CPA review BEC QuizzesModule 40, 41, 44, 45

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Module 40

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Module 40 Q1

1.Internal control systems may breakdown for all of the following reasons except:

A. Faulty judgments by personnel.B. Management may override the control.C. Controls may be improperly designed.D. Controls can be circumvented by collusion.

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Module 40 Q1 answer

A-B-D This response is incorrect. It is a possible reason for a control breakdown.

C. Correct. Limitations assume that controls are properly designed. Breakdown implies an existing effective system.

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Module 40 Q2

2. Each of the following is a limitation of enterprise risk management (ERM) except:A.ERM deals with risk, which is related to the future and is inherently uncertain.B.ERM operates at different levels with respect to different objectives.C.ERM can provide absolute assurance with respect to objective categories.D.ERM is as effective as the people responsible for its functioning.

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Module 40 Q2 answerA. Incorrect. The uncertainty in forecasting the future is an important

limitation of ERM, and, therefore, this is not the correct answer to this question.

B. Incorrect. ERM does operate at different levels with respect to different objectives, as is clear in the COSO ERM framework. Therefore, this is a limitation of ERM, and is not the correct answer to this question.

C. Correct. While it is accurate to say that ERM can provide reasonable levels of assurance, it cannot provide absolute assurance with respect to risk management objectives. Consequently, this is the correct answer to the question, because this statement is false.

D. Incorrect. ERM is dependent upon the people responsible for its functioning. Because this statement is true, and because this is a limitation of ERM, this is not the correct answer to this question.

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Module 40 Q3

3. A manufacturing firm noted that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following responses to the risk?A.Risk reductionB.Prospect theoryC.Risk sharingD.Risk acceptance

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Module 40 Q3 answerA. Correct. This best describes the risk management approach taken by the

firm. Specifically, because the firm cannot locally source its raw materials, it is relocating its production facility to reduce the risk of stock-outs.

B. Incorrect. This question has nothing to do with prospect theory. Tversky and Kahneman's prospect theory argues that decision makers weight losses more heavily than they do gains. Prospect theory has nothing to do with the manufacturing firm's decision to relocate its production facilities.

C. Incorrect. A risk-sharing approach would be, perhaps, to share the risk of stock-outs with a supplier. In order for this to be a risk-sharing approach, another firm or company would need to be involved in sharing the risks related to the sourcing of raw materials.

D. Incorrect. The company has not decided to accept the risk of the unavailability of supplied materials. Instead, it has taken action to mitigate or reduce the risk. Hence this is not a correct answer to this question.

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Module 40 Q4

4. According to the Institute of Internal Auditors’ Standards, the internal audit function should have all of the following competencies except:A.Knowledge of key information technology risks.B.Knowledge to evaluate fraud risk.C.Knowledge of information technology audit techniques.D.Knowledge of financial reporting.

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Module 40 Q4 answer

D. Correct. This knowledge is not required. Internal auditors deal with operations, risk management, and internal control.

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Module 40 Q5

5. If internal control is properly designed, the same employee should not be permitted toA.Sign checks and cancel supporting documents.B.Receive merchandise and prepare a receiving report.C.Prepare disbursement vouchers and sign checks.D.Initiate a request to order merchandise and approve merchandise received.

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Module 40 Q5 answerA. Incorrect. The person signing the checks should cancel

supporting documents to avoid duplicate payment.B. Incorrect. The individual receiving the merchandise should

prepare a receiving report so as to establish control over the goods.

C. Correct. The preparation of disbursement vouchers and signing of checks places an individual in a position in which s/he can both prepare erroneous vouchers and then pay them. Proper internal controls should prevent misappropriation of funds.

D. Incorrect. The person requesting the merchandise will be able to determine whether the appropriate merchandise has been received and should, therefore, approve its receipt.

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Module 41

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Module 41 Q1

1. What is the computer process called when data processing is performed concurrently with a particular activity and the results are available soon enough to influence the particular course of action being taken or the decision being made?

A. Batch processing.B. Real-time processing.C. Integrated data processing.D. Random access processing.

Module 41 Q1 answerA. Incorrect. Integrated batch processing systems collect data into

groups (batches) prior to processing. Then, the entire group of records is processed at regular intervals.

B. Correct. This answer is correct because online real-time systems are those for which processing is performed as data are input and the results are available immediately.

C. Incorrect. Integrated data processing refers to a system (batch or real-time) for which duplicate records and duplicate operations are minimized.

D. Incorrect. This answer is incorrect because random access processing is a method of data access (random versus sequential access), not a method of data processing.

Module 41 Q2

2. When considering disaster recovery, what type of backup facility involves an agreement between two organizations to aid each other in the event of disaster?

