Certified Public Accountant CPA Questions + Answers Part 17
Posted: Tue Feb 22, 2022 6:20 pm
QUESTION 440
The amount of inventory that a company would tend to hold in safety stock would increase as the:
A. Costofcarryinginventorydecreases.
B. Variabilityofsalesdecreases.
C. Costs of running out of stock decreases.
D. Length of time that goods are in transit decreases.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. As the cost of carrying inventory decreases, safety stock would tend to increase to reduce the risk of stock outs.
Choice "b" is incorrect. As sales become more predictable (sales variability decreases), less (not more) safety stock would be needed because the risk of stock outs would have decreased. Choice "c" is incorrect. If the cost of stock outs decrease, safety stock would decrease. Choice "d" is incorrect. If lead-time decreases, safety stock would decrease.
QUESTION 441
The level of safety stock in inventory management depends on all of the following, except the:
A. Levelofuncertaintyofthesalesforecast.
B. Levelofcustomerdissatisfactionforbackorders.
C. Level of uncertainty in lead-time for stock shipments. D. Cost to reorder stock.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reorder costs do not impact the level of safety stock. Choices "a", "b", and "c" are incorrect. Safety stock levels are affected by:
1. Uncertain sales forecasts - greater uncertainty means a higher level of safety stock should be carried.
2. Dissatisfaction of customers - if customers are dissatisfied with back orders (which occur when there are stock outs), then more safety stock should be carried to prevent stock outs.
3. Uncertain lead times - greater uncertainty means a higher level of safety stock is needed.
QUESTION 442
The following information regarding inventory policy was assembled by the JRJ Corporation. The company uses a 50-week year in all calculations.
The reorder point is:
A. 3,300units. B. 2,100units. C. 1,300 units. D. 5,200 units.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A 50-week year would mean that 200 units are sold per week (10,000 units per year over 50 weeks). Therefore, 800 units are sold during the lead-time (4 weeks × 200 units per week). Required safety stock is 1,300 units, which means that no less than 1,300 units must be on hand at any time. The reorder point is then 2,100 units (1,300 safety stock plus the 800 units used during lead time). Choices "a", "c", and "d" are incorrect, per the above Explanation:.
QUESTION 443
All of the following are inventory carrying costs, except:
A. Insurance.
B. Opportunitycostoninventoryinvestment. C. Obsolescence and spoilage.
D. Inspections.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Inspections. Inspections are part of order costs, not carrying costs. Choices "a" and "c" are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory).
Choice "b" is incorrect. The economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.
QUESTION 444
Which one of the following would not be considered a carrying cost associated with inventory?
A. Insurancecosts.
B. Costofcapitalinvestedintheinventory. C. Cost of obsolescence.
D. Shipping costs.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shipping costs (which are selling costs) would not be considered a carrying cost associated with inventory. Choices "a", "b", and "c" are incorrect. Each of the following would be considered a carrying cost associated with inventory.
A. Insurance costs.
B. Cost of capital invested in the inventory.
C. Cost of obsolescence.
QUESTION 445
Handyman Inc. operates a chain of hardware stores across New England. The controller wants to determine the optimum safety stock levels for an air purifier unit. The inventory manager has compiled the following data.
· The annual carrying cost of inventory approximates 20 percent of the investment in inventory. · The inventory investment per unit averages $50.
· The stockout cost is estimated to be $5 per unit.
· The company orders inventory on the average of ten times per year.
· Total cost = carrying cost + expected stockout cost.
· The probabilities of a stockout per order cycle with varying levels of safety stock are as follows.
The total cost of safety stock on an annual basis with a safety stock level of 100 units is:
A. $1,750 B. $1,950 C. $2,000 D. $650
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $1,750 total annual cost of safety stock of 100 units.
Choices "b", "c", and "d" are incorrect, per the above calculation.
QUESTION 446
Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?
A. Installmentloans.
B. Commercialpaper.
C. Trade credit.
D. Bankers' acceptances.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Trade credit generally provides the largest source of short-term credit for small firms. Choices "a", "b", and "d" are incorrect, per the above Explanation:.
QUESTION 447
Which one of the following provides a spontaneous source of financing for a firm?
A. Accountspayable. B. Accountsreceivable. C. Debentures.
D. Preferred stock.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Accounts payable provide a spontaneous source of financing for a firm. Choice "b" is incorrect. Accounts receivable take time to factor. Choices "c" and "d" are incorrect.
Each of the following take time to issue:
C. Debentures.
D. Preferred stock.
QUESTION 448
Which one of the following statements about trade credit is correct? Trade credit is:
A. Notanimportantsourceoffinancingforsmallfirms. B. Asourceoflong-termfinancingtotheseller.
C. Subject to risk of buyer default.
D. Usually an inexpensive source of external financing.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Trade credit is subject to risk of buyer default. Choice "a" is incorrect. Trade credit is an important source of financing for small firms. Choice "b" is incorrect. Trade credit is not a source of long-term financing to the seller. Choice "d" is incorrect. Trade credit is usually an expensive source of external financing.
QUESTION 449
CyberAge outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.
Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company's weighted annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is:
A. 27.0percent. B. 28.0percent. C. 29.3 percent. D. 30.2 percent.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. 28% weighted annual interest rate. This question pertains to a complex computation of effective rates on lost discounts for multiple terms and multiple balances. The computation of the annual percentage cost of the lost discount is equal to the effective rate of interest for the period (for example 2/10, net 30 is 2% interest charge/ 98% proceeds) times the number of times this period occurs in a year (for example 2/10, net 20 is 360 days per year divided by 20 day period during which the lost discount is used or 18 times). Extension of this logic to the referenced question involves allocating the computed annual rates to the relative balances of the outstanding payables as follows:
QUESTION 450
CyberAge outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.
Should CyberAge use trade credit and continue paying at the end of the credit period?
A. No,ifthecostofalternativeshort-termfinancingismore.
B. Yes,ifthefirm'sweightedaveragecostofcapitalisequaltoitsweightedaveragetradecredit. C. No, if the cost of alternative long-term financing is more.
D. Yes, if the cost of alternative short-term financing is more.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes, CyberAge should use trade credit and continue paying at the end of the credit period, if the cost of alternative short-term financing is more. Choices "a", "b", and "c" are incorrect, per the above Explanation:.
QUESTION 451
The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given below.
A. Payafactortobuythecompany'sreceivables,whichaverage$125,000permonthandhaveanaveragecollectionperiodof30days.Thefactorwilladvanceup to 80 percent of the face value of receivables at 10 percent and charge a fee of 2 percent of all receivables purchaseD. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
B. Borrow$110,000fromabankat12percentinterest.A9percentcompensatingbalancewouldberequired.
C. Issue $110,000 of six-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
D. Borrow $125,000 from a bank on a discount basis at 20 percent. No compensating balance would be required.Assume a 360-day year in all of your calculations.The cost of Alternative B is:
E. 10.5percent.
F. 12.0percent.
G. 13.2 percent.
H. 21.0 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 452
The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given below.
A. Payafactortobuythecompany'sreceivables,whichaverage$125,000permonthandhaveanaveragecollectionperiodof30days.Thefactorwilladvanceup to 80 percent of the face value of receivables at 10 percent and charge a fee of 2 percent of all receivables purchaseD. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
B. Borrow$110,000fromabankat12percentinterest.A9percentcompensatingbalancewouldberequired.
C. Issue $110,000 of six-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
D. Borrow $125,000 from a bank on a discount basis at 20 percent. No compensating balance would be required.Assume a 360-day year in all of your calculations.The cost of Alternative D. is:
E. 10.0percent.
F. 20.0percent.
G. 25.0 percent.
H. 40.0 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 453
A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?
