Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology

(1347 questions)

[Fact Pattern #1] The management and employees of a large household goods moving company decided to adopt total quality management (TQM) and continuous improvement (CI). They believed that, if their company became nationally known as adhering to TQM and CI, one result would be an increase in the company’s profits and market share. [1] Gleim #: 1.1 -- Source: CIA 1195 III-12 (Refers to Fact Pattern #1) The primary reason for adopting TQM was to achieve

A. B. C. D.

Greater customer satisfaction. Reduced delivery time. Reduced delivery charges. Greater employee participation. Answer (A) is correct. TQM is an integrated system that anticipates, meets, and exceeds customers’ needs, wants, and expectations. Answer (B) is incorrect because reduced delivery time is one of many potential activities that need improvement. Answer (C) is incorrect because reduced delivery charges is one of many potential activities that need improvement. Answer (D) is incorrect because increased employee participation is necessary to achieve TQM, but it is not the primary purpose for establishing the program.

[2] Gleim #: 1.2 -- Source: CIA 1195 III-13 (Refers to Fact Pattern #1) Quality is achieved more economically if the company focuses on

A. B. C. D.

Appraisal costs. Prevention costs. Internal failure costs. External failure costs. Answer (A) is incorrect because prevention is ordinarily less costly than the combined costs of appraisal, internal failure, and external failure. Answer (B) is correct. Prevention attempts to avoid defective output. Prevention costs include preventive maintenance, employee training, review of equipment design, and evaluation of suppliers. Prevention is less costly than detection and correction of defective output. Answer (C) is incorrect because prevention is ordinarily less costly than the combined costs of appraisal, internal failure, and external failure. Answer (D) is incorrect because prevention is ordinarily less costly than the combined costs of appraisal, internal failure, and external failure.

[3] Gleim #: 1.3 -- Source: CIA 1195 III-28 A traditional quality control process in manufacturing consists of mass inspection of goods only at the end of a production process. A major deficiency of the traditional control process is that

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

A. B. C. D.

It is expensive to do the inspections at the end of the process. It is not possible to rework defective items. It is not 100% effective. It does not focus on improving the entire production process. Answer (A) is incorrect because other quality control processes can also be expensive. Answer (B) is incorrect because reworking defective items may be possible although costly. Answer (C) is incorrect because no quality control system will be 100% effective. Answer (D) is correct. The process used to produce the goods is not thoroughly reviewed and evaluated for efficiency and effectiveness. Preventing defects and increasing efficiency by improving the production process raises quality standards and decreases costs.

[4] Gleim #: 1.4 -- Source: CIA 1196 III-24 Under a total quality management (TQM) approach

A. B. C. D.

Measurement occurs throughout the process, and errors are caught and corrected at the source. Quality control is performed by highly trained inspectors at the end of the production process. Upper management assumes the primary responsibility for the quality of the products and services. A large number of suppliers are used in order to obtain the lowest possible prices. Answer (A) is correct. Total quality management emphasizes quality as a basic organizational function. TQM is the continuous pursuit of quality in every aspect of organizational activities. One of the basic tenets of TQM is doing it right the first time. Thus, errors should be caught and corrected at the source. Answer (B) is incorrect because total quality management emphasizes discovering errors throughout the process, not inspection of finished goods. Answer (C) is incorrect because all members of the organization assume responsibility for quality of the products and services. Answer (D) is incorrect because the total quality management philosophy recommends limiting the number of suppliers to create a strong relationship.

[5] Gleim #: 1.5 -- Source: CIA 596 III-29 Which of the following is a characteristic of total quality management (TQM)?

A. B. C. D.

Management by objectives. On-the-job training by other workers. Quality by final inspection. Education and self-improvement. Answer (A) is incorrect because one of the 14 points recommends elimination of numerical quotas. MBO causes aggressive pursuit of numerical quotas. Answer (B) is incorrect because informal learning from coworkers serves to entrench bad work habits. One of the 14 points stresses proper training of everyone. Answer (C) is incorrect because another of the 14 points states that quality by final inspection is unnecessary if quality is built in from the start. Answer (D) is correct. According to management theorist W. Edwards Deming’s well-known 14 points, education and self-improvement are essential. Knowledge is opportunity. Hence, continuous improvement should be everyone’s primary career objective.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

[6] Gleim #: 1.6 -- Source: CIA 596 III-30 In which of the following organizational structures does total quality management (TQM) work best?

A. B. C. D.

Hierarchal. Teams of people from the same specialty. Teams of people from different specialties. Specialists working individually. Answer (A) is incorrect because hierarchal organization stifles TQM. Answer (B) is incorrect because TQM works best with teams of people from different specialties. Answer (C) is correct. TQM advocates replacement of the traditional hierarchal structure with teams of people from different specialties. This change follows from TQM’s emphasis on empowering employees and teamwork. Employees should have proper training, necessary information, and the best tools; be fully engaged in the decision process; and receive fair compensation. If such empowered employees are assembled in teams of individuals with the required skills, TQM theorists believe they will be more effective than people performing their tasks separately in a rigid structure. Answer (D) is incorrect because teamwork is essential for TQM.

[7] Gleim #: 1.7 -- Source: CIA 1196 III-23 The most important component of quality control is

A. B. C. D.

Ensuring goods and services conform to the design specifications. Satisfying upper management. Conforming with ISO-9000 specifications. Determining the appropriate timing of inspections. Answer (A) is correct. The intent of quality control is to ensure that goods and services conform to the design specifications. Whether the focus is on feedforward, feedback, or concurrent control, the emphasis is on ensuring product or service conformity. Answer (B) is incorrect because quality control is geared towards satisfying the customer, not upper management. Answer (C) is incorrect because ensuring the conformance with ISO-9000 specifications is a component of a compliance audit, not quality control. Answer (D) is incorrect because determining the appropriate timing of inspections is only one step towards approaching quality control. Consequently, it is not the primary component of the quality control function.

[8] Gleim #: 1.8 -- Source: CMA 1296 3-22 The cost of scrap, rework, and tooling changes in a product quality cost system is categorized as a(n)

A. B. C. D.

Training cost. External failure cost. Internal failure cost. Prevention cost.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

Answer (A) is incorrect because training costs are prevention costs. Answer (B) is incorrect because the costs of external failure, such as warranty expense, product liability, and customer ill will, arise when problems are discovered after products have been shipped. Answer (C) is correct. Internal failure costs are incurred when detection of defective products occurs before shipment. Examples of internal failure costs are scrap, rework, tooling changes, and downtime. Answer (D) is incorrect because prevention costs are incurred to avoid defective output. Examples include preventive maintenance, employee training, review of equipment design, and evaluation of suppliers. [9] Gleim #: 1.9 -- Source: CMA 1295 3-12 The four categories of costs associated with product quality costs are

A. B. C. D.

External failure, internal failure, prevention, and carrying. External failure, internal failure, prevention, and appraisal. External failure, internal failure, training, and appraisal. Warranty, product liability, training, and appraisal. Answer (A) is incorrect because carrying cost is not one of the elements of quality costs. Answer (B) is correct. The following are the four categories of quality costs: prevention, appraisal, internal failure, and external failure (lost opportunity). Costs of prevention include attempts to avoid defective output, including employee training, review of equipment design, preventive maintenance, and evaluation of suppliers. Appraisal costs include quality control programs, inspection, and testing. Internal failure costs are incurred when detection of defective products occurs before shipment, including scrap, rework, tooling changes, and downtime. External failure costs are incurred after the product has been shipped, including the costs associated with warranties, product liability, and customer ill will. Answer (C) is incorrect because training costs are not a category of quality costs. Answer (D) is incorrect because warranty, product liability, and training are not cost categories identified by SMA 4R.

[10] Gleim #: 1.10 -- Source: CMA 1295 3-14 The cost of statistical quality control in a product quality cost system is categorized as a(n)

A. B. C. D.

Internal failure cost. Training cost. External failure cost. Appraisal cost. Answer (A) is incorrect because internal failure costs arise after poor quality has been found; statistical quality control is designed to detect quality problems. Answer (B) is incorrect because statistical quality control is not a training cost. Answer (C) is incorrect because external failure costs are incurred after the product has been shipped, including the costs associated with warranties, product liability, and customer ill will. Answer (D) is correct. The following are the four categories of quality costs: prevention, appraisal, internal failure, and external failure (lost opportunity). Appraisal costs include quality control programs, inspection, and testing. However, some authorities regard statistical quality and process control as preventive activities because they not only detect faulty work but also allow for adjustment of processes to avoid future defects.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

[11] Gleim #: 1.11 -- Source: CMA 697 3-28 Listed below are selected line items from the cost-of-quality report for Watson Products for last month. Category Rework Equipment maintenance Product testing Product repair Amount $ 725 1,154 786 695

What is Watson’s total prevention and appraisal cost for last month?

A. B. C. D.

$786 $1,154 $1,940 $2,665 Answer (A) is incorrect because $786 is the appraisal cost. Answer (B) is incorrect because $1,154 is the prevention cost. Answer (C) is correct. The costs of prevention and appraisal are conformance costs that serve as financial measures of internal performance. Prevention costs are incurred to prevent defective output. These costs include preventive maintenance, employee training, review of equipment design, and evaluation of suppliers. Appraisal costs are incurred to detect nonconforming output. They embrace such activities as statistical quality control programs, inspection, and testing. The equipment maintenance cost of $1,154 is a prevention cost. The product testing cost of $786 is an appraisal cost. Their sum is $1,940. Answer (D) is incorrect because $2,665 includes rework, an internal failure cost.

[12] Gleim #: 1.12 -- Source: CMA 697 3-27 All of the following are generally included in a cost-of-quality report except

A. B. C. D.

Warranty claims. Design engineering. Supplier evaluations. Lost contribution margin. Answer (A) is incorrect because the costs of warranty claims are readily measurable external failure costs captured by the accounting system. Answer (B) is incorrect because the cost of design engineering is a prevention cost that is usually included in cost-ofquality reports. Answer (C) is incorrect because the cost of supplier evaluations is a prevention cost that is usually included in cost-ofquality reports. Answer (D) is correct. A cost-of-quality report includes most costs related to quality, including the costs of external failure, internal failure, prevention, and appraisal. Lost contribution margins from poor product quality are external failure costs that normally do not appear on a cost-of-quality report because they are opportunity costs. Opportunity costs are not usually recorded by the accounting system, thereby understating the costs of poor quality. Lost contribution margins from reduced sales, market share, and sales prices are external failure costs that are also not usually included in a cost-of-quality report.

[13] Gleim #: 1.13 -- Source: Publisher Conformance is how well a product and its components meet applicable standards. According to the robust quality concept,

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

A. B. C. D.

A certain percentage of defective units is acceptable. Units are acceptable if their characteristics lie within an acceptable range of values. The goal is for all units to be within specifications. Every unit should reach a target value. Answer (A) is incorrect because the traditional view of quality treats a certain number of defective units as acceptable. Answer (B) is incorrect because the traditional view of quality deems that a unit is acceptable if it is within a range of specified values. Answer (C) is incorrect because the robust quality concept is an extension of the zero-defects approach. The goal of robust quality is in every case to reach a target value, not merely a range of acceptable values. Answer (D) is correct. Conformance is how well a product and its components meet applicable standards. The traditional view is that conforming products are those with characteristics that lie within an acceptable specified range of values that includes a target value. This view also regarded a certain percentage of defective (nonconforming) units as acceptable. The traditional view was superseded by the zero-defects approach that sought to eliminate all nonconforming output. An extension of this approach is the robust quality concept. Its goal is to reach the target value in every case. The reason is that hidden quality costs occur when output varies from the target even though the units are within specifications.

[14] Gleim #: 1.14 -- Source: Publisher The Plan-Do-Check-Act (PDCA) Cycle is a quality tool devised by W.E. Deming. It is best described as

A. B. C. D.

A “management by fact” approach to continuous improvement. An ongoing evaluation of the practices of best-in-class organizations. The translation of customer requirements into design requirements. The responsibility of every employee, work group, department, or supplier to inspect the work. Answer (A) is correct. PDCA is a “management by fact” or scientific method approach to continuous improvement. PDCA creates a process-centered environment because it involves studying the current process, collecting and analyzing data to identify causes of problems, planning for improvement, and deciding how to measure improvement (Plan). The plan is then implemented on a small scale if possible (Do). The next step is to determine what happened (Check). If the experiment was successful, the plan is fully implemented (Act). The cycle is then repeated using what was learned from the preceding cycle. Answer (B) is incorrect because competitive benchmarking is an ongoing evaluation of the practices of best-in-class organizations. Answer (C) is incorrect because quality deployment is the translation of customer requirements into design requirements. Answer (D) is incorrect because the “quality at the source” concept emphasizes the responsibility of every employee, work group, department, or supplier to inspect the work.

[15] Gleim #: 1.15 -- Source: Publisher Which of the following quality costs are nonconformance costs?

A. B. C. D.

Systems development costs. Costs of inspecting in-process items. Environmental costs. Costs of quality circles.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

Answer (A) is incorrect because systems development costs are prevention (conformance) costs. Answer (B) is incorrect because costs of inspecting in-process items are appraisal (conformance) costs. Answer (C) is correct. Nonconformance costs include internal and external failure costs. External failure costs include environmental costs, e.g., fines for violations of environmental laws and loss of customer goodwill. Answer (D) is incorrect because costs of quality circles are prevention (conformance) costs. [16] Gleim #: 1.16 -- Source: Publisher Quality costing is similar in service and manufacturing organizations. Nevertheless, the differences between these organizations have certain implications for quality management. Thus,

A. Direct labor costs are usually a higher percentage of total costs in manufacturing organizations. B. External failure costs are relatively greater in service organizations. C. Quality improvements resulting in more efficient use of labor time are more likely to be accepted by employees in service organizations. D. Poor service is less likely to result in loss of customers than a faulty product. Answer (A) is incorrect because direct labor costs are usually a higher percentage of total costs in service organizations. Answer (B) is correct. External failure costs arise when problems occur after delivery. They occur because products or services are nonconforming or otherwise do not satisfy customers. External failure costs in service enterprises are even more important than in manufacturing environments. Faulty goods sometimes may be reworked or replaced to a customer’s satisfaction, but poor service tends to result in a loss of customers. Answer (C) is incorrect because service activities are usually more labor intensive than in modern manufacturing environments. Thus, more efficient labor usage is more likely to be viewed as a threat to employee job security in service organizations. Answer (D) is incorrect because the badwill resulting from poor service may be even more likely than a defective product to result in loss of customers. [17] Gleim #: 1.17 -- Source: Publisher An organization has adopted the robust quality approach. According to this view of quality,

A. The minimum point on the total quality cost curve occurs when conformance cost per unit equals nonconformance cost per unit. B. Improving quality requires tradeoffs among categories of quality costs. C. Beyond some point, incurrence of prevention and appraisal costs is not cost beneficial. D. Costs in all categories of quality costs may be reduced while improving quality.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

Answer (A) is incorrect because, according to the robust quality concept, conformance costs do not necessarily have to continue to increase to obtain additional reductions in nonconformance costs. Answer (B) is incorrect because, according to the robust quality concept, conformance costs do not necessarily have to continue to increase to obtain additional reductions in nonconformance costs. Answer (C) is incorrect because, according to the robust quality concept, conformance costs do not necessarily have to continue to increase to obtain additional reductions in nonconformance costs. Answer (D) is correct. The optimal level of quality costs traditionally has been deemed to occur where the conformance cost curve intercepts the nonconformance cost curve, which corresponds to the minimum point on the total cost curve. Thus, beyond some point, incurrence of prevention and appraisal costs is not cost beneficial. However, the modern robust quality view is that this relationship does not always hold. Improving quality and reducing costs in each category may be possible if the most efficient prevention methods are applied. For example, selection of a supplier meeting high quality standards regarding defect rates and delivery times may drive down not only failure costs but also the prevention and appraisal costs incurred when supplier performance was less reliable. Thus, conformance costs do not have to continue to increase to obtain additional reductions in nonconformance costs. [18] Gleim #: 1.18 -- Source: CMA 693 4-28 When evaluating projects, breakeven time is best described as

A. B. C. D.

Annual fixed costs ÷ monthly contribution margin. Project investment ÷ annual net cash inflows. The point at which cumulative cash inflows on a project equal total cash outflows. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows. Answer (A) is incorrect because it is related to breakeven point, not breakeven time. Answer (B) is incorrect because the payback period equals investment divided by annual undiscounted net cash inflows. Answer (C) is incorrect because the payback period is the period required for total undiscounted cash inflows to equal total undiscounted cash outflows. Answer (D) is correct. Breakeven time evaluates the rapidity of new product development. The usual calculation determines the period beginning with project approval that is required for the discounted cumulative cash inflows to equal the discounted cumulative cash outflows. However, it may also be calculated as the point at which discounted cumulative cash inflows on a project equal discounted total cash outflows. The concept is similar to the payback period, but it is more sophisticated because it incorporates the time value of money. It also differs from the payback method because the period covered begins at the outset of a project, not when the initial cash outflow occurs.

[19] Gleim #: 1.19 -- Source: CIA 594 III-56 Management of a company is attempting to build a reputation as a world-class manufacturer of quality products. Which of the following measures would not be used by the firm to measure quality?

A. B. C. D.

The percentage of shipments returned by customers because of poor quality. The number of parts shipped per day. The number of defective parts per million. The percentage of products passing quality tests the first time.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

Answer (A) is incorrect because the percentage of shipments returned measures quality by the number of defective units. Answer (B) is correct. The number of parts shipped per day would most likely be used as a measure of the effectiveness and efficiency of shipping procedures, not the quality of the product. This measure does not consider how many of the parts are defective. Answer (C) is incorrect because the number of defective parts per million measures quality by the number of defective units. Answer (D) is incorrect because the percentage of products passing quality tests the first time measures quality by the number of nondefective products. [20] Gleim #: 1.20 -- Source: CMA 694 3-16 In year 2, a manufacturing company instituted a total quality management (TQM) program producing the following report: Summary Cost of Quality Report (000s) Year 1 Prevention costs Appraisal costs Internal failure costs External failure costs Total quality costs $ 200 210 190 1,200 $1,800 Year 2 $ 300 315 114 621 $1,350 % Change +50 +50 –40 –48 –25

On the basis of this report, which one of the following statements is most likely true?

A. An increase in conformance costs resulted in a higher quality product and therefore resulted in a decrease in nonconformance costs. B. An increase in inspection costs was solely responsible for the decrease in quality costs. C. Quality costs such as scrap and rework decreased by 48%. D. Quality costs such as returns and repairs under warranty decreased by 40%. Answer (A) is correct. TQM emphasizes the supplier’s relationship with the customer, and recognizes that everyone in a process is at some time a customer or supplier of someone else, either within or outside the organization. The costs of quality include costs of conformance and costs of nonconformance. Costs of conformance include prevention costs and appraisal (inspection) costs. Nonconformance costs are composed of internal failure costs and external failure costs, such as lost opportunity. Conformance costs (prevention and appraisal) increased substantially, whereas the nonconformance costs (internal and external failure) decreased. Hence, the increase in conformance costs resulted in a higher quality product. Answer (B) is incorrect because prevention costs also increased substantially, which could also have led to higher quality products. Answer (C) is incorrect because scrap and rework are internal failure costs, which decreased by 40%. Answer (D) is incorrect because returns and repairs are external failure costs, which decreased by 48%.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

[21] Gleim #: 1.21 -- Source: CIA 1195 III-98 Quality cost indices are often used to measure and analyze the cost of maintaining a given level of quality. One example of a quality cost index, which uses a direct labor base, is computed as

The following quality cost data were collected for May and June: May Prevention costs Appraisal costs Internal failure costs External failure costs Direct labor costs $ 4,000 6,000 12,000 14,000 90,000 June $ 5,000 5,000 15,000 11,000 100,000

Based upon these cost data, the quality cost index

A. B. C. D.

Decreased 4 points from May to June. Was unchanged from May to June. Increased 10 points from May to June. Decreased 10 points from May to June. Answer (A) is correct. The index for May was 40% [($4,000 + $6,000 + $12,000 + $14,000) ÷ $90,000], and the index for June was 36% [($5,000 + $5,000 + $15,000 + $11,000) ÷ $100,000]. Answer (B) is incorrect because the index decreased. Answer (C) is incorrect because the increase in prevention costs was 10% of the increase in labor costs. Answer (D) is incorrect because the decrease in appraisal costs was 10% of the increase in labor costs.

[Fact Pattern #2]

Wolk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance.

The following information is considered typical of the time involved to complete orders: • Wait time: - From order being placed to start of production - From start of production to completion Inspection time Process time Move time

10.0 days 5.0 days 1.5 days 3.0 days 2.5 days

• • •

[22] Gleim #: 1.22 -- Source: CMA 693 3-17 (Refers to Fact Pattern #2) What is the manufacturing cycle efficiency for this order?

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
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A. B. C. D.

25.0%. 13.6%. 37.5%. 69.2%. Answer (A) is correct. Manufacturing cycle efficiency is defined as the quotient of the time required for value-added production divided by total manufacturing lead time. For this order, the total lead time is 12 days (5.0 + 1.5 + 3.0 + 2.5), and the manufacturing cycle efficiency is 25% (3 days of processing ÷ 12). Answer (B) is incorrect because 13.6% includes the 10 days prior to production in the denominator, a period not included in the calculation of manufacturing cycle efficiency. Answer (C) is incorrect because inspection time and move time should be included in the denominator. Answer (D) is incorrect because the calculation involves dividing the 3 days of processing time by the total of 12 days to complete production.

[23] Gleim #: 1.23 -- Source: CMA 693 3-18 (Refers to Fact Pattern #2) What is the delivery cycle time for this order?

A. B. C. D.

7 days. 12 days. 15 days. 22 days. Answer (A) is incorrect because 7 days excludes the wait time. Answer (B) is incorrect because 12 days ignores the 10 days of the waiting period prior to the start of production. Answer (C) is incorrect because 15 days incorporates the wait time but not the production periods. Answer (D) is correct. The delivery cycle time is defined as the entire time from receipt of the order until delivery of the order. This period equals 22 days (10.0 + 5.0 + 1.5 + 3.0 + 2.5)

[24] Gleim #: 1.24 -- Source: Publisher Quality Company produces a component of a machine. The target value for a key dimension of the component is 100 millimeters (mm). The quality loss per unit if the key dimension is measured at precisely the upper or lower specification limit (100 mm ± 1 mm) is estimated to be $10. The following are the measures of a sample of four units: Unit 1 2 3 4 Measurement 99.0 101.0 99.5 100.5

The Quality Company produces 1,000 of the components. Based on the sample, the estimated quality loss is

A. B. C. D.

$625 $6,250 $10,000 $25,000

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
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Answer (A) is incorrect because $625 equals $.625 times 1,000 units. Answer (B) is correct. The quality loss constant (k) in the Taguchi quality loss function equation is $10 [$10 loss at the specification limit ÷ (1 mm)²]. Accordingly, the quality loss for the sample may be determined as follows: Measurement in mm 99.0 101.0 99.5 100.5 Actual – Target (x – T) –1 +1 –.5 +.5

Unit 1 2 3 4

(x – T)2 1.00 1.00 .25 .25 2.50

k(x – T)2 $10.00 10.00 2.50 2.50 $25.00

The average per unit quality loss for the sample is $6.25 ($25 ÷ 4). Consequently, the total estimated loss for 1,000 components is $6,250. Answer (C) is incorrect because $10,000 equals $10 times 1,000 units. Answer (D) is incorrect because $25,000 is based on the total loss for the sample ($25), not the unit average loss ($6.25). [25] Gleim #: 1.25 -- Source: Publisher Which of the following statements regarding benchmarking is false?

A. Benchmarking involves continuously evaluating the practices of best-in-class organization and adapting company processes to incorporate the best of these practices. B. Benchmarking, in practice, usually involves a company’s formation of benchmarking teams. C. Benchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the company’s performance of an activity and the performance by the best in the world or the best in the industry. D. The benchmarking organization against which a firm is comparing itself must be a direct competitor. Answer (A) is incorrect because they are true statements about benchmarking. Answer (B) is incorrect because they are true statements about benchmarking. Answer (C) is incorrect because they are true statements about benchmarking. Answer (D) is correct. Benchmarking is an ongoing process that entails quantitative and qualitative measurement of the difference between the company’s performance of an activity and the performance by a best-in-class organization. The benchmarking organization against which a firm is comparing itself need not be a direct competitor. The important consideration is that the benchmarking organization be an outstanding performer in its industry. [26] Gleim #: 1.26 -- Source: CIA 595 III-22 An example of an internal nonfinancial benchmark is

A. B. C. D.

The labor rate of comparably skilled employees at a major competitor’s plant. The average actual cost per pound of a specific product at the company’s most efficient plant. A $50,000 limit on the cost of employee training programs at each of the company’s plants. The percentage of customer orders delivered on time at the company’s most efficient plant.

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The percentage of orders delivered on time at the company’s most efficient plant is an example of an internal nonfinancial benchmark. Answer (C) is incorrect because no measure of a positive attitude has been specified for the employee. Answer (C) is incorrect because the cost of a training program is a financial benchmark. an internal nonfinancial measure is A. Answer (D) is correct. These elements are aimed primarily at Copyright 2006 Gleim Publications. B. The customer is always right. Inc.Source: Publisher Managerial performance may be measured in many ways. Customer satisfaction. [29] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the labor rate of a competitor is a financial benchmark. different measures have a long-term or short-term emphasis. Delivery performance. learning new philosophies. Answer (B) is incorrect because the cost per pound of a product at the company’s most efficient plant is a financial benchmark. This procedure also involves identifying the underlying key actions and causes that contribute to the performance difference. Answer (A) is incorrect because market share is an external nonfinancial measure. C.28 -. and providing extensive training are all elements of a major change in organizations. For example.Source: CIA 597 III-3 Focusing on customers. Customer complaints should be processed promptly. [27] Gleim #: 1. promoting innovation.27 -. driving out fear. Answer (D) is correct. Examples of internal nonfinancial measures are product quality. B.Source: CIA 597 III-14 Which of the following criteria would be most useful to a sales department manager in evaluating the performance of the manager’s customer-service group? A. Benchmarking is a continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices.29 -. Feedback regarding managerial performance may take the form of financial and nonfinancial measures that may be internally or externally generated. A criterion that requires all customer inquiries to be answered within 7 days of receipt permits accurate measurement of performance. Answer (A) is incorrect because customer orientation is difficult to quantify. Answer (B) is incorrect because the standard specified is vague. D. Manufacturing lead time. D. subjectivity. C. It requires analysis and measurement of key outputs against those of the best organizations. Market share. new product development time. Answer (B) is incorrect because delivery performance is an external nonfinancial measure. Employees should maintain a positive attitude when dealing with customers. Moreover. [28] Gleim #: 1. and manufacturing lead time (cycle time). All customer inquiries should be answered within 7 days of receipt. Answer (D) is correct. Printed for Pol Mirafuentes Page 13 . Answer (C) is incorrect because customer satisfaction is an external nonfinancial measure. The quantitative and specific nature of the appraisal using this standard avoids the vagueness. and personal bias that may afflict other forms of personnel evaluations.

B. Inc. both internal and external. It treats the pursuit of quality as a basic organizational function that is as important as production or marketing. not to “fix it in” or “inspect it in. Making machine adjustments periodically to reduce defects. thereby allowing a company to reduce staffing. Managing costs of products and services better. Being efficient and effective at the same time. and quality should be built in (designed in) from the start. not to “fix it in” or “inspect it in. Copying leading organizations to better compete with them. B. Teams are a natural vehicle for sharing ideas. The use of teams eliminates the need for supervision. promotion of teamwork. which leads to process improvement. Performing inspections to isolate defects as early as possible. C. The approach of TQM is to build in and design in quality. not adjustment. C. B. Employee motivation is always higher for team members than for individual contributors. Total quality management emphasizes quality as a basic organizational function. Answer (A) is incorrect because competitive benchmarking is just one tool for implementing TQM. not rework. One of the basic tenets of TQM is doing it right the first time. and attention to satisfaction of customers. Thus. errors should be caught and corrected at the source. TQM is the continuous pursuit of quality in every aspect of organizational activities. employee training and empowerment. Answer (D) is incorrect because TQM’s primary focus is not cost reduction. identifies customer needs. Answer (C) is incorrect because TQM’s primary focus is not profitability. in order to become the low-cost provider.30 -. The approach of TQM is to build in and design in quality. TQM is a comprehensive approach to quality. Answer (C) is incorrect because TQM emphasizes prevention. TQM emphasizes the supplier’s relationship with the customer. Identifying and reworking production defects before sale. not to “fix it in” or “inspect it in. and recognizes that everyone in a process is at some time a customer or supplier of someone else. D. Copyright 2006 Gleim Publications. Answer (B) is correct.Source: CIA 597 III-24 One of the main reasons that implementation of a total quality management program works better through the use of teams is A. The approach of TQM is to build in and design in quality. not inspection.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. D. Focusing on the total quality of products and services. C.” [31] Gleim #: 1.” Answer (D) is incorrect because TQM emphasizes prevention. either within or without the organization. D. Designing the product to minimize defects.Source: CIA 597 III-4 Total quality management in a manufacturing environment is best exemplified by A. in order to indirectly affect profits. Teams are more efficient and help an organization reduce its staffing. TQM is the continuous pursuit of quality in every aspect of organizational activities through a philosophy of doing it right the first time. [30] Gleim #: 1.31 -. Answer (A) is incorrect because TQM emphasizes prevention. Printed for Pol Mirafuentes Page 14 . improvement of processes.” Answer (B) is correct.

It is not possible to rework defective items.000 68. Teams are an excellent vehicle for encouraging the sharing of ideas and removing process improvement obstacles.000 Copyright 2006 Gleim Publications. Printed for Pol Mirafuentes Page 15 .000 27.000 63. internal failure costs.000 150.Source: CIA 1195 III-28 A traditional quality control process in manufacturing consists of mass inspection of goods only at the end of a production process. TQM promotes teamwork by modifying or eliminating traditional (and rigid) vertical hierarchies and instead forming flexible groups of specialists.32 -.000 156. It does not focus on improving the entire production process.000 145. and self-managed teams are typical formats.000 35.000 180. Answer (C) is correct. The process used to produce the goods is not thoroughly reviewed and evaluated for efficiency and effectiveness.000 32. [32] Gleim #: 1. appraisal costs. Inc. The company plans to prepare a report that classifies these costs into the following four categories: preventive costs.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because teams are often inefficient and costly. [Fact Pattern #3] Listed below are costs of quality that a manufacturing company has incurred throughout its operations. B. Answer (A) is incorrect because other quality control processes can also be expensive.000 22. It is not 100% effective. cross-functional teams. Answer (B) is incorrect because high motivation does not directly affect the process improvement that is the key to quality improvement. A major deficiency of the traditional control process is that A. C. Answer (D) is incorrect because the use of teams with less supervision and reduced staffing may be by-products of TQM. It is expensive to do the inspections at the end of the process.000 90. Cost Items Design reviews Finished goods returned due to failure Freight on replacement finished goods Labor inspection during manufacturing Labor inspection of raw materials Manufacturing product-testing labor Manufacturing rework labor and overhead Materials used in warranty repairs Process engineering Product-liability claims Product-testing equipment Repairs to equipment due to breakdowns Scheduled equipment maintenance Scrap material Training of manufacturing workers Amount $275. Quality circles. but they are not ultimate objectives. Preventing defects and increasing efficiency by improving the production process raises quality standards and decreases costs.000 125.000 55. D. and external failure costs. Answer (B) is incorrect because reworking defective items may be possible although costly. Answer (C) is incorrect because no quality control system will be 100% effective. Answer (D) is correct.000 75.

then focusing on meeting it. [34] Gleim #: 1. Internal failure costs.. Inc. review of equipment design. Answer (B) is correct. and testing.g.000 training). Answer (D) is incorrect because external failure costs are incurred after shipment. C. $643. C. rework.000 scheduled maintenance + $156. D. e.000 $768. Training quality inspectors. B. Thus. and loss of customer goodwill. by employee training. B.000 ($275. e. and downtime.000 $736. B. by employee training. product liability. Printed for Pol Mirafuentes Page 16 . [35] Gleim #: 1. Appraisal costs embrace such activities as statistical quality control programs.g.000 Answer (A) is incorrect because $643. Answer (C) is incorrect because $736. Preventive costs. C. review of equipment design.Source: CIA 597 III-23 Which of the following is a key to successful total quality management? A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [33] Gleim #: 1. Copyright 2006 Gleim Publications. Answer (A) is incorrect because prevention attempts to avoid defective output. D. including the costs associated with warranties.Source: CIA 597 III-96 (Refers to Fact Pattern #3) The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as A..000 omits scheduled equipment maintenance and includes labor inspection of raw materials (an appraisal cost). D. Both costs are appraisal costs. inspection.000 includes the cost of product testing equipment (an appraisal cost). preventive maintenance.000 includes the cost of product testing equipment and labor inspection of raw materials. preventive maintenance.35 -. The categories of quality costs include conformance costs (prevention and appraisal) and nonconformance costs (internal failure and external failure).Source: CIA 597 III-97 (Refers to Fact Pattern #3) The dollar amount of the costs of quality classified as preventive costs for the manufacturing firm would be A. tooling changes. including scrap.000 process engineering + $90.34 -. and evaluation of suppliers. Prevention attempts to avoid defective output. Focusing intensely on the customer. Establishing a well-defined quality standard. Appraisal costs. the preventive costs equal $701. External failure costs.000 $701. Answer (B) is correct.000 design reviews + $180. and evaluation of suppliers. Answer (C) is incorrect because internal failure costs are incurred when detection of defective products occurs before shipment. Answer (D) is incorrect because $768.33 -. Creating appropriate hierarchies to increase efficiency. the cost of detecting nonconforming products is an appraisal cost. Accordingly.

an organization evaluates managerial performance based on A. The trend in managerial performance evaluation is the balanced scorecard approach. growth. such as residual income. The cumulative improvement from a company’s TQM efforts cannot readily be copied by competitors. [37] Gleim #: 1. once a standard is reached. TQM begins with external customer requirements. and (4) learning. These measures may be financial or nonfinancial and usually include items in four categories: (1) financial. identifies internal customer-supplier relationships and requirements. Answer (A) is incorrect because the balanced scorecard approach uses multiple measures. B. Inc. (3) internal business processes. the cumulative effect of TQM’s continuous improvement process can attract and hold customers and cannot be duplicated by competitors. Answer (D) is incorrect because TQM involves continuous improvement. TQM emphasizes satisfaction of customers.Source: Publisher Using the balanced scorecard approach. C. TQM provides a comprehensive planning process for a business. A single ultimate measure of operating results. C. Answer (C) is incorrect because TQM does not focus solely on cost reduction. Introducing new products can lure customers away from competitors. TQM considers the supplier’s relationship with the customer. Answer (B) is correct. Answer (B) is incorrect because new products can be quickly copied by competitors and therefore do not provide a sustained competitive advantage. D. and innovation. continuous improvement requires its constant reevaluation. and establishes requirements for external suppliers. (2) customer. Multiple financial measures only. Because TQM affects every aspect of the organization’s activities. Printed for Pol Mirafuentes Page 17 . [36] Gleim #: 1.Source: Publisher On a balanced scorecard. and recognizes that everyone in a process is at some time a customer or supplier of someone else. Answer (D) is incorrect because TQM is only one tool of strategic management.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because total quality management (TQM) de-emphasizes specialized quality inspectors. Answer (C) is incorrect because the balanced scorecard approach includes financial measures. Answer (B) is correct. Reduced costs associated with better quality can support higher shareholder dividends. D. TQM is a comprehensive approach to quality.36 -. either within or without the organization.37 -. [38] Gleim #: 1. Answer (A) is correct. both internal and external. Multiple nonfinancial measures only. Multiple financial and nonfinancial measures. Multiple measures of performance permit a determination as to whether a manager is achieving certain objectives at the expense of others that may be equally or more important. Thus. Thus. B. it permeates the organizational culture. which of the following is not a customer measure? Copyright 2006 Gleim Publications. Answer (D) is incorrect because the balanced scorecard approach includes nonfinancial measures. identifies customer needs. Answer (C) is incorrect because centralization often needs to be reduced to implement a TQM process. It treats the pursuit of quality as a basic organizational function that is as important as production or marketing.38 -.Source: CIA 597 III-20 One of the main reasons total quality management (TQM) can be used as a strategic weapon is that A.