A. Cold site.B. Hot site.C. Reciprocal agreement.D. Rollback.

Module 41 Q2 answer

A. Incorrect. cold site ordinarily involves processing at another site.

B. Incorrect. hot site ordinarily relies upon a commercial disaster recovery service that allows a business to continue in the event of computer disaster.

C. Correct. a reciprocal agreement involves agreement between two or more organizations to help each other in the event of disaster to one’s processing.

D. Incorrect. a checkpoint system is more directly related to copying the database at certain points for backup support.

Module 41 Q3

3. SQL is most directly related to A. String question language processing.B. The "grandfather, father, son" method of

record retention.C. Electronic commerce.D. Relational databases.

Structured Query Language

Module 41 Q3 answer

A. Incorrect. the term string question language processing is not used in information technology.

B. Incorrect. SQL is not directly related to record retention using the grandfather, father, son approach

C. Incorrect. while electronic commerce may use SQL, the most direct tie is to relational databases.

D. Correct. virtually all relational databases use the SQL computer language. SQL-Structured Query Language.

Module 41 Q4

4. The Internet is made up of a series of networks which include

A. Gateways to allow mainframe computers to connect to personal computers.

B. Bridges to direct messages through the optimum data path.

C. Repeaters to physically connect separate local area networks (LANs).

D. Routers to strengthen data signals between distant computers.

Module 41 Q4 answer

A. Correct. Gateways connect Internet computers of dissimilar networks.

B. Incorrect. Routers determine the best path for data.

C. Incorrect. Bridges connect physically separate LANs.

D. Incorrect. Repeaters strengthen signal strength.

Module 41 Q5

5. Companies now can use electronic transfers to conduct regular business transactions. Which of the following terms best describes a system where an agreement is made between two or more parties to electronically transfer purchase orders, sales orders, invoices, and/or other financial documents?

A. Electronic mail (e-mail). B. Electronic funds transfer (EFT).C. Electronic data interchange (EDI). D. Electronic data processing (EDP).

Module 41 Q5 answer

A. Incorrect. E-mail can send text or document files, but the term encompasses a wide range of transfers. Electronic data interchange specifically applies to the system described in the question.

B. Incorrect. (EFT) refers to the transfer of money. C. Correct. Electronic data interchange refers to the

electronic transfer of documents between businesses. D. Incorrect. (EDP) is a generic term which refers to

computerized processing of transaction data within organizations.

Module 44

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Module 44 Q1

1. The cash conversion is accurately illustrated by which of the following expressions?

A. Inventory conversion period+ Receivables conversion period− Payables deferral period

B. Inventory conversion period− Receivables conversion period− Payables deferral period

C. Inventory conversion period+ Receivables conversion period+ Payables deferral period

D. Inventory conversion period− Receivables conversion period− Payables deferral period+ Long-term financing period

Module 44 Q1 answer

A. This answer is correct. The cash conversion cycle measures the time period from the time the firm pays for its materials and labor to the time it collects its cash from sales.

Module 44 Q22. A company sells 10,000 skateboards a year at $66 each. All sales

are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers. What is the expected average collection period for the company?

A. 10 days.B. 15 days.C. 20 days.D. 30 days.

Module 44 Q2 answerC. This answer is correct. The average collection period is calculated

as: 0.5(10 days) + 0.5(30 days) = 5 + 15 = 20 days. Not covered but should be pretty straightforward

Related and not covered• Receivables collection period (days sales outstanding)—The

average time required to collect accounts receivable.

• As an example, assume that the average receivables balance is $3,000,000 and credit sales are $40,000,000; the receivables collection period is equal to 27 days as calculated below.

• Receivables collection period= $3,000,000        $40,000,000/365 days = 27 days

Module 44 Q3

3. A company has $1,500,000 of outstanding debt and $1,000,000 of outstanding common equity. Management plans to maintain the same proportions of financing from each source if additional projects are undertaken. If the company expects to have $60,000 of retained earnings available for reinvestment in new projects in the coming year, what dollar amount of new investments can be undertaken without issuing new equity?

A. $0B. $ 24,000C. $ 90,000D. $150,000

Module 44 Q3 answerD. Is correct.Not covered. From The proportion of equity in the financial structure of the firm is the value of

outstanding equity divided by the total value of all financing sources.

Value of equity = 1,000,000 =0.40Value of debt + Value of equity 1,000,000 + 1,500,000

Since the question states that the firm will maintain the same weight of each financing source, each dollar invested is composed of 40 cents of equity and 60 cents of debt. The first $60,000 of equity used in financing new projects is sourced from retained earnings. This source of equity is exhausted when the firm reaches an investment level of

$60,000 / 0.4 = $150,000.