A. .40 B. .60 C. 1.5
D. 2.5
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:
$60,000/$40,000 = 1.5
Choice "a" is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000. Choice "b" is incorrect. .6 is obtained by dividing total costs into fixed costs. Choice "d" is incorrect. 2.5 is obtained by dividing total costs by variable costs.
QUESTION 454
In planning and controlling capital expenditures, the most logical sequence is to begin with:
A. Analyzingcapitaladditionproposals.
B. Analyzingandevaluatingallpromisingalternatives.
C. Identifying capital addition projects and other capital needs. D. Developing capital budgets.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The most logical sequence in planning and controlling capital expenditures is to begin with identifying capital addition projects and other capital needs. Choice "a" is incorrect. Analyzing capital addition proposals omits other capital needs. Choice "b" is incorrect. Analyzing and evaluating all promising alternatives is beyond the scope of planning and controlling capital expenditures.
Choice "d" is incorrect. Developing capital budgets is the same as planning and controlling capital expenditures.
QUESTION 455
Return on assets:
A. Isameasureofprofitabilityandindicateshowmuchisleftofeachsalesdollartocoveroperatingexpensesandprofit.
B. Isaprofitabilitymeasureandcanbeusedtoevaluatetheefficiencyofassetusageandmanagement,andtheeffectivenessofbusinessstrategiestocreate profits.
C. Measures the amount of operating income earned above the imputed cost of capital for the operating unit. If the measure is positive, returns exceed the cost of financing the operating unit.
D. Measures asset activity and the ability of the firm to generate sales through the use of assets.Generally, the more sales dollars generated per dollar of assets used, the better the net income of an entity.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Return on assets is a profitability measure and can be used to evaluate the efficiency of asset usage and management, and the effectiveness of business strategies to create profits. Choice "a" is incorrect. This option defines gross profit margin. Choice "c" is incorrect. This option defines residual income. Choice "d" is incorrect. This option defines total asset turnover.
QUESTION 456
Limitations of the information provided by total asset turnover include:
A. Agoodmeasurefortrendanalysisofaparticularcompany,butvariablewaysofcalculatingcostofgoodssoldlimititsusefulnessforcomparativeanalysis.
B. Thecalculationcanbeaffectedbyvaryingaccountingassumptions,whichaffectthecalculationofnetincome.
C. Because of differing costs of capital, the measure cannot be effectively used for comparative analysis.
D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure. Choice "a" is incorrect. This option pertains to gross profit margin. Choice "b" is incorrect. This option pertains to return on the investment in assets. Choice "c" is incorrect. This option pertains to residual income.
QUESTION 457
Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annual operating income for a company is:
A. Returnonassets.
B. Long-rangeprofitobjectives.
C. Industry average for earnings on sales. D. Internal rate of return.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In evaluating the adequacy of the budgeted annual operating income, you would not use the internal rate of return calculation. The internal rate of return is used for capital budgeting. Choices "a", "b", and "c" are incorrect. Return on assets, long range profit objectives, industry average for earnings on sales, and earnings per share [not mentioned as an option] are all measures for evaluating the adequacy of the budgeted annual operating income.
QUESTION 458
The selection of the denominator in the return on investment (ROI) formula is critical to the measure's effectiveness. Which denominator is criticized because it combines the effects of operating decisions made at one level of the organization with financing decisions made at another organization level?
A. T otal assets available.
B. T otal assets employed.
C. Working capital plus other assets.
D. Shareholder's equity.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders' equity is the ROI denominator that has been criticized because it combines the effects of operating decisions made at another organization level. Choices "a", "b", and "c" are incorrect, per the above Explanation:.
QUESTION 459
Micro Manufacturers uses a performance reporting system that combines both financial and nonfinancial measures to evaluate division performance. All of the following measure operational efficiency, except:
A. Operatingleverage.
B. Days'salesinaccountsreceivables. C. Inventoryturnover.
D. Residual income.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Residual income measures profitability in excess of a target rate of return.
Operational efficiency is not considered.
Choices "a", "b", and "c" are incorrect. Operating leverage, days' sales in accounts receivable, and inventory are all measures of operational efficiency, specifically, efficiency in managing working capital.
QUESTION 460
Managerial performance can be measured in many different ways including return on investment (ROI) and residual income (RI). A good reason for using RI instead of ROI is that:
A. RIcanbecomputedwithoutregardtoidentifyinganinvestmentbase.
B. GoalcongruenceismorelikelytobepromotedbyusingRI.
C. RI is well understood and often used in the financial press.
D. ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Goal congruence is promoted through the use of the residual income approach. The ROI approach may cause segments that achieve high returns to reject investments that may benefit the company but lower the segment's rate of return.
Choices "a", "c", and "d" are incorrect, per the above Explanation:.
QUESTION 461
The imputed interest rate used in the residual income approach to performance evaluation can best be described as the:
A. Historicalweightedaveragecostofcapitalforthecompany.
B. Targetreturnoninvestmentsetbythecompany'smanagement.
C. Averagereturnoninvestmentsforthecompanyoverthelastseveralyears. D. Marginal after-tax cost of capital on new equity capital.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The imputed interest rate used in the residual income approach can best be described as the target return on investment set by the company's management. Choice "a" is incorrect, but it is a close second. The historical weighted average cost of capital may be how management sets the target return on investment.
Choice "c" is incorrect. The average return on investments for past years may not be a good indication of management's future intentions.
Choice "d" is incorrect. Marginal after-tax cost of capital on new equity may be how management sets its targets, but it may not be, too.
QUESTION 462
One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income:
A. Dividedbythecurrentyear'scapitalexpenditurespluscostofcapital. B. Dividedbyfixedassets.
C. Divided by current assets.
D. Divided by total assets.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Return on investment is operating income divided by total assets. Choice "a" is incorrect. Current year's capital expenditures plus cost of capital would be a meaningless denominator.
Choice "b" is incorrect. This omits the current assets employed by the division.
Choice "c" is incorrect. This omits fixed assets.
QUESTION 463
The following selected data pertain to the Darwin Division of Beagle Co. for 1994:
What was Darwin's 1994 residual income?
A. $0
B. $4,000 C. $10,000 D. $30,000
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Residual income is income less the imputed interest rate times average invested capital. Capital turnover is equal to sales / average invested capital.
Choice "a" is incorrect. Residual income is greater than zero. The imputed interest rate times average invested capital needs to be compared with operating income. Choice "b" is incorrect. Residual income is not simply the imputed interest rate times operating income.
The imputed interest rate times average invested capital needs to be compared with operating income. Choice "c" is incorrect. Residual income is not simply imputed interest rate times average invested capital. The operating income must be considered.
QUESTION 464
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.
· Williams can raise cash by selling $1,000, 8 percent, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay floatation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8 percent. · Williams can sell 8 percent preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share. · Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and floatation costs are expected to amount to $5 per share. · Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
· Williams' preferred capital structure is:
Long-term debt 30% Preferred stock 20 Common stock 50
The cost of funds from retained earnings for Williams, Inc. is:
A. 7.0percent. B. 7.4percent. C. 8.1 percent. D. 7.8 percent.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. 7.0 percent cost of funds from retained earnings. The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return "lost" by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.
$7 / $100 = 7%
Choices "b", "c", and "d" are incorrect, per the above Explanation:/calculation.
QUESTION 465
Sam, CPA, is one of the partners in a limited liability partnership with other CPAs. Sam avoids personal liability for:
A. Thewrongfulactsofemployeesactingunderhissupervision.
B. Hisownnegligentacts.
C. The malpractice of his partners regarding errors and omissions. D. The negligent actions of his subordinates under his direct control.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: A partner in a LLP is personally liable for tort liabilities arising from his own negligence and the negligence of his direct subordinates and for breach of contract damages. He is NOT personally liable for the negligent actions committed by his partners.