Source: CPA. warranty returns. operating readiness. and liquidity. Internal business. Profitability is a combination of internal and external considerations. which is more of an internal process measure than an external-based measure? A. expense. cycle time is strictly related to internal processes. The balanced scorecard is an accounting report that connects the firm’s critical success factors (CSFs) determined in a strategic analysis to measures of its performance. CSFs are financial and nonfinancial measures. Answer (A) is correct. B. C. profits. and innovation perspective. personnel turnover. Answer (A) is incorrect because market share and its trend is a customer measure. and quality. Measures of employee satisfaction. and competence may include R&D personnel qualifications. Answer (D) is incorrect because market share is a measure that includes external considerations. Thus. [39] Gleim #: 1. B. and personnel complaints and survey results. Printed for Pol Mirafuentes Page 18 . service response time. Service response time. fair value of the firm’s stock. B. prompt delivery. retention. Answer (B) is incorrect because profitability is a measure that includes external considerations. morale. growth. Answer (C) is incorrect because customer satisfaction is a measure that includes external considerations. and competence of the workforce. Copyright 2006 Gleim Publications. Customer satisfaction and market share are related to how customers perceive a product and how competitors react. the CSFs may be sales. C. D. the CSFs may be development of new products. Learning and growth. For the learning. Answer (C) is incorrect because service response time is a customer measure. flexibility of response to changing conditions. Financial. Answer (C) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Cycle time is the manufacturing time to complete an order. Market share. human resource development. Answer (B) is incorrect because. C. for the internal business perspective. Customer measures include market share and its trend. D. Market share. hours of training. Answer (D) is incorrect because warranty expense is a customer measure. Answer (D) is incorrect because. [40] Gleim #: 1. skill set levels attained. for the customer perspective.Source: Publisher On a balanced scorecard. Customer satisfaction. Answer (B) is correct. Economic value added. productivity. complaints. and survey results. for the financial perspective. Inc. marketing and selling performance. dealer and distributor relationships. Economic value added. Customer. Warranty expense. Cycle time. adapted Under the balanced scorecard concept. D. or EVA.40 -. Profitability. Answer (A) is incorrect because.39 -. delivery performance. employee satisfaction and retention are measures used under which of the following perspectives? A. is a financial measure. the CSFs may be quality. promptness of their introduction. the CSFs may be customer satisfaction and retention rate. and safety.

Adhering to ISO 14000 standards will not reduce monitoring and inspection by regulatory agencies. which leads to a better understanding of who internal customers and users are. which is valid for 3 years. Adoption of ISO 9000 standards may allow the company to sell products in foreign markets. ISO 14000 standards will not make it easier to do business across borders. Printed for Pol Mirafuentes Page 19 .” Answer (D) is incorrect because a registrar who is convinced that a quality system conforms to the selected standard issues a certificate describing the scope of the registration. D. Individual European Union countries’ standards are typically more strict than ISO 14000 standards.Source: Publisher According to ISO 9000 standards. Upon satisfactory completion of an on-site visit. D. ISO registration allows customers to be more comfortable with suppliers’ products and services. Answer (C) is correct. the registrar has the right to audit all employees if he or she decides to do so. However. Answer (C) is incorrect because employees must be able to “say what they do” and demonstrate that they “do what they say. Answer (A) is correct. Employees must have the ability to explain their jobs and show that they are capable of performing properly. Answer (A) is incorrect because many foreign countries are beginning to require adoption of ISO 9000 standards as a prerequisite for a company to sell products or services in that country. a registrar may issue a certificate describing the scope of the registration. ISO registration makes customers more comfortable with the supplier’s products and services. ISO registration may help companies discover internal process and quality improvements. C. Answer (B) is incorrect because many companies view ISO registration as a key to remaining competitive. which of the following is false in regard to registrars? A. Regulators are permitted to use voluntary audits as a basis for punitive action. Inc.43 -. C. many of the companies that register uncover internal process and quality improvement as a result. Most employees are subject to being audited.41 -. ISO 9000 allows companies to understand who internal customers and users are without sharing private information. Answer (B) is incorrect because some companies have preliminary audits by registrars to prepare for the official audit. D. B. The registration is usually valid for a 3-year period. Companies may have preliminary audits by registrars. B. Market pressure is usually the main driving force for companies that adopt ISO 9000 standards. ISO 9000 forces companies to share information.Source: Publisher Why have many European Union countries not adopted ISO 14000 standards? A.Source: Publisher Which of the following is not true about the advantages of adopting ISO 9000 standards? A. C. [43] Gleim #: 1.42 -. B. Answer (D) is incorrect because many companies that implement ISO 9000 standards uncover internal process and quality improvements.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [41] Gleim #: 1. [42] Gleim #: 1. Copyright 2006 Gleim Publications. Employees must be able to competently describe their jobs and demonstrate that they are performing properly. During an on-site visit.

Answer (B) is correct. Recording software usage is a performance-monitoring control concerned with the extent and efficiency of network software use.Source: Publisher Which of the following is not required when ISO 9000 standards are adopted? A. and many individual countries’ standards are typically more strict than the ISO 14000 standards. The standards provide no basis for judging the quality of the end product. D. [44] Gleim #: 1. The marketplace will make this determination on its own. Consistent high quality products. Answer (A) is incorrect because the failure of network fiber-optic lines is a fault management control. Answer (B) is incorrect because internal audits assure that the company is complying with the documented QMS procedures and ISO 9000 standards. accounting management. configuration management. Answer (D) is incorrect because a registrar must ensure that the company’s quality control system conforms to the selected standard. [45] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because many believe adhering to ISO 14000 standards will reduce monitoring or inspection by regulatory agencies. Answer (A) is incorrect because one of the most important steps to adhering to ISO 9000 standards is to organize a QMS. B. Creation of an internal audit system. security management. Copyright 2006 Gleim Publications. Allocating network costs to system users of the network. Compiling statistics on the number of times that application software is used. Recording unauthorized access violations. Organization of a quality management system. Answer (B) is incorrect because recording unauthorized access violations is a security management control. Answer (C) is incorrect because many countries in the European Union have adopted measures similar to the ones in the US to prevent self-incrimination during voluntary ISO audits. Answer (D) is incorrect because ISO 14000 establishes internationally recognized standards that are intended to diminish trade barriers and make it easier to do business across borders.45 -. Inc. B. A QMS explains the company’s quality control and management’s commitment to quality. The objective of ISO 9000 standards is to ensure consistent quality. Answer (D) is incorrect because allocating network costs to system users of the network is an accounting management control. C.Source: CIA 1196 III-60 The International Organization for Standardization has developed standards for ring networks that include fault management. Reporting the failure of network fiber-optic lines. On-site inspections by a registrar. Which of the following controls is included in the performance-monitoring standards? A. Answer (C) is correct. Many European countries already have environmental systems in place. and performance monitoring. Answer (C) is correct. The IOS consists of standards organizations from more than 75 countries. D.44 -. C. Its performancemonitoring standards pertain to management’s ongoing assessment of the quality of performance over time. ISO 9000 is a set of generic standards for establishing and maintaining a quality system within a company. Printed for Pol Mirafuentes Page 20 .

0 and 1. During the current year. relationship exists. Answer (B) is correct. whereas –. Answer (B) is incorrect because –. B. Answer (C) is correct. D. Answer (A) is incorrect because a perfect negative correlation exists.46 -. C.Source: CIA 595 II-46 The internal auditor of a bank has developed a multiple regression model which has been used for a number of years to estimate the amount of interest income from commercial loans. r) measures the strength of the linear relationship. The magnitude of r is independent of the scales of measurement of X and Y. which of the following correlation coefficients represents the strongest relationship between the independent and dependent variables? A.0 signifies a perfect inverse relationship.02 is a very weak correlation coefficient. As X increases by 1. and a value of 1.0. [48] Gleim #: 1.02 –. Answer (D) is incorrect because a linear relationship exists between X and Y.75 Answer (A) is incorrect because 1.89 suggests a very strong inverse relationship between the independent and dependent variables.48 -.Source: CIA 593 III-64 What coefficient of correlation results from the following data? X 1 2 3 4 5 Y 10 8 6 4 2 A. Which of the following conclusions are justified by the change? Copyright 2006 Gleim Publications. Hence. a perfectly inverse relationship exists. Printed for Pol Mirafuentes Page 21 .0 to 1.89 .0 indicates a perfectly inverse linear relationship between X and Y. C. not a direct.0. and r must be equal to –1.0 indicates a perfectly direct relationship between X and Y. A value of zero indicates no linear relationship between X and Y.0 signifies a perfect direct relationship.75 is .Source: CIA 1194 II-46 In regression analysis. [47] Gleim #: 1. 0 –1 +1 Cannot be determined from the data given. the auditor applies the model and discovers that the r2 value has decreased dramatically. D.25 from the maximum value.0. Y consistently decreases by 2.47 -.03 is an impossible value. Because the range of values is between –1. but the model otherwise seems to be working okay. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [46] Gleim #: 1. B.03 –. Its range is –1. The coefficient of correlation (in standard notation. A value of –1. A value of –1. 1.11 from the minimum value.89 is . Answer (C) is incorrect because an inverse. A value of +1. –. Answer (D) is incorrect because .

Answer (D) is incorrect because linear regression models are simpler models. Dependent variable.200 3.515 . The reason may be a systematic error in the account balance.65 7.820 4. Thus. The prior year’s data regarding maintenance hours and costs. are causing interest income to change. Answer (A) is incorrect because cross-sectional regression analysis is inappropriate.469 . Wilkens Company wants to determine the cost behavior pattern of the maintenance costs. Constant coefficient. Printed for Pol Mirafuentes Page 22 . D. A linear regression analysis would increase the model’s reliability.260 4. some other factor must be causing interest income to change. but the auditor should first understand the factors that may be causing r 2 to decrease.2884 49. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Wilkens has decided to use linear regression by employing the equation y = a + bx for maintenance costs. Independent variable.Source: CMA 1290 4-27 (Refers to Fact Pattern #4) In the standard regression equation y = a + bx.12126 34. [Fact Pattern #4] In preparing the annual profit plan for the coming year.030 4.000 3.600 2.00 684. In this case. not included in the model. B.200 $ 3. Answer (C) is correct.960 3.050 3. C. Regression analysis is no longer an appropriate technique to estimate interest income. the letter b is best described as a(n) A.350 2.800 400 Maintenance Costs $ 4. C.49 -. Answer (B) is incorrect because regression analysis may still be the most appropriate methodology to estimate interest income.300 3. The auditor is trying to estimate changes in a single account balance over time. Variable coefficient. but the auditor should be searching for a systematic error in the account balance or applying a more complex model.470 4. Average cost per hour a b Standard error of a Standard error of b Standard error of the estimate r2 $9. This change merits audit investigation. D. Inc.600 [49] Gleim #: 1. Changing to a cross-sectional regression analysis should cause r 2 to increase. Copyright 2006 Gleim Publications. The coefficient of determination (r 2) is the amount of variation in the dependent variable (interest income) that is explained by the independent variables.99724 Hours of Activity January February March April May June July August September October November December Sum Average 480 320 400 300 500 310 320 520 490 470 350 340 4. Some new factors. less of the change in interest income is explained by the model. and the results of the regression analysis.160 $43. are given below and in the opposite column.

and a is fixed cost. Answer (B) is incorrect because the budgeted maintenance costs are $3. in a cost determination regression. D. Answer (C) is incorrect because the constant coefficient is a. Answer (C) is incorrect because the budgeted maintenance costs are $3.746 [52] Gleim #: 1.Source: CMA 1290 4-29 (Refers to Fact Pattern #4) Based upon the data derived from the regression analysis. [50] Gleim #: 1. b represents the variable coefficient.746 (rounded to the nearest dollar).600 $3. For example. Answer (B) is incorrect because the dependent variable is y. C. Answer (D) is correct. 420 maintenance hours in a month would mean the maintenance costs (rounded to the nearest dollar) would be budgeted at A. Independent variable. x equals units produced. Printed for Pol Mirafuentes Page 23 . in a regression to determine the total cost of production.Source: CMA 1290 4-28 (Refers to Fact Pattern #4) The letter x in the standard regression equation is best described as a(n) A. $3.790 $3.65 + 7.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because x is the independent variable.2884(420) y = $3. B. b is the variable cost per unit. Constant coefficient.780 $3. Answer (A) is correct. Coefficient of determination. [51] Gleim #: 1.746. D. Answer (D) is correct. Answer (C) is incorrect because the constant coefficient is a. Inc. B. x is the number of units produced.746.Source: CMA 1290 4-30 (Refers to Fact Pattern #4) The percentage of the total variance that can be explained by the regression equation is Copyright 2006 Gleim Publications. The letter x in the standard regression equation is the independent variable.52 -. y equals total costs.51 -. y = a + bx y = 684.50 -. For example. Dependent variable.746. Substituting the given data into the regression equation results in a budgeted cost of $3. Answer (D) is incorrect because r 2 is the coefficient of determination. C. Answer (B) is incorrect because the dependent variable is y. In the standard regression equation.746 Answer (A) is incorrect because the budgeted maintenance costs are $3.

When monthly advertising is at its average level.80 of additional sales. Cross-sectional regression analysis. Advertising is not a good predictor of sales because the coefficient is so small. B. This coefficient value indicates that A.54 -. C. The average monthly advertising expenditure in the sample is $800. Thus. Cross tabulations with chi-square analysis of significance. D. the value of the independent variable is multiplied by the coefficient. or .Source: CIA 595 II-47 An internal auditor for a large automotive parts retailer wishes to perform a risk analysis and wants to use an appropriate statistical tool to help identify stores that would be out of line compared to the majority of stores. B. which corresponds to the coefficient of determination (r²).8. or . The regression coefficient represents the change in the dependent variable corresponding to a unit change in the independent variable.99724.724%. 99. Time series multiple regression analysis to identify changes in individual stores over time. which corresponds to the coefficient of determination (r²). Answer (B) is incorrect because the percentage of the total variance explained by the regression equation is 99. If the coefficient of determination is . Answer (A) is incorrect because a regression coefficient is unrelated to the means of the variables. which corresponds to the coefficient of determination (r²).53 -.724%. Linear time series analysis. [53] Gleim #: 1. Answer (D) is incorrect because the absolute size of the coefficient bears no necessary relationship to the importance of the variable.613% 80. D. Answer (C) is incorrect because the percentage of the total variance explained by the regression equation is 99.862% Answer (A) is correct. Answer (D) is incorrect because the percentage of the total variance explained by the regression equation is 99. Inc. product sales will be $800. Printed for Pol Mirafuentes Page 24 . D.Source: CIA 1195 II-30 A division uses a regression in which monthly advertising expenditures are used to predict monthly product sales (both in millions of dollars). Copyright 2006 Gleim Publications.982% 99.99724.724%. C.724% 69. it is the slope of the regression line. The coefficient of determination (r²) measures the percentage of the total variance in cost that can be explained by the regression equation. or . C.724% of the variance is explained by the regression equation. The results show a regression coefficient for the independent variable equal to 0. the values in the regression equation explain virtually the entire amount of total cost.000. The product is then added to the y-intercept value.99724. every additional dollar of advertising results in $.99724. The most appropriate statistical tool to use is A. Answer (B) is incorrect because. On average.000.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Thus. B. to predict a specific value of sales. 99. Answer (C) is correct. [54] Gleim #: 1.

Printed for Pol Mirafuentes Page 25 . [57] Gleim #: 1. the error terms are usually correlated or dependent on the prior period. C. Variance of error term is constant. Unless the model is built. Time series analysis is a regression model in which the independent variable is time. Answer (D) is incorrect because the objective is to compare stores at one moment in time. Answer (B) is incorrect because the objective of a histogram is to show frequency distribution in graphic form.e. Divide a universe of data into homogeneous groups.. B. Answer (C) is incorrect because the objective of stratification is to divide a universe of data into homogeneous groups.Source: CIA 589 III-50 The moving-average method of forecasting Copyright 2006 Gleim Publications.Source: CIA 1195 III-11 Quality control programs employ many tools for problem definition and analysis. D. B. Display a population of items for analysis. Distribution of error terms is normal. Answer (D) is incorrect because an expected value of the error term equal to zero is usually met. Multiple regression time series analysis compares the performance of an individual store over a period of time. Expected value of error term equals zero. however. the value of the next time period is frequently dependent on the value of the time period before that.57 -.55 -. they are characterized by autocorrelation (serial correlation). A scatter diagram is one of these tools. Cross-sectional data. i. Answer (B) is correct. The objective of a scatter diagram is to A. Answer (D) is incorrect because regression analysis is used to find trend lines. In time series analysis. Show frequency distribution in graphic form. Answer (A) is incorrect because constant variance of the error term is usually met. Thus. Each observation is represented by a dot on a graph corresponding to a particular value of X (the independent variable) and Y (the dependent variable). the analysis is not useful. [56] Gleim #: 1. Hence. Answer (A) is correct. Show the vital trend and separate trivial items. Answer (C) is incorrect because cross tabulations have to be built on a model of expectations. Answer (C) is incorrect because normal distribution of the error term is usually met. cross-sectional regression analysis is the most appropriate statistical tool because it compares attributes of all stores’ operating statistics at one moment in time.56 -. It is a simple model that compares data for an individual store over time. D. C. Error terms are independent.Source: Publisher Violation of which assumption underlying regression analysis is prevalent in time series analysis? A. The objective of a scatter diagram is to demonstrate correlations. Inc. [55] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because linear time series analysis is inapplicable. Answer (B) is correct. Time series data pertain to a given entity over a number of prior time periods. pertain to different entities for a given time period or at a given time.

the average includes each new observation and discards the oldest observation. Answer (B) is incorrect because regression analysis relates the forecast to changes in particular variables. It does not give more importance to more recent data. C. Thus. Answer (C) is incorrect because. Derives final forecasts by adjusting the initial forecast based on the smoothing constant. Printed for Pol Mirafuentes Page 26 . Unweighted moving average. Inc. [58] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The forecast formula for the next period (for time period t+1) is the sum of the last N observations divided by N. plus the last forecast times one minus the constant. B.g. B. Answer (B) is correct. exponential means that greater weight is placed on the most recent data.280 Copyright 2006 Gleim Publications. many or different production methods or locations) at a particular moment in time. D. Significant changes in the organization affecting sales volumes were made within the last 9 months. D. the total labor cost of four batches will be A. This feature is important because of the organizational changes that affected sales volume. The most effective analysis technique to use would be A.. Using a batch size of 100 and assuming the learning curve continues.58 -. Regresses the variable of interest on a related variable to develop a forecast. Thus. plus the last forecast times one minus the constant. Exponential smoothing. Answer (D) is incorrect because linear regression analysis determines the equation for the relationship among variables. each forecast equals the sum of the last observation times the smoothing constant. with the weights of all data falling off exponentially as the data age. Is a cross-sectional forecasting method. B. Answer (D) is correct.Source: CMA 1293 4-24 The average labor cost per unit for the first batch produced by a new process is $120.Source: CIA 594 II-38 As part of a risk analysis. Answer (A) is incorrect because an unweighted average will not give more importance to more recent data. Includes each new observation in the average as it becomes available and discards the oldest observation. The cumulative average labor cost after the second batch is $72 per product. Under exponential smoothing. under exponential smoothing. Queuing theory. C. Linear regression analysis.368 $2. [59] Gleim #: 1. each forecast equals the sum of the last observation times the smoothing constant.592 $17. The simple moving-average method is a smoothing technique that uses the experience of the past N periods (through time period t) to forecast a value for the next period. C. Answer (A) is incorrect because cross-sectional regression analysis examines relationships among large amounts of data (e. an auditor wishes to forecast the percentage growth in next month’s sales for a particular plant using the past 30 months’ sales results.320 $10. Answer (C) is incorrect because queuing theory is used to minimize the cost of waiting lines.59 -. $4. D.

500 8. Printed for Pol Mirafuentes Page 27 .50 × 1.400 * Applied on the basis of direct labor hours ** Applied at the rate of 10% of variable cost [60] Gleim #: 1. Given a $120 cost per unit for the first 100 units and a $72 cost per unit when cumulative production doubled to 200 units. the learning curve percentage must be 60% ($72 ÷ $120).368 is based on the assumption that the cumulative average unit labor cost is reduced by the learning curve percentage with each batch.000 1. Answer (D) is correct.400 $15.320 equals the cost of the items in the fourth batch. C. D. If production is again doubled to 400 units (four batches).20 ($72 × 60%). B. Moss Point’s total cost on this order would be estimated at A.000 $41. The company has now been requested to prepare a bid for 150 units of the same product. Hence. Inc.800 Copyright 2006 Gleim Publications.Source: CMA 1288 5-19 (Refers to Fact Pattern #5) If an 80% learning curve is applicable. Direct materials Direct labor ($8.60 -.000 hours)* Fixed overhead ** $ 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because $4.20). not each doubling of output.000 hours) Variable overhead ($4. Ordinarily.500 4. the average unit labor cost should be $43. One common assumption in a learning curve model is that the cumulative average time (and labor cost) per unit is reduced by a certain percentage each time production doubles. [Fact Pattern #5] Moss Point Manufacturing recently completed and sold an order of 50 units that had costs as shown in the next column.592 represents the labor cost of 100 units at the unit rate expected after another doubling of production to eight batches.00 × 1. Answer (C) is incorrect because $2. $26. total labor cost for 400 units is estimated to be $17.280 (400 × $43. The time required to perform a given task becomes progressively shorter. the curve is expressed in a percentage of reduced time to complete a task for each doubling of cumulative production. The learning curve reflects the increased rate at which people perform tasks as they gain experience.000 $38.400 $32. Answer (B) is incorrect because $10.

000. [62] Gleim #: 1.000 instead of 1. The total cost for the last 150 units is $26. which are declining.960-hour total gives 960 hours for the last 150 units. Assuming that the cumulative average-time model applies. Answer (C) is incorrect because. 40% of the time only notification of the buyer about a potential defect is required. The labor ($8.000 for 200 units. a change of more than 50%. A second lot of 50 would reduce the cumulative hours per lot to 700 (70% × 1. Adding $6.960 (4 × 490). Inc.000). Materials costs are strictly variable and should remain proportional to production.000 hours required for the first 50 units from the 1.500 × 80%).500 for materials and $13. estimated total hours would be 4. Answer (D) is incorrect because $41. Include increased fixed overhead costs. Given four lots of 50 each. the bid for the 150 units would A.000.900 for labor and overhead). Subtracting the 1.800. Be 10% lower than the total bid at an 80% learning curve.800 – $15. an 80% learning curve means that the cumulative average time per unit (and labor cost. with no learning curve effect.40 direct labor hours per unit at $8. D.4 hours. D. Fixed overhead is 10% of total variable cost. Show a 30% reduction in the total direct labor hours required with no learning curve. [61] Gleim #: 1.Source: CMA 683 5-8 A company is simulating the actions of a government agency in which 50% of the time a recall of a product is required. An appropriate assignment of random numbers for the recall category would be A.500 per 50-unit lot) gives a total variable cost of $38. C. Include 6.000 per lot ($10. 1-40 40-90 61-100 11-60 Copyright 2006 Gleim Publications.61 -. the total cost for labor and variable overhead must be $32. Answer (B) is incorrect because $32. If production doubles again (to a total production of 200 units or four lots of 50 each). Thus.50 per hour. Answer (C) is incorrect because $38. and 10% of the time no action on its part is required. Answer (B) is incorrect because fixed costs applied per lot would decline because they are based on labor hours. for an output of 200 units.000) costs (labor-related).Source: CMA 1288 5-20 (Refers to Fact Pattern #5) If Moss Point had experienced a 70% learning curve.000 × 80%). The average cost per lot for labor and variable overhead after 100 units have been produced should be 80% of the costs of the first lot of 50 units. so total cost is $41. Printed for Pol Mirafuentes Page 28 . at an average cost of $8. however. Answer (A) is incorrect because.400 ($41.500) and variable overhead ($4. B. Random numbers of 1 to 100 are being used.000 instead of 1. the average labor and variable overhead cost per 50-unit lot will be $10. with no learning curve effect. A doubling to four lots would reduce the cumulative hours per lot to 490 (70% × 700).960. the total hours worked would be 1. The sum of the direct labor hours for the initial lot of 50 units was 1.000 per lot.000 ($12. Dividing 960 hours by 150 units produces a per-unit time of 6.000 is the total cost for labor and variable overhead for 200 units.000 for raw materials ($1. B. given a constant labor rate) declines by 20% when unit output doubles in the early stages of production. The first lot size was 50 units. which was produced at a total cost of $15. will be affected by the learning curve. C. the cumulative average cost for labor and variable overhead will be $8.400).960.800 is the total cost for 200 units. estimated total hours would be 4. a change of more than 50%.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Thus.62 -.000 is the total variable cost for 200 units. Answer (D) is correct.400 ($1.

Source: CMA 1294 4-29 Quick Response Plumbing (QRP). supplies plumbing contractors and retailers throughout the Northeast on a next-day delivery basis. managers thoroughly analyze many alternatives and decide on the best alternative for the company. Sensitivity analysis. Program Evaluation Review Technique (PERT). Inc.Source: CMA 690 5-21 Through the use of decision models. Answer (B) is incorrect because 40-90 includes 51 numbers. QRP wants to estimate the wait time when more than two freight cars arrive in the same night. the distribution of results from the model will be obtained. Monte Carlo simulation. QRP has a centrally located warehouse to accept receipts of plumbing supplies. some freight must be held until the next day for unloading. B. C. Printed for Pol Mirafuentes Page 29 . a wholesale distributor. B. Answer (D) is correct. Integer programming. The appropriate technique to analyze the arrival of freight cars is A. The appropriate technique to analyze the alternatives by using expected inputs and altering them before a decision is made is A. Linear programming. Given a 50% chance of a recall. If this process is performed many times. QRP’s prior records indicate that the number of freight cars that arrive in the course of a night range from zero to five or more. Linear programming. The warehouse has a single dock to accept and unload railroad freight cars during the night. In addition. Often the actual results achieved from a particular decision are not what was expected when the decision was made. D. or minimize a cost function. Expected value analysis. C. Answer (C) is correct. [63] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 1-40 is an appropriate assignment of random numbers for the notification category. The Monte Carlo simulation method is often used to generate the individual values for a random variable. Answer (A) is incorrect because integer programming is a variation of linear programming that concerns problems in which some variables are not continuous. The performance of a quantitative model under uncertainty may be investigated by randomly selecting values for each variable in the model (based on the probability distribution of each variable) and then calculating the value of the solution. 50 different numbers should be assigned to that alternative. noncontinuous values.64 -. Answer (B) is incorrect because linear programming is a technique used to maximize a revenue or profit function.63 -. subject to constraints such as limited resources or minimum (or maximum) levels of production time. Answer (C) is incorrect because 61-100 is an appropriate assignment of random numbers for the notification category. an alternative that was not selected would have actually been the best decision for the company. Copyright 2006 Gleim Publications. Regression analysis. Integer programming problems are also known as discrete models because the variables take on discrete. If more than two freight cars arrive on the same night. Answer (D) is incorrect because regression analysis is used to find an equation for the linear relationships among variables. D. with no indicated pattern of arrivals. This answer is the only alternative with 50 numbers (11-60). It takes 5 hours to unload each freight car. [64] Gleim #: 1.

B. Queuing theory. for a given rate of arrivals. Inc. Answer (C) is incorrect because regression analysis estimates the relation among variables. Econometric theory. a queuing system consists of a waiting line and a service facility (a copy center in this case). Recently. the most effective technique to analyze the problem is A. Answer (B) is incorrect because linear programming optimizes a given objective function subject to constraints. C. As such. credit policy changes.65 -. They evolve from their starting value to a changed value. D. Answer (A) is correct. An appropriate technique for minimizing turnaround time and the cost of providing copy services is A. Queuing theory is a group of mathematical models for systems involving waiting lines. to calculate the sensitivity of the solution (variability of outcomes) to changes in a variable. Answer (B) is incorrect because linear programming optimizes a function given certain constraints. [66] Gleim #: 1. Linear programming. Printed for Pol Mirafuentes Page 30 .Source: CIA 1193 III-67 A company has several departments that conduct technical studies and prepare reports for clients. Management is considering decentralizing copy services to reduce the turnaround and provide clients with timely reports. preceding events. and writeoffs. Answer (D) is incorrect because game theory is an approach to decision making that considers the actions of competitors. An example is the game of blackjack in which the probability of certain cards being dealt is dependent upon what cards have already been dealt. Answer (D) is incorrect because dynamic programming is a problem-solving approach that breaks a large mathematical model into a number of smaller. Game theory.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because expected value analysis is used to determine an anticipated return or cost based upon probabilities of events and their related outcomes. The objective is to minimize total costs. Answer (C) is incorrect because PERT is a network technique used to plan and control large projects. Copyright 2006 Gleim Publications. Answer (A) is correct. D. Sensitivity modeling can be used to determine the outcome of a variety of decisions.66 -. A trial-and-error method may be adopted. In the analysis of bad debts. such as collections. C. The probabilities of these doubtful accounts follow a transition process over time. Monte Carlo analysis. Answer (D) is correct. Regression analysis. Markov chain analysis. In general. A Markov chain is a series of events in which the probability of an event depends on the immediately preceding event. Answer (C) is incorrect because Monte Carlo analysis is a simulation technique that uses random-number procedures to create values for probabilistic components. including both service and waiting costs (turnaround time). there have been long delays in having these reports copied at the company’s centralized copy center because of the dramatic increase in business. manageable problems. usually in a computer model. Answer (B) is incorrect because econometrics forecasts the impact of different economic policies and conditions. Dynamic programming.Source: CIA 1190 III-46 A firm is attempting to estimate the reserves for doubtful accounts. [65] Gleim #: 1. B. affect the probabilities of future losses.

Source: CIA 586 III-15 A bank has changed from a system in which lines are formed in front of each teller to a one-line. the average time a unit waits. and the average number of units in the system and the mean length of the queue. C. D. Queuing models determine the operating characteristics of a waiting line: the probability that no units are in the system. B. and the average number of units in the system and the mean length of the queue. Increase accuracy in teller reconciliations at the end of the day because fewer customers are served by each teller. Decrease time customers spend in the line. Answer (D) is incorrect because queuing theory minimizes the sum of the costs of waiting and of providing service. Actual amount of time each unit spends in the queue. the average units in the system. Answer (B) is incorrect because the queuing model calculates the average percentage of time that a service facility is idle.Source: CMA 688 5-27 Queuing models are concerned with balancing the cost of waiting in the queue with the A. Implementing the new system will A. the probability of a specified number of units in the queue.67 -. Usage rate for the service being rendered. Number of customers in the queue. Answer (C) is incorrect because queuing theory minimizes the sum of the costs of waiting and of providing service. This minimization occurs at the point where the cost of waiting is balanced by the cost of providing service. Cost of providing service. if paid employees are waiting. and the probability of a given number of units in the system. Answer (A) is correct. the probability that a unit must wait.68 -. [68] Gleim #: 1. the average units in the line. Copyright 2006 Gleim Publications. the probability of a specified number of units in the queue. C. Improve on-the-job training for tellers because each will perform different duties. the person at the head of the line goes to that teller. multiple-server system.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [67] Gleim #: 1. B. the sum of (1) the cost of providing service (including facility costs and operating costs) and (2) the cost of idle resources waiting in line. and the average number of units in the system and the mean length of the queue. [69] Gleim #: 1. Answer (B) is incorrect because queuing theory minimizes the sum of the costs of waiting and of providing service. Decrease the bank’s wage expenses because the new system uses fewer tellers. The latter may be a direct cost. Inc. the average time a unit is in the system. the actual time spent in the queue cannot be determined from the model. C. Average number of units in the system and the mean length of the queue. Average waiting time in the queue. B. However. Probability of a specified number of units in the queue. for a given rate of arrivals. Printed for Pol Mirafuentes Page 31 . Queuing (waiting-line) models minimize. D. the probability of a specified number of units in the queue.Source: CMA 688 5-28 The operating condition that cannot be identified by using a queuing model is the A. Average percentage of time that a service facility is idle. or an opportunity cost in the case of waiting customers. When a teller is free. Answer (D) is incorrect because the queuing model calculates the average percentage of time that a service facility is idle. Answer (C) is correct. D.69 -. Answer (A) is incorrect because the queuing model calculates the average percentage of time that a service facility is idle.

