces decorative hardware used by home construction firms and sold in do-it-yourself retail outlets. The business is highly competitive with little opportunity for raising prices. StoniBrook’s master budget for the next fiscal year is shown below. Sales $8,400,000 Cost of goods sold* 6,000,000 Advertising 500,000 Sales salaries 400,000 Sales commissions 168,000 Administrative expenses 350,000 Operating income $ 982,000 *50% direct material, 30% direct labor, 20% fixed overhead The following events could impact the budget. Renegotiation of a union contract resulting in a 3.5% wage increase for factory workers. A 5% increase in the cost of 20% of its material. Elimination of sales commissions with an equal increase in sales salaries. If all of these events occur, the incremental change in StoniBrook’s operating income will be a. $123,000 decrease. b. $93,000 decrease. c. $45,000 increase. d. $75,000 increase. 49. CSO: 1B4a LOS: 1B4d All of the following are criticisms of the traditional budgeting process except that it a. makes across-the-board cuts when early budget iterations show that planned expenses are too high. b. incorporates non-financial measures as well as financial measures into its output. c. overemphasizes a fixed time horizon such as one year. d. is not used until the end of the budget period to evaluate performance. 40 50. CSO: 1B4a LOS: 1B4c What would be the correct chronological order of preparation for the following budgets? I. Cost of goods sold budget. II. Production budget. III. Purchases budget. IV. Administrative budget. a. I, II, III, IV. b. III, II, IV, I. c. IV, II, III, I. d. II, III, I, IV. 51. CSO: 1B4a LOS: 1B4c Which one of the following best describes the order in which budgets should be prepared when developing the annual master operating budget? a. Production budget, direct material budget, revenue budget. b. Production budget, revenue budget, direct material budget. c. Revenue budget, production budget, direct material budget. d. Revenue budget, direct material budget, production budget. 52. CSO: 1B4d LOS: 1B4a A budgeting approach that requires a manager to justify the entire budget for each budget period is known as a. performance budgeting. b. program budgeting. c. zero-base budgeting. d. incremental budgeting. 53. CSO: 1B4d LOS: 1B4a A company’s board of directors has requested a full in-depth review of all budgeted items for next fiscal year’s operating budget. The controller of the company subsequently advised all business unit heads that the company will not automatically approve operating budget items for next fiscal year simply because they were approved in the past, and that all operating budget items for next fiscal year will need to be justified. Based on the above information, which one of the following budgeting systems is the company most likely using? a. Activity-based budgeting. b. Zero-based budgeting. c. Project budgeting. d. Flexible budgeting. 41 54. CSO: 1B4e LOS: 1B4c The type of budget that is continually updated to add a new budget period as the most recent budget period is completed is called a(n) a. activity-based budget. b. flexible budget. c. rolling budget. d. zero-based budget. 55. CSO: 1B4f LOS: 1B4g A construction company has an annual master budget that shows straight-line depreciation expense of $516,000 for the year. The master budget shows a production volume of 206,400 units and production is expected to occur uniformly throughout the year. The capacity for the facility is 215,000 units. During February, the company produced 16,340 units of product and actual depreciation expense recorded was $40,500. The company controls manufacturing costs with a flexible budget. The flexible budget amount for depreciation expense for March would be a. $39,216. b. $40,500. c. $40,850. d. $43,000. 42 56. CSO: 1B4f LOS: 1B4d Rainbow Inc. recently appointed Margaret Joyce as vice president of finance and asked her to design a new budgeting system. Joyce has changed to a monthly budgeting system by dividing the company’s annual budget by twelve. Joyce then prepared monthly budgets for each department and asked the managers to submit monthly reports comparing actual to budget. A sample monthly report for Department A is shown below. Rainbow Inc. Monthly Report for Department A Actual Budget Variance Units 1,000 900 100F Variable production costs Direct material $2,800 $2,700 $100U Direct labor 4,800 4,500 300U Variable factory overhead 4,250 4,050 200U Fixed costs Depreciation 3,000 2,700 300U Taxes 1,000 900 100U Insurance 1,500 1,350 150U Administration 1,100 990 110U Marketing 1,000 900 100U Total costs $19,450 $18,090 $1,360U This monthly budget has been imposed from the top and will create behavior problems. All of the following are causes of such problems except a. the use of a flexible budget rather than a fixed budget. b. top management authoritarian attitude toward the budget process. c. the inclusion of non-controllable costs such as depreciation. d. the lack of consideration for factors such as seasonality. 57. CSO: 1B4f LOS: 1B4d When compared to static budgets, flexible budgets a. offer managers a more realistic comparison of budget and actual fixed cost items under their control. b. provide a better understanding of the capacity variances during the period being evaluated. c. encourage managers to use less fixed costs items and more variable cost items that are under their control. d. offer managers a more realistic comparison of budget and actual revenue and cost items under their control. 