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 466
A limited liability partnership must:
A. Fileregistrationdocumentswiththestateinwhichitisformed.
B. Holdallpartnerspersonallyliableforalldebtsandliabilitiesofthepartnershipandpartners. C. Carry no less than one hundred thousand dollars of property insurance.
D. Not have partners with professional licenses.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct.
Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as Articles of LLP. It is generally designed for professionals who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that personal liability insurance (not property insurance) be carried to protect those harmed by the professionals' malpractice.
Choices "b", "c", and "d" are incorrect, per the above rule.
QUESTION 467
Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make taxfree contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, InC. Which of the following would be the most appropriate business structure to meet all of their concerns?
A. Proprietorship.
B. Scorporation.
C. C corporation.
D. Limitedliabilitypartnership.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An LLP does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners.
A partner may be another entity.
Choice "a" is incorrect. A proprietorship by definition has only one owner, not three owners. Choice "b" is incorrect. While an S corporation allows for the same treatment of its earnings and distributions as in the facts, it is prohibited from having another company as an owner. Choice "c" is incorrect. A C corporation pays its own taxes on its earnings, and any distributions to its shareholders are again taxed at the shareholder level (known as "double taxation").
QUESTION 468
A sole proprietorship would be an ideal form of business to select if:
A. Theindividualdesirednoliabilitybeyondhiscapitalinvestment.
B. Theindividualwantedtobeablesellthebusinessatwill.
C. The individual wanted the business to be a separate entity from the sole proprietor. D. The individual wanted the business to continue indefinitely.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A sole proprietor is free to transfer or sell the business at will. Choice "a" is incorrect because a sole proprietor is personally liable for all obligations of the business. Choice "c" is incorrect. A sole proprietorship is not considered an entity separate from the sole proprietor.
Choice "d" is incorrect because a sole proprietorship ends with the death of the sole proprietor.
QUESTION 469
Formation of which of the following types of business does not require the filing of documents with the state?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A sole proprietorship can be formed without filing with the state. Formation of either a corporation or a limited partnership requires a filing. Choices "a", "b", and "d" are incorrect per the Explanation: above.
QUESTION 470
Which of the following forms of business can be formed with only one individual owning the business?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A sole proprietorship and (in most states) a limited liability company can be formed with only one owner. A partnership requires two or more partners. Choices "a", "c", and "d" are incorrect per the Explanation: above.
QUESTION 471
Noll Corp. and Orr Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture: A. Willbetreatedasapartnershipinmostimportantlegalrespects.
Explanation/Reference:
Explanation:
B. Mustbedissolveduponthecompletionofasingleundertaking.
C. Will be treated as an association for federal income tax purposes and taxed at the prevailing corporate rates. D. Must file a certificate of limited partnership with the appropriate state agency.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Choice "a" is correct. The legal requirements, the consequences, the advantages, and disadvantages of forming a joint venture generally are identical to those of a general partnership. Joint ventures are treated as a partnership in most important legal aspects. Choice "b" is incorrect. A joint venture need not be dissolved upon the completion of a single undertaking. Joint ventures may be formed for a single transaction or for a related series of transactions.
Choice "c" is incorrect because a joint venture would be taxed like a partnership, not a corporation. Choice "d" is incorrect because a joint venture, like a partnership, may be formed without filing with the state.
QUESTION 472
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders' derivative suit in the name of the corporation?
A. Tocompelpaymentofaproperlydeclareddividend.
B. Toenforcearighttoinspectcorporaterecords.
C. To compel dissolution of the corporation.
D. To recover damages from corporate management for an ultra vires management act.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director's or an officer's scope of authority and thus is a breach of duty to the corporation. Choices "a", "b", and "c" are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.
QUESTION 473
Select Co. had the following 1994 financial statement relationships:
Asset turnover 5
Profit margin on sales 0.02
What was Select's 1994 percentage return on assets?
A. 0.1percent. B. 0.4percent. C. 2.5 percent. D. 10.0 percent.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Return on assets equals income divided by average assets. This formula can be further divided into the components of profit margin times
asset turnover (referred to as the Dupont formula):
Choices "a", "b", and "c" are incorrect, per the above calculation.
QUESTION 474
In a general partnership, the authorization of all partners is required for an individual partner to bind the partnership in a business transaction to:
A. Purchaseinventory.
B. Hireemployees.
C. Sell goodwill.
D. Sign advertising contracts.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. No such authority exists, however, for transactions outside the regular scope of business. The sale of a business's goodwill is extraordinary and is outside the ordinary scope of business. Thus, a partner must get authorization from all other partners to make the sale.
Choice "a" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Purchasing inventory is within the regular scope of business, so a partner need not get permission from the other partners to bind the partnership. Choice "b" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Hiring employees is within the regular scope of a business, so a partner need not get permission from the other partners to bind the partnership. Choice "d" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Entering into advertising contracts is within the regular course of business, and so a partner need not get permission from the other partners to bind the partnership.
QUESTION 475
The following information pertains to Quest Co.'s Gold Division for 1993:
Quest's return on investment was:
A. 10.00percent. B. 13.33percent. C. 27.50 percent. D. 30.00 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Return on investment equals net income divided by average invested capital:
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 476
Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?
A. Risk indifferent. B. Risk averse.
C. Risk seeking. D. Cautious.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Risk averse behavior describes managers who demand more return on an investment as risk increases. These managers expect to be compensated for increased risk. Choice "a" is incorrect. Risk indifferent behavior describes a manager who is neutral with regard to the return associated with a particular investment. Typically, the amount of a risk free rate of return associated with an investment of a given amount compared to a higher return associated with higher risk is viewed as having equal value.
Choice "c" is incorrect. Risk seeking behavior describes managers who seek reduced return for higher risk. Choice "d" is incorrect. The term "cautious" is a distracter. Although caution is an attitude, it is not a technical term.
QUESTION 477
If the U.S. dollar increases in value relative to the other major currencies, aggregate demand should:
A. IncreaseasU.S.goodsbecomemoreattractiveoverseas. B. DecreaseasU.S.goodsbecomelessattractiveoverseas. C. Depends on supply of foreign goods.
D. Notnecessarilychange.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If the dollar gains in value, net exports will suffer as U.S. goods become more expensive overseas; hence aggregate demand will decrease. The supply of foreign goods domestically should increase as imports become cheaper.
Choice "a" is incorrect. Demand should decrease, not increase.
Choice "c" is incorrect. Irrelevant to the question.
Choice "d" is incorrect. Demand should decrease, not remain the same.
QUESTION 478
In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output where: A. Priceequalsmarginalcost.
B. Averagecostsareminimized.
C. Price equals average cost.
D. Marginal cost equals marginal revenue.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive. Choice "a" is incorrect. Very close, but it's actual marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis.
Choice "b" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue. Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.
QUESTION 479
Under the Revised Model Business Corporation Act, when a corporation's bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder's proportionate share of rights in any newly issued shares. Rule: Preemptive rights do not provide a shareholder with the right to a proportionate share of corporate assets on dissolution.
Choice "c" is correct. "No - Yes."
Choices "a", "b", and "d" are incorrect, per the above rules.
QUESTION 480
All of the following are the rates used in net present value analysis, except for the:
A. Costofcapital.
B. Hurdlerate.
C. Discount rate.
D. Accounting rate of return.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The accounting rate of return is a capital budgeting technique, not a rate. Choices "a", "b", and "c" are incorrect. All of these are rates used in net present value analysis:
· Cost of capital
· Hurdle rate
· Discount rate
· Required rate of return
Cost of capital is the cost of borrowing. The hurdle rate, the discount rate, and the required rate of return are synonymous terms for an arbitrary rate set by management.
QUESTION 481
In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?