5 minutes. During peak periods. This terminology (channel. Inc. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the number of employees is unlikely to change due to the new system. Queue will expand to infinity. assuming a Poisson process. The question gives only peak period data. Single channel. the number of customers per teller will not change. is not used by all writers on queuing theory. One hundred customers arrive in line per hour and only 60 are serviced per hour. This type of waiting-line system is A. From this. Answer (D) is incorrect because insufficient information is given to determine overall idle time or average customer waiting time. one can conclude that the A. single phase. Copyright 2006 Gleim Publications. D. multiple-phase system is a set of supermarket checkout lines each of which is served in sequence by a cashier and a person who packs grocery bags. Answer (A) is correct. The question gives only peak period data. When all customers must wait in a single queue. Answer (B) is incorrect because insufficient information is given to determine overall idle time or average customer waiting time. the rate of arrivals has a Poisson distribution with an average of 100 customers per hour and service times that are exponentially distributed with an average of 60 seconds per customer. a decrease in waiting time is possible given multiple servers. [71] Gleim #: 1. the queue will expand to infinity during peak periods.Source: CIA 1187 III-39 The drive-through service at a fast-food restaurant consists of driving up to place an order. Average customer waiting time is 2. B. Server will be idle one-sixth of the time. Answer (C) is incorrect because peak customer service is only 60 per hour. Average rate is 100 customers per hour. phase). Single channel. The drive-through represents a single queue (channel). Another example is the typical factory assembly line. Printed for Pol Mirafuentes Page 32 . single phase. B. D. Multiple channel. Because this waiting line has three services in series. An added effect is to increase customer satisfaction. Answer (A) is incorrect because service by one ticket-seller at a movie theater is an example of a single-channel. Answer (D) is incorrect because tellers’ duties will not change. Answer (D) is incorrect because an example of a multiple-channel. Answer (C) is incorrect because. [70] Gleim #: 1.Source: CIA 584 IV-34 A post office serves customers in a single line at one service window. Answer (B) is correct. multiple phase. it may be said to be multiple phase. singlephase system. and then advancing to another window to receive the items ordered. advancing to a window to pay for the order. however. Answer (B) is correct. Accordingly. multiple phase. Answer (C) is incorrect because supermarket checkout lines are a common example of multiple single-phase servers servicing multiple lines.71 -. so on-the-job training will not improve. Multiple channel. C.70 -.

9 Service Time 1 minute 2 minutes 3 minutes 4 minutes The bank then selects random numbers for the next two cars as Random Numbers Selected: Arrival Car 3 Car 4 #3 #7 Service #7 #8 [72] Gleim #: 1. the probability of a specified time between arrivals. Answer (C) is correct. and the probability of more than one event is negligible if the interval is sufficiently small. A car will always go to the window attached to the bank unless that window has more cars waiting than the island window. 6 7. The bank is interested in determining the average waiting times of customers and has developed a model based on random numbers.e. [73] Gleim #: 1.71828. Chi-square. C. The lone teller will always serve the car that arrived first. the probability of an event is proportional to the length of the interval. Assume that the analysis begins with cars just arriving at both service windows. If λ is the average number of events in a given interval. 8 Random # 1. One teller serves both stations.. both requiring 3 minutes of service time.73 -.Source: CIA 1192 III-98 (Refers to Fact Pattern #6) The arrival time follows which probability distribution? A. the probability of k is λke-λ f(k) = k! Answer (D) is incorrect because service time has an exponential distribution.72 -. k is the number of events. the one at the attached window will be served before the one at the island. Binomial..Source: CIA 1192 III-99 (Refers to Fact Pattern #6) The time that car 3 will have to wait to be serviced (not including its own service time) is Copyright 2006 Gleim Publications. the bank assigns random numbers to arrival and service times: Time between Arrivals 1 minute 2 minutes 3 minutes 4 minutes Random # 1 2. the second on an island. any number of events must be possible in the interval of time. and e is the natural logarithm (2. one attached to the bank itself. The two key factors are the time between successive car arrivals and the time customers wait in line.).. Poisson. B. Exponential. If two cars arrive simultaneously.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #6] A bank has two drive-in lanes to serve customers. D. Inc. 5. Queuing models assume that arrivals follow a Poisson process: the events (arrivals) are independent. i. Based on a known probability distribution. 8. Printed for Pol Mirafuentes Page 33 . 2 3 4. This distribution gives the probability of zero events in a given interval. 5. Answer (A) is incorrect because the binomial distribution is a discrete distribution in which each trial has just two outcomes. Answer (B) is incorrect because the chi-square distribution is a continuous distribution used to measure the fit between actual data and the theoretical distribution. 3 4. Car 1 is at the attached window and car 2 at the island window. 6 7.

Inc. C. Answer (A) is incorrect because car 3 must wait for 4 minutes. Printed for Pol Mirafuentes Page 34 . Car 1 is at the attached window and will require 3 minutes to service. (Refer to Figure FIGURE18_12. a waiting time of 4 minutes. B. Answer (B) is incorrect because car 3 must wait for 4 minutes. 4 minutes.) [75] Gleim #: 1. B. The number of computer complaints associated with diskette problems and new software usage. Car 4 arrives at the just-vacated island window 4 minutes after car 3. Answer (D) is incorrect because car 4 must wait 4 minutes. the organization should focus on A. 5+ minutes. Car 3 arrived at the attached window 2 minutes after cars 1 and 2.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Car 2 must wait for car 1 to be serviced (3 minutes in the queue + 3 minutes to be serviced = 6 minutes). Answer (D) is incorrect because car 3 must wait for 4 minutes. [Fact Pattern #7] An organization has collected data on the complaints made by personal computer users and has categorized the complaints. 5+ minutes.Source: CIA 1192 III-100 (Refers to Fact Pattern #6) The time that car 4 will have to wait to be serviced (not including its own service time) is A. C. Answer (A) is incorrect because car 4 must wait 4 minutes. D.74 -. The number of computer complaints associated with the lack of user knowledge and hardware problems. Answer (B) is incorrect because car 4 must wait 4 minutes. The total number of personal computer complaints that occurred.75 -.Source: CIA 1195 III-15 (Refers to Fact Pattern #7) Using the information collected. B. It must wait 4 minutes for car 3 to be serviced. The cost to alleviate all computer complaints. It must wait 1 minute for car 1 to be serviced and 3 minutes for car 2 to be serviced. [74] Gleim #: 1. D. 0-2 minutes. 3 minutes. C. 0-2 minutes. 3 minutes. D. Copyright 2006 Gleim Publications. Answer (C) is correct. 4 minutes. Answer (C) is correct.

Source: CMA 689 5-25 A Gantt chart A. B. However. D. Printed for Pol Mirafuentes Page 35 . Answer (C) is incorrect because the chart does not display arithmetic means.77 -. Consequently. The Pareto diagram does not focus on the total quantity of computer complaints. relative frequencies. The absolute frequency of each computer complaint. Copyright 2006 Gleim Publications. D. Answer (B) is incorrect because linear programming is used to determine an optimal product mix. relative frequencies. the Gantt chart is not as sophisticated as PERT or CPM in that it does not reflect the relationships among the activities or define a critical path. Answer (B) is incorrect because the chart does not display arithmetic means. Answer (A) is incorrect because the chart does not display arithmetic means.76 -. [77] Gleim #: 1. or medians of each type of complaint. It displays the actual number of each type of complaint. Shows only the activities along the critical path of a network.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because more detailed information is not available. the length of a bar equals the length of an activity. Answer (D) is incorrect because cost information is not provided. Complaints based on lack of user knowledge and hardware problems are by far the most frequent according to this chart. Answer (A) is incorrect because the critical path is not shown on a Gantt chart. the company should devote its resources primarily to these issues. [76] Gleim #: 1. C. Answer (D) is correct. relative frequencies. Answer (C) is incorrect because a Gantt chart shows the activities to be completed but not their sequencing. This Pareto diagram depicts the frequencies of complaints in absolute terms. B. Does not necessarily show the critical path through a network. A Gantt or bar chart is sometimes used in conjunction with PERT or CPM to show the progress of a special project. or medians of each type of complaint. Answer (B) is incorrect because complaints about diskettes and software are infrequent. The chart does not display arithmetic means. The median of each computer complaint. C.Source: CIA 1195 III-16 (Refers to Fact Pattern #7) The chart displays A. Answer (D) is correct. Answer (C) is correct. Time is shown on the horizontal axis. Inc. Shows the critical path for a project. The arithmetic mean of each computer complaint. and shading indicates the degree of completion. relative frequencies. Is used for determining an optimal product mix. The relative frequency of each computer complaint. or medians of each type of complaint. or medians of each type of complaint.

B. On schedule. but activity D has not yet been started.78 -. The time estimates for an activity are assumed to approximate a beta probability distribution. the project is ahead of schedule. Answer (D) is incorrect because all time estimates are not weighted equally. complex projects. the expected time for an activity when given an optimistic time (A). and four times the most likely time by six. the pessimistic time.Source: CIA 586 III-23 As of week 8. Ahead of schedule. Printed for Pol Mirafuentes Page 36 . D. and pessimistic. activity A has been completed as scheduled and activities B and C are ahead of schedule. The Delphi technique. Answer (D) is incorrect because the project is ahead of schedule. (b – a) ÷ 2 (a + b) ÷ 2 (a + 4m + b) ÷ 6 (4abm) ÷ 6 Answer (A) is incorrect because the most likely time estimate should be included in the formula. but activity D has not yet been started. Behind schedule. [80] Gleim #: 1. Inc. much less completed. PERT was developed to aid managers in controlling large. [79] Gleim #: 1. Three time estimates are made: optimistic. PERT approximates the mean of the beta distribution by dividing the sum of the optimistic time.Source: CIA 597 III-98 The process of adding resources to shorten selected activity times on the critical path in project scheduling is called A. Answer (B) is incorrect because the most likely time estimate should be included in the formula. the Gantt chart shows that the project is (Refer to Figure CIA2_08_26. Answer (A) is incorrect because the project is ahead of schedule. PERT analysis includes probabilistic estimates of activity completion times. but activity D has not yet been started. Consequently.) A.79 -. Copyright 2006 Gleim Publications. much less completed. and a most likely time (m) is calculated by which one of the following formulas? A. Material-requirements planning. Answer (B) is correct. C. Answer (C) is correct. C. D. Assuming that (1) each of the bars represents the expected time necessary to complete an activity and (2) the shaded regions represent the portions completed. much less completed. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [78] Gleim #: 1.Source: CMA 694 4-1 When using PERT (Program Evaluation Review Technique). most likely.80 -. Crashing. a pessimistic time (B). B. Complete. A branch-and-bound solution. Answer (C) is incorrect because the project is ahead of schedule. B. D.

Answer (B) is incorrect because BC is not on the critical path.800 Cost to Crash 2 Weeks $15. Printed for Pol Mirafuentes Page 37 . [81] Gleim #: 1.800 ($10.000 + $8. Activity BC 2 weeks.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.82 -. at the same time.Source: CMA 1288 5-24 California Building Corporation uses the critical path method to monitor construction jobs.000 ($10. Activity EF 2 weeks. Answer (D) is correct.500 Activities BC DE EF California Building desires to reduce the normal completion time of Job #181 and.500-per-week completion penalty. The following activities can be crashed: Cost to Crash 1 Week $ 8. [82] Gleim #: 1. and the pessimistic time is 21 weeks. Therefore.500. the first activity to be crashed (have its completion time accelerated) is one on the critical path. The company is currently 2 weeks behind schedule on Job #181. D. Answer (B) is incorrect because the Delphi technique is a qualitative forecasting approach. C.000 8. Which one of the following is the best estimate of the standard deviation for the activity? A.000 10. California Building should crash A. which is subject to a $10.81 -. the only feasible choices are DE and EF on the critical path. Activity DE 1 week and activity EF 1 week. report the highest possible income for the year. which is less than the cost to crash either activity for 2 weeks. To select an activity on another path would not reduce the total time of completion. Thus. Answer (A) is incorrect because BC is not on the critical path.000 19.600 19. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks. The total cost to crash DE and EF for 1 week each is $18. Inc.Source: CMA 688 5-13 In a PERT network. B. C. Answer (D) is incorrect because a branch-and-bound solution is an integer programming solution. Answer (C) is incorrect because material-requirements planning is an inventory model. B. activity BC should not be selected because it is not on the critical path. D. 2 6 9 12 Copyright 2006 Gleim Publications. To finish activity BC 2 weeks early would not reduce the total time to complete the project. the optimistic time for a particular activity is 9 weeks. and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.500 × 2) 2-week delay penalty. Activity BC 1 week and activity EF 1 week. Thus. Activities that are to be crashed in a CPM problem should be ones that are on the critical (longest) path. The activity chosen should have a completion time that can be accelerated at the lowest possible cost per unit of time saved. When making a cost-time trade-off. which is greater than the total cost to crash DE and EF for 1 week each.800). Answer (C) is incorrect because the cost of crashing EF 2 weeks is $19. DE and EF should be crashed for 1 week each because the total cost is less than the $21.

Answer (D) is incorrect because 48 is the product of the standard deviations.500 2. However. [Fact Pattern #8] The PERT network diagram and the corresponding activity cost chart for a manufacturing project at Networks. [83] Gleim #: 1. The basis for the latter approximation is that various probability distributions have tails that lie about plus or minus three standard deviations from the mean. Inc.9% of observations in the normal distribution are expected to lie within this range.00 6. The standard deviation of the project completion time (time for the critical path) is therefore the square root of 100 (6 2 + 82). are presented below. most likely.200 6.250 4. respectively. C. Inc. and pessimistic. this distribution has finite endpoints (the optimistic and pessimistic estimates) and is unimodal. and four times the most likely time (the mode) by six.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. The mean time for the critical path is simply the sum of the means of the activity times.000 5.000 5.50 4.50 .750 7. PERT approximates the mean of the beta distribution by dividing the sum of the optimistic time.000 9. it has only one mode (the most likely time). In contrast to the normal distribution. the standard deviation is 2 weeks (12 ÷ 6). the pessimistic time. The standard deviation is approximated by dividing the difference between the pessimistic and optimistic times by six.000 6. These activities have standard deviations of 6 and 8. the standard deviation equals the square root of the sum of the variances (squares of the standard deviations) of the times for activities on the critical path. Answer (B) is correct. Answer (C) is incorrect because 9 weeks is the pessimistic estimate. (Refer to Figure CIA3_01_08. Printed for Pol Mirafuentes Page 38 . 7 10 14 48 Answer (A) is incorrect because 7 is the average standard deviation. D.000 6. PERT analysis includes probabilistic estimates of activity completion times.Source: CMA 688 5-17 A PERT network has only two activities on its critical path.) Activity AB AC AD BE CE DE BC BD Normal Cost $3.83 -.000 Crash Time 3. The standard deviation of the project completion time is A. respectively.000 4. The numbers in the diagram are the expected times (in days) to perform each activity in the project.750 3.00 5. if the pessimistic and optimistic times are 21 and 9 weeks. B. For example. Accordingly.500 2.25 Crash Cost $4. 99. Answer (D) is incorrect because 12 weeks is the difference between the optimistic and the pessimistic estimates.00 5.50 days 4. The time estimates for an activity are assumed to approximate a beta probability distribution. Three time estimates are made: optimistic.500 Copyright 2006 Gleim Publications.000 2. Answer (C) is incorrect because 14 is the sum of the standard deviations.50 .000 8. that is. Answer (B) is incorrect because 6 is the approximate number of standard deviations between the tails of the normal distribution. or 10.

Inc. DE. A-D-E must be reduced by 1. Answer (D) is incorrect because AB and CE are not on the critical path.86 -.5) based on expected times. The critical (longest) path is A-D-E.85 -. The alternatives for decreasing both A-B-C-E and A-B-D-E are more costly. 11. to decrease the project’s completion time by 1.0 crash time = 1. Crashing AB is the efficient way to reduce both A-B-C-E and A-B-D-E by the desired amount of time because it is part of both paths.5 – 6.5 – 6.0 + 6. and A-B-D-E by 1.Source: CMA 1290 4-7 (Refers to Fact Pattern #8) The expected time of the critical path is A.5 = 12. which requires 13 days (5.5 expective time – 4. B. On the critical path with the lowest unit crash cost.84 -.000 ($4. Answer (B) is incorrect because crashing activity DE saves only 1.5 day. The critical path is the longest path. However. [86] Gleim #: 1.5 days. AD and AB.5 – 3. Answer (D) is incorrect because the expected time of the critical path is 13. [85] Gleim #: 1. The only way to decrease A-D-E by 1. Printed for Pol Mirafuentes Page 39 . With the largest amount of slack.5 + . AD.5 days.5 days is to crash activity AD (5.0 day (7.5 + 7. should crash activity(ies) A.5) on the critical path and does not reduce the time needed for A-B-C-E. the first activity that should be crashed is the activity A. The incremental cost of crashing AB is $1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [84] Gleim #: 1. Hence. C.0 days. B. Answer (C) is incorrect because crashing AD does not reduce the time necessary to complete A-B-C-E or A-B-D-E.Source: CMA 694 4-3 When making a cost-time trade-off in PERT analysis.000 normal cost) to shorten the completion time by 1. With the lowest unit crash cost.5 days). The longest path in the diagram is A-D-E. B.5 days. Networks.0 days.5 days) as well as A-D-E must also be shortened.0-day saving (7. D. D. On the critical path with the maximum possible time reduction. C.5 + 7. Answer (C) is incorrect because the expected time of the critical path is 13. C. D. Answer (A) is correct. 12.Source: CMA 1290 4-8 (Refers to Fact Pattern #8) To keep costs at a minimum and decrease the completion time by 1 1/2 days. 13.000 crash cost – $3. Answer (A) is incorrect because the expected time of the critical path is 13.0 day (4. Answer (B) is correct. Inc. Copyright 2006 Gleim Publications. which has an expected time of 13 days (see preceding question).0 days.5 + 1. 11. A-B-C-E by . Crashing DE results in a 1.0 days.0 day.5).5 = 12 days) and A-B-D-E (4. paths A-B-C-E (4.0 days. AB and CE.0 days.5) only.

path in the network from node (A) to node (F) is path A-C-D-F.88 -. Answer (C) is correct. C. Answer (C) is incorrect because the time reduction should be related to its cost. To select an activity on another path would not reduce the total time of completion. D. Paths that are not critical have slack time.) The shortest time to complete the project is A. The critical path is the longest path in time through the network. Answer (D) is correct. The numbers between the arrows indicate the number of months to complete each activity. C. The arrows represent the activities. Answer (D) is incorrect because no path through the network requires 14 months. 5 months. 8 months. Thus. [88] Gleim #: 1. Answer (B) is incorrect because the project cannot be completed in less than 8 months.87 -. 14 months. That path is critical in that. the first activity to be crashed (have its completion time accelerated) is one on the critical path. Answer (B) is incorrect because the difference between the latest starting time and earliest finishing time is irrelevant. (Refer to Figure CIA3_01_09. if any activity on the critical path takes longer than expected. the entire project will be delayed. or critical. The initial activity chosen should be the one with the completion time that can be accelerated at the lowest possible cost per unit of time saved.Source: CIA 1196 III-96 The network below describes the interrelationships of several activities necessary to complete a project. Number of days an activity can be delayed without forcing a delay for the entire project. Path that has the largest amount of time associated with it. PERT diagrams are free-form networks showing each activity in a large project as a line between events. Answer (D) is correct. The maximum time reduction may not be cost effective. [87] Gleim #: 1. The longest. B. Answer (A) is incorrect because uncertainty is reflected in the use of probabilistic estimates of completion times. Answer (B) is incorrect because the activity with the lowest unit crash cost may not be on the critical path. Copyright 2006 Gleim Publications. When making a cost-time trade-off. slack is the A. Inc. so the activities along those paths can be completed before the activities along path A-C-D-F. Uncertainty associated with time estimates. Answer (C) is incorrect because the path with the largest amount of time associated with it is the critical path. Slack is the number of days an activity can be delayed without forcing a delay for the entire project. D. 6 months.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because eliminating an activity with slack will not reduce the total time of the project. Printed for Pol Mirafuentes Page 40 . the shortest time to complete the project is 8 months (3 + 3 + 2). Difference between the latest starting time and earliest finishing time.Source: CMA 695 4-12 In PERT. All other paths are shorter than path A-C-D-F. Answer (A) is incorrect because the project cannot be completed in less than 8 months. B.

Source: CIA 597 III-32 Reengineering is the thorough analysis. and transshipment. Answer (A) is incorrect because internal auditors may perform the functions of determining whether the process has senior management’s support. recommending areas for consideration. Directing the implementation of the redesigned process. D. Printed for Pol Mirafuentes Page 41 . information systems design. Which of the following is not an example of monitoring? Copyright 2006 Gleim Publications. Identify the set of connecting branches having the shortest combined length. Answer (B) is incorrect because internal auditors may perform the functions of determining whether the process has senior management’s support. The intended result is a dramatic improvement in service.g. Answer (B) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [89] Gleim #: 1. Minimize total travel time from one site to each of the other sites in a transportation system. Network models are used to solve managerial problems pertaining to project scheduling. quality. A spanning tree is a group of branches (arcs) that connects each node in the network to every other node. Maximize throughput in networks with distinct entry (source node) and exit (sink node) points.Source: CIA 1195 I-66 Monitoring is an important component of internal control. recommending areas for consideration. and developing audit plans for the new system. Flows are limited by capacities of the arcs (e. Answer (D) is incorrect because the minimal spanning tree algorithm identifies the set of connecting branches having the shortest combined length.90 -. The shortest-route. assignment. Identify bottlenecks in a network and hence identify the longest path. Answer (C) is incorrect because the maximal flow algorithm maximizes throughput in networks with distinct entry (source node) and exit (sink node) points. Staff assignments of internal auditors should be rotated periodically whenever it is practicable to do so. Internal auditors should not become directly involved in the implementation of the redesign process. An internal auditor’s involvement in reengineering should include all of the following except A.89 -. and complete redesign of essential business processes. Inc. This involvement would impair their independence and objectivity. Determining whether the process has senior management’s support. and cost. D. Answer (C) is incorrect because internal auditors may perform the functions of determining whether the process has senior management’s support. C. B. A shortest-route algorithm minimizes total travel time from one site to each of the other sites in a transportation system. and transportation systems design. recommending areas for consideration. speed. C. An example problem is the determination of the shortest telecommunications linkage among users at remote sites and a central computer. [90] Gleim #: 1. and maximal flow problems are other applications of network models.. Developing audit plans for the new system. Answer (A) is incorrect because the critical path method (CPM) is intended to identify bottlenecks in a network and hence identify the longest path. Examples of applications are highway transportation systems and oil pipelines. and developing audit plans for the new system. highways or pipes). Networks consisting of nodes and arcs may be created to represent in graphic form problems related to transportation.91 -. B. minimal spanning tree. Answer (D) is correct.Source: CIA 596 III-100 A shortest-route algorithm is used in network models to A. [91] Gleim #: 1. fundamental rethinking. Recommending areas for consideration. and developing audit plans for the new system.

However. B.Source: Publisher Which of the following is a short-term approach to managing bottlenecks or binding constraints in production and distribution processes? Copyright 2006 Gleim Publications. The remaining 225 machine hours (270 . Answer (C) is correct. B. Answer (A) is incorrect because budgetary comparison is a typical example of a monitoring control. The unit throughput contribution margins for A-1 and A-2 are $150 and $300. A-1’s throughput contribution margin per unit of the scarce resource (the internal binding constraint) is $150 ($150 UCM ÷ 1 machining hour).93 -. Answer (D) is incorrect because internal auditing is a form of monitoring. It serves to evaluate management’s other controls. Answer (C) is correct.45) should be used to produce 75 units (225 ÷ 3 hours) of A-2. Answer (D) is incorrect because Tocon should produce as much of A-1 as it can sell. C. D. reconciling batch control totals is a processing control. respectively. [92] Gleim #: 1. comparisons. A-2’s throughput contribution margin per unit of the scarce resource is $100 ($300 UCM ÷ 3 machine hours). Given that the UCM per machine hour of A-2 is $100 and that the cost is $80 per hour. 180 45 45 0 Units of A-2 0 100 75 60 Answer (A) is incorrect because Tocon can sell only 45 units of A-1. with A-1 and A-2 requiring 1 hour and 3 hours. Assuming that Operation 2 has sufficient capacity to handle any additional output from Operation 1. it can produce additional units of A-2. Inc. respectively. Management regularly compares divisional performance with budgets for the division. Tocon should use 45 machine hours to produce 45 units of A-1. Data processing management regularly reconciles batch control totals for items processed with batch controls for items submitted. However. Answer (B) is incorrect because investigation of exceptions is a monitoring control used by lower-level management to determine when their operations may be out of control. It includes management and supervisory review. Tocon is considering expanding Operation 1’s capacity by 90 machine hours at a cost of $80 per hour. Each component must proceed through two processes: Operation 1 and Operation 2. Management considers whether internal control is properly designed and operating as intended and modifies it to reflect changing conditions. If Tocon adds 90 machine hours to increase the capacity of Operation 1 to 270 hours (180 + 90). Answer (B) is incorrect because Tocon can produce only 75 units of A-2 if it produces 45 units of the more profitable A-1. Ongoing monitoring occurs as part of routine operations. Tocon can sell only 45 units of A-1 and 100 units of A-2. Management has asked internal auditing to perform regular audits of the controls over cash processing. Monitoring may be in the form of separate. [93] Gleim #: 1. Data processing management regularly generates exception reports for unusual transactions or volumes of transactions and follows up with investigation as to causes. Consequently. and other actions by personnel as part of their regular activities. Printed for Pol Mirafuentes Page 42 . it cannot produce additional units of A-1 because the external binding constraint has not been relaxed. adding capacity to Operation 1 is profitable. Monitoring assesses the quality of internal control over time. D.92 -. C. Tocon should produce as much A-1 as it can sell (45 units). The capacity of Operation 1 is 180 machine hours.Source: Publisher Tocon Company produces two components: A-1 and A-2. periodic evaluations or of ongoing monitoring.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. However. reconciliations. Thus. The latter amount is within the external binding constraint. Tocon should produce Units of A-1 A. Furthermore.

250. Inc. A manufacturer that can sell all of its output produces its sole product using three operations. Reengineering. Answer (D) is incorrect because $(20.000 units $1. The cost of the additional workers is $50.000 $(14. Answer (C) is correct. B. The change in operating income attributable to the increase in workers is A. [Fact Pattern #9] This information is relevant to a theory of constraints (TOC) analysis. B.800. It is the streamlining of procedures to make automation more efficient.200. the annual output of the bottleneck operation will increase by 500 units. Each unit sells for $120. the change in operating income is $(14.000) is based on the assumption that an additional $12 per unit of fixed costs will be applied.000 Operation 2 150.000) Answer (A) is incorrect because $50. $50.000 $36. Rationalization.000 [500 units × ($120 unit price – $48 DM per unit)].000 units 150. Theory of constraints. Answer (B) is incorrect because reengineering an approach to business process analysis that entails process innovation and core process redesign. The following annual cost and capacity information is available concerning those operations: Operation 1 Total capacity per year Total output per year Fixed cost of operations (not including direct materials) [94] Gleim #: 1.000 units 150. The incremental annual throughput contribution (revenues – direct materials costs) from adding workers to Operation 2 is $36.000. The theory of constraints (TOC) is a short-term approach to managing bottlenecks (binding constraints) in production and distribution processes.000 is the incremental throughput contribution.000) $(20.000 units 150. Its basic principle is that short-term profit maximization requires maximizing the contribution margin of the binding constraint (the throughput contribution). Printed for Pol Mirafuentes Page 43 . it finds new ways of doing things. and it requires videotaping the performance of a job.000 per year. Operation 2 is the bottleneck because it is functioning at its capacity. Answer (A) is correct. D.000 units $2. As a result. Other variable costs are immaterial.94 -. and direct materials costing $48 per unit are added at the start of the first operation.000 Operation 3 180. Answer (B) is incorrect because $36. Because the cost of the additional workers is $50.000 is the incremental cost. Answer (D) is incorrect because a micromotion study is a method used for work management. C. Copyright 2006 Gleim Publications.000). C. D. Answer (C) is incorrect because rationalization is yet another approach to business process analysis.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.Source: Publisher 200. Micromotion study. Instead of improving existing procedures.000 units $1.000 (Refers to Fact Pattern #9) Assume that additional workers are hired for the bottleneck operation to expedite setups and materials handling.

Answer (D) is incorrect because ISO 9000 standards are generic in nature and only ensure consistent quality in the product being produced.Source: Publisher (Refers to Fact Pattern #9) Assume that X Company offers to perform the Operation 2 function on 1. C. [96] Gleim #: 1. Hence. Answer (B) is incorrect because the ISO rules specify that standards are periodically revised every 5 years in light of technological and market developments. X’s offer effectively increases the capacity of the bottleneck operation. X but not Y. Answer (B) is incorrect because X’s offer but not Y’s offer is acceptable.Source: Publisher What is the main benefit for most companies who adopt ISO 14000 standards? A.000 units at a unit price of $40. Answer (A) is correct. C.000 [1. Compliance with the standards is voluntary.000 (1. it will result in the incurrence of additional costs with no increase in throughput contribution. Printed for Pol Mirafuentes Page 44 . ISO 9000 is a set of generic standards for establishing and maintaining a quality system within a company. The Environmental Protection Agency cannot use voluntary ISO audits as a basis for imposing penalties.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [95] Gleim #: 1. B.96 -. B. Companies are required to adopt ISO 14000 standards to operate in the European Union. D. excluding direct materials cost. even though its $7 unit price is less than the $8 unit operating cost (excluding direct materials) for Operation 1.000 units × $40). The objective of ISO 9000 standards is to ensure consistent quality even if the quality is poor.000-unit capacity.97 -. Also assume that Y Company offers to perform the Operation 1 function on 1. given that Operation 2 is already producing at its 150. B.000 units × ($120 unit price – $48 DM per unit)]. Copyright 2006 Gleim Publications. Answer (C) is incorrect because X’s offer but not Y’s offer is acceptable. Y’s offer should be rejected because. Which of these mutually exclusive offers is acceptable? A. Answer (D) is incorrect because X’s offer but not Y’s offer is acceptable. D. Neither offer should be accepted. [97] Gleim #: 1. Answer (C) is correct. The ISO 9000 standards are revised every 5 years to account for technological and market developments. The market will determine the quality of the end result.000 units at a unit price of $7. Companies learn how well their environmental management system operates relative to those of other companies. X or Y. excluding direct materials cost. the relevant cost of X’s offer is less than the incremental throughput contribution. Reduced monitoring and inspection by regulatory agencies. D. The objective of ISO 9000 standards is to ensure high quality products and services. Y but not X. but the increase in throughput contribution is $72.95 -. C.Source: Publisher Which of the following statements is not true regarding ISO 9000 standards? A. X’s offer should be accepted because its cost is $40. Answer (A) is incorrect because compliance is voluntary but many companies are adopting the standards for competitive reasons or out of fear that the standards will become a requirement in foreign markets. Inc.

Answer (A) is correct. Inc.00 0. Internal audits assure that the company is complying with the documented QMS procedures and ISO 9000 standards.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because not all companies are regulated by government agencies.Source: Publisher What ensures that a company is complying with the documented Quality Management System procedures and ISO 9000 standards? A. 1.50 0. Answer (C) is incorrect because this is a benefit to some companies but not others. Answer (C) is incorrect because the registrar is the external auditor who performs the on-site inspection. Answer (D) is correct. This is accomplished through the sharing of information required by ISO standards. D. [98] Gleim #: 1. Not all companies are subject to the EPA’s audits.98 -. C.00 Copyright 2006 Gleim Publications.Source: CIA 591 III-44 The following data on variables x and y was collected from June to October: June x y 24 104 July 31 76 August 19 124 September 15 140 October 22 112 The correlation coefficient between variables x and y is nearest to A. management commitment plays an important role in determining the amount of resources dedicated to quality. [99] Gleim #: 1. Management commitment. there is no guarantee that compliance with ISO 14000 standards will reduce monitoring and inspection by agencies. companies learn how well their environmental management system operates relative to those of other companies. Printed for Pol Mirafuentes Page 45 . C. The registrar observes the quality control system and evaluates the conformity to the selected standard. Answer (B) is incorrect because ISO 14000 standards are not currently required by the European Union. Also. The main benefit of instituting ISO 14000 standards is internal.99 -. D. B. Answer (D) is incorrect because the internal audit is responsible for ensuring compliance with the QMS and ISO 9000 standards. The registrar. Answer (B) is incorrect because the registrar evaluates whether the quality control system conforms to the selected standard. B. An important requirement of the ISO 9000 standards is the internal audit system. The internal audit.00 -1. However. On-site inspections by an external auditor.