When the level of investment exceeds this amount, equity financing must be raised externally.

Module 44 Q44. Kemple is a newly established janitorial firm, and the owner is

deciding what type of checking account to open. Kemple is planning to keep a $500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. Kemple also has the option of a premium business checking account that requires a $2,500 minimum balance but has no monthly fees or per check charges. If Kemple’s cost of funds is 10%, which account should Kemple choose?

A. Standard account, because the savings is $34 per year.B. Premium account, because the savings is $34 per year.C. Standard account, because the savings is $16 per year.D. Premium account, because the savings is $16 per year.

Module 44 Q4 answer

D. This answer is correct. The standard account will cost $10 per month plus $8 in check charges (80 × $0.10) = $18, or $216 per year. The premium account will have no fee but will require an additional $2,000 ($2,500 – 500) of funds on deposit. The interest cost on $2,000 for the year is $200 ($2,000 × 10%). Therefore, the cost of the premium checking is less by $16.

Standard econ type question. Look at both options, calculate the costs, then take the difference.

Module 44 Q55. A company sells 10,000 skateboards a year at $66 each. All sales

are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers. Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the company at any point in time, assuming a 365-day year?

A. $684.93B. $1,808.22C. $27,123.30D. 45,205.48

Module 44 Q5 answer

D. This answer is correct. The average accounts receivable balance is

calculated as: Credit sales per day x Average collection period =

(10,000 units x $66 unit price) / 365 x 25 days = $45,205.48.

Module 45

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Module 45 Q1

1. Yonder Motors sells 20,000 automobiles per year on credit for $25,000 each. The firm’s average receivables are $30,000,000 and average inventory is $40,000,000. Yonder’s average collection period is closest to which one of the following? Assume a 365-day year.

A. 17 days.B. 22 days.C. 29 days.D. 61 days.

Module 45 Q1 answerCorrect Answer: B.

The average collection period, also called the days’ sales outstanding in receivables, is calculated as the number of days in the year over the receivables turnover ratio. Yonder’s can thus be calculated as follows:

Average collection period = Average accounts receivables ÷ average sales per day =$30,000,000 ÷ [(20,000 × $25,000) ÷ 365] =$30,000,000 ÷ ($500,000,000 ÷ 365) =365 * $30,000,000 ÷ 500,000,000 =21.9 days

Module 45 Q1 alternative answerCorrect Answer: B. formula is presented in a slightly different fashion

than the book but both give the same answer.

The average collection period, also called the days’ sales outstanding in receivables, is calculated as the number of days in the year over the receivables turnover ratio. Yonder’s can thus be calculated as follows:

Average collection period = Days in year ÷ Accounts receivable turnover =365 ÷ (Net credit sales ÷ Average net receivables) =365 ÷ [(20,000 × $25,000) ÷ $30,000,000] =365 ÷ ($500,000,000 ÷ $30,000,000) =365 ÷ 16.667 =21.9 days

Module 45 Q2

2. The DePaul Corporation had a net income of $50,000. What is the amount of the investment if the return on investment is 20%?

A. $100,000B. $200,000C. $250,000D. $500,000

Module 45 Q2 answer

C. This answer is correct. One way of calculating ROI is net income divided by invested capital (equity). This answer is correct because the amount of investment would be computed as follows: If ROI = 20% and net income = $50,000, then dividing $50,000 by 20% = $250,000.

Module 45 Q3

3. Super Sets, Inc. manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent of Super Set customers take discounts and pay on day 10, while the remaining 30% pay on day 30. What is the average collection period in days?

A. 10B. 16C. 24D. 40

Module 45 Q3 answer

B. This answer is correct because the average collection period is calculated to be 16 (70% x 10 days + 30% x 30 days).

Not covered. Given now.

Module 45 Q4

4. The following is available for Cara Corp. for 2012:

Sales $2,000,000Average invested capital 500,000Net operating income 300,000Imputed interest rate 18%

What is the return on investment at Cara Corp.?A. 60%B. 33%C. 18%D. 15%

Module 45 Q4 answer

A. This answer is correct. The return on investment would be computed by dividing net operating income by average invested capital (300,000 / 500,000 = 60%).

Module 45 Q5

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

A. ROI is a percentage, while RI is a dollar amount.B. ROI may lead to rejecting projects that yield positive

cash flows.C. ROI does not necessarily reflect the company’s cost of

capital.D. ROI does not reflect all economic gains.

Module 45 Q5 answer

B. This answer is correct. The requirement is to identify the primary disadvantage of using ROI rather than the RI as an evaluation technique. This answer is correct because if a unit is being evaluated based on ROI, it may not want to undertake a project with a lower ROI than its current average even though the project has positive RI.