A. Inflationisirrelevanttocurrencydemand.
B. Asinflationassociatedwithaforeigneconomyincreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyfalls.
C. Asinflationassociatedwithaforeigneconomyincreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyincreases. D. Asinflationassociatedwithaforeigneconomydecreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyfalls.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency. Choice "a" is incorrect. Inflation, along with interest rates and trade restrictions are significant determinants of exchange rates.
Choice "c" is incorrect. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency, not increase demand. Choice "d" is incorrect. As inflation associated with a foreign currency decreases in relation to a domestic economy, demand for the foreign currency rises. Inflation weakens the domestic currency in relation to the foreign currency and makes foreign products less expensive and increases demand. Increased demand for a foreign import will increase the demand for its currency, not decrease demand.
QUESTION 482
The local video store's business increased by 12 percent after the movie theater raised its prices from $6.50 to $7.00. This is an example of:
A. Substitutegoods.
B. Superiorgoods.
C. Complementarygoods. D. Independent goods.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For substitute goods, as the price of one good goes up, the demand for another, substitute good increases as consumers desire the lower- priced substitute good. Choice "b" is incorrect. Superior goods. Just as the demand for inferior goods declines with an increase in the income level of a consumer, superior goods will experience a spurt in demand as prices are raised.
Choice "c" is incorrect. The demands for mutually "complementary goods" fluctuate together (e.g., more cereal purchases are accompanied by an increase in the demand for milk). Choice "d" is incorrect. Independent goods have unrelated demand functions (e.g., bread and vacuum cleaners).
QUESTION 483
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s directors are elected by its:
A. Officers.
B. Outgoingdirectors. C. Stockholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Directors are elected by the stockholders.
QUESTION 484
When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act, they must agree to:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. "Yes - No."
Rule: A partnership is an agreement between two or more persons to carry on, as co-owners, a business for profit; partners share management and profits and losses, not gross receipts. Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 485
Which of the following documents would most likely contain specific rules for the management of a business corporation?
A. Articlesofincorporation. B. Bylaws.
C. Certificate of authority.
D. Shareholders' agreement.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation. Choice "a" is incorrect. Articles of incorporation are filed with the state and contain information regarding the formation of the corporation.
Choice "c" is incorrect. A certificate of authority is filed with the foreign state that a business wishes to do business in and with permission from that state. Choice "d" is incorrect. A shareholder agreement is a contract between shareholders for any rights or duties agreed upon between the parties.
QUESTION 486
The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40 percent.
What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting analysis?
A. $81,000 B. $68,400 C. $63,000 D. $60,000
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $63,000 net cash flow for the tenth year.
Alternate Computation:
In year 10, Moore will generate a $100,000 profit from the incremental sales (2000 units × ($500 - $450)). This profit will be taxed at 40%, so the net after-tax increase in cash flow is $60,000. The machine is fully depreciated in year 10 because it was depreciated over a 5-year life. The tax basis of the machine is zero on the date Moore receives a $5,000 salvage value for the machine. The gain on the machine of $5,000 ($5,000 SV - $0 Basis) is taxed at 40%, or $2,000 in total tax outflow for the gain, so the net inflows on the salvage is $3,000. Therefore, the total after-tax cash flows in year 10 for the new machine is $60,000 + $3,000 = $63,000.
QUESTION 487
The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the:
A. Historicalweightedaveragecostofcapitalforthecompany.
B. Averagereturnoninvestmentthathasbeenearnedbythecompanyoveraparticulartimeperiod. C. Average return on assets employed over a particular time period.
D. Average prime lending rate for the year being evaluated.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Historical weighted average cost of capital is usually used as the target or hurdle rate in the residual income approach. Choices "b", "c", and "d" are incorrect, per the above definition.
QUESTION 488
A company uses the following formula in determining its optimal level of cash.
Where:
b = Fixed cost per transaction
i = Interest rate on marketable securities
T = Total demand for cash over a period of time
This formula is a modification of the Economic Order Quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the interest rate on marketable securities is 6 percent per year. The company estimates that it will make cash payments of $12,000 over a one-month perioD. What is the average cash balance (rounded to the nearest dollar)?
A. $1,000 B. $2,000 C. $3,464 D. $6,928
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Like the EOQ, this formula represents the amount of cash brought in by the sale of marketable securities. Also like the EOQ, this cash goes to zero (or the safety level) over time. The average cash (like the average inventory) is one half of the amount collected. Remember also to convert the interest rate to a per month figure of 0.5%
Choices "a", "b", and "d" are incorrect, per above.
QUESTION 489
Which one of the following statements concerning pure monopolies is correct?
A. Thedemandcurveofamonopolistisperfectlyelastic.
B. Thepriceatwhichamonopolistmaximizesitsprofitiswherepriceequalsbothmarginalcostandmarginalrevenue. C. A monopolist's marginal revenue curve lies below its demand curve.
D. The supply curve of a monopolist is perfectly inelastic.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A monopolist's marginal revenue curve lies below its demand curve. Choice "a" is incorrect. The demand curve of a monopolist is not perfectly elastic. Choice "b" is incorrect. A monopolist sets its price higher than marginal revenue. Choice "d" is incorrect. A monopolist can change the quantity supplied or fix the price but cannot do both simultaneously. In any case, its supply curve is not perfectly inelastic.
QUESTION 490
When a partner in a general partnership lacks actual or apparent authority to contract on behalf of the partnership, and the party contracted with is aware of this fact, the partnership will be bound by the contract if the other partners:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. "Yes - No."
Rule: The authority of partners is governed by agency law. Under agency law, a principal is not bound to the third party unless the agent had actual authority or apparent authority. When the agent has no actual authority and no apparent authority, the principal (in this case the partnership) will only be liable if it chooses to adopt the agreement (i.e., ratify).
Rule: Amending the partnership agreement (presumably to grant authority) will not cause the partnership to be bound because authority must exist at the time the contract is made or the partnership must ratify the contract.
Choices "a", "c", and "d" are incorrect, per the above rules.
QUESTION 491
Park and Graham entered into a written partnership agreement to operate a retail store. Their agreement was silent as to the duration of the partnership. Park wishes to dissociate from the partnership. Which of the following statements is correct?
A. Parkmaydissociatefromthepartnershipatanytime.
B. UnlessGrahamconsentstothedissociation,Parkmustapplytoacourtandobtainadecreeorderingthedissociation. C. Park may not dissociate from the partnership unless Graham consents.
D. Park may dissociate from the partnership only after notice of the proposed dissolution is given to all partnership creditors.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time. Choice "b" is incorrect. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time. No court order is required. Choice "c" is incorrect. Partnerships are consensual relationships, so any partner has the power to dissociate at any time; he or she need not obtain the consent of the other partners (though absent consent, the partner will be liable for damages if the dissociation is wrongful). Choice "d" is incorrect. There is no requirement of giving partnership creditors a formal notice of intent to dissociate, but it is a good idea to do so to avoid liability on future partnership obligations.
QUESTION 492
Fanny and John each own and manage their own companies. Fanny's business is manufacturing freight boxes of all types, and John's business is selling freight boxes to different industries. They decide to combine their expertise and knowledge to produce and sell freight boxes specifically designed for the new airline company that just formed in their city. Which of the following best describes the business formed by the parties?
A. Ageneralpartnership.
B. Alimitedliabilitypartnership. C. A sole proprietorship.
D. A joint venture.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A joint venture is formed for a single business undertaking such as building and designing freight containers to be sold specifically to one company. Each company coming together in this joint venture has its own business outside of this one endeavor. Choice "a" is incorrect. A general partnership is more broad in its business purpose than a joint venture is.
Choice "b" is incorrect. A limited liability partnership is primarily designed for professionals who want to work as partners but with limited personal liability. Choice "c" is incorrect. Sole proprietorships have only one person in the business.