Source: CIA 595 III-97 A company is formulating its plans for the coming year.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a positive correlation coefficient implies that one variable increases (decreases) as the other increases (decreases).200 includes the collection of May credit sales rather than March credit sales. [100] Gleim #: 1. The calculation treats the entire sales figure for March as credit sales. Answer (C) is incorrect because $4. including the preparation of its cash budget.025. that is.000 = $1.000). The data clearly do not support this conclusion.800. In the example to the left. The data clearly do not support this conclusion.000 3.025.600 $4. and 58% of March’s credit sales.500.100 -.000 For the month of April. the observations fall exactly along a straight line and the value of one variable increases (decreases) as the other decreases (increases). A correlation coefficient of -1. Answer (B) is correct.000 4.781. Answer (D) is incorrect because $4.200 $4.000 + (40% × 70% × $4. C.200. Answer (B) is correct. The cash receipts for April equal April’s cash sales (30% × $4. 30% of the company’s sales are cash sales.729. Copyright 2006 Gleim Publications.000 Answer (A) is incorrect because $3.000 4.781. The data clearly indicate that the two variables move in opposite directions. B.600. Historically.600 [$1.968 $3.200.000 3.968 results from improperly calculating the collections of April and March credit sales.200.000. 40% of April’s credit sales.000 improperly calculates the collections of March credit sales. the equation of the straight line is y = or x = 200 – 4x 50 – 1y 4 Answer (C) is incorrect because a positive correlation coefficient implies that one variable increases (decreases) as the other increases (decreases).00 implies a perfect inverse correlation.408. Collections on Account In the month of sale In the month following the sale Uncollectible Percentage 40% 58% 2% Sales for the first five months of the coming year are forecast as follows. Answer (D) is incorrect because a correlation coefficient of zero implies that the two variables are unrelated.408. The remaining 70% are credit sales with the following collection pattern.000) + (58% × 70% × $3. Inc. D.000. Printed for Pol Mirafuentes Page 46 .600.000)]. January February March April May $3. The 2% uncollectible amount should not be removed from the credit sales before the collection percentage is applied.000. total cash receipts equal $3.729. the total cash receipts from sales and collections on account would be A. $3. Consequently.

D The earliest completion time for the project is A. Answer (B) is incorrect because 14 days is not the completion time of a path to completion. D. The two paths through the network are ACE (5 + 4 + 6 = 15 days) and BDE (3 + 2 + 6 = 11 days).) Activity A B C D E Time (days) 5 3 4 2 6 Immediate Predecessor None None A B C. Product Hours per Unit A Machine Center 1 Machine Center 2 Contribution per unit 2. 14 days. Subject to: 4A + 5B < 130. Answer (D) is incorrect because 20 days is the sum of all of the activity times.101 -. B. Copyright 2006 Gleim Publications.Source: CIA 597 III-100 The following information and diagram apply to a project: (Refer to Figure CIA3_01_10. C.102 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [101] Gleim #: 1. Hence. not the longest.Source: CIA 1191 III-33 The data below were gathered on two different machine centers and two products. Answer (C) is correct. Subject to: A < 0. Maximize: Contribution > 4A + 5B. Subject to: 2. 15 days. D. the earliest completion time is 15 days. time to completion. C. Printed for Pol Mirafuentes Page 47 .5A + 4B < 60. 11 days. 20 days. B. [102] Gleim #: 1. The critical or longest path is A-C-E. Answer (A) is incorrect because 11 days is the shortest. Inc.5 6 $4 B 4 3 $5 Hours Available 60 70 Which item below would be part of a linear programming formulation of this problem? A.

C. Optimistic time. Answer (C) is correct. Also. Answer (A) is incorrect because PERT breaks down a project into a set of events. [103] Gleim #: 1. Answer (C) is incorrect because optimistic time is the time for completing a project if all goes well. It is used specifically in project management. and establishes a completion time for each event. Dummy activity. Its control function lies in its ability to identify variations and thus formulate corrective actions. not a constraint. They include all of the following except: A. Hence. It is also used to determine whether production processes are out of control. [104] Gleim #: 1. Statistical process (quality) control is not used to control large scale projects. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the objective function is to maximize the total contribution margin (4A + 5B). Answer (B) is incorrect because this equation (A < 0) is nonsensical. B. arranges the events into a strict priority network. lumpy increments. the left side of the equation states the objective function. The linear programming solution is subject to constraints on the availability of machine hours in both centers.103 -. PERT. D. Answer (D) is correct. Essentially a subset of PERT. respectively. Answer (B) is incorrect because the latest finish is the latest that an activity can finish without causing delay in the completion of the project. Gantt charts. Statistical quality control is a method of determining whether the shipment or production run of units lies within acceptable limits. CPM uses a deterministic rather than a probabilistic estimate of the time required for task completion. Answer (D) is incorrect because Gantt charts compare scheduled production with actual production. C. Copyright 2006 Gleim Publications.104 -. For example. Printed for Pol Mirafuentes Page 48 . in Machine Center 1. Statistical process control. Answer (C) is correct. CPM. Answer (A) is incorrect because a dummy activity is one that consumes no time but establishes precedence among activities. Answer (B) is incorrect because CPM is used to control large scale projects. B. Lumpy demand.Source: CIA 594 III-61 Which of the following terms is not used in project management? A. but only 60 hours are available. D. products A and B require 2.5 and 4 hours per unit. Project management concerns managing teams assigned to special projects. This amount is not expressed as an inequality. Latest finish.Source: CIA 594 II-40 Various tools are employed to control large scale projects. Lumpy demand refers to periodic demand for a product or service that increases in large.5A + 4B < 60 Answer (D) is incorrect because the hours available in the two machine centers cannot be added together. the optimal production of A and B to the following constraint: 2.

A-DE (4 + 6 + 5 = 15) is the critical path. Answer (C) is correct. A-D-E. The critical path is the longest path because it defines the minimum duration of the project.107 -. [106] Gleim #: 1. Recently. The predecessor of C is A. if slack time in an activity exists. C. Answer (B) is incorrect because it is not a backup activity.Source: CIA 1191 III-37 In a critical path analysis. Answer (A) is incorrect because the path length of A-C is 13.Source: CIA 592 III-69 Activity scheduling information for the installation of a new computer system is given below. paths that are not critical have slack time. Could be delayed without delaying the overall project. Answer (D) is incorrect because B-D-C is not a path. B-E. In other words. the critical path is A. D. Is a backup activity to replace a main activity should it fail. An appropriate technique for minimizing turnaround time and the cost of providing copy services is Copyright 2006 Gleim Publications. B. A-C.105 -. D Duration (Days) 4 3 9 6 5 For this project. Involves essentially no time to complete. Answer (C) is correct. Inc. B. Answer (D) is incorrect because time is involved in a slack activity. Slack is the free time associated with each activity. there have been long delays in having these reports copied at the company’s centralized copy center because of the dramatic increase in business.106 -. Is not essential to the overall project. Answer (B) is incorrect because the path length of B-E is 8. [107] Gleim #: 1. Printed for Pol Mirafuentes Page 49 . the activity A. C. D. Answer (A) is incorrect because an activity with slack may nevertheless be essential to the overall project. Activity A B C D E Immediate Predecessor A A B. B-D-C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [105] Gleim #: 1.Source: CIA 1193 III-67 A company has several departments that conduct technical studies and prepare reports for clients. Slack represents unused resources that can be diverted to the critical path. Management is considering decentralizing copy services to reduce the turnaround and provide clients with timely reports.

6 7. The objective of queuing theory is to minimize the total cost of the system. Answer (A) is correct. Car 1 is at the attached window and car 2 at the island window. D. B. C. One teller serves both stations. Based on a known probability distribution. The lone teller will always serve the car that arrived first. This company wishes to reduce the total of waiting costs (turnaround time) and the cost of copy services. If two cars arrive simultaneously. both requiring 3 minutes of service time. Queuing theory. 6 7. 2 3 4. Game theory. and (2) the cost of idle resources waiting in line. 9 Service time 1 minute 2 minutes 3 minutes 4 minutes The bank then selects random numbers for the next two cars as Random Numbers Selected Arrival Car 3 Car 4 #3 #7 Service #7 #8 [108] Gleim #: 1. one attached to the bank itself. Regression analysis. The latter may be a direct cost if paid employees are waiting. Printed for Pol Mirafuentes Page 50 .108 -. the bank assigns random numbers to arrival and service times: Random # 1 2. This minimization occurs at the point at which cost of waiting is balanced by the cost of providing service. including both service and waiting costs. Answer (B) is incorrect because linear programming is a mathematical technique for optimizing a given objective function subject to constraints. 5. for a given rate of arrivals.Source: CIA 1192 III-95 (Refers to Fact Pattern #10) The problem just described is best approached by use of which quantitative method? Copyright 2006 Gleim Publications. the one at the attached window will be served before the one at the island. [Fact Pattern #10] A bank has two drive-in lanes to serve customers. Inc. Two basic costs are involved in queuing (waiting-line) models: (1) the cost of providing service (including facility costs and operating costs). 5. 8. Answer (D) is incorrect because game theory is a mathematical approach to decision-making in which each decision-maker takes into account the courses of action of competitors. 3 4.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. or an opportunity cost in the case of waiting customers. 8 Time between arrivals: 1 minute 2 minutes 3 minutes 4 minutes Random # 1. The bank is interested in determining the average waiting times of customers and has developed a model based on random numbers. Assume that the analysis with cars just arriving at both service windows. A car will always go to the window attached to the bank unless that window has more cars waiting than the island window. The two key factors are the time between successive car arrivals and the time customers wait in line. Answer (C) is incorrect because regression analysis is a statistical procedure for estimating the relation between variables. the second on an island. Linear programming.

D.Source: CIA 1192 III-96 (Refers to Fact Pattern #10) The technique used in analyzing the problem is best described as A.Source: CIA 1192 III-97 (Refers to Fact Pattern #10) The process of making sure that the model measures what it is supposed to measure is called A. Simulation is a technique for experimenting with logical/mathematical models using a computer. [109] Gleim #: 1. This minimization occurs at the point where the cost of waiting is balanced by the cost of providing service. the distribution of results from the model will be obtained. Simulation theory. or an opportunity cost in the case of waiting customers. many problems cannot be solved by known analytical methods because of the behavior of the variables and the complexity of their interactions. Statistical inference. and (2) the cost of idle resources waiting in line. Answer (A) is correct.109 -. B. The latter may be a direct cost if paid employees are waiting. Hypothesis testing. Linear programming. Printed for Pol Mirafuentes Page 51 . The objective of the queuing theory is to minimize the total cost of the system. Answer (B) is incorrect because ARIMA modeling is a time-series technique. the performance of a quantitative model under uncertainty may be investigated by randomly selecting values for each of the variables in the model (based on the probability distribution of each variable) and then calculating the value of the solution. Exponential smoothing. Two basic costs are involved in queuing (waiting-line) models. [110] Gleim #: 1. Inc.110 -. for a given rate of arrivals. multiple parameters. Differential calculus. Integrated autoregressive-moving average (ARIMA) modeling. C. Confidence coefficient analysis. Despite the power of mathematics. If this process is performed a large number of times. D. Answer (A) is incorrect because ARIMA modeling is a times-series technique. D. Answer (D) is incorrect because linear programming optimizes outputs given scarce resources. However. C. Copyright 2006 Gleim Publications. (1) the cost of providing service (including facility costs and operating costs). including both service and waiting costs. Queuing theory. B. C. Answer (D) is incorrect because differential calculus is used to establish optimization points. Linear programming. Integrated autoregressive-moving average (ARIMA) modeling. Answer (C) is correct. Answer (B) is incorrect because exponential smoothing is a time-series model. Answer (C) is incorrect because linear programming optimizes outputs given scarce resources. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Validation.

Answer (C) is incorrect because confidence coefficients are an integral part of statistical estimation and hypothesis testing. Answer (D) is incorrect because sensitivity analysis is a method for studying the effects of changes in one or more variables on the results of a decision model. Answer (D) is correct. D. the game is a positive-sum game. it will be able to estimate the distribution of demand for this new product. Monte Carlo simulation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because statistical inference refers to estimation or hypothesis testing. Linear programming. the marketing department would like to develop a computerized model for projecting demand for this product. Answer (A) is correct. By using a random-number procedure to generate values for the different factors. the competitor will consider what your company will charge. C.often using historical data. Game theory. Answer (B) is incorrect because hypothesis testing relates to the testing of specific null hypotheses. [111] Gleim #: 1. C.112 -. This method of estimating the distribution of demand for the new product is called A. that changes could make the model invalid for the future. Games are classified according to the number of players and the algebraic sum of the payoffs. interactions among these factors. Copyright 2006 Gleim Publications. marketing needs to consider the price that a major competitor will charge for a similar product because the competitor’s price will affect the demand for your company’s product. An appropriate mathematical technique for analyzing such a decision is A. Inc. Sensitivity analysis. the model is historically valid.Source: CIA 592 III-64 Because of the large number of factors that could affect the demand for its new product. however. in setting its price. This assurance requires validation of the model -. Linear programming. There is still some risk.111 -. and the probabilities associated with different values of these factors. Correlation analysis. Some assurance is needed that the results of the experiment will be realistic. B. B. however. In setting this price. In a two-person game. Validation is a step in the simulation procedure.Source: CIA 1193 III-71 The marketing department of your company is deciding on the price to charge for a key product. Similarly. If it is possible for both players to profit. If the model gives results equivalent to what actually happened. if the payoff is given by the loser to the winner. D. Printed for Pol Mirafuentes Page 52 . Game (or decision) theory is a mathematical approach to decision making when confronted with an enemy or competitor. Answer (C) is incorrect because linear programming is a mathematical technique for optimizing a given objective subject to certain constraints. Differential analysis. Answer (B) is incorrect because probability theory is a mathematical technique used to express quantitatively the likelihood of occurrence of an event. Probability theory. [112] Gleim #: 1. Mathematical models have been developed to select optimal strategies for certain simple games. the algebraic sum is zero and the game is called a zero-sum game.

Queuing theory.114 -. that changes could make the model invalid for the future. [114] Gleim #: 1. Least squares. It also should provide some assurance that the results of the experiment will be realistic. In order to use this information to predict when and where to send their boats. Inc.Source: CIA 593 III-65 A large fishing operation has information on the interval. however.113 -. the model is historically valid. Applying the model. Answer (A) is incorrect because it is part of the validation process. Answer (B) is incorrect because linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints. There is still some risk. B. which of the following techniques should be used? A. C. If the model gives results equivalent to what actually happened. Answer (C) is incorrect because it is part of the validation process. [113] Gleim #: 1. Simulations that use a random-number procedure to generate values for the inputs are referred to as Monte Carlo simulations. The model should not be implemented until this validation process is complete. The Monte Carlo technique is used in a simulation to generate the individual values for a random value. Answer (B) is incorrect because it is part of the validation process.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. time. Checking that assumed probability distributions are reasonable. B. Printed for Pol Mirafuentes Page 53 .Source: CIA 1190 III-41 An account executive has just designed a Monte Carlo model to estimate the costs of a particular type of project. Validating the model could include all except A. Answer (D) is correct. The inputs to the model are then varied a large number of times to estimate the distribution of possible outcomes from the model of the variable of interest. This process involves not only searching for errors but also verifying the assumptions. C. Comparing test results with previously validated models. Simulation. D. This assurance is often obtained using historical data. Copyright 2006 Gleim Publications. Simulation is a technique in which a probabilistic process is first modeled. D. Answer (C) is incorrect because correlation analysis is a statistical procedure for studying the relations among variables. and probabilities of shrimp schools staying beneath their fishing boats. Answer (D) is incorrect because differential analysis is a method used for decision-making that compares differences in costs (and revenues) of two or more possibilities. Exponential smoothing. An essential step in the simulation procedure is to validate the mathematical model used. Checking for errors in the computer programming.

validate the model. [116] Gleim #: 1. the performance of a quantitative model under uncertainty may be investigated by randomly selecting values for each variable in the model (based on its probability distribution) and then calculating the value of the solution. many problems cannot be solved by known analytical methods because of the behavior of the variables and the complexity of their interactions.116 -. Sensitivity analysis is a method for studying the effects of changes in one or more variables on the results of a decision model.Source: CIA 593 III-66 A cost-volume-profit model developed in a dynamic environment determined that the estimated parameters used may vary between limits. Inc. A time-series study. simulation models are probabilistic. Simulation is a technique for experimenting with logical/mathematical models using a computer. They mathematically estimate what actual performance would be. not deterministic. the distribution of results from the model will be obtained. Answer (A) is correct. Answer (B) is incorrect because least squares is a prediction and estimation technique using a single dependent and single or multiple independent variables. A sensitivity analysis.Source: CIA 594 III-60 Which of the following is not true about simulation models? A. [115] Gleim #: 1. and conduct the simulation and evaluate the results. Answer (D) is incorrect because a time-series study involves forecasting data over time. Printed for Pol Mirafuentes Page 54 . Thus. Answer (B) is incorrect because statistical estimation involves the estimation of parameters. After a problem has been formulated into any mathematical model. B. design the experiment. Answer (C) is incorrect because statistical hypothesis testing calculates the conditional probability that both the hypothesis is true and the sample results have occurred. C. B. D. C. Statistical estimation. Answer (A) is correct. Answer (D) is incorrect because simulation models are by definition stochastic or probabilistic models. Answer (D) is incorrect because exponential smoothing is a forecasting technique using arbitrary weights. Simulation (Monte Carlo simulation) is a technique for experimenting with logical/mathematical models using a computer. Despite the power of mathematics. If this process is performed many times. formulate the model. They are deterministic in nature. A simulation uses the laws of probability to generate values for random variables.115 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Subsequent testing of the model with respect to all possible values of the estimated parameters is termed A. Answer (C) is incorrect because simulation models mathematically estimate what performance would be under various conditions. They emulate stochastic systems. Answer (C) is incorrect because queuing theory is a waiting-line technique used to balance desirable service levels against the cost of providing more service. D. Answer (B) is incorrect because simulation modeling samples the operation of a system. The may involve sampling. Statistical hypothesis testing. However. it may be subjected to sensitivity analysis. The simulation procedure has five steps: define the objectives. Copyright 2006 Gleim Publications.

Expected net cash flows from this decision depend on several factors. all of the following are useful except A. Differential analysis.Source: CIA 1196 III-8 In forecasting purchases of inventory for a firm. Answer (C) is incorrect because differential analysis is used for decision making when differences in costs (revenues) for two or more options are compared. In this case. C. B. and the probabilities associated with different levels of those factors. Printed for Pol Mirafuentes Page 55 .Source: CIA 1194 III-58 An investment company is attempting to allocate its available funds between two investment alternatives.118 -. Capital budgeting.Source: CIA 1194 III-61 A company is deciding whether to purchase an automated machine to manufacture one of its products. D. Correlation analysis. Queuing theory. interactions among those factors. Simulation is a technique used to describe the behavior of a real-world system over time. Answer (A) is correct. Knowledge of the behavior of business cycles. Differential analysis.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [117] Gleim #: 1. Linear programming. B. Linear programming is a mathematical technique for planning resource allocation that optimizes a given objective function that is subject to certain constraints. the maximum investment is constrained by a 70% limit on either investment choice.119 -. which differ in terms of expected return and risk. Inc. This technique usually employs a computer program to perform the simulation computations. Answer (A) is correct. Answer (D) is incorrect because queuing theory is used to minimize the sum of the costs of waiting lines and servicing waiting lines when items arrive randomly at a service point and are serviced sequentially. Answer (C) is incorrect because correlation analysis is a statistical procedure for studying the relation between variables. Internal allocations of costs to different segments of the firm. C. Sensitivity analysis examines how outcomes change as the model parameters change. [119] Gleim #: 1. Simulation and sensitivity analysis. The company would like to minimize its risk while earning an expected return of at least 10% and investing no more than 70% in either of the investment alternatives. D. stocks and bonds. Answer (B) is incorrect because linear programming is a mathematical technique for optimizing a given objective function subject to certain constraints.117 -. Econometric modeling. Information on the seasonal variations in demand. An appropriate technique for allocating its funds between stocks and bonds is A. Copyright 2006 Gleim Publications. B. Linear programming. C. Answer (D) is incorrect because differential analysis is used for decision making that compares differences in costs (revenues) of two or more options. D. Answer (B) is incorrect because capital budgeting is used to analyze and evaluate long-term capital investments. [118] Gleim #: 1. The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is A.

[120] Gleim #: 1. Answer (B) is incorrect because linear programming is used to determine an optimal product mix. the length of a bar equals the length of an activity.Source: CMA 689 5-24 The primary difference between PERT and CPM is that A. the seasonal variation is usually incorporated as an index number in the forecasting model. Answer (D) is correct.). Activity times are estimated for normal effort and crash effort. to sunk costs. However. the critical paths are found for normal and crash times. Inc. it is a network technique. Printed for Pol Mirafuentes Page 56 . unlike PERT. etc. Sunk costs are not relevant to decision making. More than one critical path may exist for each diagram. These estimates allow the project manager to estimate the costs of completing the project if some of the activities are completed on a crash basis. Copyright 2006 Gleim Publications. Internal allocations of costs relate to costs already incurred. Shows only the activities along the critical path of a network. But CPM was developed independently of PERT and is widely used in the construction industry. The 1:4:1 method is typically used in PERT.121 -. but the most likely estimate is weighted four times more heavily than the others. to forecasting future purchases. Crash time is the time to complete an activity assuming that all available resources were devoted to the task (overtime. Answer (C) is incorrect because. C. Answer (C) is incorrect because a less significant difference between PERT and CPM is that PERT uses probabilistic estimates of completion times. Under this method. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. Answer (D) is correct.Source: CMA 689 5-25 A Gantt chart A. Shows the critical path for a project. the most optimistic and pessimistic estimates are weighted equally. Is used for determining an optimal product mix. for example. CPM may be thought of as a subset of PERT. it uses deterministic time and cost estimates. Does not necessarily show the critical path through a network. D. in time series analysis. Answer (B) is incorrect because CPM but not PERT uses activity costs and considers crash times. B. Answer (A) is incorrect because the critical path is not shown. Such a model is used as a forecasting tool. in time series analysis. Both PERT and CPM are network analysis techniques. CPM times are deterministic. and shading indicates the degree of completion. but. Its advantages include cost estimates plus the concept of "crash" efforts and costs. Like PERT. A Gantt or bar chart is sometimes used in conjunction with PERT or CPM to show the progress of a special project. that is. CPM considers activity costs and PERT does not. Answer (C) is incorrect because a Gantt chart shows the activities to be completed but not their relationships (sequencing). PERT considers activity costs and CPM does not. Answer (A) is incorrect because CPM specifies the activity times (uses deterministic estimates). The network diagram is constructed in the same manner as PERT diagrams.120 -. the Gantt chart is not as sophisticated as PERT or CPM in that it does not reflect the relationships among the activities or define a critical path. B. CPM uses probabilities on the activity times and PERT does not. Answer (B) is correct. Answer (D) is incorrect because an econometric model is an application of statistical methods to economic problems. Once the diagram is constructed. Activity costs are also estimated for normal and crash efforts. PERT can assign probabilities to activity times and CPM does not. D. Time is shown on the horizontal axis. extra crew. the cyclical fluctuation in business activity is usually incorporated as an index number in the forecasting model. [121] Gleim #: 1.

and a +1 relationship indicates a perfect positive correlation. A zero correlation coefficient would indicate no association between the variables. Regression analysis is used to find an equation for the linear relationship among variables. The best explanation of the value r is that it A. A -1 relationship indicates a perfect negative correlation.12 is a slightly stronger correlation.Source: CMA 1289 5-14 Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation. Encompasses factors outside the relevant range.123 -. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [122] Gleim #: 1.12 0. Is based on objective and constraint functions. -0. B. Answer (B) is incorrect because regression results are limited to observations within the relevant range. Estimates the independent variable. Answer (B) is correct. Printed for Pol Mirafuentes Page 57 . Ranges in size from negative infinity to positive infinity. Thus.73 signifies a strong negative correlation. The correlation coefficient can vary from -1 to +1. Answer (D) is incorrect because 0. Regression analysis is often used to estimate a dependent variable (such as cost) given a known independent variable (such as production). Inc. D.122 -. Interprets variances in terms of the independent variable. Of the options given in the question. Is always positive.11. B. Answer (C) is incorrect because regression analysis does not use constraint functions. C.Source: CMA 697 4-26 A regression equation A. [124] Gleim #: 1. Estimates the dependent variables. D. Answer (C) is incorrect because 0. Answer (D) is incorrect because the dependent variable is estimated using regression analysis. C.73 -0. [123] Gleim #: 1. the correlation coefficient that is nearest to zero is -0. r.11 0.35 is a considerably stronger correlation. D. the correlation coefficient that is nearest to zero would indicate the weakest linear association.124 -. Copyright 2006 Gleim Publications. B.35 Answer (A) is incorrect because -0. Answer (A) is correct. The behavior of the dependent variable is explained in terms of one or more independent variables. Is a measure of the relative relationship between two variables.Source: CMA 1285 5-27 The correlation coefficient that indicates the weakest linear association between two variables is A.

[125] Gleim #: 1. C. cyclical variation. Regression analysis. Answer (C) is incorrect because the size of the coefficient varies between -1. Ignoring it. Copyright 2006 Gleim Publications.Source: CMA 696 4-20 A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the consequences of possible prediction errors is A. Time series analysis relies on past experience. Printed for Pol Mirafuentes Page 58 . B. Alternatively.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the coefficient is negative if the relationship between the variables is inverse. analysis determines the average change in the dependent variable given a unit change in one or more independent variables. The magnitude of r is independent of the scales of measurement of x and y. Learning curve analysis. The coefficient of correlation (r) measures the strength of the linear relationship between the dependent and independent variables.0 and +1. seasonality. Multiplying the data by a seasonality factor. A value of zero indicates no linear relationship between the x and y variables. Answer (C) is correct. and random variation. D. a forecast based on trend analysis is a means of adjusting for seasonality. Seasonal variations are common in many businesses. Sensitivity analysis determines how a result varies with changes in a given variable or parameter in a mathematical decision model. A value of +1.0 and +1. seasonality. B. but most methods use a seasonal index. The seasonality in the data can be removed by A. or subtracting it from. Inc.125 -. a manager might first calculate the net present value or internal rate of return assuming that a new asset has a 10-year life. and random variation.126 -. they are reflected in the data and must be considered for a model to be accurate. Answer (A) is incorrect because expected value is the probabilistically weighted average of the outcomes of an action. The NPV or IRR can then be recalculated using a 5-year life to determine how sensitive the result is to the change in the assumption. and a value of -1. Subtracting a seasonality factor from the data.0. Answer (C) is correct. Expected value analysis. Answer (B) is incorrect because seasonality factors cannot be ignored. Changes in the value of a variable may have several possible components including secular trends. cyclical variation. Answer (B) is incorrect because the coefficient relates the two variables to each other.0. Answer (D) is incorrect because the seasonality adjustment for a single season’s data may be an increase or a decrease.Source: CMA 1293 4-25 The four components of time series data are secular trend. in a present value analysis. C.0 indicates a perfectly inverse relationship. seasonal variations can be removed from data by using a weighted average of several time periods instead of data from individual periods. Answer (B) is incorrect because learning curve analysis quantifies how labor costs decline as employees learn their jobs through repetition. The coefficient lies between -1. Answer (A) is incorrect because adding a seasonality factor to. D. A variety of methods exist for including seasonal variations in a forecasting model.0 indicates a perfectly direct relationship. or least squares. [126] Gleim #: 1. Sensitivity analysis. Taking the weighted average over four time periods. Answer (D) is incorrect because regression. For example. Answer (D) is correct.

Ratio analysis that compares changes in the investment portfolio on a monthly basis. The following are selected data from recent financial statements (dollar figures in millions): Current Year Revenue Investments (average balances) Medical research grants made Investment income Administrative expense [127] Gleim #: 1. Exponential smoothing. C. The organization has just finished a major fundraising drive that raised $500 million for the current fiscal period. Linear programming. B. Regression analysis. B. Which of the following analytical review procedures should the auditor use? A. (b) changes in portfolio mix. Printed for Pol Mirafuentes Page 59 . or (c) other factors. C. Inc. Regression analysis develops an equation to explain the behavior of a dependent variable (for example. The Delphi technique. [128] Gleim #: 1. Answer (B) is incorrect because ratio analysis measure changes but do not explain them. investments.128 -. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #11] An international nonprofit organization finances medical research. Copyright 2006 Gleim Publications. investment income) in terms of one or more independent variables (for example. D. Trend analysis that compares the changes in investment income as a percentage of total assets and of investment assets over the past 5 years.Source: CIA R98 III-35 Which of the following will allow a manufacturer with limited resources to maximize profits? A. The majority of its revenue and support comes from fund-raising activities. Simple linear regression that compares investment income changes over the past 5 years to determine the nature of the changes. and specific grants from an initial sponsoring corporation. The organization has been in operation over 15 years and has a small internal audit department. Answer (D) is correct. Answer (C) is incorrect because trend analysis measure changes but do not explain them. Multiple regression analysis that includes independent variables related to the nature of the investment portfolio and market conditions.Source: CIA 597 I-31 $500 210 418 16 10 Past Year $425 185 325 20 8 (Refers to Fact Pattern #11) The auditor wishes to determine if the change in investment income during the current year was due to (a) changes in investment strategy. Multiple regression analysis is the best approach because it allows the auditor to regress the change in investment income on more than one independent variable.127 -. Answer (A) is incorrect because simple linear regression is based on just one independent variable. market risk and the risks of particular investments).

Inc.g. The process is reiterated until the opinions converge on an optimal solution. The process is reiterated until the opinions converge on an optimal solution. Exponential smoothing. Linear programming is a technique used to optimize an objective function. Thus. [129] Gleim #: 1. Answer (B) is incorrect because. C. The Delphi technique is an approach in which the manager solicits opinions on a problem from experts. Process quality control is used to prevent defects. Product quality control is more important than process quality control.Source: CIA 1184 III-12 Which of the following observations concerning quality control is more accurate? A. Thus. method. summarizes the opinions. etc. Process quality control is used when examining the quality of goods or services which already exist. linear programming is used for planning resource allocations. In business. that is. with the weights of all data falling off exponentially as the data age. to maximize a revenue or profit function or to minimize a cost function. regression analysis determines functional relationships among quantitative variables. Copyright 2006 Gleim Publications. [130] Gleim #: 1. limited (scarce) resources or minimum/maximum levels of production. each forecast equals the sum of the last observation times the smoothing constant. B. Each forecast is based on a fixed number of prior observations. D. Answer (D) is incorrect because a moving average is the simplest form of smoothing.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the Delphi technique is an approach in which the manager solicits opinions on a problem from experts. with the weights of all data falling off exponentially as the data age. Answer (C) is correct. Thus. Managers are often faced with problems of selecting the most profitable or least costly way to use available resources. Product quality control is designed to balance the marketability of higher quality against the cost of attaining higher quality. Moving averages. exponential means that greater weight is placed on the most recent data. exponential means that greater weight is placed on the most recent data. Answer (D) is correct. plus the last forecast times one minus the constant. the Delphi technique is a qualitative. each forecast equals the sum of the last observation times the smoothing constant. whereas product quality control is used primarily to identify defects after the fact. performance.129 -. D. Printed for Pol Mirafuentes Page 60 .130 -. C. plus the last forecast times one minus the constant. Thus.Source: CIA R98 III-36 Which of the following is not an appropriate time series forecasting technique? A. Least squares. The behavior of the dependent variable is explained in terms of one or more independent variables. B. Answer (B) is incorrect because under exponential smoothing. subject to constraints. under exponential smoothing. and feeds the summaries back to the experts (without revealing any of the participants to each other). not a quantitative. Answer (A) is incorrect because regression (least squares) analysis extends correlation to find an equation for the linear relationship among variables. summarizes the opinions. and feeds the summaries back to the experts (without revealing any of the participants to each other). e. Answer (C) is incorrect because regression analysis is used to fit a linear trend line to a dependent variable based on one or more independent variables. The Delphi technique..

Feedforward. It focuses on improving quality. Answer (C) is incorrect because control of budgeted expenditures is not mentioned in the example. C. Answer (D) is correct.132 -. It emphasizes employee training and commitment. Answer (C) is incorrect because it is applicable to process (not product) quality control. C. product/service design and production. expensive piece of machinery was going to be purchased. and achieving the lowest overall business cost. Encouraging cross-functional teamwork helps achieve the lowest overall business cost. Process analysis studies the means of producing a product with a view to lowering costs and increasing efficiency while producing items of appropriate quality. Answer (B) is incorrect because this statement describes participative management. Answer (B) is correct. Feedback. D. B. Product quality control involves inspection during production to eliminate defective items. Copyright 2006 Gleim Publications. Manufacturers must make fundamental changes in the way they produce products and do each job right the first time. TQM emphasizes participation by all employees in the decision-making process. TQM establishes quality as an organizational objective and views it as a major component of the organization’s service to its customers. TQM emphasizes encouraging cross-functional teamwork. B. reducing cycle time. Reducing the cost of inspection helps achieve the lowest overall business cost. Answer (D) is incorrect because process quality control and product quality control are both important elements in a quality control program. Budgetary. D. better statistical quality control. This notification allowed the treasurer to make an orderly liquidation of some of the company’s investment portfolio on favorable terms. and cross-functional teamwork.Source: CIA 594 III-53 Which statement best describes Total Quality Management (TQM)? A. TQM emphasizes doing each job right the first time. [131] Gleim #: 1. reducing cycle time. Strategic. providing increased customer satisfaction. The effect of process analysis is to act as a pre-control to prevent defects. What type of control was involved? A. Printed for Pol Mirafuentes Page 61 . They apply to such long-term variables as quality and R&D. Answer (D) is correct. and achieving the lowest overall business cost. Answer (C) is incorrect because TQM has a broader emphasis. It focuses on improving quality. Inc. Answer (B) is incorrect because strategic controls are broad-based and affect an organization over a long period. Superior product quality is not attained merely through more inspection. Answer (A) is incorrect because feedback controls apply to decision making based on evaluations of past performance. Another example is the quality control inspection of raw materials and work-in-process to avoid defective finished goods. TQM emphasizes reducing the cost of inspection.131 -. Ordinarily. providing increased customer satisfaction.Source: CIA 1191 III-11 The operations manager of a company notified the treasurer of that organization 60 days in advance that a new. the quality of a product or service is as important to customers as cost and timeliness. [132] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because it describes product (not process) quality control. Answer (A) is incorrect because TQM has a broader emphasis. Feedforward control provides for the active anticipation of problems so that they can be avoided or resolved in a timely manner. and customer service.