43 58. CSO: 1B5a LOS: 1B5o Tut Company’s selling and administrative costs for the month of August, when it sold 20,000 units, were as follows. Costs Per Unit Total Variable costs $18.60 $372,000 Step costs 4.25 85,000 Fixed costs 8.80 176,000 Total selling and administrative costs $31.65 $633,000 The variable costs represent sales commissions paid at the rate of 6.2% of sales. The step costs depend on the number of salespersons employed by the company. In August there were 17 persons on the sales force. However, two members have taken early retirement effective August 31. It is anticipated that these positions will remain vacant for several months. Total fixed costs are unchanged within a relevant range of 15,000 to 30,000 units per month. Tut is planning a sales price cut of 10%, which it expects will increase sales volume to 24,000 units per month. If Tut implements the sales price reduction, the total budgeted selling and administrative costs for the month of September would be a. $652,760. b. $679,760. c. $714,960. d. $759,600. 59. CSO: 1B5a LOS: 1B5c Netco’s sales budget for the coming year is as follows. Item Volume in Units Sales Price Sales Revenue 1 200,000 $50 $10,000,000 2 150,000 10 1,500,000 3 300,000 30 9,000,000 Total sales revenue $20,500,000 Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering an 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue will decrease by a. $1,050,000. b. $850,000. c. $750,000. d. $550,000. 44 60. CSO: 1B5a LOS: 1B5i Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September. Hannon’s policy is to have on hand enough inventory at the end of the month to cover 25% of the next month’s sales. What will be the cost of the inventory that Hannon should budget for purchase in August? a. $509,600. b. $540,000. c. $560,000. d. $680,000. 61. CSO: 1B5a LOS: 1B5f Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Streeter maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter. How many units should Streeter produce in the second quarter? a. 72,000 units. b. 75,000 units. c. 78,000 units. d. 84,000 units. 45 62. CSO: 1B5a LOS: 1B5f Ming Company has budgeted sales at 6,300 units for the next fiscal year, and desires to have 590 good units on hand at the end of that year. Beginning inventory is 470 units. Ming has found from past experience that 10% of all units produced do not pass final inspection, and must therefore be destroyed. How many units should Ming plan to produce in the next fiscal year? a. 6,890. b. 7,062. c. 7,133. d. 7,186. 63. CSO: 1B5a LOS: 1B5f Savior Corporation assembles backup systems for home computers. For the first quarter, the budget for sales is 67,500 units. Savior will finish the fourth quarter of last year with an inventory of 3,500 units, of which 200 are obsolete. The target ending inventory is 10 days of sales (based upon 360 days). What is the budgeted production for the first quarter? a. 75,000. b. 71,700. c. 71,500. d. 64,350 64. CSO: 1B5a LOS: 1B5f Sunrise Company produces light switches. Sales for the next year are expected to be 65,000 units in the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter. Sunrise usually maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be sold in the next quarter. However, due to a work stoppage, the finished goods inventory at the end of the first quarter is 8,000 units less than it should be. How many units should Sunrise produce in the second quarter? a. 75,000 units. b. 78,000 units. c. 80,000 units. d. 86,000 units. 46 65. CSO: 1B5a LOS: 1B5f Data regarding Rombus Company's budget are shown below. Planned sales 4,000 units Material cost $2.50 per pound Direct labor 3 hours per unit Direct labor rate $7 per hour Finished goods beginning inventory 900 units Finished goods ending inventory 600 units Direct materials beginning inventory 4,300 units Direct materials ending inventory 4,500 units Materials used per unit 6 pounds Rombus Company's production budget will show total units to be produced of a. 3,700. b. 4,000. c. 4,300. d. 4,600. 66. CSO: 1B5a LOS: 1B5f Krouse Company is in the process of developing its operating budget for the coming year. Given below are selected data regarding the company’s two products, laminated putter heads and forged putter heads, that are sold through specialty golf shops. Putter Heads Forged Laminated Raw materials Steel 2 pounds @ $5/lb. 1 pound @ $5/lb. Copper None 1 pound @ $15/lb. Direct labor 1/4 hour @ $20/hr. 1 hour @ $22/hr. Expected sales (units) 8,200 2,000 Selling price per unit $30 $80 Ending inventory target (units) 100 60 Beginning inventory (units) 300 60 Beginning inventory (cost) $5,250 $3,120 Manufacturing overhead is applied to units produced on the basis of direct labor hours. Variable manufacturing overhead is projected to be $25,000, and fixed manufacturing overhead is expected to be $15,000. The estimated cost to produce one unit of the laminated putter head is a. $42. b. $46. c. $52. d. $62. 47 67. CSO: 1B5a LOS: 1B5d Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month of sale and 40% collected in the following month. A partial schedule of cash collections for January through March of the coming year reveals the following receipts for the period. Cash Receipts January February March December receivables $32,000 From January sales 54,000 $36,000 From February sales 66,000 $44,000 Other information includes the following. Inventories are maintained at 30% of the following month’s sales. Assume that March sales total $150,000. The number of units to be purchased in February is a. 3,850 units. b. 4,900 units. c. 6,100 units. d. 7,750 units. 