The amount of inventory that a company would tend to hold in safety stock would increase as the:
A. Costofcarryinginventorydecreases.
B. Variabilityofsalesdecreases.
C. Costs of running out of stock decreases.
D. Length of time that goods are in transit decreases.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. As the cost of carrying inventory decreases, safety stock would tend to increase to reduce the risk of stock outs.
Choice "b" is incorrect. As sales become more predictable (sales variability decreases), less (not more) safety stock would be needed because the risk of stock outs would have decreased. Choice "c" is incorrect. If the cost of stock outs decrease, safety stock would decrease. Choice "d" is incorrect. If lead-time decreases, safety stock would decrease.
QUESTION 441
The level of safety stock in inventory management depends on all of the following, except the:
A. Levelofuncertaintyofthesalesforecast.
B. Levelofcustomerdissatisfactionforbackorders.
C. Level of uncertainty in lead-time for stock shipments. D. Cost to reorder stock.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reorder costs do not impact the level of safety stock. Choices "a", "b", and "c" are incorrect. Safety stock levels are affected by:
1. Uncertain sales forecasts - greater uncertainty means a higher level of safety stock should be carried.
2. Dissatisfaction of customers - if customers are dissatisfied with back orders (which occur when there are stock outs), then more safety stock should be carried to prevent stock outs.
3. Uncertain lead times - greater uncertainty means a higher level of safety stock is needed.
QUESTION 442
The following information regarding inventory policy was assembled by the JRJ Corporation. The company uses a 50-week year in all calculations.
The reorder point is:
A. 3,300units. B. 2,100units. C. 1,300 units. D. 5,200 units.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A 50-week year would mean that 200 units are sold per week (10,000 units per year over 50 weeks). Therefore, 800 units are sold during the lead-time (4 weeks × 200 units per week). Required safety stock is 1,300 units, which means that no less than 1,300 units must be on hand at any time. The reorder point is then 2,100 units (1,300 safety stock plus the 800 units used during lead time). Choices "a", "c", and "d" are incorrect, per the above Explanation:.
QUESTION 443
All of the following are inventory carrying costs, except:
A. Insurance.
B. Opportunitycostoninventoryinvestment. C. Obsolescence and spoilage.
D. Inspections.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Inspections. Inspections are part of order costs, not carrying costs. Choices "a" and "c" are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory).
Choice "b" is incorrect. The economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.
QUESTION 444
Which one of the following would not be considered a carrying cost associated with inventory?
A. Insurancecosts.
B. Costofcapitalinvestedintheinventory. C. Cost of obsolescence.
D. Shipping costs.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shipping costs (which are selling costs) would not be considered a carrying cost associated with inventory. Choices "a", "b", and "c" are incorrect. Each of the following would be considered a carrying cost associated with inventory.
A. Insurance costs.
B. Cost of capital invested in the inventory.
C. Cost of obsolescence.
QUESTION 445
Handyman Inc. operates a chain of hardware stores across New England. The controller wants to determine the optimum safety stock levels for an air purifier unit. The inventory manager has compiled the following data.
· The annual carrying cost of inventory approximates 20 percent of the investment in inventory. · The inventory investment per unit averages $50.
· The stockout cost is estimated to be $5 per unit.
· The company orders inventory on the average of ten times per year.
· Total cost = carrying cost + expected stockout cost.
· The probabilities of a stockout per order cycle with varying levels of safety stock are as follows.
The total cost of safety stock on an annual basis with a safety stock level of 100 units is:
A. $1,750 B. $1,950 C. $2,000 D. $650
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $1,750 total annual cost of safety stock of 100 units.
Choices "b", "c", and "d" are incorrect, per the above calculation.
QUESTION 446
Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?
A. Installmentloans.
B. Commercialpaper.
C. Trade credit.
D. Bankers' acceptances.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Trade credit generally provides the largest source of short-term credit for small firms. Choices "a", "b", and "d" are incorrect, per the above Explanation:.
QUESTION 447
Which one of the following provides a spontaneous source of financing for a firm?
A. Accountspayable. B. Accountsreceivable. C. Debentures.
D. Preferred stock.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Accounts payable provide a spontaneous source of financing for a firm. Choice "b" is incorrect. Accounts receivable take time to factor. Choices "c" and "d" are incorrect.
Each of the following take time to issue:
C. Debentures.
D. Preferred stock.
QUESTION 448
Which one of the following statements about trade credit is correct? Trade credit is:
A. Notanimportantsourceoffinancingforsmallfirms. B. Asourceoflong-termfinancingtotheseller.
C. Subject to risk of buyer default.
D. Usually an inexpensive source of external financing.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Trade credit is subject to risk of buyer default. Choice "a" is incorrect. Trade credit is an important source of financing for small firms. Choice "b" is incorrect. Trade credit is not a source of long-term financing to the seller. Choice "d" is incorrect. Trade credit is usually an expensive source of external financing.
QUESTION 449
CyberAge outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.
Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period, the company's weighted annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is:
A. 27.0percent. B. 28.0percent. C. 29.3 percent. D. 30.2 percent.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. 28% weighted annual interest rate. This question pertains to a complex computation of effective rates on lost discounts for multiple terms and multiple balances. The computation of the annual percentage cost of the lost discount is equal to the effective rate of interest for the period (for example 2/10, net 30 is 2% interest charge/ 98% proceeds) times the number of times this period occurs in a year (for example 2/10, net 20 is 360 days per year divided by 20 day period during which the lost discount is used or 18 times). Extension of this logic to the referenced question involves allocating the computed annual rates to the relative balances of the outstanding payables as follows:
QUESTION 450
CyberAge outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.
Should CyberAge use trade credit and continue paying at the end of the credit period?
A. No,ifthecostofalternativeshort-termfinancingismore.
B. Yes,ifthefirm'sweightedaveragecostofcapitalisequaltoitsweightedaveragetradecredit. C. No, if the cost of alternative long-term financing is more.
D. Yes, if the cost of alternative short-term financing is more.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Yes, CyberAge should use trade credit and continue paying at the end of the credit period, if the cost of alternative short-term financing is more. Choices "a", "b", and "c" are incorrect, per the above Explanation:.
QUESTION 451
The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given below.
A. Payafactortobuythecompany'sreceivables,whichaverage$125,000permonthandhaveanaveragecollectionperiodof30days.Thefactorwilladvanceup to 80 percent of the face value of receivables at 10 percent and charge a fee of 2 percent of all receivables purchaseD. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
B. Borrow$110,000fromabankat12percentinterest.A9percentcompensatingbalancewouldberequired.
C. Issue $110,000 of six-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
D. Borrow $125,000 from a bank on a discount basis at 20 percent. No compensating balance would be required.Assume a 360-day year in all of your calculations.The cost of Alternative B is:
E. 10.5percent.
F. 12.0percent.
G. 13.2 percent.
H. 21.0 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 452
The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given below.
A. Payafactortobuythecompany'sreceivables,whichaverage$125,000permonthandhaveanaveragecollectionperiodof30days.Thefactorwilladvanceup to 80 percent of the face value of receivables at 10 percent and charge a fee of 2 percent of all receivables purchaseD. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.
B. Borrow$110,000fromabankat12percentinterest.A9percentcompensatingbalancewouldberequired.
C. Issue $110,000 of six-month commercial paper to net $100,000. (New paper would be issued every 6 months.)
D. Borrow $125,000 from a bank on a discount basis at 20 percent. No compensating balance would be required.Assume a 360-day year in all of your calculations.The cost of Alternative D. is:
E. 10.0percent.
F. 20.0percent.
G. 25.0 percent.
H. 40.0 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 453
A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?
A. .40 B. .60 C. 1.5
D. 2.5
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:
$60,000/$40,000 = 1.5
Choice "a" is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000. Choice "b" is incorrect. .6 is obtained by dividing total costs into fixed costs. Choice "d" is incorrect. 2.5 is obtained by dividing total costs by variable costs.