Objectives. B. Employee-oriented. Answer (A) is correct. Answer (C) is incorrect because role analysis. The accomplishment of objectives depends on the establishment of standards that serve as feedforward controls. Printed for Pol Mirafuentes Page 62 .135 -. [134] Gleim #: 1. team building. and survey feedback. Answer (A) is incorrect because budgeting. to ensure that a desired future state is attained. Which approach is used by a system that places the focus on how the job was done? A. and an evaluation-reward system. A feedback control measures actual performance.Source: CIA 588 III-12 Performance appraisal systems might use any of three different approaches: (1) who did the job. (2) how the job was done. standards. These control systems consist of which three basic components? A. and cash management. empowerment. B. and job enrichment are all motivational strategies. C. C.133 -. financial ratio analysis. which is often associated with JIT systems but is applicable to other environments. D. financial ratio analysis. D. D.Source: CIA 1191 III-10 To be successful. a firm not only inspects finished goods but also monitors product returns and customer complaints. Feedforward control. Inc. Hence. Answer (D) is incorrect because goal setting. and evaluating complaints are post-action controls intended to eliminate deviations in future cycles of the process under control. something that has already occurred. monitoring product returns.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [133] Gleim #: 1. Copyright 2006 Gleim Publications.134 -. Answer (C) is incorrect because customer complaints are not part of production control. Adherence to performance standards signifies that an organization is on course to attain its objectives. C. Answer (B) is incorrect because feedforward controls anticipate problems before they occur. Behavior-oriented. large companies must develop means to keep the organization focused in the proper direction. Inspecting finished goods. Budgeting. or (3) what was accomplished. Organizational control systems help keep companies focused. Which type of control best describes these efforts? A. A well-developed evaluation-reward system that is clearly communicated to employees should motivate them to improved performance. empowering employees. Goal-oriented. and job enrichment. and cash management are means of financial control. B. [135] Gleim #: 1. Production control. team building.Source: CIA 592 III-17 As part of a Total Quality Control program. Role analysis. Answer (D) is incorrect because TQC. TQC is not limited to inventory control. It deemphasizes the role of separate quality control departments by making each employee responsible for his/her work. and survey feedback are used in developmental efforts to correct organizational deficiencies. An organizational control system must be based on a statement of what is to be achieved and when (objectives). is a philosophy emphasizing that each member of the organization is a quality control inspector. It is used to evaluate the past to improve future performance. Inventory control. Feedback control. Trait-oriented. Answer (B) is correct. Setting goals.

problem solving. Behavior control involves examining work processes rather than work output. challenge. A. It analyzes the project in terms of its component activities and determines their sequencing and timing. C. Answer (A) is incorrect because TQC is a quality control program in which everyone sees quality control as his/her job. job design and company culture). [136] Gleim #: 1. solving problems. and designing and implementing change. organizational (e. According to Marshall Soshkin ["Participative Management is an Ethical Imperative. Answer (B) is incorrect because job enlargement refers to increasing the number of tasks one must perform. D. decision making. Answer (D) is correct. Answer (B) is correct. Answer (C) is incorrect because kanban is a manual inventory technique used in just-in-time inventory control systems.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. [137] Gleim #: 1. B.136 -. workers who participate in the aforementioned ways should experience greater autonomy and find their tasks more meaningful.137 -. D." Organizational Dynamics 12 (Spring 1984): 4-22] employees may participate in goal setting. In turn. B. PERT (Program Evaluation Review Technique) is applied in the management of complex projects.. Answer (C) is incorrect because PERT is a planning tool. and acceptance and commitment. Behavior-oriented performance evaluation rewards the behavior that is desired by management. Answer (C) is incorrect because a trait-oriented approach tends to reward what the supervisor thinks of the employee rather than the job the employee did. Answer (D) is incorrect because an employee-oriented approach would focus on who did the job. Total quality control. Printed for Pol Mirafuentes Page 63 . Subject to various individual (values and attitudes). security. this experience should lead to satisfaction. Yes Yes No No Control No Yes Yes No Answer (A) is incorrect because PERT is a control tool as well as a planning tool. Answer (D) is incorrect because PERT is a planning tool.Source: CIA 592 III-7 Identify the management technique in which employees assist in setting goals. Job enlargement. Thus. Ultimate results are innovation and improved performance and productivity. Participative management. it systematically combines planning with control. and environmental (such as technological change and competition) contingencies. making decisions. Answer (B) is incorrect because the goal-oriented approach measures how well the employee attained the objectives or goals set by management. and designing and implementing organizational changes. Inc.g.Source: Publisher Is PERT analysis a control tool or a planning tool? Planning A. C. Copyright 2006 Gleim Publications. Kanban.

Compiling statistics on the number of times that application software is used. Answer (B) is incorrect because recording unauthorized access violations is a security management control. business with the company. C. Anyone external to the company and those internal who rely on its product to get their job done. B. Improved customer satisfaction through product quality. The ISO 9000 performance-monitoring standards pertain to management’s ongoing assessment of the quality of performance over time. [140] Gleim #: 1.Source: CIA 596 III-32 If a company is customer-centered.138 -. Emphasis on existing products. C. Printed for Pol Mirafuentes Page 64 . Allocating network costs to system users of the network. Everybody external to the company who is currently doing. B. or may in the future do.139 -. Answer (D) is incorrect because allocating network costs to system users of the network is an accounting management control. whether the customer is internal or external. Only people internal to the company who directly use its product. Answer (B) is incorrect because customers are internal as well as external. [139] Gleim #: 1.Source: CIA 1196 III-60 ISO 9000 standards for ring networks include fault management. C. D. Emphasis on continuous improvement. configuration management. Responsiveness to the changing manufacturing environment. B. D. An internal customer is a member of the organization who relies on another member’s work to accomplish his/her task. Inc. Answer (A) is incorrect because the failure of network fiber-optic lines is a fault management control. Recording unauthorized access violations. Copyright 2006 Gleim Publications.Source: CIA 596 III-20 Which one of the following is not a characteristic of an innovative manufacturing company? A. Answer (D) is incorrect because customers are internal as well as external.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [138] Gleim #: 1. Reporting the failure of network fiber-optic lines.140 -. its customers are defined as A. One of the tenets of TQM is customer orientation. Recording software usage is a performance-monitoring control concerned with the extent and efficiency of network software use. D. security management. Only people external to the company who have purchased something from the company. Answer (C) is correct. Answer (A) is incorrect because customers are internal as well as external. and performance monitoring. Answer (C) is correct. accounting management. Which of the following controls is included in the performance-monitoring standards? A.

The number of insurance claims processed per day.Source: CIA 596 II-1 A company. the flow of innovative products and services must be continuous. not efficiency. B. Answer (A) is incorrect because motivation is the desire and the commitment to achieve a specific goal. The sharing of goals by supervisors and subordinates. Answer (D) is incorrect because the goal of increasing market share concerns effectiveness. Thus. The desire and the commitment to achieve a specific goal. [142] Gleim #: 1. Answer (A) is incorrect because the rate of absenteeism does not compare input and output. An efficient organizational structure maximizes output for a given amount of input. An organizational structure is efficient if it facilitates the accomplishment of organizational objectives with minimum resources and fewest unsought consequences.Source: Publisher Goal congruence is A. and increase flexibility.142 -. not efficiency. C. Answer (D) is incorrect because customer satisfaction is the highest priority according to modern management practice. Goal congruence is agreement on the goals of the organization and/or the segment by both supervisors and subordinates. Answer (C) is correct. Insurance claims processed per day relates output (claims processed) to input (a day’s work).Source: CIA 594 III-57 Which of the following is an example of an efficiency measure? A. minimize inventory. The goal of becoming a leading manufacturer.143 -. [143] Gleim #: 1. The extent to which individuals have the authority to make decisions. Answer (B) is incorrect because the goal of becoming a leading manufacturer concerns effectiveness. B. has decided to benchmark one of its stores for the purpose of analyzing the accuracy and reliability of branch store financial reporting. Thus. C. Printed for Pol Mirafuentes Page 65 . The extent of the attempt to accomplish a specific goal. an efficiency measure compares input to output. Answer (B) is correct. [141] Gleim #: 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because continuous improvement is important for achieving and maintaining high levels of performance. Innovative companies are customer driven.141 -. Simply emphasizing existing products is not an effective strategy for most organizations. Answer (B) is incorrect because more and more manufacturers are automating to achieve high quality. Inc. D. which has many branch stores. continuous improvement (called kaizen by the Japanese) is essential for such companies. The goal of increasing market share. deliver customized products on time. Answer (C) is incorrect because autonomy is the extent to which individuals have the authority to make decisions. Which one of the following is the most likely measure to be included in a financial benchmark? Copyright 2006 Gleim Publications. Performance is assumed to be optimized when there is an understanding that personal and segmental goals be consistent with those of the organization. The rate of absenteeism. D. Answer (C) is correct. Answer (D) is incorrect because managerial effort is the extent of the attempt to accomplish a specific goal. Because customers demand ever better quality and competitors are attempting to provide that quality.

Answer (B) is incorrect because implementing better statistical quality control techniques is a detail of the TQM emphasis.5% 22.800 2. Answer (C) is correct. High turnover of employees. Answer (D) is incorrect because the number of suppliers is not a financial benchmark.Source: CIA 1196 III-92 Quality cost indices are often used to measure and analyze the cost of maintaining or improving the level of quality. High level of employee participation in setting budgets. Answer (A) is incorrect because reducing the cost of inspection is a detail of the TQM emphasis.000 80. which would compromise the accuracy and reliability of financial reports. The company’s quality cost index is calculated using total cost of quality divided by sales dollars. B. 7. Bad debt write-offs may result from recording fictitious sales. [144] Gleim #: 1. High number of suppliers. B.9% Copyright 2006 Gleim Publications.0% 5. Answer (C) is correct.800 4. D. C. Encouraging cross-functional teamwork. and building teamwork and employee empowerment. Such indices are computed by dividing the total cost of quality over a given period by some measure of activity during that period (for example.145 -. Doing each job right the first time. D. B. C. Implementing better statistical quality control techniques. Sales Direct materials cost Direct labor cost Testing and inspection cost Scrap and rework cost Quality planning cost Cost of customer complaints and returns $400.Source: CIA 596 III-23 Which statement best describes the emphasis of total quality management (TQM)? A. The basic principles of TQM include doing each job right the first time. being customer oriented. A high level of bad debt write-offs could indicate fraud.5% 6. D.400 16. Reducing the cost of inspection.000 The quality cost index for March is A. Answer (B) is incorrect because employee participation in setting budgets is not a financial benchmark. committing the company culture to continuous improvement.144 -. sales dollars). Answer (A) is incorrect because turnover of employees is not a financial benchmark. C. Inc. High amount of bad debt write-offs. [145] Gleim #: 1.000 6.000 100. Answer (D) is incorrect because encouraging cross-functional teamwork is a detail of the TQM emphasis.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The following cost data are available for a company for the month of March. Printed for Pol Mirafuentes Page 66 .

inspection. D. The total cost of quality equals the sum of prevention costs (quality planning). appraisal costs (testing and inspection). Determining the appropriate timing of inspections.000 ($2. Answer (A) is correct. times 100%. Answer (C) is incorrect because ensuring the conformance with ISO-9000 specifications is a component of a compliance audit. Answer (D) is incorrect because 5.000) × 100%]. Ensuring goods and services conform to the design specifications.800 + $6. divided by sales. or $30. [147] Gleim #: 1. D. The quality cost index equals the total costs of quality.000 cost of customer complaints. Quality-related costs can be subdivided into four categories: external failure costs. and appraisal costs. the emphasis is on ensuring product or service conformity. Appraisal costs embrace such activities as statistical quality control programs. and external failure costs (customer complaints and returns). Answer (C) is incorrect because external failure costs arise when quality problems occur after shipment. Answer (D) is incorrect because determining the appropriate timing of inspections is only one step towards approaching quality control.0% equals the sum of direct labor and testing and inspection costs. it is not the primary component of the quality control function. Answer (C) is incorrect because 22.800 + $4. External failure cost. Thus. B. and testing. Conforming with ISO-9000 specifications. [146] Gleim #: 1. internal failure costs (scrap and rework). or concurrent control.Source: CMA 693 3-13 Product-quality-related costs are part of a total quality control program. Printed for Pol Mirafuentes Page 67 .000 ÷ $400. C. Thus. Opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. divided by sales.147 -. C. Answer (A) is incorrect because prevention costs are incurred in an attempt to avoid defective output. Consequently. Answer (B) is incorrect because 6. the quality cost index for March is 7.5% [($30. feedback.000). Answer (B) is incorrect because quality control is geared towards satisfying the customer. Inc. Appraisal cost. Answer (B) is correct. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n) A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.146 -.400 + $16. the cost of detecting nonconforming individual products is an appraisal cost. prevention costs. internal failure costs. Opportunity cost. Copyright 2006 Gleim Publications. B. The intent of quality control is to ensure that goods and services conform to the design specifications.9% does not include testing and inspection cost in quality costs.5% does not include the $4. not upper management. not quality control. Whether the focus is on feedforward. Answer (D) is incorrect because opportunity costs are not specifically associated with product quality.Source: CIA 1196 III-23 The most important component of quality control is A. Prevention cost. it is the benefit provided by the next best use of that resource. Satisfying upper management.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [148] Gleim #: 1. An increase in conformance costs resulted in a higher quality product and therefore resulted in a decrease in nonconformance costs. Answer (B) is incorrect because prevention costs also increased substantially. the increase in conformance costs resulted in a higher quality product. Answer (C) is incorrect because scrap and rework are internal failure costs. B. Controlling cannot operate effectively without the tools provided by planning. Nonconformance costs are composed of internal failure costs and external failure costs.Source: CIA 1184 III-11 Which of the following statements best describes the relationship between planning and controlling? A.200 1. Planning prevent problems. controlling is concerned with the past. which could also have led to higher quality products. Conformance costs (prevention and appraisal) increased substantially. C. Planning and controlling are completely independent of each other. controlling is initiated by problems which have occurred. Quality costs such as scrap and rework decreased by 48%. D.350 % Change +50 +50 -40 -48 -25 On the basis of this report. B. whereas the nonconformance costs (internal and external failure) decreased. a manufacturer instituted a total quality management (TQM) program producing the following report (in currency units): Summary Cost of Quality Report (000s) 2003 Prevention costs Appraisal costs Internal failure costs External failure costs Total quality costs 200 210 190 1. Inc. TQM emphasizes the supplier’s relationship with the customer and recognizes that everyone in a process is at some time a customer or supplier of someone else.149 -. [149] Gleim #: 1. Printed for Pol Mirafuentes Page 68 . Hence. Planning looks to the future.800 2004 300 315 114 621 1. D. which decreased by 48%. C. Copyright 2006 Gleim Publications.Source: CMA 694 3-16 In 2004. either within or outside the organization. Answer (A) is correct. such as lost opportunity. The costs of quality include costs of conformance and costs of nonconformance. which decreased by 40%. An increase in inspection costs was solely responsible for the decrease in quality costs.148 -. Answer (D) is incorrect because returns and repairs are external failure costs. which one of the following statements is most likely true? A. Quality costs such as returns and repairs under warranty decreased by 40%. Costs of conformance include prevention costs and appraisal (inspection) costs.

the objective function is 8X + 6Y. D.150 -. such as raw materials. Capital budgeting. Answer (D) is incorrect because 5X + 8Y is the sum of the constraints. Answer (B) is incorrect because 2X + Y is a constraint. A control system operates through establishing standards of performance. measuring actual performance. Answer (B) is incorrect because planning and controlling overlap. The objective function is the function to be optimized. Control is the process of making certain that plans are achieving the desired objectives. e. Planning provides needed tools for the control process by establishing standards. taking corrective action. components.Source: CIA R98 III-32 An appropriate technique for planning and controlling manufacturing inventories. B. Answer (C) is correct.g. Answer (D) is correct.. Printed for Pol Mirafuentes Page 69 . [151] Gleim #: 1.Source: CIA 593 III-63 A firm must decide the mix of production of Product X and Product Y. C. Based on profits per unit ($8 and $6. and reviewing and revising standards. This firm wishes to maximize profits on the sales of two products (X and Y).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a control system looks to the future when it provides for corrective action and review and revision of standards. and subassemblies whose demand depends on the level of production is A. Answer (C) is incorrect because comprehensive planning includes creation of controls. B.151 -. respectively). Inc. Materials requirements planning. analysis and comparison of performance with standards. budgets. Data related to the two products is given in the following table: Products X Resource A Resource B Unit Profit 3 2 $8 Y 7 1 $6 What is the appropriate objective function to maximize profit? A. [150] Gleim #: 1. Regression analysis. 3X + 7Y 2X + Y 8X + 6Y 5X + 8Y Answer (A) is incorrect because 3X + 7Y is a constraint. Linear programming. There are only two resources used in the two products. resources A and B. C. D. Copyright 2006 Gleim Publications.

Teams can use the diverse knowledge and skills of all team members. Answer (D) is incorrect because linear programming is a decision model concerned with allocating scarce resources to maximize profit or minimize costs. MRP is a centralized push-through system.152 -. Employee motivation is higher for team members than for individual contributors. Copyright 2006 Gleim Publications. Quality control circles are used to obtain input from employees and to locate the best perspective on problem solving. D.Source: IIA. Answer (B) is incorrect because teams are often inefficient and costly. the high motivation does not always translate directly to quality improvement. It is usually implemented in the form of a computer-based information system designed to plan and control raw materials used in production. thereby allowing a company to become leaner and more profitable. Answer (B) is incorrect because regression analysis is used to fit a linear trend line to a dependent variable based on one or more independent variables. Rework costs. inspection. Printed for Pol Mirafuentes Page 70 . Answer (C) is incorrect because rework costs. Appraisal costs are those costs (such as test equipment maintenance and destructive testing) incurred to detect which products do not conform to specifications. Answer (D) is incorrect because. Well-managed teams can be highly creative and are able to address complex problems better than individuals can. [152] Gleim #: 1. output based on forecasted demand is pushed through to the next department or to inventory. Appraisal embraces such activities as statistical quality control programs. Answer (D) is incorrect because failure costs are incurred in the repair of nonconforming products. Answer (A) is correct. Failure costs. Answer (B) is correct. Prevention costs. Appraisal costs. The use of teams eliminates the need for supervision. B.153 -.Source: IIA. Materials requirements planning (MRP) is a system that translates a production schedule into requirements for each component needed to meet the schedule. Teams are quicker to make decisions. although employee motivation may be high in teams. thereby helping to reduce cycle time. B. it is not eliminated. are incurred when a nonconforming product is detected and corrections are made. adapted The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as A. C. Answer (C) is incorrect because capital budgeting is the process of planning expenditures for long-lived assets. Inc. Answer (C) is incorrect because. although need for supervision may be reduced. It involves choosing among investment proposals using a ranking procedure. C. a type of failure cost. Employee involvement means training and empowering employees to harness their creativity for problem solving.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. D. [153] Gleim #: 1. adapted The use of teams in total quality management is important because A. and testing. It assumes that forecasted demand is reasonably accurate and that suppliers can deliver based upon this accurate schedule. Answer (A) is incorrect because prevention costs are incurred to prevent the production of products that do not conform to specifications.

2($20) + 0. C. D. multiply the probability of demand by the expected profit.2($50) = $10. Answer (D) is correct.2($20) = $18.1($0) + 0.2($10) + 0. is the standard that provides a model for quality assurance programs.5($20) + 0. The computation is: 0. ISO argues that following the eight management principles that underlie the ISO 9000 standards will lead to improved employee satisfaction. there is no direct reference to any such concept in the ISO 9000 standards.155 -. Inc. Answer (D) is incorrect because of the following computation: 0. D.Source: IIA. Quality Management Systems – Requirements.2($10) = $10. B.2(-$10) + 0. For each level of production. Answer (B) is incorrect because of the following computation: 0. C.5 50 0. This is one of the major changes to the ISO 9000 standards made in the 2000 revision. 30 yachts should be built.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [154] Gleim #: 1. Organizations are required to monitor information on customer satisfaction as a measure of performance. To achieve the maximum expected profit.5($10) + 0. a risk assessment approach is what underlies internal auditing. B.2($10) + 0. The attitude and actions of the board and management regarding the significance of control within the organization. adapted The sales manager for a builder of custom yachts developed the following conditional table for annual production and sales Demand Probability 10 0.1 20 0. Answer (A) is incorrect because this is not a part of the ISO 9000 standards. Answer (C) is incorrect because the ISO 9000 approach does not take a risk assessment approach. The principle that improved employee satisfaction will lead to increased productivity. ISO 9001:2000. Answer (C) is correct.1(-$30) + 0. [155] Gleim #: 1.2 30 0.154 -. 10 20 30 50 Answer (A) is incorrect because of the following computation: 0. how many yachts should be built? A.5($10) + 0.5($30) + 0. Copyright 2006 Gleim Publications.2 Yachts Built 10 20 30 50 10 0 -10 -30 Expected Profit 10 20 10 -10 10 20 30 10 10 20 30 50 According to the table. Printed for Pol Mirafuentes Page 71 .1(-$10) + 0. Answer (B) is incorrect because this is the control environment as defined in the glossary of The IIA’s Standards. The assessment of the risk that objectives are not achieved.2($30) = $22. adapted Which of the following is a major element of the ISO 9000:2000 quality management system standards? A.1($10) + 0.Source: IIA. A requirement for organizations to monitor information on customer satisfaction as a measure of performance.

Models are used in the forecasting process to make decisions that optimize future results. B. Information about seasonal variations in demand. Answer (A) is correct. adapted All of the following are useful for forecasting the needed level of inventory except A. Crashing. Regression analysis. Exponential smoothing.Source: IIA. Econometric modeling. Answer (D) is incorrect because using econometric models can be valuable when forecasting the required purchases of inventory. A branch-and-bound solution. Inc. Crashing is the process of adding resources to shorten activity times on the critical path in project scheduling. Linear programming. Answer (C) is incorrect because understanding seasonal variations in demand for the product can be valuable when forecasting the required purchases of inventory. Copyright 2006 Gleim Publications.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [156] Gleim #: 1. adapted The process of adding resources to shorten selected activity times on the critical path in project scheduling is called A. adapted Which of the following will allow a manufacturer with limited resources to maximize profits? A.Source: IIA. Answer (B) is correct. Answer (B) is incorrect because the Delphi technique is a qualitative forecasting approach. ABC analysis. C. C. Answer (C) is incorrect because ABC analysis is an inventory model. The Delphi technique. B. Printed for Pol Mirafuentes Page 72 . Activity times are estimated for normal effort and crash effort.157 -. D. The Delphi technique. D. D.156 -. C. B. Answer (D) is incorrect because the branch-and-bound solution is an integer programming solution. Forecasts are the basis for business plans. Internal accounting allocations of costs to different segments of the company are arbitrary assignments of already incurred costs that do not have anything to do with forecasting demand.158 -. Answer (A) is incorrect because knowing the behavior of business cycles can be valuable when forecasting the required purchases of inventory.Source: IIA. Knowledge of the behavior of business cycles. Internal accounting allocations of costs to different segments of the company. [157] Gleim #: 1. [158] Gleim #: 1.

not increased. C. Answer (D) is correct. Answer (C) is incorrect because regression analysis is a statistical technique used to develop forecasts based on the relationship between two or more variables. To remove the effect of seasonal variation from a time series. [161] Gleim #: 1. Copyright 2006 Gleim Publications. Answer (B) is incorrect because the original data should be divided by the seasonal factor.160 -. Divided by the seasonal factor. C. [160] Gleim #: 1. Inc. Pre-authorize equipment maintenance and overtime pay. adapted A balanced scorecard is primarily concerned with A.Source: IIA. Answer (D) is correct. B.159 -.Source: IIA. Staff. Structure. Answer (B) is incorrect because budgeting maintenance department activities based on previous work orders will not prevent equipment breakdowns and repairs. Answer (A) is incorrect because scheduling production based on capacity utilization ignores other important factors such as demands.Source: IIA. adapted To remove the effect of seasonal variation from a time series. Answer (D) is correct. D. D. Schedule production based on capacity planning. C. Answer (A) is incorrect because the original data should be divided by the seasonal factor. Answer (B) is incorrect because exponential smoothing is a forecasting technique that uses past time series values to arrive at forecasted values. [159] Gleim #: 1. A preventive maintenance program will reduce equipment breakdowns and repairs. Establish a preventive maintenance program for all production equipment. Plan maintenance activity based on an analysis of equipment repair work orders. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the Delphi technique is a qualitative forecasting method that obtains forecasts through group consensus. Answer (C) is incorrect because the original data should be divided by the seasonal factor. B. Printed for Pol Mirafuentes Page 73 .161 -. Seasonal variations are common in many businesses. Systems. original data should be A. It is the correct technique to optimize the problem of limited resources. adapted A means of limiting production delays caused by equipment breakdown and repair is to A. not multiplied. not reduced. the original data (with the four trends) is divided by the seasonal norm. Reduced by the seasonal factor. Multiplied by the seasonal factor. Increased by the seasonal factor. Linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints. Strategy. Answer (C) is incorrect because standing authorizations of work orders and overtime will not address the problem posed. D.

These costs include the costs of inspection. Answer (B) is incorrect because inspection is a necessary procedure. which represent an external failure cost. competencies and measures are appropriate to achieve the agreed-upon strategies. Inspect completed goods for compliance with established tolerances. II. Review sales returns for defects not detected during the final inspection process. Establish a quality circle that includes management and subordinates to discuss labor efficiency. and III. I. II and III only.g. Answer (A) is incorrect because establishing a quality circle is not a specific quality control procedure. Answer (D) is incorrect because systems are a means to achieving objectives that have been established after the development of the scorecard. The scorecard is primarily a tool to assist the organization in describing and clarifying its strategy and then alignment of its performance measures to that strategy. and IV. Inc. [162] Gleim #: 1. Answer (C) is correct. the primary aim is the alignment of performance measures with strategy. by reviewing equipment design and materials requirements. B. although such discussions may lead to improved procedures. An organization also should investigate the causes of sales returns. testing. Printed for Pol Mirafuentes Page 74 . which of the following quality control procedures should be employed? I. C.162 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because although a balanced scorecard should be developed with staff in mind. III and IV only. the organization should incur certain prevention costs. III. Copyright 2006 Gleim Publications. D.Source: CIA 596 I-20 If a manufacturer has established a limit on the number of defects that are tolerable in the final assembly of its product. A. I. Compare materials and machinery specifications with original product designs. Quality control procedures may be categorized according to the nature of the costs incurred. Answer (B) is incorrect because structure should be created after the scorecard has been developed to ensure that responsibilities. Answer (D) is incorrect because establishing a quality circle is not a specific quality control procedure. e. Answer (C) is correct.. An organization incurs appraisal costs to ensure product quality. and statistical quality control programs. Furthermore. II. although such discussions may lead to improved procedures. IV. III.

these costs are $1. The incremental cost of additional orders equals the variable costs incurred in purchasing and receiving inventory (but not costs associated with shipping). Manager Clerks Supplies Warehouse Supervisor Rcvg. for a total of $3. supplies.140 ÷ 60 orders). For 100 orders.500 $8.250. the relevant costs with a variable element include purchasing clerks.600 1. The annual charges for the warehouse totaled $12. $48 $35 $24 $19 Answer (A) is incorrect because $48 equals total annual cost divided by total orders from the previous year. Data for the high-activity month.200 $115.000 3.860 $ 23. [164] Gleim #: 2.Source: CMA 686 5-29 Long-term capital investments are expected to earn 12% after income taxes. the costs increased by $1.300 $1. D.Source: CMA 686 5-30 (Refers to Fact Pattern #12) The annual carrying cost. respectively.600 20. Candman has decided to employ the economic order quantity (EOQ) method to determine the optimum number of cases of candy to order.750. Inc.200 2.550 2.2 -.350. respectively. and the year for the purchasing and warehouse operations appear in the next column. Answer (C) is incorrect because $24 includes the costs associated with shipping.500 31.250. and $1.140.750 400 1. B.250 260 1. Answer (B) is incorrect because $35 equals total annual cost minus the costs associated with the shipping clerks. Printed for Pol Mirafuentes Page 75 . that would be used in the EOQ model is Copyright 2006 Gleim Publications. divided by total orders from the previous year. clerks Ship. C.200.1 -.400 orders the last year. As the number of orders increased by 60.750 last year. $1.500 and $2.700. $400.800 $10. The company placed 2. The average monthly inventory last year was $75. The company leases space in a public warehouse and is charged according to the square feet occupied.210. Using the high-low method of analysis.700 2. clerks Totals $ 1. [163] Gleim #: 2.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #12] Candman Company is a wholesale distributor of candy.200 (Refers to Fact Pattern #12) The incremental cost of placing an order that would be used in the EOQ model is A. For 160 orders.600 1. Answer (D) is correct. the low-activity month. High-Activity Low-Activity Month Month Annual (160 Orders) (100 Orders) Costs Purchasing Dept. Consequently. these variable costs can be computed by determining the apparent variable costs for the two given levels of activity. The total is $4.500 18. and receiving clerks. the annual insurance and property taxes on the candy stored in the warehouse amounted to $1. In addition.400 18.000.550 1. Candman is subject to an effective income tax rate of 40%. $260. the variable or incremental costs per order must have been $19 ($1. $2. stated as a percentage.

Printed for Pol Mirafuentes Page 76 . Answer (B) is incorrect because advertising is not an ordering or carrying cost. These costs total $16.000 average investment in inventory is $15.Source: CMA 1290 4-9 The calculation of an economic order quantity (EOQ) considers A. Answer (D) is correct. the return on capital that is forgone when it is invested in inventory should be considered. The shipping costs to deliver the product to the customer. the total carrying cost is $31. The determination of the economic order quantity balances the variable costs of ordering and carrying inventory. Only variable costs should be considered. [166] Gleim #: 2. Because the tax rate is 40%.3 -. Ordering costs Purchase costs Purchase costs Ordering costs List B Carrying costs Carrying costs Quality costs Stockout costs Answer (A) is correct. Answer (B) is incorrect because 37% does not consider insurance and property taxes. [165] Gleim #: 2. The annual carrying costs are $12. The purchasing manager’s salary. C.Source: CIA 597 III-91 When the economic order quantity (EOQ) decision model is employed. Hence.750 for the warehouse. B. and the opportunity cost of investing capital in inventory.500 + $15. Copyright 2006 Gleim Publications.000 investment in inventory. unit carrying cost. It corresponds to the minimum point on the total inventory cost curve. Factors in the equation include the cost of placing an order. In addition. Answer (B) is incorrect because purchase costs are not directly incorporated into the EOQ model. $1.250 for property taxes. Carrying costs include storage costs. Answer (A) is incorrect because the purchasing manager’s salary is a fixed cost. B. insurance. and $2. the 12% after-tax return equals a 20% before-tax return (12% ÷ 60%). property taxes. Answer (D) is incorrect because 22% equals carrying costs other than return on investment divided by average inventory. Answer (D) is incorrect because stockout costs are not directly incorporated into the EOQ model. handling costs. obsolescence. Capital costs.500 for insurance.4 -. A corporate charge for advertising expenses. Inc. D. D.000. The objective of the EOQ model is to find an optimal order quantity that balances carrying and ordering costs. D. the company desires a 12% after-tax return on investments. This amount is 42% of the $75. Thus. 42% 37% 34% 22% Answer (A) is correct. Answer (C) is incorrect because neither purchase costs nor quality costs are incorporated into the EOQ model. List A A. Answer (C) is incorrect because the cost of shipping to customers is a selling expense. and annual demand in units. Answer (C) is incorrect because 34% is based on a 12% before-tax return. The EOQ is the point where the ordering cost and carrying cost curves intersect. C.000). B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. the <List A> are being offset or balanced by the <List B>.500.500 ($16. C. The EOQ model includes variable costs only. A 20% return on the $75.