68. CSO: 1B5a LOS: 1B5i Stevens Company manufactures electronic components used in automobile manufacturing. Each component uses two raw materials, Geo and Clio. Standard usage of the two materials required to produce one finished electronic component, as well as the current inventory, are shown below. Standard Material Per Unit Price Current Inventory Geo 2.0 pounds $15/lb. 5,000 pounds Clio 1.5 pounds $10/lb. 7,500 pounds Stevens forecasts sales of 20,000 components for each of the next two production periods. Company policy dictates that 25% of the raw materials needed to produce the next period’s projected sales be maintained in ending direct materials inventory. Based on this information, the budgeted direct material purchases for the coming period would be Geo Clio a. $450,000 $450,000. b. $675,000 $300,000. c. $675,000 $400,000. d. $825,000 $450,000. 48 69. CSO: 1B5a LOS: 1B5i Petersons Planters Inc. budgeted the following amounts for the coming year. Beginning inventory, finished goods $ 10,000 Cost of goods sold 400,000 Direct material used in production 100,000 Ending inventory, finished goods 25,000 Beginning and ending work-in-process inventory Zero Overhead is estimated to be two times the amount of direct labor dollars. The amount that should be budgeted for direct labor for the coming year is a. $315,000. b. $210,000. c. $157,500. d. $105,000. 70. CSO: 1B5a LOS: 1B5i Over the past several years, McFadden Industries has experienced the following regarding the company’s shipping expenses. Fixed costs $16,000 Average shipment 15 pounds Cost per pound $.50 Shown below are McFadden’s budget data for the coming year. Number of units shipped 8,000 Number of sales orders 800 Number of shipments 800 Total sales $1,200,000 Total pounds shipped 9,600 McFadden’s expected shipping costs for the coming year are a. $4,800. b. $16,000. c. $20,000. d. $20,800. 49 71. CSO: 1B5a LOS: 1B5g Swan Company is a maker of men's slacks. The company would like to maintain 20,000 yards of fabric in ending inventory. The beginning fabric inventory is expected to contain 25,000 yards. The expected yards of fabric needed for sales is 90,000. Compute the yards of fabric that Swan needs to purchase. a. 85,000. b. 90,000. c. 95,000. d. 135,000. 72. CSO: 1B5a LOS: 1B5g Manoli Gift Shop maintains a 35% gross profit margin percentage, and carries an ending inventory balance each month sufficient to support 30% of the next month’s expected sales. Anticipated sales for the fourth quarter are as follows. October $42,000 November 58,000 December 74,000 What amount of goods should Manoli Gift Shop plan to purchase during the month of November? a. $40,820. b. $51,220. c. $52,130. d. $62,800. 73. CSO: 1B5a LOS: 1B5g In preparing the direct material purchases budget for next quarter, the plant controller has the following information available. Budgeted unit sales 2,000 Pounds of materials needed per unit 4 Cost of materials per pound $3 Pounds of materials on hand 400 Finished units on hand 250 Target ending units inventory 325 Target ending inventory of pounds of materials 800 How many pounds of materials must be purchased? a. 2,475. b. 7,900. c. 8,700. d. 9,300. 50 74. CSO: 1B5a LOS: 1B5g Playtime Toys estimates that it will sell 200,000 dolls during the coming year. The beginning inventory is 12,000 dolls; the target ending inventory is 15,000 dolls. Each doll requires two shoes which are purchased from an outside supplier. The beginning inventory of shoes is 20,000; the target ending inventory is 18,000 shoes. The number of shoes that should be purchased during the year is a. 396,000 shoes. b. 398,000 shoes. c. 402,000 shoes. d. 404,000 shoes. 75. CSO: 1B5a LOS: 1B5g Maker Distributors has a policy of maintaining inventory at 15% of the next month’s forecasted sales. The cost of Maker’s merchandise averages 60% of the selling price. The inventory balance as of May 31 is $63,000, and the forecasted dollar sales for the last seven months of the year are as follows. June $700,000 July 600,000 August 650,000 September 800,000 October 850,000 November 900,000 December 840,000 What is the budgeted dollar amount of Maker’s purchases for July? a. $355,500. b. $360,000. c. $364,500. d. $399,000. 76. CSO: 1B5a LOS: 1B5m All of the following would appear on a projected schedule of cost of goods manufactured except for a. ending work-in-process inventory. b. beginning finished goods inventory. c. the cost of raw materials used. d. applied manufacturing overhead. 51 77. CSO: 1B5a LOS: 1B5j A company that manufactures furniture is establishing its budget for the upcoming year. All of the following items would appear in its overhead budget except for the a. overtime paid to the workers who perform production scheduling. b. cost of glue used to secure the attachment of the legs to the tables. c. fringe benefits paid to the production supervisor. d. freight charges paid for the delivery of raw materials to the company. 78. CSO: 1B5a LOS: 1B5l Using the following budget data for Valley Corporation, which produces only one product, calculate the company’s predetermined factory overhead application rate for variable overhead.