QUESTION 454
In planning and controlling capital expenditures, the most logical sequence is to begin with:
A. Analyzingcapitaladditionproposals.
B. Analyzingandevaluatingallpromisingalternatives.
C. Identifying capital addition projects and other capital needs. D. Developing capital budgets.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The most logical sequence in planning and controlling capital expenditures is to begin with identifying capital addition projects and other capital needs. Choice "a" is incorrect. Analyzing capital addition proposals omits other capital needs. Choice "b" is incorrect. Analyzing and evaluating all promising alternatives is beyond the scope of planning and controlling capital expenditures.
Choice "d" is incorrect. Developing capital budgets is the same as planning and controlling capital expenditures.
QUESTION 455
Return on assets:
A. Isameasureofprofitabilityandindicateshowmuchisleftofeachsalesdollartocoveroperatingexpensesandprofit.
B. Isaprofitabilitymeasureandcanbeusedtoevaluatetheefficiencyofassetusageandmanagement,andtheeffectivenessofbusinessstrategiestocreate profits.
C. Measures the amount of operating income earned above the imputed cost of capital for the operating unit. If the measure is positive, returns exceed the cost of financing the operating unit.
D. Measures asset activity and the ability of the firm to generate sales through the use of assets.Generally, the more sales dollars generated per dollar of assets used, the better the net income of an entity.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Return on assets is a profitability measure and can be used to evaluate the efficiency of asset usage and management, and the effectiveness of business strategies to create profits. Choice "a" is incorrect. This option defines gross profit margin. Choice "c" is incorrect. This option defines residual income. Choice "d" is incorrect. This option defines total asset turnover.
QUESTION 456
Limitations of the information provided by total asset turnover include:
A. Agoodmeasurefortrendanalysisofaparticularcompany,butvariablewaysofcalculatingcostofgoodssoldlimititsusefulnessforcomparativeanalysis.
B. Thecalculationcanbeaffectedbyvaryingaccountingassumptions,whichaffectthecalculationofnetincome.
C. Because of differing costs of capital, the measure cannot be effectively used for comparative analysis.
D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure. Choice "a" is incorrect. This option pertains to gross profit margin. Choice "b" is incorrect. This option pertains to return on the investment in assets. Choice "c" is incorrect. This option pertains to residual income.
QUESTION 457
Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annual operating income for a company is:
A. Returnonassets.
B. Long-rangeprofitobjectives.
C. Industry average for earnings on sales. D. Internal rate of return.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In evaluating the adequacy of the budgeted annual operating income, you would not use the internal rate of return calculation. The internal rate of return is used for capital budgeting. Choices "a", "b", and "c" are incorrect. Return on assets, long range profit objectives, industry average for earnings on sales, and earnings per share [not mentioned as an option] are all measures for evaluating the adequacy of the budgeted annual operating income.
QUESTION 458
The selection of the denominator in the return on investment (ROI) formula is critical to the measure's effectiveness. Which denominator is criticized because it combines the effects of operating decisions made at one level of the organization with financing decisions made at another organization level?
A. T otal assets available.
B. T otal assets employed.
C. Working capital plus other assets.
D. Shareholder's equity.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders' equity is the ROI denominator that has been criticized because it combines the effects of operating decisions made at another organization level. Choices "a", "b", and "c" are incorrect, per the above Explanation:.
QUESTION 459
Micro Manufacturers uses a performance reporting system that combines both financial and nonfinancial measures to evaluate division performance. All of the following measure operational efficiency, except:
A. Operatingleverage.
B. Days'salesinaccountsreceivables. C. Inventoryturnover.
D. Residual income.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Residual income measures profitability in excess of a target rate of return.
Operational efficiency is not considered.
Choices "a", "b", and "c" are incorrect. Operating leverage, days' sales in accounts receivable, and inventory are all measures of operational efficiency, specifically, efficiency in managing working capital.
QUESTION 460
Managerial performance can be measured in many different ways including return on investment (ROI) and residual income (RI). A good reason for using RI instead of ROI is that:
A. RIcanbecomputedwithoutregardtoidentifyinganinvestmentbase.
B. GoalcongruenceismorelikelytobepromotedbyusingRI.
C. RI is well understood and often used in the financial press.
D. ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Goal congruence is promoted through the use of the residual income approach. The ROI approach may cause segments that achieve high returns to reject investments that may benefit the company but lower the segment's rate of return.
Choices "a", "c", and "d" are incorrect, per the above Explanation:.
QUESTION 461
The imputed interest rate used in the residual income approach to performance evaluation can best be described as the:
A. Historicalweightedaveragecostofcapitalforthecompany.
B. Targetreturnoninvestmentsetbythecompany'smanagement.
C. Averagereturnoninvestmentsforthecompanyoverthelastseveralyears. D. Marginal after-tax cost of capital on new equity capital.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The imputed interest rate used in the residual income approach can best be described as the target return on investment set by the company's management. Choice "a" is incorrect, but it is a close second. The historical weighted average cost of capital may be how management sets the target return on investment.
Choice "c" is incorrect. The average return on investments for past years may not be a good indication of management's future intentions.
Choice "d" is incorrect. Marginal after-tax cost of capital on new equity may be how management sets its targets, but it may not be, too.
QUESTION 462
One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income:
A. Dividedbythecurrentyear'scapitalexpenditurespluscostofcapital. B. Dividedbyfixedassets.
C. Divided by current assets.
D. Divided by total assets.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Return on investment is operating income divided by total assets. Choice "a" is incorrect. Current year's capital expenditures plus cost of capital would be a meaningless denominator.
Choice "b" is incorrect. This omits the current assets employed by the division.
Choice "c" is incorrect. This omits fixed assets.
QUESTION 463
The following selected data pertain to the Darwin Division of Beagle Co. for 1994:
What was Darwin's 1994 residual income?
A. $0
B. $4,000 C. $10,000 D. $30,000
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Residual income is income less the imputed interest rate times average invested capital. Capital turnover is equal to sales / average invested capital.
Choice "a" is incorrect. Residual income is greater than zero. The imputed interest rate times average invested capital needs to be compared with operating income. Choice "b" is incorrect. Residual income is not simply the imputed interest rate times operating income.
The imputed interest rate times average invested capital needs to be compared with operating income. Choice "c" is incorrect. Residual income is not simply imputed interest rate times average invested capital. The operating income must be considered.
QUESTION 464
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.
· Williams can raise cash by selling $1,000, 8 percent, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay floatation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8 percent. · Williams can sell 8 percent preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share. · Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and floatation costs are expected to amount to $5 per share. · Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
· Williams' preferred capital structure is:
Long-term debt 30% Preferred stock 20 Common stock 50
The cost of funds from retained earnings for Williams, Inc. is:
A. 7.0percent. B. 7.4percent. C. 8.1 percent. D. 7.8 percent.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. 7.0 percent cost of funds from retained earnings. The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return "lost" by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.
$7 / $100 = 7%
Choices "b", "c", and "d" are incorrect, per the above Explanation:/calculation.
QUESTION 465
Sam, CPA, is one of the partners in a limited liability partnership with other CPAs. Sam avoids personal liability for:
A. Thewrongfulactsofemployeesactingunderhissupervision.
B. Hisownnegligentacts.
C. The malpractice of his partners regarding errors and omissions. D. The negligent actions of his subordinates under his direct control.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: A partner in a LLP is personally liable for tort liabilities arising from his own negligence and the negligence of his direct subordinates and for breach of contract damages. He is NOT personally liable for the negligent actions committed by his partners.
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 466
A limited liability partnership must:
A. Fileregistrationdocumentswiththestateinwhichitisformed.
B. Holdallpartnerspersonallyliableforalldebtsandliabilitiesofthepartnershipandpartners. C. Carry no less than one hundred thousand dollars of property insurance.