Answer (C) is incorrect because product demand and ordering costs must be known with some certainty. (2) divided by the periodic carrying cost. and ordering costs are uncertain. B. Less inventory is on hand. the model is relatively insensitive to error. the assumption is that receipts are of perfect quality. lead-time.5 -. Answer (A) is incorrect because carrying costs typically decline in JIT companies. C. If the JIT purchase policy is successful in reducing the total inventory costs of the manufacturing company. sometimes several times a day. D. Purchasing costs Purchasing costs Quality costs Stockout costs Cost Category to Decrease Stockout costs Quality costs Ordering costs Carrying costs Copyright 2006 Gleim Publications. Inc. JIT companies typically do not inspect incoming goods. Suppliers are limited to those who guarantee perfect quality and prompt delivery. Answer (D) is incorrect because the need for communication with the vendor is greater. D. which of the following combinations of cost changes would be most likely to occur? Cost Category to Increase A. D. shipments of raw materials are received just in time to be incorporated into the manufacturing process. [169] Gleim #: 2.Source: CMA 1294 4-8 A characteristic of the basic economic order quantity (EOQ) model is that it A. C. Printed for Pol Mirafuentes Page 77 . materials are delivered directly to the production line ready for insertion in the finished product.7 -. Orders and deliveries must be made on short notice.Source: CIA 597 III-94 A manufacturing company is attempting to implement a just-in-time (JIT) purchase policy system by negotiating with its primary suppliers to accept long-term purchase orders which result in more frequent deliveries of smaller quantities of raw materials. Hence.6 -. The objective of JIT is to reduce carrying costs by eliminating inventories and increasing the deliveries made by suppliers.Source: CMA 1294 4-6 Companies that adopt just-in-time purchasing systems often experience A. Answer (A) is correct. Answer (C) is incorrect because.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [167] Gleim #: 2. Answer (D) is incorrect because an EOQ model can be used with any type of system. Less need for linkage with a vendor’s computerized order entry system. C. A greater need for inspection of goods as the goods arrive. Answer (B) is correct. A reduction in the number of suppliers. B. Quality control is shifted to the supplier. Answer (B) is incorrect because the EOQ model can be used regardless of the relationship between carrying and holding costs. [168] Gleim #: 2. Should not be used in conjunction with computerized perpetual inventory systems. Is used when product demand. in a JIT system. A given percentage error in a value results in a lower percentage change in the EOQ. An increase in carrying costs. B. Ideally. Is relatively insensitive to error. The basic EOQ model equals the square root of the quotient of (1) the product of twice the demand times the cost per order. The focus of quality control under JIT is the prevention of quality problems. Should not be used when carrying costs are large in relation to procurement costs.

but the manufacturing company’s stockout costs will increase. The excess demand has been 100 units (300 – 200) greater than the proposed safety stock 30% of the time (12 ÷ 40).600 is the annual carrying cost of 200 units of safety stock. Inc.200 is the annual cost of establishing a 400-unit safety stock.8 -. [170] Gleim #: 2. Demand has exceeded the safety stock by 200 units (400 – 200) 15% of the time (6 ÷ 40).000 units for part number 191 and has computed an optimal lot size of 6.) Copyright 2006 Gleim Publications.200 Answer (A) is incorrect because $2. The stockout cost per unit is $3.Source: CMA 1288 5-22 Arnold Enterprises uses the EOQ model for inventory control. the cost of quality is not necessarily affected by a JIT system. respectively. The objective of a JIT system is to reduce carrying costs by eliminating inventories and increasing the deliveries made by suppliers. The cost per stockout was $300 ($3 × 100). or $2. Answer (D) is correct. shipments are received just in time to be incorporated into the manufacturing process. The cost per stockout was $600 ($3 × 200). Given 30% and 15% probabilities of $300 and $600 stockout costs. The company has an annual demand of 50. $2. plus the stockout costs incurred when 200 units are insufficient. Given 8 cycles (50. C.040 $4. The annual cost consists of the carrying cost of the 200 units of safety stock at $13 each. the expected stockout cost for a 200-unit safety stock is $180 per inventory cycle [($300 × 30%) + ($600 × 15%)]. Ideally.040 [$2. B. Answer (B) is correct. Answer (B) is incorrect because the cost of quality is not necessarily affected by a JIT system. This system increases the risk of stockout costs because the inventory buffer is reduced or eliminated. (Refer to Figure CIA3_02_14. respectively. so the ordering costs are likely to decrease.600 + (8 × $180)]. D.260 is the annual cost of establishing a 300-unit safety stock.250 units.600. The following data have been gathered in an attempt to determine an appropriate safety stock level: Units Short Because of Excess Demand During the Lead Time Period 200 300 400 Number of Times Short in the Last 40 Reorder Cycles 6 12 6 The annual cost of establishing a 200-unit safety stock is expected to be A. Answer (D) is incorrect because $5. [Fact Pattern #13] The diagram presented represents the economic order quantity (EOQ) model. the annual cost of a 200-unit safety stock is therefore $4. Answer (C) is incorrect because $4.000 units ÷ 6.250 EOQ).260 $5. However. Answer (C) is incorrect because fewer purchase orders are processed by the manufacturer.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the supplier may seek a concession on the selling price that will raise purchasing costs. Per-unit carrying costs and stockout costs are $13 and $3. Printed for Pol Mirafuentes Page 78 .600 $4.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [171] Gleim #: 2. [172] Gleim #: 2. AB. C. BC. Safety stock is represented by the line AE. AC. D. The line segment AC depicts the time to consume an entire order (to reduce the inventory to the safety stock). C.9 -. [173] Gleim #: 2. Time is shown along the x axis. C.Source: CMA 1289 5-16 (Refers to Fact Pattern #13) Which line segment represents the reorder lead time? A. Answer (B) is incorrect because BC is the reorder lead time. Inc. Answer (A) is incorrect because AB is the time between the receipt of the last order and the placing of the next order. Answer (D) is correct. AC. BC. Answer (C) is correct. Answer (D) is incorrect because BC is the reorder lead time. AE. B.Source: CMA 1289 5-18 (Refers to Fact Pattern #13) Which line segment represents the length of time to consume the total quantity of materials ordered? A. AF.Source: CMA 1289 5-17 (Refers to Fact Pattern #13) Which line segment identifies the quantity of safety stock maintained? A. The quantity of inventory on hand is represented by the y axis and time by the x axis. The reorder lead time is represented by the line segment BC. Quantities of inventory are shown along the y axis. Answer (B) is correct. Answer (B) is incorrect because AE is the safety stock. D. DE. AE. Answer (C) is incorrect because AF represents the quantity of inventory that will be used during the reorder lead time. B.11 -. D. BC.10 -. Printed for Pol Mirafuentes Page 79 . Answer (C) is incorrect because AC is the time to consume the EOQ. Answer (A) is incorrect because AB is the time between receipt of the last order and the placing of the next order. AE. Answer (A) is incorrect because DE represents the total inventory on hand just after an order has been received. B. Answer (D) is incorrect because AE is the safety stock. Copyright 2006 Gleim Publications. AB.

and the company orders 1.000 13.13 -.W. 0 units.100 420 Total Expected Cost $21. Annual expected carrying cost of a safety stock equals the unit carrying cost ($5) times the number of units. The probability of a stockout at various levels of safety stock is Units of Safety Stock 0 100 200 300 400 Probability of a Stockout .05 . times the number of cycles (24). 400 units.00 245.600.000. a safety stock of 400 units has the lowest total expected cost.500 units of product 24 times a year at a cost of $100 per order.750). The corporation works 240 days per year. Hence.000 headbands per year.00 87.600 5.000 Expected Stockout Cost Per Cycle $875. Printed for Pol Mirafuentes Page 80 .Source: CMA 1293 4-8 (Refers to Fact Pattern #14) Huron Corporation should carry safety stock of Copyright 2006 Gleim Publications. Annual expected stockout cost equals the cost per occurrence ($1.30 .50 17.01 The optimal safety stock level for the company is A. 300 units. The average purchase lead time is 20 working days.100 6. [175] Gleim #: 2. B. Answer (C) is incorrect because a safety stock of 300 units has a total expected cost of $3.100.600 2. The total expected cost of safety stock equals the sum of the expected annual stockout cost and the expected annual carrying cost.880 3.00 525. Maximum lead time is 27 working days.50 .000 1. Answer (D) is correct.750 per occurrence. costs $1.420 [Fact Pattern #14] The Huron Corporation purchases 60. Inn Co.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [174] Gleim #: 2.50 Expected Stockout Cost for 24 Cycles $21.14 . times the probability of a stockout per cycle.000 12.Source: CMA 692 4-23 Each stockout of a product sold by A. C. Answer (A) is incorrect because a safety stock of 0 units has a total expected cost of $21. Answer (B) is incorrect because a safety stock of 100 units has a total expected cost of $13.12 -. The carrying cost per unit of inventory is $5 per year. D. Inc.880 2. Units Held 0 100 200 300 400 Carrying Cost $ 0 500 1.500 2. 100 units.

000 per year ÷ 240 days). B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Copyright 2006 Gleim Publications. a safety stock for 7 days (27 – 20) should be maintained.750 units.750 units.000 units.000 units does not allow for safety stock. The reorder point is the quantity on hand when an order is placed.250 units. B.750 units. Hence.750 units (27 × 250). Printed for Pol Mirafuentes Page 81 .750 units. C. It is the inventory level at the reorder point minus the expected usage during the lead time.Source: CMA 1293 4-9 (Refers to Fact Pattern #14) Huron Corporation should reorder headbands when the quantity in inventory reaches A. Answer (C) is correct. [176] Gleim #: 2.250 units includes only 1 day of safety stock.000 units. a 7-day safety stock. D. Answer (D) is incorrect because 5. an order should be placed when 27 days of inventory are on hand.000 units represents the quantity expected to be sold during the normal lead time. and usage of 250 units per day. Given a maximum lead time of 27 days and a normal lead time of 20 days. Answer (A) is incorrect because 5. C. 5. 1. 1. 250 units. 5. safety stock is 1. Answer (C) is incorrect because 1. 6.750 units includes not only the safety stock but also the units expected to be sold during the normal lead time. Answer (B) is incorrect because 6. Answer (D) is incorrect because 250 units is 1 day’s sales. Safety stock is defined as the amount of extra stock that is kept to guard against stockouts. Inc. Daily usage is 250 units (60. 6. 5. a total of 6. Answer (B) is correct. D. Answer (A) is incorrect because 5.750 units covers only safety stock. With a 20-day normal lead time.750 units (7 × 250 units).14 -.

B. Inc. D. Inc.000 of setup costs.000 [$10 × ($5.000 ($10 per unit carrying cost × average inventory of 500 units).500 of carrying costs would exceed the $2. and RCF has scheduled four equal production runs of computer chairs for the coming year.250 of carrying costs would exceed the $4. There are no computer chairs on hand. Answer (B) is incorrect because two production runs correspond to an EOQ of 2. and production start-up is within one day.000 units. setup costs will total $5. 1 2 4 5 Answer (A) is incorrect because a single production run indicates an EOQ of 5. sales occur uniformly throughout the year. Answer (D) is correct.000 units. The EOQ minimizes the sum of carrying and setup costs. plugging the data into the EOQ formula results in the following: Thus.15 -. total costs are minimized at $10. Copyright 2006 Gleim Publications.000-unit demand.Source: CMA 694 4-23 (Refers to Fact Pattern #15) The number of production runs per year of computer chairs that would minimize the sum of carrying and setup costs for the coming year is A. and the cost to initiate a production run is $1. The resulting $12.000). Carrying costs will also equal $5. RCF is considering using the following formula for determining the economic order quantity (EOQ): If: A = cost to initiate a production run per purchase order D = annual unit demand K = cost of carrying one unit per year [177] Gleim #: 2.250 units. Thus. the first of which is to be run immediately. The annual demand for the chairs is estimated to be 5. At this level.500 units and an average inventory of 1.000 ÷ 2)] would exceed the $1. Accordingly. if each lot consists of 1. five production runs per year are needed to meet the 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #15] Ryerson Computer Furniture.000. C. RCF has 250 business days per year. Printed for Pol Mirafuentes Page 82 . Answer (C) is incorrect because four production runs correspond to an EOQ of 1.000 units.000 of setup costs. (RCF) manufactures a line of office computer chairs. The carrying costs of $25.000 (5 × $1.250 units and an average inventory of 625 units.000 of setup costs.000. The EOQ is the amount at which carrying costs are equal to setup costs. The resulting $6. The annual cost to hold one unit in inventory is $10 per year.

000 is based upon an EOQ of 1. Answer (B) is incorrect because $5. Inc.17 -.250 $12.Source: Publisher An organization must manage its flows of raw materials. and customer service). Supply chain. B. The need to purchase or manufacture goods in cost-efficient batches. the average inventory is 625 units (1. Shortages that may lead to rationing by suppliers or manufacturers and hoarding by manufacturers or retailers. or information through intermediaries to ultimate consumers. Given four production runs and an annual demand of 5. Inventory will total 1. each production run must generate 1. marketing. Answer (D) is incorrect because the phrase “integrated chain” is not a technical term. Answer (B) is correct. (b) components.250 units at the completion of each run but will decline to zero just prior to the next run. and personnel.000 $6. C. These flows and the related activities also may occur across separate organizations. Thus. Answer (C) is incorrect because logistics is a branch of military science. B. The supply chain consists of flows from sources of (a) raw materials. and the total carrying cost is $6. or (e) information through intermediaries to ultimate consumers. Answer (A) is incorrect because the supply chain consists of the flows that may occur across the functions in an organization’s value chain or separate organizations. components. C. Printed for Pol Mirafuentes Page 83 . (c) finished goods. services. and transportation of military materials. These flows may occur across the functions in an organization’s A. (d) services.250.000 units and an average inventory of 500 units.Source: Publisher The bullwhip or whiplash effect on inventories begins when retailers face uncertain demand from consumers caused by randomness in buying habits. [179] Gleim #: 2.250 units. finished goods.250 ÷ 2). Changes in price that may encourage purchases in anticipation of future increases. These flows and the related activities may occur across the functions in an organization’s value chain (R&D. D.500 is based on the maximum inventory level. C. [180] Gleim #: 2. $4. Logistic chain. Integrated chain.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [178] Gleim #: 2.250 ($10 × 625 units).500 Answer (A) is incorrect because the cost of maintaining an average inventory of 625 units is $6.000 units. Answer (D) is incorrect because $12. Copyright 2006 Gleim Publications. Sharing of information and coordination among the organizations in the supply chain. production. Answer (C) is correct.16 -.18 -. It can be avoided by A. Value chain. B.000 $5.Source: CMA 694 4-22 (Refers to Fact Pattern #15) If RCF does not maintain a safety stock. D. D. design. It addresses the procurement. facilities. maintenance. distribution. the estimated total carrying costs for the computer chairs for the coming year based on their current schedule is A.

pricing. (b) avoidance of stockouts. pricing.Source: Publisher A desired result of the sharing of information by all functions and organizations in the supply chain is A. Incompatibility of the information systems of the parties. and IV. Answer (C) is correct. and retailers. Fewer rush orders. Answer (B) is incorrect because purchases in anticipation of future price increases cause the bullwhip or whiplash effect.19 -. III. C. Printed for Pol Mirafuentes Page 84 . brokers. Agent Broker Consignee Consumer A. II. B. D. III. Inc. Answer (A) is correct. Sharing information about sales. Stockouts.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the need to purchase or manufacture goods in cost-efficient batches is a cause of the bullwhip or whiplash effect. B. Answer (C) is incorrect because rationing by suppliers or manufacturers and hoarding by manufacturers or retailers cause the bullwhip or whiplash effect. Answer (D) is incorrect because a consumer is a buyer. and III only. II. and sales forecasts by all functions and organizations in the supply chain moderates demand uncertainty for all parties. C. consignees. D. and (d) production as needed by retailers. (b) avoidance of stockouts. The desired results are: (a) minimization of inventories held by suppliers.20 -. (c) fewer rush orders. Answer (B) is incorrect because minimization of inventories held by all parties in the supply chain is a desired result of sharing information. II. manufacturers.Source: Publisher Which of the following are intermediaries between sellers and buyers? I. Copyright 2006 Gleim Publications. Answer (D) is incorrect because incompatibility of the information systems of the parties is a difficulty faced by supplychain management. I. agents. not a desired result of sharing information. Answer (C) is incorrect because avoidance of stockouts is a desired result of sharing information. advertising campaigns. and retailers. Intermediaries include merchant middlemen. and (d) production as needed by retailers. and retailers. Answer (D) is correct. advertising campaigns. A distribution channel is a series of interdependent marketing institutions that facilitate the transfer of a product from producer (seller) to consumer (buyer). [182] Gleim #: 2. I and III only. manufacturers. inventory. Answer (A) is incorrect because a consignee is also an intermediary between sellers and buyers. Maximization of inventories held by suppliers. manufacturers. IV. Sharing information about sales. and sales forecasts by all functions and organizations in the supply chain moderates demand uncertainty for all parties. and facilitating intermediaries. The desired results are: (a) minimization of inventories held by suppliers. I and II only. inventory. Answer (B) is incorrect because a broker is an intermediary. not an intermediary. (c) fewer rush orders. [181] Gleim #: 2. I.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [183] Gleim #: 2. negatively sloped relation between price charged and the resulting demand level for normal goods. such as the introduction of ATMs in supermarkets. Within this range. The joint nature of horizontal distribution efforts is the tool for managing channel conflict. Vertical distribution system. producers. not a decrease. Because such a system is managed by a single firm.Source: Publisher The channel structure in which producers. Answer (A) is incorrect because. Copyright 2006 Gleim Publications. (Refer to Figure CIA3_02_17.) B. the reaction to a price increase for prestige goods is an increase. a single firm sets up two or more channels. channel conflicts can be evaluated and managed internally. Horizontal distribution systems consist of two or more companies at one level of the channel working together to exploit new opportunities. and retailers act as a unified system is a A. Printed for Pol Mirafuentes Page 85 . Channel conflict is managed through common ownership.21 -. Unilateral distribution system. contractual relationships.Source: CIA 596 IV-78 Which one of the graphs depicts the demand curve for prestige goods? A. As prices increase. In a multichannel system. Answer (B) is incorrect because the demand curve can be linear or curvilinear. and retailers act as a unified system. the relation between price and quantity demanded will again become negatively sloped.) C. (Refer to Figure CIA3_02_20. in a horizontal distribution system. the demand curve is upward sloping. Answer (C) is correct. wholesalers. Multichannel system. two or more companies at one level of the channel work together. wholesalers. [184] Gleim #: 2.) Answer (A) is incorrect because this graph describes the familiar. Answer (C) is incorrect because a unilateral distribution system is not a channel structure. In vertical distribution systems. C. or administration by one or a few dominant channel members. (Refer to Figure CIA3_02_19. in the quantity demanded. (Refer to Figure CIA3_02_18. B.22 -. Answer (B) is correct. but it bends the wrong way. Inc. Horizontal distribution system. Answer (D) is incorrect because this demand curve has the same basic shape as the demand curve for prestige goods. quantity demanded first falls and then rises in this graph. a single firm sets up two or more channels to reach one or more customer segments. in a multichannel system. The reason is that consumers interpret the higher price to indicate a better or more desirable product. Over some intermediate range of prices. Answer (D) is incorrect because. Above some price level. D.) D.

the product must appear to be worth its price. Adding a standard markup to the cost of the product.Source: CIA 595 IV-74 Which of the following pricing policies involves the selling company setting freight charges to customers at the actual average freight cost? A. Nonprice variables in the marketing mix augment the perceived value.Source: CIA 1194 IV-78 Buyer-based pricing involves A.Source: CIA 1194 IV-79 Market-skimming pricing strategies could be appropriate when A. For example. B. C. Basing prices on competitors’ prices. C. C. B. they can undercut the price. and competitors cannot enter the market and undercut the price. Market-skimming pricing is used when a new product is introduced at the highest price possible given the benefits of the product. The costs of producing a small volume are low. Freight absorption pricing. FOB-origin pricing. D. Determining the price at which the product will earn a target profit. Answer (A) is incorrect because adding a standard markup to the cost of the product is cost-plus pricing. Answer (C) is correct.24 -. Answer (D) is incorrect because basing prices on competitors’ prices is going-rate pricing. Basing prices on the product’s perceived value. No buyers want the product at a high price. if no buyers want the product at a high price. For market skimming to work. Buyer-based pricing involves basing prices on the product’s perceived value rather than on the seller’s cost. Zone pricing. Answer (B) is incorrect because determining the price at which the product will earn a target profit is target profit pricing. Competitors can easily enter the market.23 -. Answer (C) is incorrect because. Answer (D) is incorrect because the product quality and image must support a high price. Answer (B) is correct. B.25 -. Answer (A) is incorrect because. Inc. D. if competitors can easily enter the market. [186] Gleim #: 2. Uniform delivered pricing. the costs of producing a small volume cannot be so high that they eliminate the advantage of charging more. this marketing strategy is inappropriate. The product is of poor quality. a cup of coffee may have a higher price at an expensive restaurant than at a fast-food outlet. [187] Gleim #: 2. D. Printed for Pol Mirafuentes Page 86 .Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [185] Gleim #: 2. Copyright 2006 Gleim Publications.

so the seller must receive a price above their storage and delivery costs. to all customers regardless of their location. Answer (B) is incorrect because optional products are offered for sale along with the main product. In uniform delivered pricing. such as selling.26 -. storing. Functional discounts. and record keeping. Answer (D) is incorrect because product bundles are combinations of products sold together at a reduced price. Products are bundled to promote the sale of certain items that consumers might not otherwise purchase. Optional-product pricing. Answer (C) is incorrect because functional or trade discounts are provided to channel members in return for the performance of certain functions. Answer (D) is incorrect because. Customers are not charged actual average freight costs. Customers are not charged actual delivery costs.Source: CIA 1195 IV-76 In which product-mix pricing strategy is it appropriate for the seller to accept any price that exceeds the storage and delivery costs for the product? A. Product-bundle pricing. Sellers often make their profits on the captive products rather than on the main product. the company charges the same price. Quantity discounts. Answer (B) is incorrect because quantity discounts encourage large volume purchases. the selling company absorbs all or part of the actual freight charges. Any amount received above the storage and delivery costs for a by-product allows the seller to reduce the main product’s price to make it more competitive. both nearby and distant customers are charged the same amount.27 -. The captive products therefore will be priced well above the storage and delivery costs. Seasonal discounts are designed to smooth production by the selling firm. Seasonal discounts. permits the company to advertise one price nationwide. in FOB-origin pricing. so the price must exceed storage and delivery costs. and facilitates marketing to faraway customers. Thus. [188] Gleim #: 2. D. in zone pricing. in freight absorption pricing.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. They are unlikely to have a zero production cost. By-product pricing. Captive-product pricing. C. Printed for Pol Mirafuentes Page 87 . such as film for use with a camera. Its production entails no additional costs. Inc. Copyright 2006 Gleim Publications. Answer (C) is incorrect because. Answer (A) is incorrect because cash discounts encourage prompt payment.Source: CIA 1195 IV-75 Which of the following price adjustment strategies is designed to stabilize production for the selling firm? A. B. For example. This policy is easy to administer. Cash discounts. which is sold at a low price. D. each customer pays its actual freight costs. Answer (D) is correct. Answer (C) is incorrect because captive products must be used along with the main product. such as season tickets for a theater. C. a ski manufacturer offers seasonal discounts to retailers in the spring and summer to encourage early ordering. Answer (A) is correct. The combined price of the bundle must be low enough to encourage consumers to buy the bundle but must recover production costs and provide some profit for the seller. B. A by-product is a product of relatively minor importance generated during the production of one or more other products. [189] Gleim #: 2. Answer (B) is correct. differential freight charges are set for customers on the basis of their location. This price is the company’s average actual freight cost. inclusive of shipping costs.

S. Federal statutes and many state laws prohibit the practice. Supreme Court has held that pricing is predatory when two conditions are met: (1) the seller’s price is below “an appropriate measure of its costs.S.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [190] Gleim #: 2. or to injure. Price stability. Answer (B) is incorrect because full-cost pricing provides evidence that the company is not violating antitrust laws against predatory pricing.” and (2) it has a reasonable prospect of recovering the resulting loss through higher prices or greater market share. or prevent competition. The U. industry. it will be abandoned. the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share. Which one of the following is least associated with cost-based pricing? A. Price discrimination. including unit fixed costs and unit variable costs. D.S.28 -. Subtracting the unit target profit margin determines the long-term unit target cost. Predatory pricing is intentionally pricing below cost to eliminate competition and reduce supply. In the long term. Fixed-cost recovery. company in the U. given the company’s knowledge of its customers and competitors. Dumping. the sales price is known before the product is developed. C. Such sale is illegal if it threatens material injury to a U. market is below an appropriate measure of costs. Inc. Hence. It limits the ability to cut prices. B. to tend to create a monopoly. If cost-cutting measures do not permit the product to be made at or below the target cost. destroy. Predatory pricing. Answer (D) is incorrect because price discrimination entails charging different prices to different customers for essentially the same product if the effect is to lessen competition substantially. Answer (B) is incorrect because dumping is defined under U.29 -. Price justification.S.S.S. D. in developing cost-based pricing. Answer (A) is incorrect because collusive pricing involves a conspiracy to set higher prices. Answer (C) is correct. Printed for Pol Mirafuentes Page 88 . C.S. Answer (D) is incorrect because full-cost pricing has the advantage of recovering the full long-term costs of the product. the seller has engaged in A. Copyright 2006 Gleim Publications. Answer (C) is correct.Source: CMA 1296 4-6 Several surveys point out that most managers use full product costs. B. market of a product below its market value in the country where it was produced. [191] Gleim #: 2. A target price is the expected market price of a product. Answer (A) is incorrect because full-cost pricing promotes price stability. Accordingly. seller’s price in the U.Source: Publisher A U. law as sale by a non-U. all costs are relevant. Target pricing. under target pricing. Collusive pricing. Moreover.

40 $70. the unit target full cost is $281.40 ($320 unit target price × 12%). The current full cost per unit is $352.000. Unit target operating income is $38.000 $7.000 CGS + $7.40 is the unit target operating income.Source: Publisher A company’s product has an expected 4-year life cycle from research.000.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [192] Gleim #: 2.00 [($13.920. Thus.000 3. The following information about costs and revenues of Fulford’s product are available for the year just ended: Unit sales Unit selling price Cost of goods sold Value-chain operating costs excluding production 60. design) Manufacturing costs Downstream costs (marketing.000 1.200.920.40). C. customer service) After-purchase costs $2. [193] Gleim #: 2. Answer (C) is correct.000 units sold]. by what amount must it reduce the full cost per unit? A. B.00 equals the current full cost per unit minus the new unit target price.000 other value chain operating costs) ÷ 60.60).000 1.000 by reducing the product’s unit price to $320.00 $38. C.000 The company plans to produce 200.00 Answer (A) is incorrect because $32. Answer (B) is incorrect because $38. Hence. If Fulford desires a unit target operating income of 12%.000.40 $80.000 $400 $13.00 equals the change in the unit price. Printed for Pol Mirafuentes Page 89 .60 ($320 – $38.200.000 units and price the product at 125% of the whole-life unit cost. the budgeted unit selling price is A. D. Budgeted costs are Upstream costs (R&D. distribution. development. B.Source: Publisher Fulford Company applies the target pricing and costing approach. D. and design through its withdrawal from the market. Answer (D) is incorrect because $80.31 -. so the necessary reduction in the full cost per unit is $70.00 – $281. $15 $31 $36 $45 Copyright 2006 Gleim Publications.200. $32.40 ($352.000 Fulford plans to increase unit sales to 80.30 -. Inc.

000. The company is pursuing a cost A.000 + $1. manufacturing. B. design. Answer (B) is incorrect because $31 is the budgeted unit life-cycle cost. B. [194] Gleim #: 2.34 -. support. [196] Gleim #: 2. and methods of distribution against the target’s. Containment strategy. C.Source: IIA.32 -. It may also entail developing next-generation technology so as to move the competition to an arena where the challenger is in a stronger position.000 units]. A flank attack may be directed at a geographic or segmental weakness of the target (an underserved market) or an unmet need (such as the desire for more healthful fast food). by ad campaigns. e. Such warfare ordinarily must be followed by a different (and stronger) type of attack if the challenge is to succeed. carefully chosen price decreases. distribution. Bypass attack. A cost focus strategy aims at cost leadership in a particular segment. and research). Leadership strategy.000) ÷ 200..000 + $1. Frontal attack.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because $15 is the budgeted unit manufacturing cost.Source: Publisher The dominant firm in a market pursues a market-leader strategy. Whole-life costs include after-purchase costs (operating. Printed for Pol Mirafuentes Page 90 . Guerilla warfare. It may involve diversification of products or geographic markets. Answer (B) is incorrect because the bypass attack directs the assault against markets other than those where the competitive target is strong. Focus strategy. Hence. This strategy may involve Copyright 2006 Gleim Publications. Inc. Answer (D) is incorrect because cost containment aims at controlling costs related to a particular product/market but not necessarily producing at the lowest possible cost. Answer (C) is incorrect because cost differentiation aims at providing a product at different costs in different market segments.000. adapted A manufacturing company produces plastic utensils for a particular segment at the lowest possible cost. D. and the budgeted unit selling price is $45 ($36 × 125%). Differentiation strategy. Answer (A) is incorrect because a cost leader is the lowest cost producer in the industry as a whole. Answer (D) is correct. and disposal) incurred by customers as well as life-cycle costs (R&D.000 + $3. such as a regional market or a specialty product line.Source: Publisher A runner-up firm in a market may choose a market-challenger strategy. Answer (B) is correct. D. The rationale for a focus strategy is that the narrower market can be better served. marketing.g. C. Answer (C) is incorrect because $36 is the budgeted unit whole-life cost. repair. [195] Gleim #: 2. Flank attack. prices. Answer (A) is incorrect because guerilla warfare consists of numerous small attacks designed to reduce the strength of the target. The result is a gap in need fulfillment that the attacker can convert into a strong position in a profitable segment. and lawsuits. A flank attack succeeds when market segments shift. Answer (D) is correct.33 -. Which general attack strategy adopted by a market challenger is directed at a gap in customer need fulfillment? A.200. the budgeted unit whole-life cost is $36 [($2. Answer (C) is incorrect because a frontal attack directly pits the firm’s products.000. promotions.

adapted In a product’s life cycle. imitators have entered the market and competitors have learned which technologies and features are successful. and the mass market is targeted through advertising. The strategy is to advance by these means and by achieving economies of productive scale. B. flooding the market with products for every segment and niche. adapted During the growth stage of a product’s life cycle A. and increase distribution effectiveness is the basis for a good offensive strategy. The quality of products is poor. Answer (A) is incorrect because. B. Product’s production cost. Copyright 2006 Gleim Publications. In the growth stage. Inc. Printed for Pol Mirafuentes Page 91 .Source: IIA. New product models and features are introduced. distribution channels are extended. Constant innovation to improve products and services. Innovations as an offensive strategy. encouraging new uses. Answer (C) is incorrect because a preemptive defense anticipates an attack. for example. by attracting new users. Holding the market stable to avoid attracting new competitors.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. and promoting increased use. There is little difference between competing products. Answer (B) is correct. sales and profits increase rapidly. Answer (A) is incorrect because poor product quality is evident during the introduction stage of the product life cycle.35 -. new competitors enter an expanding market.36 -. The leader must continuously improve the value offered to customers. the first symptom of the decline stage is a decline in the A. customers are early adopters. cost per customer decreases. or by sending market signals indicating ways in which the leader intends to anticipate attacks. Answer (B) is incorrect because a position defense strengthens the firm’s brand power. [198] Gleim #: 2. Sending market signals as a mobile defense. D. new product models and features are introduced. Product’s prices. C. control costs. the leader should attempt to increase total demand. Answer (C) is incorrect because competitors are most numerous and products become less differentiated during the maturity stage of the product life cycle. The quality of the products becomes more variable and products are less differentiated. D.Source: IIA. and promotion spending declines or remains stable. such as by targeting particular competitors before they can launch assaults. B. Firm’s inventory levels. prices are set to penetrate the market. Answer (D) is correct. Answer (D) is incorrect because the quality of the products becomes more variable and products are less differentiated during the decline stage of the product life cycle. C. A flank defense to strengthen the firm’s brand. Product’s sales. C. The firm enters new market segments and distribution channels and attempts to build brand loyalty and achieve the maximum share of the market. as the firm most likely to gain. In this stage. Thus. D. [197] Gleim #: 2.

by definition. Available alternatives. They may initially be high to permit cost recovery when unit sales are low. This first symptom of the decline stage of a product’s life cycle triggers such other effects as price cutting. [200] Gleim #: 2. build supplier relations. Expensive sales promotion. The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and selective distribution to generate awareness of the product and encourage customers to try it. Answer (C) is incorrect because no mass market is available during the introduction stage. Answer (D) is incorrect because a change in prices is a marketing decision. increase production and marketing efforts. Answer (B) is correct. D. Cost-plus prices are charged. adapted While auditing a marketing department. C. Introduction stage. little competition exists. Decline stage.Source: IIA. B. [199] Gleim #: 2. This decline may be slow or rapid.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a decline in the firm’s purchases–resulting in a decline in the firm’s inventory levels–is not the first symptom. Under such a philosophy. Answer (D) is incorrect because.Source: IIA. Competitors tend not to enter the market until they have greater assurance of profits.37 -. adapted At the introduction stage of an innovative product. and higherincome customers (innovators) are usually targeted. The sales of most product types and brands eventually decrease permanently. Maturity stage. during the introduction stage. Growth stage. e.38 -. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. the per-customer cost is high. Printed for Pol Mirafuentes Page 92 . High competition. Moreover. Inc. basic versions of the product are produced. Answer (A) is correct. Moreover. plan for financing to cope with losses. A mass market. and plan for competition.g. production costs may decrease in any stage of a product’s life cycle and not specifically in the decline stage. and reduction in promotion budgets. Copyright 2006 Gleim Publications. a decrease in the product’s prices is a response to a permanent decline in sales. the profit growth is normally slow due to A. Answer (B) is incorrect because. D. B. not many alternatives are available during the introduction stage of an innovative product. C. It is an action that may be taken in the maturity stage to compete in the market. Competitors are few. the price charged on a consistent basis for a specific product would probably be lowest during which life cycle stage? A. new plant technology or the increased availability of raw materials. The strategy is to infiltrate the market. narrowing of the product line. Thus.. Answer (C) is incorrect because a decline in production costs may be due to many factors. It will occur only when production declines as a result of a drop in sales.

C. Growth stage. prices will be lower than during the introduction stage. In addition. Introduction stage. Although costs are also high during this period. but not as low as during the maturity stage. adapted While auditing a marketing department. Answer (B) is incorrect because. pre-unit costs are on the rise because volume is declining. Answer (A) is incorrect because production volume is low during the introduction stage. Decline stage.Source: IIA. the opportunity for cost reductions would be greatest in which stage of the life cycle? A. and the benefits of the learning curve are being realized. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Answer (C) is incorrect because production volume changes little during the maturity stage. D. Inc. [201] Gleim #: 2. Maturity stage. Hence. Introduction stage.Source: IIA. Thus. during the growth stage. so prices can be raised. during the decline stage.39 -. D. Copyright 2006 Gleim Publications. Under such a philosophy. In the growth stage. fixed costs are being spread over more units of production. the opportunity for cost reductions is at its maximum because production volume is increasing at a high rate. price-cutting predominates as firms struggle to maintain sales volume in the face of a permanent decrease in demand.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. During the growth stage. The result is less opportunity for cost reductions. During which stage of the life cycle would it be appropriate to advertise that the company’s product is the lowest price and best quality of all competitors? A. Answer (C) is correct. resulting in higher prices. during the introduction stage. During the maturity stage. However. firms are engaged in competitive price-cutting measures.40 -. Answer (D) is incorrect because. [202] Gleim #: 2. C. Answer (D) is incorrect because costs per unit typically rise during the decline stage as production volume declines. competition is at its greatest and costs are at their lowest. B. Moreover. Growth stage. prices are at their highest. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Answer (B) is correct. pre-unit costs of production are high and little competition exists. low volume reduces the opportunities for cost reductions. late in the decline stage. costs are dropping and competitors are being added. resulting in some of the lowest prices seen during a product’s life cycle. Decline stage. adapted While auditing a marketing department. but costs are not at their minimum and competitors are not at their maximum. B. there are few competitors. Printed for Pol Mirafuentes Page 93 . Maturity stage. The manager has asked the auditor for advice about increasing advertising of various products.

Answer (D) is incorrect because few competitors exist during the decline stage. C. Answer (C) is correct. III. The maturity stage is the ideal time for advertising lower prices and superior quality because this is the period during a product’s life when competition is greatest. II. multinational firms I. Answer (B) is incorrect because multinational firms also change the product to prevent gray market activity. II and III only. D. B. To prevent this activity by their distributors. These activities clearly lower the profits in some markets of the multinational firm that was the initial seller. Printed for Pol Mirafuentes Page 94 . products imported from one country to another are sold by persons trying to make a profit from the difference in retail prices between the two countries. II. C. and quality is sometimes poor.42 -. Engaged in dumping. The firm is A. [204] Gleim #: 2. Raise prices charged to lower-cost distributors. a firm has reasons to set itself apart. [203] Gleim #: 2. Answer (A) is incorrect because multinational firms also police their distributors and change the product to prevent gray market activity.. Operating in a gray market. A. and III.Source: Publisher Gray market activity is in essence a form of arbitrage. Inc. One response is to monitor the practices of distributors and retaliate if necessary.41 -. I only.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because few competitors exist during the introduction stage. Answer (D) is correct. Because price and quality are both concerns of customers during the maturity stage. by adapting the product or offering distinct service features. D. B. Copyright 2006 Gleim Publications. Answer (C) is incorrect because multinational firms also raise prices charged to lower-cost distributors to prevent gray market activity. Engaged in price discrimination. prices may rise late in the decline stage for the remaining firms as per-unit costs increase. it is ideal for the firm to differentiate its product by advertising low prices and higher quality. e. A second response is to charge higher prices to the low-cost distributors to reduce their incentives to participate in a gray market. Change the product. Police their distributors. I.g. I and II only. A third response is to differentiate products sold in different countries. Answer (B) is incorrect because buyers are less concerned with price and quality during the growth stage than in the maturity stage. Due to the availability of many alternatives or substitutes. In a gray market. Moreover.Source: Publisher A firm buys like-new computer equipment from bankrupt companies and resells it in foreign markets at prices significantly below those charged by competitors. Operating in a black market.

The most likely reason for these effects is that the A. Printed for Pol Mirafuentes Page 95 . Price is a cost-plus price. In a gray market. C. Create a gray market. Transfer price is too high. the higher the transfer. B. Answer (A) is incorrect because an arm’s-length price is what a competitor would charge in that market. [205] Gleim #: 2. Answer (D) is correct. import duties would be lower and taxes would be higher. A firm may set a cost-based price in each market with a standard markup. Answer (B) is incorrect because a uniform pricing policy may overprice the product in some markets and underprice it in others. Overprice the product in some markets and underprice it in others. Set too high a price in countries where the firm’s costs are high.Source: Publisher A firm ships its product to a foreign subsidiary and charges a price that may increase import duties but lower the income taxes paid by the subsidiary. Answer (C) is incorrect because charging what consumers can afford in each country may create a gray market. The reason is most likely Copyright 2006 Gleim Publications. Answer (C) is correct. Answer (D) is incorrect because black market operations are illegal.44 -. the seller firm in this case was exploiting a price difference between markets. Answer (C) is incorrect because. Answer (A) is correct.Source: Publisher A firm sells its product in a foreign market for a much higher price than in its home market. In a region or country where costs are high. products imported from one country to another are sold by persons trying to make a profit from the difference in retail prices between the two countries.Source: Publisher A global firm establishes a cost-based price for its product in each country. C. B. The most likely negative outcome is that this pricing strategy will A. Transfer price is too low. Answer (B) is incorrect because a cost-plus price does not necessarily trigger higher import duties. In essence. the tax levied on a subsequent sale by the subsidiary will be lower because of its higher acquisition cost. Answer (D) is incorrect because dumping often entails charging a below-cost price. However. the higher the potential tariffs. A transfer price is the price charged by one subunit of a firm to another. [206] Gleim #: 2. Answer (B) is incorrect because price discrimination involves illegally selling the same products at different prices to different customers. When the subsidiarybuyer is in a foreign country. Result in dumping.45 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because dumping is sale below cost or at less than the price charged in the home market. D. Price is an arm’s-length price.43 -. D. this strategy may result in prices that are too high to be competitive within the local market. Inc. [207] Gleim #: 2. if the transfer price is too low.

Answer (C) is correct. C.g. 40 through 75.. Answer (D) is correct. assist in employee development. Answer (B) is incorrect because dumping is sale at a price below cost or below the price in the home country. profits earned by importers.Source: CMA 696 1-20 The protected group under the Age Discrimination in Employment Act of 1967. B. Dumping. Answer (D) is incorrect because it is a purpose of a performance evaluation. e. B. B. If demand is price elastic. provide motivation. Printed for Pol Mirafuentes Page 96 . [208] Gleim #: 2. D. Nondiscriminatory benefits are given to everyone in the organization in equal amounts regardless of title. pay. Copyright 2006 Gleim Publications. Answer (C) is incorrect because In a gray market. Evaluations reinforce accomplishments. There are many reasons for evaluating performance. However. Answer (B) is incorrect because it is a purpose of a performance evaluation. wholesalers. Price elasticity of demand. Answer (A) is correct. or achievement of objectives. [209] Gleim #: 2. D. Motivate the employees.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. and serve as a basis for wage increases. 35 through 60.46 -. products imported from one country to another are sold by persons trying to make a profit from the difference in retail prices between the two countries. Inc. 45 and older. Price escalation. as amended. certain managerial employees are not protected by this amendment. The Age Discrimination in Employment Act is designed to protect individuals aged 40 and older from employment discrimination. Answer (A) is incorrect because the act provides protection for individuals who are aged 40 and older. Answer (D) is incorrect because the act provides protection for individuals who are aged 40 and older.47 -. C. and retailers. Gray market activity. and import duties. currency fluctuations. The act has been amended to eliminate the mandatory retirement age. Answer (C) is incorrect because it is a purpose of a performance evaluation. Determine which employees deserve salary increases. Answer (B) is incorrect because the act provides protection for individuals who are aged 40 and older. help in assessing employee strengths and weaknesses. Price escalation is caused by an accumulation of additional costs.Source: Publisher Evaluating performance is not done to A. 40 and older. Determine the amount of nondiscriminatory benefits that each employee deserves. D. Assess the available human resources of the firm. Answer (A) is incorrect because price elasticity of demand is the relationship of total revenue to a change in price. a price increase results in lower revenue. transportation expenses. is defined as anyone in which age group? A. C. permit the organization to assess its human resource needs.

such as those on religious and political matters. An objective evaluation. often quantitative criteria. [211] Gleim #: 2. Try to counsel the new hire into more reasonable beliefs. the personnel director. The only legitimate grounds on which the supervisor may take action is the employee’s behavior. Ask the rest of the team for their reaction and act according to the group consensus. B. A projection. Answer (A) is incorrect because personal beliefs alone are not an appropriate basis for managerial action. B. should communicate appraisal information to a new employee by A.50 -. Discussing each department’s evaluation system in detail. Answer (B) is incorrect because personal beliefs alone are not an appropriate basis for managerial action. An evaluation subject to the halo effect. It occurs when the manager allows one negative trait to influence the evaluation of other traits.Source: Publisher A company allows each of its departments to develop its own system for evaluating performance. Linda Ward.Source: CIA 596 II-33 A manager discovers by chance that a newly hired employee has strong beliefs that are very different from the manager’s and from those of most of the other employees. B. Answer (D) is incorrect because an objective evaluation uses verifiable. C. Answer (C) is correct. A judgmental evaluation. Copyright 2006 Gleim Publications. D. [212] Gleim #: 2. Providing an overview of all systems within the company. 2. C. C. subjective criteria. Printed for Pol Mirafuentes Page 97 . Answer (B) is correct. (s)he has made A. The manager’s best course of action would be to A. Inc. cannot be the basis of personnel actions. Discrimination on the basis of personal beliefs could expose the organization to legal action.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [210] Gleim #: 2. Answer (A) is incorrect because a judgmental evaluation is based on nonverifiable. The converse of the halo effect is the horn effect. Describing how her own performance is evaluated. Presenting anything that is pertinent to the listener’s situation. Personal beliefs. Answer (C) is incorrect because projection is the process of attributing one’s own traits to another person. Take no action unless the new hire’s behavior is likely to cause harm to the organization. D. D. The halo effect occurs when the appraiser judges one or a few employee traits and carries over this judgment to the evaluation of the employee’s other traits. Facilitate the reassignment of the new hire as quickly as possible before this situation becomes disruptive. Answer (D) is incorrect because personal beliefs alone are not an appropriate basis for managerial action.Source: Publisher When a manager generalizes from the evaluation of one or a few traits to the employee’s total performance. 1.48 -.49 -.

but it does emphasize other rewards. C.Source: Publisher A disadvantage of separating performance evaluations from wage-increase decisions is that A. D. such as feelings of achievement and the recognition of superiors. Answer (C) is incorrect because discussing information that is irrelevant to the new employee’s appraisal information would confuse the new employee. Not enough emphasis is placed on short-run performance. lessened job satisfaction. Answer (B) is incorrect because this separation does not deprive money of its motivational power.Source: Publisher A company that formerly paid certain management employees on a salary plus commission basis decided to compensate a test group solely with commissions. Printed for Pol Mirafuentes Page 98 . Answer (A) is incorrect because an advantage of separating appraisals from wage increases is that more emphasis is placed on long-term objectives and goals.53 -. The evaluation may also not be taken as seriously by the employee if compensation is not correlated with performance. C.. The director should also obtain feedback from the employee to determine if everything is clearly understood. Initiate job simplification programs.g. Answer (D) is incorrect because an advantage of separating performance evaluations from wage-increase decisions is that the employee’s good performance can be separated from the overall company’s bad financial performance. The personnel director should tailor the discussion to the listener by describing how the employee’s department evaluates performance and what is expected of him/her. Improve its fringe benefit package. B.Source: Publisher A company that wishes to improve its rate of retention of its experienced employees might A. Answer (B) is correct. Answer (C) is correct. The employee may not be motivated immediately by a good appraisal because of the delay in receipt of any monetary reward. Performance of these employees declined.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. [214] Gleim #: 2. they motivate employees to remain with the company.52 -. Answer (A) is incorrect because reduced opportunity for advancement may motivate employees to find jobs elsewhere. Answer (D) is incorrect because abolition of a mandatory retirement age would be more appropriate. and a higher turnover rate. [215] Gleim #: 2. B. The employee’s performance evaluation does not consider the financial status of the company overall. Accordingly. Inc. Set a mandatory retirement age. Fringe benefits (e. Answer (C) is incorrect because job simplification may result in boredom. Answer (D) is incorrect because discussing information that is irrelevant to the new employee’s appraisal information would confuse the new employee. The most likely explanation for this result is that Copyright 2006 Gleim Publications. [213] Gleim #: 2. Answer (B) is incorrect because discussing information that is irrelevant to the new employee’s appraisal information would confuse the new employee. Financial rewards may lose their motivational effect. pensions and profit-sharing plans) may be contingent on duration of employment. D. Employees may not be motivated by good appraisals.51 -. Abolish its hire-from-within policy.

Answer (D) is correct. the best solution would be to A. C. B. Copyright 2006 Gleim Publications. To improve the retention of skilled employees in the accounting department.54 -. the change in compensation method probably caused the performance decline. Answer (C) is incorrect because a performance decline followed a reduction in the security of compensation. Answer (C) is correct. Answer (B) is incorrect because Herzberg defines a motivational factor as one whose absence will not diminish performance but whose presence will be a motivator.55 -. Provide job sharing and flextime opportunities for accounting department employees. D. [216] Gleim #: 2. Job sharing and flextime allow employees to adjust their work schedules and hours to better achieve personal objectives. Adherence to federal regulations regarding sex discrimination in paying and promoting workers.Source: CIA 1195 III-22 The human resource department of an organization observed that accounting staff turnover was unusually high. [217] Gleim #: 2. D. B. Implement a program of job rotation within the accounting department. hence. Increased concerns about security made the employees risk averse. Exit interviews indicated that the accounting department work schedule was highly restrictive for accountants who had young children. C. Answer (B) is incorrect because job enlargement would not adequately address the scheduling issue. C. Enrich the jobs of accounting department employees. B. money was probably a hygiene (maintenance) factor according to Herzberg’s two-factor theory of motivation. Promote job enlargement for the positions experiencing the greatest turnover.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Satisfaction of the need for security may have permitted the employees to adopt promising and profitable but more risky strategies. Paying new employees more than older ones. Initiation of job enrichment programs. These programs can increase worker loyalty and motivation. The employee received special attention. Inc. A straight salary with commissions rewarded increased efforts while providing greater security and a reduction in anxiety. Answer (A) is incorrect because job rotation would not adequately address the scheduling issue. Answer (D) is incorrect because job enrichment would not adequately address the scheduling issue. D. Adoption of flextime rules.Source: Publisher The factor that would not contribute to retention of experienced employees would be A. Printed for Pol Mirafuentes Page 99 . Compensation was not a hygiene factor. Since people concerned about security needs tend to be risk averse. Answer (A) is incorrect because the famous Hawthorne studies suggest that the employees’ knowledge of their special status would improve their output. Compensation was a motivational factor.

In the short run. Answer (C) is incorrect because this traditional accounting method does not value the organization’s human assets. it is not shown in balance sheets or accounted for in earnings statements. It also pays some employees higher salaries because of their educational qualifications. [218] Gleim #: 2.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a more intrinsically satisfying job will improve the retention rate. Printed for Pol Mirafuentes Page 100 .56 -. The employee may become less productive. Cost accounting. Answer (D) is correct. (s)he is likely to be motivated to perform better. Answer (B) is incorrect because employees subject to discrimination may be strongly motivated to find other jobs. etc. Answer (C) is correct. (s)he will probably look for another job. [219] Gleim #: 2.g. Thus. Under the company’s compensation program. Inc. Another is a “cost” approach. The employee may seek a position with another company.g. Human asset accounting.Source: Publisher A company’s compensation program does not allow for salary increases based on above-average performance after an employee reaches the top of a position’s salary range. and the changes in value. When an employee can earn a desired salary increase only through a promotion.58 -. the group hired first will be unhappy. Answer (A) is correct. Answer (C) is incorrect because this behavior would undermine the employee’s chance for a promotion. C. The employee may not be motivated to improve performance. Answer (B) is incorrect because this traditional accounting method does not value the organization’s human assets. Although this “asset” is enormously valuable (sometimes estimated at two or three times the annual payroll). [220] Gleim #: 2. Which of the following is most likely to be an effect on his/her behavior? A. D. retirement). Answer (A) is incorrect because this behavior would undermine the employee’s chance for a promotion. Human resource or human asset accounting attempts to measure the value.) offset by reductions (e. The employee may refuse new duties or tasks. child care) might have compelled him/her to leave. the newcomers will be satisfied. Answer (D) is incorrect because greater freedom in determining his/her hours may enable a worker to remain with the company when other responsibilities (e. Answer (D) is incorrect because it merely audits the skills of the current employees and forecasts needs. B. When old employees discover that newcomers are being hired at higher salaries. feeling that their greater experience should warrant greater reward. C. of the organization’s investment in human assets. D. customer goodwill.57 -.Source: Publisher An employee with a good background and years of experience earns a salary at the top of his/her range.. One experimental measurement approach is a sort of “present value” of human resources. such a policy will provide incentives for experienced workers to leave the company. If this does not result in a promotion. This company could improve the program by Copyright 2006 Gleim Publications. Answer (B) is incorrect because this behavior would undermine the employee’s chance for a promotion.. B. with dollar investments (training. Financial accounting.Source: Publisher The value of retaining employees is determined by A. the employee must earn a promotion in order to increase his/her salary above the usual annual increase. contributing to the overall dissatisfaction. But it is possible that next year’s newcomers will be hired at still higher salaries. Human resource planning.

Answer (A) is incorrect because the company should administer a uniform system of salary increases. Answer (B) is incorrect because the company could improve its system if it provided other compensation. such as assisting with an employee’s tuition or recognizing an employee who has given many years of service. refusing to hire a person at the top of a salary range unless (s)he will be promoted quickly. D. The 360-degree performance appraisal is a model for employee assessment in the age of teamwork. Answer (C) is incorrect because the critical incident technique is based on having a list of critical aspects of a job against which to compare the employee’s performance. this is known as the A. customers. Inc. Answer (D) is incorrect because BARS is based on specific job-related behaviors. Leniency error. Critical incident technique.60 -. Feedback is typically provided anonymously and is usually subjective. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Copyright 2006 Gleim Publications. D. B. Answer (B) is incorrect because this is a nonsense term. C.Source: Publisher If a supervisor fails to give an employee a negative evaluation because of fear of damaging a good working relationship. Allowing each manager to set up his/her own system of salary increases. Answer (A) is correct. and equating experience and education so that employees are treated fairly. Answer (D) is incorrect because the company would please all employees by increasing this percentage. and those who work for the employee. Developing a system that equates years of experience with education. These include starting a bonus program for above-average performance. [221] Gleim #: 2.59 -. 360-degree performance appraisal. C. [222] Gleim #: 2. D. C.Source: Publisher Which of the following methods of employee evaluation is best used in a situation where employees are heavily involved in teamwork? A. Behaviorally anchored rating scales (BARS). Recency effect. B. Attribution method. Contrast error. Answer (C) is correct. It is based on giving workers feedback from peers. A company with a compensation program that stops rewarding above-average performance at the top of each salary range and rewards education with higher compensation could improve the system in several ways. it would usually not be effective in a team situation. supervisors. Decreasing the annual percentage increase in each salary range. Printed for Pol Mirafuentes Page 101 . Providing only monetary compensation. Halo effect.

D. Answer (B) is incorrect because the recency effect means that the employee’s most recent behavior overshadows overall performance. C. Sawyer’s Internal Auditing (IIA. Thus. Hiring an insider leads to the possibility of social inbreeding within the firm. 791) suggests the following questions for inexperienced candidates: What is your concept of internal auditing? How did you hear about it? Why do you think you’d like it? What kinds of assignments would you like best? What are your outside interests? What are your personal goals? Answer (D) is incorrect because federal law prohibits asking about marital status. Copyright 2006 Gleim Publications. [223] Gleim #: 2.Source: CIA 1192 III-10 When faced with the problem of filling a newly created or recently vacated executive position. B. It is difficult to identify proven performers among internal candidates. One of the disadvantages of promoting from within is that A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. organizations must decide whether to promote from within or to hire an outsider. Printed for Pol Mirafuentes Page 102 . continuing education may not be relevant. Inc.Source: CIA 591 III-11 During an audit of the personnel function. A leniency error is when a manager fails to give a negative evaluation because of fear of damaging a good working relationship with an employee.62 -. Which of the following questions would normally be appropriate when interviewing an inexperienced person applying for an entry-level internal auditing position? A. B. Answer (C) is correct.61 -. 1988. without consideration of performance standards. Answer (D) is incorrect because a contrast error is the tendency to rate people relative to other people. D. Answer (C) is incorrect because the halo effect means the manager’s judgment on one positive trait affects the rating on other traits. Internal promotions can have negative motivational effect on the employees of the firm. Answer (B) is incorrect because the applicant is inexperienced and thus may not have written reports in previous jobs. Internal promotions are more expensive to the organization than hiring an outsider. C. [224] Gleim #: 2. p. How have you kept up your internal auditing education? What kind of reports have you written in previous jobs? What are your career goals? What is your marital status? Answer (A) is incorrect because the inexperienced applicant may have just finished his/her education. it was noted that numerous questions were asked of potential hirees.

selling. or transferring title. A. D. but these changes usually occur over extended periods. For example. D. Computer resources. and distributing their goods and services to ultimate consumers. then resell the products. Customers can make reservations either with an airline or through a travel agency. usually have selective or exclusive distribution rights. or wholesalers. Printed for Pol Mirafuentes Page 103 . Answer (C) is incorrect because it is more difficult to identify proven performers from among outside candidates than internal candidates. Identify the primary vulnerability of JIT systems. Hiring an internal candidate can lead to social inbreeding. [225] Gleim #: 2. B. Inc. In this situation. Copyright 2006 Gleim Publications. Implementation time. a travel agency is classified as which type of distribution channel? A. Answer (A) is correct. Answer (D) is incorrect because facilitating agents assist in functions other than buying. An intermediary. Answer (C) is incorrect because distributors. travel agents access an airline’s computerized reservation system and make reservations for their customers without ever taking title to the ticket. Work stoppages. Materials supply contracts. Answer (A) is incorrect because JIT systems can require significant computer resources. JIT minimizes inventory by relying on coordination with suppliers to provide deliveries when they are needed for production.64 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because internal promotions usually lead to increased motivation among employees. Answer (B) is incorrect because jobbers buy from manufacturers.Source: CIA 595 III-32 Just-in-time (JIT) inventory systems have been adopted by large manufacturers to minimize the carrying costs of inventories.Source: CIA 597 IV-80 The airlines have been leaders in the use of technology.63 -. Many firms look to external candidates for certain jobs because they bring a fresh perspective to the organization’s problems and may have more up-to-date training or education. Answer (B) is incorrect because contracts may have to be renegotiated with strict delivery and quality specifications. A distributor. Marketing intermediaries assist companies in promoting. work stoppages at suppliers or transportation disruptions can cause almost immediate work stoppages at the manufacturer plant. Answer (C) is correct. Answer (B) is incorrect because internal promotions are less expensive. A jobber. A facilitating agent. Answer (D) is incorrect because JIT can be implemented over an extended period or a shorter time frame depending on the manufacturer’s immediate needs. C. B. Answer (D) is correct. C. selling. [226] Gleim #: 2. The firm can avoid the expenses associated with an executive search and certain training costs. Consequently. but they can also be maintained manually.

1. Printed for Pol Mirafuentes Page 104 . costs. Answer (C) is incorrect because. divided by the unit periodic holding cost. Answer (A) is incorrect because the basic EOQ model does not include safety stock.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [227] Gleim #: 2.800 swag hooks (1 × 1. If no safety stocks are required for inventory. C. Also.65 -.500 1.800 banana hooks (2. The company needs 1.600 3. Backlog costs are not quantified in the model. Backlogs are customer orders that cannot be filled immediately because of stockouts.Source: CIA 594 III-66 The purpose of the economic order quantity model is to: A.600 Answer (A) is incorrect because 1. Answer (B) is correct.800 swag hooks would be needed if no swag hooks were in current inventory. Answer (B) is correct. D. B.800 Wood Screws 1.800) and 3. Minimize the safety stock. what are the company’s net requirements for swag hooks and screws needed to fill this order? Swag Hooks A. are to be minimized. but order costs.200 wood screws (3. not quantities. B. Answer (C) is incorrect because 1.700 1. Minimize the inventory quantities. are relevant.500 1.400 wood screws assumes that one wood screw is used per banana hook. The company has 200 finished banana hooks in current inventory.66 -. C. The bill of material for this item and the parts inventory for each material required are as follows: Bill of Materials Raw Material Wooden neck Wooden base Swag hook Wood screws Foot pads Quantity Required 1 1 1 2 4 On Hand 0 0 300 400 1.600 wood screws would be needed if no banana hooks were in current inventory. Answer (D) is incorrect because 1. not demand costs.800). Copyright 2006 Gleim Publications. 3. Minimize the sum of the order costs and the holding costs. Answer (D) is incorrect because quantity demanded is a variable in the model.700 swag hooks and 3.000 An incoming order calls for delivery of 2.600 wood screws (2 × 1.500 swag hooks (1. in the EOQ model.000 banana hooks in 2 weeks. Minimize the sum of the demand costs and the backlog costs. D.600 wood screws would be needed if no banana hooks were in current inventory. Inc.200 3.800 – 300) and 3. [228] Gleim #: 2. the company must obtain 1.000 – 200) and therefore 1. The EOQ equals the square root of: twice the annual demand multiplied by the variable cost per order.400 3.Source: CIA 596 III-98 A company manufactures banana hooks for retail sale. The purpose of the EOQ model is to minimize the sum of inventory order costs and holding costs.600 – 400). Given that 300 swag hooks and 400 wood screws are on hand.

Copyright 2006 Gleim Publications. Answer (A) is incorrect because regression analysis is used to fit a linear trend line to a dependent variable based on one or more independent variables. Answer (C) is incorrect because Markov process models are used to study the evolution of certain systems over repeated trials. Answer (B) is correct. Answer (D) is incorrect because queuing theory is a waiting-line technique used to balance desirable service levels against the cost of providing more service. In business and economics. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [229] Gleim #: 2. and the cost of placing an order is $10. K is the cost of carrying one item for 1 year. the EOQ is approximately 447 units if the annual demand is 10. [230] Gleim #: 2. The EOQ formula is If: D is the demand. B.Source: CIA 593 III-70 Which of the following is used in determining the economic order quantity (EOQ)? A. A is the cost of placing one order. Queuing theory. Answer (C) is incorrect because 483 results when annual demand is 11. C. Calculus. carrying costs per unit per annum. carrying costs are 1 currency unit per item per annum.000 units per annum and the carrying and ordering costs remain at $1 and $10.500 units.000 units per year. Answer (D) is incorrect because 500 results when annual demand is 12. Printed for Pol Mirafuentes Page 105 . and cost per order. 316 447 483 500 Answer (A) is correct. based on a constant annual demand. The primary business application of differential calculus is to identify the maxima or minima of curvilinear functions.000 units. C. respectively? A. Markov process. Inc. Answer (B) is incorrect because 447 is the EOQ when demand is 10.67 -.68 -. these are the points of revenue or profit maximization (maxima) or cost minimization (minima). D. D. Regression analysis. What will the EOQ be if the demand falls to 5.664 units. or number of units used per year. For example. The EOQ results from differentiating the total cost with regard to order quantity.Source: CIA 590 III-45 The EOQ (economic order quantity) model calculates the cost-minimizing quantity of a product to order.

C. Group A items are reviewed on a regular basis. and delivery costs. The fixed costs of the ordering department will be unaffected. However. A change in the service level. Also. Answer (C) is incorrect because ordering costs will not increase. Answer (A) is incorrect because service will improve. Inc. The ABC system is a method for controlling inventories that divides inventory items into three groups: Group A -. Group B items may not have to be reviewed as often as group A items. extensive use of models and records is not cost effective. not short. B. For group C. and the cost of such review is minimized if it is limited to high. Answer (A) is incorrect because long. stockout costs prompt a more frequent review. Answer (D) is correct. C. D. and distributes inventory. B. maintains. frequently used. items prompt a more frequent review. Moreover. Answer (B) is correct. but more often than group C items. The ABC method therefore reduces the safety-stock investment because high-value items are frequently monitored and medium-value items are monitored more often than inexpensive items. not inexpensive. increasing the safety stock increases carrying costs. Copyright 2006 Gleim Publications. Expensive. which may account for about 20% of the total inventory items low-dollar value items. An increase in ordering. Frequent review can prevent stockouts and decrease inventory levels. carrying. The company decides to add to the safety stock and expedite delivery for several product lines on a trial basis.Source: CIA 1193 IV-26 Which of the following inventory items would be the most frequently reviewed in an ABC inventory control system? A. frequently used. It is cheaper to order large quantities infrequently. Printed for Pol Mirafuentes Page 106 .70 -.69 -. high stock-out cost items with long lead times. high stock-out cost items with short lead times. not low. Answer (B) is incorrect because high. Safety stocks are amounts held in excess of forecasted demand to avoid the losses associated with stockouts. high stock-out cost items with long lead times. carrying. Answer (C) is incorrect because expensive. Holding safety stocks improves the level of service to customers at the expense of increased holding costs. in the first year. For the selected product lines the company will experience A. Answer (D) is incorrect because delivery will increase under the new expedited delivery policy. Expensive. lead times prompt a more frequent review. and delivery costs. which account for the remaining 70% of sales or usage Group C -- The ABC system permits the proper degree of managerial control to be identified and exercised over each group. an additional order may be necessary to increase the safety stock. D. A decrease in ordering. low stock-out cost items with long lead times. Expensive. which account for a small portion (perhaps 10%) of the total inventory usage Group B -medium-dollar value items.high-dollar value items. frequently used. Inexpensive. frequently used.or medium-value items.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [231] Gleim #: 2. [232] Gleim #: 2. the department’s variable costs should not change because the EOQ will be the same.Source: CIA 1190 III-42 A company stocks. An increase in some costs but no change in the service level.

As with MRP. however. Just-in-time purchasing. Answer (D) is incorrect because just-in-time purchasing involves the purchase of goods such that delivery immediately precedes demand or use. factory space. production delays are almost unavoidable if the materials are not on hand. it arrives just in time.72 -. [234] Gleim #: 2. D. A safety stock planning system. A key element of the JIT system is reduction or elimination of waste of materials. components. Linear programming. Answer (B) is correct. minimization of inventory is a goal.71 -. C. not before. A master budgeting system. production. under MRP. Answer (A) is incorrect because the economic order quantity is a decision model that focuses on the trade-off between carrying and ordering costs. [235] Gleim #: 2. and machine usage. and some Japanese users have been able to get twice-daily deliveries. D. An MRP system uses a parts list. An economic order quantity model. Answer (B) is incorrect because the economic order quantity is the order quantity that minimizes total inventory costs. Answer (A) is incorrect because safety stock is the inventory maintained in order to reduce the number of stockouts resulting from higher-than-expected demand during lead time. Answer (D) is incorrect because the master budget is the detailed financial plan for the next period. Materials requirements planning. The factory is organized so as to bring materials and tools close to the point of use rather than keeping them in storage areas. Answer (C) is incorrect because linear programming is a decision model concerned with allocating scarce resources to maximize profit or minimize costs. labor. and inventory control. This system is referred to as A. C. Printed for Pol Mirafuentes Page 107 . JIT is a manufacturing philosophy popularized by the Japanese that combines purchasing. Minimizing inventory is the key to reducing waste. An emphasis on quality and a “pull” of materials related to demand are key differences between JIT and MRP. When a part is needed on the production line. B.Source: CIA 592 III-62 An inventory planning method that minimizes inventories by arranging to have raw materials and subcomponents arrive immediately preceding their use is called A. Daily deliveries from suppliers are the ultimate objective. It assumes that estimated demand for materials is reasonably accurate and that suppliers can deliver based upon this accurate schedule. It is crucial that delivery delays be avoided because. Answer (C) is correct. JIT also encompasses changes in the production process itself. B. and lead times for each type of material to obtain materials just as they are needed for planned production. Economic order quantity.Source: CIA 1193 IV-25 The company uses a planning system that focuses first on the amount and timing of finished goods demanded and then determines the derived demand for raw material. A just-in-time inventory system.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [233] Gleim #: 2.Source: CIA 595 III-98 One of the elements included in the economic order quantity (EOQ) formula is Copyright 2006 Gleim Publications.73 -. often called a bill of materials. Materials requirements planning (MRP) is usually a computer-based information system designed to plan and control raw materials used in a production setting. and subassemblies at each of the prior stages of production. Inc.

750 $2. total annual holding cost is $1. Answer (A) is incorrect because the safety stock is not included in the basic EOQ formula.250 $2. Yearly demand. Answer (D) is incorrect because the lead time for delivery is not included in the basic EOQ formula. [237] Gleim #: 2. B. Adding safety stock results in an average level of 1.250 Answer (A) is incorrect because $750 results from subtracting instead of adding the cost of holding safety stock. which it sells for $8.250 + 500).750 [(1. The company desires a safety stock of 500 units.400 $2. D. Inc. $1. Printed for Pol Mirafuentes Page 108 .500.250 units (2. Answer (B) is incorrect because $1. Answer (D) is incorrect because $2. The basic EOQ formula is used to minimize the total of inventory carrying and ordering costs.75 -. [Fact Pattern #16] Using an EOQ analysis (assuming a constant demand). Safety stock. Selling price of item.880 $3.000 units.600 Copyright 2006 Gleim Publications. C. The basic EOQ equals the square root of a fraction consisting of a numerator equal to the product of twice the unit periodic demand and the variable cost per order and a denominator equal to the unit periodic carrying cost.Source: CIA 595 III-99 (Refers to Fact Pattern #16) Annual inventory holding costs equal A. C. D. It costs the company $150 to place a detailed order. Answer (C) is incorrect because the selling price of the item is not included in the basic EOQ formula. B.74 -. and the monthly demand for the product is 4.250 results from double counting the cost of holding safety stock.Source: CIA 595 III-100 (Refers to Fact Pattern #16) Total inventory ordering costs per year equal A.500 units. [236] Gleim #: 2. B. Answer (B) is correct. Answer (C) is correct. C. Given that demand is constant and the EOQ is 2.500 ÷ 2). it is determined that the optimal order quantity is 2. D. A five-day lead time is needed for delivery.250 $1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.750 units (1. the average inventory level without regard to safety stock is 1. Lead time for delivery.250 ignores safety stock.750 units × $4) × 25%]. Annual inventory holding costs equal 25% of the average inventory level. $750 $1. Given also that annual holding costs are 25% of average inventory and that unit cost is $4. It costs the company $4 per unit to buy the product.