D. Not have partners with professional licenses.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct.
Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as Articles of LLP. It is generally designed for professionals who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that personal liability insurance (not property insurance) be carried to protect those harmed by the professionals' malpractice.
Choices "b", "c", and "d" are incorrect, per the above rule.
QUESTION 467
Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make taxfree contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, InC. Which of the following would be the most appropriate business structure to meet all of their concerns?
A. Proprietorship.
B. Scorporation.
C. C corporation.
D. Limitedliabilitypartnership.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An LLP does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners.
A partner may be another entity.
Choice "a" is incorrect. A proprietorship by definition has only one owner, not three owners. Choice "b" is incorrect. While an S corporation allows for the same treatment of its earnings and distributions as in the facts, it is prohibited from having another company as an owner. Choice "c" is incorrect. A C corporation pays its own taxes on its earnings, and any distributions to its shareholders are again taxed at the shareholder level (known as "double taxation").
QUESTION 468
A sole proprietorship would be an ideal form of business to select if:
A. Theindividualdesirednoliabilitybeyondhiscapitalinvestment.
B. Theindividualwantedtobeablesellthebusinessatwill.
C. The individual wanted the business to be a separate entity from the sole proprietor. D. The individual wanted the business to continue indefinitely.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A sole proprietor is free to transfer or sell the business at will. Choice "a" is incorrect because a sole proprietor is personally liable for all obligations of the business. Choice "c" is incorrect. A sole proprietorship is not considered an entity separate from the sole proprietor.
Choice "d" is incorrect because a sole proprietorship ends with the death of the sole proprietor.
QUESTION 469
Formation of which of the following types of business does not require the filing of documents with the state?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A sole proprietorship can be formed without filing with the state. Formation of either a corporation or a limited partnership requires a filing. Choices "a", "b", and "d" are incorrect per the Explanation: above.
QUESTION 470
Which of the following forms of business can be formed with only one individual owning the business?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A sole proprietorship and (in most states) a limited liability company can be formed with only one owner. A partnership requires two or more partners. Choices "a", "c", and "d" are incorrect per the Explanation: above.
QUESTION 471
Noll Corp. and Orr Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture: A. Willbetreatedasapartnershipinmostimportantlegalrespects.
Explanation/Reference:
Explanation:
B. Mustbedissolveduponthecompletionofasingleundertaking.
C. Will be treated as an association for federal income tax purposes and taxed at the prevailing corporate rates. D. Must file a certificate of limited partnership with the appropriate state agency.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Choice "a" is correct. The legal requirements, the consequences, the advantages, and disadvantages of forming a joint venture generally are identical to those of a general partnership. Joint ventures are treated as a partnership in most important legal aspects. Choice "b" is incorrect. A joint venture need not be dissolved upon the completion of a single undertaking. Joint ventures may be formed for a single transaction or for a related series of transactions.
Choice "c" is incorrect because a joint venture would be taxed like a partnership, not a corporation. Choice "d" is incorrect because a joint venture, like a partnership, may be formed without filing with the state.
QUESTION 472
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders' derivative suit in the name of the corporation?
A. Tocompelpaymentofaproperlydeclareddividend.
B. Toenforcearighttoinspectcorporaterecords.
C. To compel dissolution of the corporation.
D. To recover damages from corporate management for an ultra vires management act.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director's or an officer's scope of authority and thus is a breach of duty to the corporation. Choices "a", "b", and "c" are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.
QUESTION 473
Select Co. had the following 1994 financial statement relationships:
Asset turnover 5
Profit margin on sales 0.02
What was Select's 1994 percentage return on assets?
A. 0.1percent. B. 0.4percent. C. 2.5 percent. D. 10.0 percent.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Return on assets equals income divided by average assets. This formula can be further divided into the components of profit margin times
asset turnover (referred to as the Dupont formula):
Choices "a", "b", and "c" are incorrect, per the above calculation.
QUESTION 474
In a general partnership, the authorization of all partners is required for an individual partner to bind the partnership in a business transaction to:
A. Purchaseinventory.
B. Hireemployees.
C. Sell goodwill.
D. Sign advertising contracts.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. No such authority exists, however, for transactions outside the regular scope of business. The sale of a business's goodwill is extraordinary and is outside the ordinary scope of business. Thus, a partner must get authorization from all other partners to make the sale.
Choice "a" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Purchasing inventory is within the regular scope of business, so a partner need not get permission from the other partners to bind the partnership. Choice "b" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Hiring employees is within the regular scope of a business, so a partner need not get permission from the other partners to bind the partnership. Choice "d" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Entering into advertising contracts is within the regular course of business, and so a partner need not get permission from the other partners to bind the partnership.
QUESTION 475
The following information pertains to Quest Co.'s Gold Division for 1993:
Quest's return on investment was:
A. 10.00percent. B. 13.33percent. C. 27.50 percent. D. 30.00 percent.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Return on investment equals net income divided by average invested capital:
Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION 476
Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?
A. Risk indifferent. B. Risk averse.
C. Risk seeking. D. Cautious.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Risk averse behavior describes managers who demand more return on an investment as risk increases. These managers expect to be compensated for increased risk. Choice "a" is incorrect. Risk indifferent behavior describes a manager who is neutral with regard to the return associated with a particular investment. Typically, the amount of a risk free rate of return associated with an investment of a given amount compared to a higher return associated with higher risk is viewed as having equal value.
Choice "c" is incorrect. Risk seeking behavior describes managers who seek reduced return for higher risk. Choice "d" is incorrect. The term "cautious" is a distracter. Although caution is an attitude, it is not a technical term.
QUESTION 477
If the U.S. dollar increases in value relative to the other major currencies, aggregate demand should:
A. IncreaseasU.S.goodsbecomemoreattractiveoverseas. B. DecreaseasU.S.goodsbecomelessattractiveoverseas. C. Depends on supply of foreign goods.
D. Notnecessarilychange.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If the dollar gains in value, net exports will suffer as U.S. goods become more expensive overseas; hence aggregate demand will decrease. The supply of foreign goods domestically should increase as imports become cheaper.
Choice "a" is incorrect. Demand should decrease, not increase.
Choice "c" is incorrect. Irrelevant to the question.
Choice "d" is incorrect. Demand should decrease, not remain the same.
QUESTION 478
In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output where: A. Priceequalsmarginalcost.
B. Averagecostsareminimized.
C. Price equals average cost.
D. Marginal cost equals marginal revenue.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive. Choice "a" is incorrect. Very close, but it's actual marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis.
Choice "b" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue. Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.
QUESTION 479
Under the Revised Model Business Corporation Act, when a corporation's bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder's proportionate share of rights in any newly issued shares. Rule: Preemptive rights do not provide a shareholder with the right to a proportionate share of corporate assets on dissolution.
Choice "c" is correct. "No - Yes."
Choices "a", "b", and "d" are incorrect, per the above rules.
QUESTION 480
All of the following are the rates used in net present value analysis, except for the:
A. Costofcapital.
B. Hurdlerate.
C. Discount rate.
D. Accounting rate of return.
Correct Answer: D
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The accounting rate of return is a capital budgeting technique, not a rate. Choices "a", "b", and "c" are incorrect. All of these are rates used in net present value analysis:
· Cost of capital
· Hurdle rate
· Discount rate
· Required rate of return
Cost of capital is the cost of borrowing. The hurdle rate, the discount rate, and the required rate of return are synonymous terms for an arbitrary rate set by management.
QUESTION 481
In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?
A. Inflationisirrelevanttocurrencydemand.
B. Asinflationassociatedwithaforeigneconomyincreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyfalls.
C. Asinflationassociatedwithaforeigneconomyincreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyincreases. D. Asinflationassociatedwithaforeigneconomydecreasesinrelationtoadomesticeconomy,demandfortheforeigncurrencyfalls.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency. Choice "a" is incorrect. Inflation, along with interest rates and trade restrictions are significant determinants of exchange rates.
Choice "c" is incorrect. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency, not increase demand. Choice "d" is incorrect. As inflation associated with a foreign currency decreases in relation to a domestic economy, demand for the foreign currency rises. Inflation weakens the domestic currency in relation to the foreign currency and makes foreign products less expensive and increases demand. Increased demand for a foreign import will increase the demand for its currency, not decrease demand.
QUESTION 482
The local video store's business increased by 12 percent after the movie theater raised its prices from $6.50 to $7.00. This is an example of:
A. Substitutegoods.
B. Superiorgoods.
C. Complementarygoods. D. Independent goods.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For substitute goods, as the price of one good goes up, the demand for another, substitute good increases as consumers desire the lower- priced substitute good. Choice "b" is incorrect. Superior goods. Just as the demand for inferior goods declines with an increase in the income level of a consumer, superior goods will experience a spurt in demand as prices are raised.
Choice "c" is incorrect. The demands for mutually "complementary goods" fluctuate together (e.g., more cereal purchases are accompanied by an increase in the demand for milk). Choice "d" is incorrect. Independent goods have unrelated demand functions (e.g., bread and vacuum cleaners).
QUESTION 483
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s directors are elected by its:
A. Officers.
B. Outgoingdirectors. C. Stockholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Directors are elected by the stockholders.
QUESTION 484
When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act, they must agree to:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. "Yes - No."
Rule: A partnership is an agreement between two or more persons to carry on, as co-owners, a business for profit; partners share management and profits and losses, not gross receipts. Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 485
Which of the following documents would most likely contain specific rules for the management of a business corporation?
A. Articlesofincorporation. B. Bylaws.
C. Certificate of authority.
D. Shareholders' agreement.
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation. Choice "a" is incorrect. Articles of incorporation are filed with the state and contain information regarding the formation of the corporation.
Choice "c" is incorrect. A certificate of authority is filed with the foreign state that a business wishes to do business in and with permission from that state. Choice "d" is incorrect. A shareholder agreement is a contract between shareholders for any rights or duties agreed upon between the parties.
QUESTION 486
The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40 percent.
What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting analysis?
A. $81,000 B. $68,400 C. $63,000 D. $60,000
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $63,000 net cash flow for the tenth year.
Alternate Computation:
In year 10, Moore will generate a $100,000 profit from the incremental sales (2000 units × ($500 - $450)). This profit will be taxed at 40%, so the net after-tax increase in cash flow is $60,000. The machine is fully depreciated in year 10 because it was depreciated over a 5-year life. The tax basis of the machine is zero on the date Moore receives a $5,000 salvage value for the machine. The gain on the machine of $5,000 ($5,000 SV - $0 Basis) is taxed at 40%, or $2,000 in total tax outflow for the gain, so the net inflows on the salvage is $3,000. Therefore, the total after-tax cash flows in year 10 for the new machine is $60,000 + $3,000 = $63,000.
QUESTION 487
The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the:
A. Historicalweightedaveragecostofcapitalforthecompany.
B. Averagereturnoninvestmentthathasbeenearnedbythecompanyoveraparticulartimeperiod. C. Average return on assets employed over a particular time period.
D. Average prime lending rate for the year being evaluated.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Historical weighted average cost of capital is usually used as the target or hurdle rate in the residual income approach. Choices "b", "c", and "d" are incorrect, per the above definition.
QUESTION 488
A company uses the following formula in determining its optimal level of cash.
Where:
b = Fixed cost per transaction
i = Interest rate on marketable securities
T = Total demand for cash over a period of time
This formula is a modification of the Economic Order Quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the interest rate on marketable securities is 6 percent per year. The company estimates that it will make cash payments of $12,000 over a one-month perioD. What is the average cash balance (rounded to the nearest dollar)?
A. $1,000 B. $2,000 C. $3,464 D. $6,928
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Like the EOQ, this formula represents the amount of cash brought in by the sale of marketable securities. Also like the EOQ, this cash goes to zero (or the safety level) over time. The average cash (like the average inventory) is one half of the amount collected. Remember also to convert the interest rate to a per month figure of 0.5%
Choices "a", "b", and "d" are incorrect, per above.
QUESTION 489
Which one of the following statements concerning pure monopolies is correct?
A. Thedemandcurveofamonopolistisperfectlyelastic.
B. Thepriceatwhichamonopolistmaximizesitsprofitiswherepriceequalsbothmarginalcostandmarginalrevenue. C. A monopolist's marginal revenue curve lies below its demand curve.
D. The supply curve of a monopolist is perfectly inelastic.
Correct Answer: C
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A monopolist's marginal revenue curve lies below its demand curve. Choice "a" is incorrect. The demand curve of a monopolist is not perfectly elastic. Choice "b" is incorrect. A monopolist sets its price higher than marginal revenue. Choice "d" is incorrect. A monopolist can change the quantity supplied or fix the price but cannot do both simultaneously. In any case, its supply curve is not perfectly inelastic.
QUESTION 490
When a partner in a general partnership lacks actual or apparent authority to contract on behalf of the partnership, and the party contracted with is aware of this fact, the partnership will be bound by the contract if the other partners:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. "Yes - No."
Rule: The authority of partners is governed by agency law. Under agency law, a principal is not bound to the third party unless the agent had actual authority or apparent authority. When the agent has no actual authority and no apparent authority, the principal (in this case the partnership) will only be liable if it chooses to adopt the agreement (i.e., ratify).
Rule: Amending the partnership agreement (presumably to grant authority) will not cause the partnership to be bound because authority must exist at the time the contract is made or the partnership must ratify the contract.
Choices "a", "c", and "d" are incorrect, per the above rules.
QUESTION 491
Park and Graham entered into a written partnership agreement to operate a retail store. Their agreement was silent as to the duration of the partnership. Park wishes to dissociate from the partnership. Which of the following statements is correct?
A. Parkmaydissociatefromthepartnershipatanytime.
B. UnlessGrahamconsentstothedissociation,Parkmustapplytoacourtandobtainadecreeorderingthedissociation. C. Park may not dissociate from the partnership unless Graham consents.
D. Park may dissociate from the partnership only after notice of the proposed dissolution is given to all partnership creditors.
Correct Answer: A
Section: Business Environment and Concepts (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time. Choice "b" is incorrect. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time. No court order is required. Choice "c" is incorrect. Partnerships are consensual relationships, so any partner has the power to dissociate at any time; he or she need not obtain the consent of the other partners (though absent consent, the partner will be liable for damages if the dissociation is wrongful). Choice "d" is incorrect. There is no requirement of giving partnership creditors a formal notice of intent to dissociate, but it is a good idea to do so to avoid liability on future partnership obligations.
QUESTION 492
Fanny and John each own and manage their own companies. Fanny's business is manufacturing freight boxes of all types, and John's business is selling freight boxes to different industries. They decide to combine their expertise and knowledge to produce and sell freight boxes specifically designed for the new airline company that just formed in their city. Which of the following best describes the business formed by the parties?
A. Ageneralpartnership.
B. Alimitedliabilitypartnership. C. A sole proprietorship.
D. A joint venture.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A joint venture is formed for a single business undertaking such as building and designing freight containers to be sold specifically to one company. Each company coming together in this joint venture has its own business outside of this one endeavor. Choice "a" is incorrect. A general partnership is more broad in its business purpose than a joint venture is.
Choice "b" is incorrect. A limited liability partnership is primarily designed for professionals who want to work as partners but with limited personal liability. Choice "c" is incorrect. Sole proprietorships have only one person in the business.