Maintaining a safety stock avoids the costs of stockouts. lost sales and customer dissatisfaction. Printed for Pol Mirafuentes Page 109 . Total annual demand is 48. Increase by 20%. p = cost per purchase order.500 EOQ)].000 units. Keep a safety stock. Use a just-in-time inventory system. To do so. Answer (C) is correct.000 per month × 12). Hence. [238] Gleim #: 2. Decrease by 20%. total annual ordering costs equal $2. D = annual demand in units. B. Answer (A) is correct. Answer (D) is incorrect because $3. Answer (B) is incorrect because a just-in-time inventory system involves the purchase of materials and production of components immediately preceding their use. C. the organization should A.000 units. It can be calculated using the formula If: Q = order size in units. Increase by 6%. Inc. Answer (D) is incorrect because a master production schedule is a statement of the timing and amounts of individual items to be produced.77 -. C. Answer (B) is incorrect because $2. e. Keep a master production schedule.000 units (4. s = carrying cost per year for one unit of inventory. If the annual demand decreases by 36% the optimal order size will A. Copyright 2006 Gleim Publications.250 equals the annual holding cost of the average inventory excluding safety stock. D..400 assumes an EOQ of 3. Decrease by 6%. Answer (C) is incorrect because materials requirements planning is a system for scheduling production and controlling the level of inventory for components with dependent demand. Management would like to ensure that there is sufficient inventory on hand during periods of high demand so that it does not lose sales (and customers).g. [239] Gleim #: 2.Source: CIA 1195 III-97 The economic order quantity is the size of the order that minimizes total inventory costs which include ordering and holding costs.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because $1.600 assumes an EOQ of 2. Safety stock is inventory maintained to reduce the number of stockouts resulting from higherthan-expected demand during lead time. D.Source: CIA 1195 III-66 An organization sells a product for which demand is uncertain. Employ a materials requirements planning system.76 -.880 [$150 cost per order × (48. B.000 units ÷ 2.

the variable inventory costs are CU2. Answer (B) is incorrect because a CU1. Answer (C) is incorrect because 6% is the square root of 36%. Answer (C) is incorrect because increasing the order size increases total costs. The increase in inventory costs is CU500 (CU2. Answer (D) is incorrect because 6% is the square root of 36%. CU1. The EOQ is 2. Answer (B) is incorrect because the new EOQ decreases to 80% of its former value. by how much will its total inventory costs change? A. can be computed using the following expression: If: TC Q D F p s = = = = = = total inventory costs size of each order annual demand in units fixed costs of ordering variable cost of placing one order holding cost per year for one unit of inventory The following inventory information is available for an organization (costs stated in currency units): Annual demand (D) Variable cost of placing one order (p) Holding cost per unit (s) Economic order quantity (Q) Fixed cost of ordering 20.000 {[(2. CU900 increase. the variable inventory costs are CU2.000 units ÷ 2.000 units.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.000 units. Copyright 2006 Gleim Publications. Q.000 units ÷ 4.000 units. Printed for Pol Mirafuentes Page 110 .000 units at a time rather than 2. CU1.500 {[(4. C.000 units × CU1) ÷ 2] + [(20. When the order size is 4.000 increase.Source: CIA 1196 III-95 The economic order quantity.000 units. [240] Gleim #: 2.000 units × CU1) ÷ 2] + [(20.000 units CU100 CU1 2. Inc.000 units) × CU100]}. that is. Answer (D) is incorrect because a CU900 increase results from an order size of 5.78 -. D. Answer (A) is correct.000 units) × CU100]}. is the size of the order that minimizes total inventory costs. the EOQ will decrease by 20%.000 units CU0 If the organization decides to order 4.000 units. from 100% to 64%.000). CU500 increase. These costs. which are composed of ordering and holding costs. If D decreases by 36%.000 increase omits the change in the number of orders.500 – CU2. B.000 decrease. When the order size is 2.

and retail outlets. Answer (C) is incorrect because a physical distribution system includes the location of retail outlets. Answer (C) is correct. Copyright 2006 Gleim Publications. C. Warehousing. Answer (A) is incorrect because penetration pricing is a new product pricing method in which an introductory price is set relatively low to attract as many customers as possible. D. D. Answer (C) is correct.79 -. Consumers. Price skimming. C. Cost-based pricing is a pricing method in which a standard markup or target profit is added to the cost of the product in determining the product’s sales price. B. transportation. B. Answer (D) is incorrect because physical distribution is the efficient movement of finished products to consumers. Shipping point. Answer (B) is correct. Answer (D) is incorrect because a physical distribution system includes warehousing. and controlling the movement of materials and final goods to meet customer needs while earning a profit. Answer (B) is incorrect because physical distribution is the efficient movement of finished products to consumers. and customers. B. They include warehousing. Cost-based pricing. Going-rate pricing. Location of retail outlets. Physical distribution systems coordinate suppliers. Pricing.81 -. C. [243] Gleim #: 2. channels. marketers. Warehouses. It controls value-added flows from suppliers to consumers. Answer (A) is incorrect because a physical distribution system includes transportation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [241] Gleim #: 2. D. Retail outlets.80 -.Source: Publisher Which of the following is not a component of physical distribution? A. implementing. Inc. Physical distribution is the efficient management of supply chains. Answer (D) is incorrect because price skimming sets the introductory price relatively high to attract buyers who are not concerned with price.Source: Publisher Which of the following is the method of adding a standard markup to the cost of the product? A. Transportation. Answer (B) is incorrect because going-rate pricing is a method of pricing based largely on competitors’ prices. Penetration pricing. Physical distribution (market logistics) involves planning. Printed for Pol Mirafuentes Page 111 . [242] Gleim #: 2.Source: Publisher Physical distribution is the moving of finished products to A. Answer (A) is incorrect because physical distribution is the efficient movement of finished products to consumers. purchasing agents.

Carrying costs include warehousing costs. Decrease the holding cost percentage. Consumers buy them often and with a minimum of comparison and effort. Inc. Answer (B) is incorrect because the reorder point is based on lead time. Included in the formula are annual demand. spoilage. Decrease the economic order quantity.82 -. B. [245] Gleim #: 2. Interest on invested capital. Public warehouse rental charges. obsolescence. B. Convenience goods are consumer goods and services that are usually low-priced and widely available. [246] Gleim #: 2.Source: CMA 1294 4-7 Which one of the following items is not directly reflected in the basic economic order quantity (EOQ) model? A. insurance. Examples are soap and newspapers. and interest on invested capital. Answer (B) is incorrect because specialty goods are usually sold through selective or exclusive distribution. The cost of the inventory itself and any quantity discounts lost on inventory purchases are not components of the EOQ model. Inventory obsolescence. ordering (or setup) costs. Copyright 2006 Gleim Publications. D. Increase the reorder point. Shopping goods.g. Answer (C) is incorrect because public warehouse rental charges is considered in the basic EOQ model. life insurance. ordering cost is a numerator value. D. in the EOQ model. A decrease in inventory ordering costs should decrease the economic order quantity. Answer (A) is incorrect because interest on invested capital is considered in the basic EOQ model. are often marketed through personal selling. Answer (A) is correct. Producers of convenience goods ordinarily use intensive distribution to sell their products through a large number of retail or wholesale units. The basic EOQ model minimizes the sum of ordering (or setup) and carrying costs. Answer (D) is correct.Source: Publisher Intensive distribution is most likely to be used for A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [244] Gleim #: 2. Convenience goods. C. B. Answer (C) is incorrect because the EOQ does not increase when inventory order costs decrease. and carrying costs. Quantity discounts lost on inventory purchases. C..84 -.83 -. Answer (C) is correct. Answer (B) is incorrect because inventory obsolescence is considered in the basic EOQ model. Answer (A) is incorrect because shopping goods are usually sold through selective distribution. Answer (D) is incorrect because unsought goods. Printed for Pol Mirafuentes Page 112 . D. The effect is that more orders can be made (of smaller quantities) without increasing costs.Source: CMA 691 4-4 A decrease in inventory order costs will A. Increase the economic order quantity. Unsought goods. Answer (D) is incorrect because the holding cost percentage will always be identical to the ordering cost percentage in accordance with the fundamental calculus underlying the EOQ model. not the EOQ model. Specialty goods. Accordingly. C. e.

Answer (D) is incorrect because an MRP system recognizes that the demand for one inventory item creates a dependent demand for the components of that item.Source: CMA 688 5-22 When a specified level of safety stock is carried for an item in inventory.Source: CMA 1286 5-11 The inventory model that follows the concept that 80% of the value of an inventory is in 20% of the inventory items is the A. An economic order quantity (EOQ) system. Decreases by the amount of the safety stock.87 -. The ABC method of inventory control requires management to exert greatest control over the A classification items. D.86 -. under MRP. C. It assumes that estimated demand for materials is reasonably accurate and that suppliers can deliver based upon this accurate schedule. Economic order quantity (EOQ) model. Answer (A) is correct.85 -. ABC system. and lead times for each type of material to obtain materials just as they are needed for planned production. C. production delays are almost unavoidable if the materials are not on hand. Answer (B) is incorrect because the EOQ model is intended to minimize the sum of holding and ordering costs. Increases by one-half the amount of the safety stock. [248] Gleim #: 2. which says. Copyright 2006 Gleim Publications. that 20% of the customers account for 80% of the profit. Answer (B) is correct.Source: CMA 1286 5-10 In production management. Materials requirements planning (MRP) system. D. A materials requirements planning (MRP) system. B. A critical path method (CPM) system. for instance. B. Just-in-time inventory system. Answer (A) is incorrect because a CPM system is a project management and scheduling technique that determines the longest time path from the first to the last event for a project. Increases by the amount of the safety stock. An MRP system uses a parts list. product breakdown into component parts and lead times for procuring these parts is necessary for A. Printed for Pol Mirafuentes Page 113 . C. Answer (C) is incorrect because a just-in-time system attempts to reduce holding costs by scheduling deliveries of materials as closely as possible to when they are needed in production. Answer (D) is incorrect because the main purpose of the ABC system is to increase control over items accounting for the most profit. An ABC system. the average inventory level for that item A. This method is analogous to the 80/20 rule. B. Inc. It is crucial that delivery delays be avoided because.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [247] Gleim #: 2. Answer (C) is incorrect because the EOQ model does not adjust for the dependent demand for the components of an inventory item. [249] Gleim #: 2. which usually include a relatively small percentage of total items but a high percentage of the dollar volume. D. often called a bill of materials. Is one-half the level of the safety stock. Materials requirements planning (MRP) is usually considered a computer-based information system designed to plan and control raw materials used in a production setting.

Answer (A) is incorrect because the introduction of a distributor will affect the number of contacts in the marketing channel. and the distributor) in the channel will A. and subassemblies whose demand depends on the level of production is A. Answer (C) is incorrect because the number of contacts decreased. The number of contacts without a distributor is 16 (four producers × four customers). Increase from 8 to 16. It is usually implemented in the form of a computerbased information system designed to plan and control raw materials used in production. each serving the same four customers. such as raw materials. the basic model predicts that the average inventory level will be 250. the effort required of producers and consumers is reduced by the distributor. It involves choosing among investment proposals using a ranking procedure. Answer (C) is incorrect because capital budgeting is the process of planning expenditures for long-lived assets. thereby increasing marketing efficiency. Decrease from 8 to 4.Source: CIA 597 IV-78 A distribution channel moves goods from producers to customers. The modified EOQ model assumes that safety stock will never be used. the number of contacts (among producers.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the average inventory level increases by the amount of the safety stock. Copyright 2006 Gleim Publications. Printed for Pol Mirafuentes Page 114 . The number with a distributor is 8 (four producers + four customers).88 -. Answer (B) is incorrect because regression analysis is used to fit a linear trend line to a dependent variable based on one or more independent variables. if a safety stock of 100 is carried by the company in the example. C. The company will have 500 units immediately after a purchase and zero immediately before the receipt of the next purchase (replenishment is assumed to be instantaneous). the average level of inventory will be one-half of the economic order quantity. Suppose a channel has four producers. Materials requirements planning. Answer (A) is correct. if the EOQ is 500. It assumes that forecasted demand is reasonably accurate and that suppliers can deliver based upon this accurate schedule. the average inventory level will increase to 350. Answer (D) is correct.Source: CIA R98 III-32 An appropriate technique for planning and controlling manufacturing inventories. Decrease from 16 to 8. Answer (D) is correct. Thus. Regression analysis. Answer (D) is incorrect because linear programming is a decision model concerned with allocating scarce resources to maximize profit or minimize costs. Linear programming. B. D. If there is no safety stock. If a distributor is introduced. Be unaffected. Answer (B) is incorrect because the average inventory level increases by the amount of the safety stock. Inc. Materials requirements planning (MRP) is a system that translates a production schedule into requirements for each component needed to meet the schedule. For example. and no middlemen. MRP is a centralized push-through system. Capital budgeting. B. [251] Gleim #: 2. Answer (C) is incorrect because the average inventory level increases by the amount of the safety stock. components. output based on forecasted demand is pushed through to the next department or to inventory. However. Thus. C. D. Inventory will be 600 units immediately upon receipt of a purchase and 100 units immediately before the receipt of the next purchase. customers. [250] Gleim #: 2.89 -. Answer (B) is incorrect because the number of contacts declined from 16 to 8. safety stock increases the average inventory level by the amount of the safety stock.

Copyright 2006 Gleim Publications. [254] Gleim #: 2. Answer (C) is incorrect because it refers to freight-absorption pricing.90 -.91 -. C. B. Answer (B) is correct. Answer (A) is incorrect because cash discounts encourage prompt payment. Sets differential freight charges for customers on the basis of their location. Price skimming is used when a new product is introduced at the highest price possible given the benefits of the product. the costs of producing a small volume cannot be so high that they eliminate the advantage of charging more. Inc.Source: CIA 1195 IV-75 Which of the following price adjustment strategies is designed to smooth production for the selling firm? A. B. inclusive of shipping. Setting different freight charges for customers in different zones. A seller that uses uniform delivered pricing charges the same price. Using markups tied closely to the price paid for a product. Answer (D) is correct. Answer (D) is incorrect because it relates to pricing by intermediaries. D. For example. to all customers regardless of location. Functional discounts.Source: Publisher A seller that does which of the following is engaged in uniform delivered pricing? A. storing. such as selling. a ski manufacturer offers seasonal discounts to retailers in the spring and summer to encourage early ordering. D. C. Cash discounts. the product must appear to be worth its price. Answer (C) is incorrect because it refers to zone pricing. Seasonal discounts are designed to smooth production by the selling firm. Absorbs all of the actual freight charges. Answer (B) is correct. and competitors cannot enter the market and undercut the price. For market skimming to work. Answer (D) is incorrect because it refers to zone pricing.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [252] Gleim #: 2.Source: CIA 1194 IV-79 Price skimming involves A. C. Charges each customer its actual freight costs.92 -. [253] Gleim #: 2. inclusive of shipping. Answer (A) is incorrect because it refers to FOB-origin pricing. Quantity discounts. Answer (C) is incorrect because functional or trade discounts are provided to channel members in return for the performance of certain functions. Charges the same price. Setting a low introductory price. Printed for Pol Mirafuentes Page 115 . Setting a high introductory price. B. and record keeping. Seasonal discounts. Answer (B) is incorrect because quantity discounts encourage large volume purchases. to all customers regardless of their location. Answer (A) is incorrect because it refers to penetration pricing. D.

D. Collusive pricing. Printed for Pol Mirafuentes Page 116 . Answer (C) is incorrect because it refers to the practice of redesigning products to improve quality without raising prices. Answer (B) is incorrect because it refers to the practice of accepting prices at any amount in excess of storing and delivering the by-products. Basing-point pricing. This pricing method is A.Source: Publisher Selling below cost in other countries is called A. Cost-plus pricing. C. Answer (C) is incorrect because FOB-origin pricing charges each customer its actual freight costs.95 -. C. [256] Gleim #: 2. Price discrimination. Predatory pricing. Product-bundle pricing entails selling combinations of products at a price lower than the combined prices of the individual items. Dumping. Value pricing. Copyright 2006 Gleim Publications. B.Source: Publisher Jabberwock Corporation’s corporate headquarters is in Carroll City.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [255] Gleim #: 2. produces and sells two products. Manx has begun setting a price of $13 for one of each. Collusive pricing.94 -. Jabberwock also has six distribution centers. D. [257] Gleim #: 2.93 -. Product A costs $10 per unit and Product B costs $5 per unit. D. Jabberwock sets freight costs based on the distance of the destination city from Carroll City. one in Carroll City and the others located throughout North America.Source: Publisher Manx Co. or offering the same quality at lower prices. Answer (A) is correct. In order to increase sales of B. B. regardless of the actual point of origin of the shipment. Basing-point pricing charges each customer the freight costs incurred from a specified city to the destination. C. Product-bundle pricing. The As are selling very well. Answer (A) is correct. FOB-origin pricing. Answer (D) is incorrect because collusive pricing occurs when companies conspire to restrict output and set artificially high prices. Zone pricing. Answer (B) is incorrect because zone pricing sets differential freight charges for customers on the basis of their location. but sales of B are low. What is this pricing method? A. This strategy promotes sales of items consumers might not otherwise buy. Answer (D) is incorrect because cost-plus pricing is not a geographical pricing method. B. Inc. By-product pricing.

Pricing objectives include profit maximization. Answer (D) is incorrect because collusive pricing occurs when companies conspire to restrict output and set artificially high prices. is an inappropriate pricing tactic that may trigger retaliatory tariffs and other sanctions. Profit maximization. which assumes that all firms select the price that results in the highest profit target margin maximization. 3. [258] Gleim #: 2. [259] Gleim #: 2. D. Answer (B) is incorrect because it is a pricing objective.Source: Publisher Monolith Company. If Monolith wishes to achieve a unit target operating income of 10%. $100 $125 $225 $250 Copyright 2006 Gleim Publications.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because it is pricing products below cost. Answer (D) is correct. 4. C. which refers to setting prices to maintain a stable relationship between the firm’s prices and the industry leader’s prices Price setting is not a factor in maximizing production.000 $5.000 Monolith plans to increase sales of computers to 15.96 -. Inc. which refers to setting prices to meet target sales volumes or market shares image oriented objectives. 1.000. Image oriented objectives. Production maximization. Answer (B) is incorrect because price discrimination is charging different prices to different customers. D. C. B.000 in the next year by reducing the unit price to $1.500. uses a target pricing and costing approach.250. by what amount must it reduce the full cost per unit? A. B. 2. The following is Monolith’s costs and revenues for the year just ended: Number of computers sold Sales price per computer Cost of goods sold Operating costs excluding production 10. stabilization objectives. which refers to setting prices to enhance the consumer’s perception of the firm’s merchandise mix 5. Answer (C) is correct. Answer (A) is incorrect because it is a pricing objective. which refers to selling below cost in other countries.Source: Publisher All of the following are objectives of pricing except A.500 $8. Answer (C) is incorrect because it is a pricing objective. Stabilization.000 $1.97 -. which produces Hal computers. Dumping. which is stated as a percentage ratio of profits to sales volume-oriented objectives. Printed for Pol Mirafuentes Page 117 . It may be done both domestically and in other countries.

Source: CMA 1296 4-6 Several surveys point out that most managers use full product costs. in developing cost-based pricing. In the long term. so the necessary reduction in full cost per unit is $225 ($1.350 [($8. [262] Gleim #: 2. For example. under target pricing. Answer (C) is correct. Unit target operating income is $125 (10% × $1. Answer (A) is incorrect because full-cost pricing promotes price stability. Answer (B) is incorrect because full-cost pricing provides evidence that the company is not violating antitrust laws against predatory pricing. Answer (A) is incorrect because adding a standard markup to the cost of the product is cost-plus pricing.000 cost of goods sold + $5. Fixed-cost recovery. If cost-cutting measures do not permit the product to be made at or below the target cost. It limits the ability to cut prices. Basing prices on the product’s perceived value. B. Which one of the following is least associated with cost-based pricing? A. Answer (D) is incorrect because it is the change in unit price. [260] Gleim #: 2.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because it equals the current full cost per unit minus the new unit target price. A target price is the expected market price of a product.350 – $1. the sales price is known before the product is developed. Printed for Pol Mirafuentes Page 118 .250 – $125).125). including unit fixed costs and unit variable costs. Answer (B) is incorrect because it is the unit target operating income. a cup of coffee may have a higher price at an expensive restaurant than at a fast food outlet. [261] Gleim #: 2.000 units sold]. given the company’s knowledge of its customers and competitors.Source: Publisher Value engineering is Copyright 2006 Gleim Publications.000.125 ($1. Target pricing. Answer (B) is incorrect because determining the price at which the product will earn a target profit is target-profit pricing. Answer (D) is incorrect because basing prices on competitors’ prices is going-rate pricing. the unit target full cost is $1.250 target price). Market-based pricing involves basing prices on the product’s perceived value rather than on the seller’s cost. B. Adding a standard markup to the cost of the product. the product will be abandoned. C.99 -. Price stability. C. Nonprice variables in the marketing mix augment the perceived value. Hence. all costs are relevant. Inc.Source: CIA 1194 IV-78 Market-based pricing involves A. Basing prices on competitors’ prices. Answer (C) is correct. D. D. Determining the price at which the product will earn a target profit. Subtracting the unit target profit margin determines the long-term unit target cost.98 -.000 operating costs excluding production) ÷ 10.100 -. The current full cost per unit is $1.500. Thus. Answer (D) is incorrect because full-cost pricing has the advantage of recovering the full long-term costs of the product. Answer (C) is correct. Price justification.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C. design of products. Answer (B) is incorrect because it refers to cost-plus pricing. design of processes. D. production. Such prices allow the seller to reduce the costs and therefore the prices of the main products. Answer (C) is incorrect because product-bundle pricing entails selling combinations of products at a price lower than the combined prices of individual items. These egg whites are sold at any price that is greater than the cost of storing and delivering them. The U. Answer (A) is correct. Answer (B) is incorrect because it refers to price discrimination. C. It is a systematic approach to assessing all aspects of the value chain cost buildup for a product: R&D. [264] Gleim #: 2.Source: Publisher Sunshine Co. Answer (D) is incorrect because it refers to dumping. D. Answer (C) is incorrect because value added engineering is not directly related to marketing mix strategies. Answer (A) is correct. An element of a marketing mix strategy. A method of determining prices based on a cost determination. [263] Gleim #: 2. D. Pricing products at different prices for different customers. Conspiring to restrict output and set artificially high prices. By-product pricing. Value pricing.101 -. Answer (B) is incorrect because captive-product pricing involves products that must be used with a main product. B. including egg yolks. which are made with many fine ingredients. distribution. Captive-product pricing. Pricing products below cost to destroy competitors. Value engineering is a means of reaching targeted cost levels. Answer (D) is correct.102 -. A systematic approach to assessing all aspects of cost buildup for a product. The purpose is to minimize costs without sacrificing customer satisfaction. Answer (C) is incorrect because it refers to collusive pricing. Copyright 2006 Gleim Publications. Printed for Pol Mirafuentes Page 119 . Product-bundle pricing. Sunshine also sells the egg whites that are left over from its production process. Inc. Its most popular product is its key lime pies.Source: Publisher Which of the following is a definition of predatory pricing? A. Supreme Court has held that a price is predatory if it is below an appropriate measure of costs and the seller has a reasonable prospect of recovering its losses in the future through higher prices or greater market share.S. B. is a producer of citrus flavored dessert products. Selling below cost in other countries. The pricing of the egg whites is A. Answer (A) is incorrect because it refers to Kaizen. A policy of seeking continuous improvement in all phases of company activities. Answer (D) is incorrect because value pricing entails redesigning products to improve quality without raising prices or offering the same quality at lower prices. B. and customer service. marketing. By-product pricing usually sets prices at any amount in excess of storing and delivering byproducts. Predatory pricing is the practice of pricing products below cost to destroy competitors. C.

000 $10 $515. the price of a product or service tends to be higher given a peak-load pricing approach. Answer (C) is incorrect because it involves basing prices on the product’s perceived value. B. A cost-plus price equals the cost plus a markup. Printed for Pol Mirafuentes Page 120 . Cost-based pricing begins with a cost determination followed by setting a price that will recover the value chain costs and provide the desired return on investment. Collusive pricing.Source: Publisher Prices vary directly with capacity usage under A.Source: Publisher A company uses a target pricing and costing approach. The following is its costs and revenues for the current year: Units sold Sales price per unit Cost of goods sold Operating costs excluding production 100.Source: Publisher Which of the following is a false statement about cost-based pricing? A.103 -. A cost-plus price equals the cost plus a markup. C. when demand falls. A cost-based price should cover costs and provide the desired return on investment. Cost-based pricing. C. Under peak-load pricing. B. prices vary directly with capacity usage. when idle capacity is available. D.000 in the next year by reducing the unit price to $8.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [265] Gleim #: 2.104 -. Most companies use either absorption manufacturing cost or total cost when calculating the price. Variable costs may not be used as the basis for costs. Market-based pricing. Variable costs may be used as the basis for cost. but then fixed costs must be covered by the markup. Peak-load pricing. Answer (D) is incorrect because it involves making a cost determination and setting a price that will recover costs and provide a return on investment. by what amount must it reduce the full cost per unit? Copyright 2006 Gleim Publications.000 The company intends to increase unit sales to 120. Cost may be defined in many ways. Answer (A) is incorrect because it refers to the illegal practice of conspiring to restrict output and set artificially high prices. Answer (B) is correct.105 -. Thus. Inc. Answer (C) is correct. [267] Gleim #: 2.000 $335. [266] Gleim #: 2. If the company is to achieve a unit target operating income of 15%. Answer (B) is incorrect because it is a true statement about cost-based pricing. A commonly used cost-plus pricing formula is to add a markup percentage to the total cost. Answer (A) is incorrect because it is a true statement about cost-based pricing. that is. D. Answer (D) is incorrect because it is a true statement about cost-based pricing.

each customer pays its actual freight costs. This price is the company’s average actual freight cost.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.Source: CIA 595 IV-74 Which of the following pricing policies involves the selling company setting freight charges to customers at the actual average freight cost? A. Printed for Pol Mirafuentes Page 121 .70 Answer (A) is incorrect because it equals the current full cost per unit minus the new unit target price. The current full cost per unit is $8. D. This policy is easy to administer.20 (15% × $8 target price). Customers are not charged actual average freight costs. D. Answer (C) is incorrect because it is the change in unit price. FOB-origin pricing. to all customers regardless of their location.80).000 operating costs excluding production) ÷ 100. the company charges the same price. Predatory pricing. It involves two or more competitors conspiring to restrict output and charge artificially high prices. In uniform delivered pricing. Thus.Source: Publisher A situation in which companies conspire to restrict output and set artificially high prices is known as: A.107 -. Zone pricing. Answer (B) is incorrect because predatory pricing occurs when a company sells products below cost to destroy competitors. Unit target operating income is $1. Market-based pricing. C. differential freight charges are set for customers on the basis of their location. Copyright 2006 Gleim Publications. the unit target full cost is $6. $0.000 cost of goods sold + $335. B. [268] Gleim #: 2.80 ($8 – $1.50 $1. D. [269] Gleim #: 2. Uniform delivered pricing. in FOB-origin pricing. B. B. Answer (C) is incorrect because price discrimination occurs when different prices are charged to different customers. in freight absorption pricing.20 $1. Answer (D) is incorrect because.50 $1. Inc. Answer (B) is correct. both nearby and distant customers are charged the same amount. Answer (A) is incorrect because. so the necessary reduction in full cost per unit is $1.50 – $6.70 ($8. Answer (C) is incorrect because. Answer (D) is correct.00 units sold]. and facilitates marketing to faraway customers. Thus.20).50 [$515. Customers are not charged actual delivery costs. Answer (B) is incorrect because it is the unit target operating income. the selling company absorbs all or part of the actual freight charges. Price discrimination. Collusive pricing. Collusive pricing is illegal. C. Answer (A) is correct. permits the company to advertise one price nationwide. inclusive of shipping costs.106 -. Freight absorption pricing. C. Answer (D) is incorrect because market-based pricing bases prices on a product’s perceived value rather than on cost. in zone pricing.

[271] Gleim #: 2. FOB-origin pricing. The opposite approach is to use penetration pricing. B. Answer (D) is incorrect because FOB-origin pricing charges each customer its actual freight costs. Zone pricing. Pricing by intermediaries. Captive-product pricing.109 -. Predatory pricing. Printed for Pol Mirafuentes Page 122 .Source: Publisher A pricing strategy that sells combinations of products at a price lower than the combined prices of the individual items is A. Answer (B) is incorrect because this means charging the going rate in the market. which involves setting a relatively low price to gain deep market penetration quickly. Basing-point pricing. Market-based pricing. rather than simply being set at a high price. Answer (A) is incorrect because the price is based on buyer perceptions in market-based pricing. Penetration pricing. B. C. Product-bundle pricing is a strategy to promote items consumers might not otherwise buy by selling combinations of products at a price lower than the prices of the individual items combined. Answer (D) is incorrect because captive-product pricing involves charging a low price for a main product (such as a razor). Answer (C) is correct. D. Price skimming is the practice of setting an introductory price relatively high to attract buyers who are not concerned about price and to recover research and development costs rather quickly. What is this pricing method commonly called? A. Inc. Answer (A) is incorrect because it is not discriminatory to charge everyone the same from the same point. Answer (C) is incorrect because penetration pricing sets a relatively low price to gain deep market penetration quickly.108 -. Answer (C) is correct. D. Answer (B) is correct. Copyright 2006 Gleim Publications.Source: Publisher Washboard Inc. C. charges customers the shipping costs incurred from Detroit to the destination regardless of the shipping point of origin. Basing-point pricing charges each customer the freight costs incurred from a specified city to the destination regardless of the actual point of origin of the shipment. Once a person has a razor.110 -. he has to buy blades. Answer (A) is incorrect because predatory prices are prices set below cost to destroy competitors. Answer (D) is incorrect because pricing by intermediaries does not describe the setting of a high introductory price. while razor blades are sold at a high markup. C. Price skimming. Answer (B) is incorrect because zone pricing differs by region of the country to which a shipment is made. Product-bundle pricing. Going-rate pricing. B. [272] Gleim #: 2.Source: Publisher Setting the introductory price of a new product relatively high is A. Discriminatory pricing.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [270] Gleim #: 2. D.

C. market is below an appropriate measure of costs and the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share.” Answer (D) is incorrect because the Japanese concept of continuous improvement is known as “Kaizen. the seller has engaged in Copyright 2006 Gleim Publications.Source: CIA 1195 IV-76 In which product-mix pricing strategy is it appropriate for the seller to accept any price that exceeds the storage and delivery costs for the product? A. A. Answer (A) is correct. so the seller must receive a price above their storage and delivery costs. manufacturer’s price in the U. III. Value engineering requires distinguishing between cost incurrence and locked-in costs.S. Answer (B) is incorrect because optional products are offered for sale along with the main product.113 -. The combined price of the bundle must be low enough to encourage consumers to buy the bundle but must recover production costs and provide some profit for the seller. Answer (A) is incorrect because the Japanese concept of continuous improvement is known as “Kaizen. D. Items I. Sellers often make their profits on the captive products rather than on the main product. D.S. II.” Answer (B) is correct. Value engineering is a means of reaching targeted cost levels. Value engineering is a means of reaching targeted cost levels. Optional-product pricing. which is sold at a low price. Value engineering is the Japanese concept that emphasizes continuous improvement in all phases of company activities through numerous minor changes. Any amount received above the storage and delivery costs for a by-product allows the seller to reduce the main product’s price to make it more competitive. with emphasis on controlling costs at the design stage. C. so the price must exceed storage and delivery costs. They are unlikely to have a zero production cost. The captive products therefore will be priced well above the storage and delivery costs. B. Value engineering requires distinguishing between cost incurrence and locked-in costs. such as season tickets for a theater.” [274] Gleim #: 2. It is not Japanese. Items I and III only. II. Captive-product pricing. [275] Gleim #: 2. Answer (C) is incorrect because the Japanese concept of continuous improvement is known as “Kaizen. Printed for Pol Mirafuentes Page 123 . Product-bundle pricing. A by-product is a product of relatively minor importance generated during the production of one or more other products. B.111 -.112 -. with an emphasis on controlling costs at the design stage.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [273] Gleim #: 2.Source: Publisher If a U.Source: Publisher Which of the following statements is true with respect to value engineering? I. Inc. such as film for use with a camera. Answer (C) is incorrect because captive products must be used along with the main product. Products are bundled to promote the sale of certain items that consumers might not otherwise purchase. Items II and III only. Answer (D) is incorrect because product bundles are combinations of products sold together at a reduced price. Its production entails no additional costs. and III. By-product pricing. Items I and II only.

or to injure. Answer (C) is correct.000 by reducing the product’s unit price to $320. to tend to create a monopoly. Hence. Answer (B) is incorrect because dumping is defined under U.60 ($320 – $38.200.00 [($13.40 (12% × $320 unit target price). so the necessary reduction in the full cost per unit is $70.S. The U. Predatory pricing. [276] Gleim #: 2.000 Flesher plans to increase unit sales to 80.40 ($352.000 CGS + $7. Supreme Court has held that pricing is predatory when two conditions are met: (1) the seller’s price is below “an appropriate measure of its costs. Inc. Printed for Pol Mirafuentes Page 124 .40 $70. Dumping.60). Such sale is illegal if it threatens material injury to a U. $32.S.00 Answer (A) is incorrect because $32. Answer (C) is correct. Answer (B) is incorrect because because $38. market of a product below its market value in the country where it was produced. C.920. law as sale by a non-U.000 other value chain operating costs) &divide. or prevent competition.40 is the unit target operating income.S. Unit target operating income is $38. D.Source: Publisher Flesher Furniture Company applies a target pricing and costing approach. Copyright 2006 Gleim Publications.S. Federal statutes and many state laws prohibit the practice. the unit target full cost is $281.S. D. Answer (A) is incorrect because collusive pricing involves a conspiracy to set higher prices. 60.00 $38.200.000 $7. Collusive pricing. Predatory pricing is intentionally pricing below cost to eliminate competition and reduce supply.114 -. If Flesher desires a unit target operating income of 12%. C.920. company in the U.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Answer (D) is incorrect because price discrimination entails charging different prices to different customers for essentially the same product if the effect is to lessen competition substantially. The current full cost per unit is $352.000 units sold]. B.40 $80. by what amount must it reduce the full cost per unit? A.000 $400 $13. Price discrimination.00 – $281. destroy. Answer (D) is incorrect because $80.” and (2) it has a reasonable prospect of recovering the resulting loss through higher prices or greater market share.00 equals the change in the unit price. The following information about costs and revenues of Flesher’s product are available for the year just ended: Unit sales Unit selling price Cost of goods sold Value-chain operating costs excluding production 60. B.40).00 equals the current full cost per unit minus the new unit target price. industry.

[279] Gleim #: 2. or age. Printed for Pol Mirafuentes Page 125 . B. Criminal record (but only for security clearance purposes). A manager’s judgment of one positive trait affects his/her rating of other traits. D. Trade discounts. such as selling. [278] Gleim #: 2. C.116 -. number of children. Answer (D) is correct. Credit customers who pay their balances in full within 30 days receive a 5% discount. B. improve cash flows.Source: Publisher Labrador Hardware Co. Quantity discounts encourage large volume purchases. Cash discounts. and avoid bad debts. has implemented the following discount policies: Customers may trade in older models of tools when buying the latest models. Answer (B) is incorrect because number of children may not be asked in a recruiting interview. Copyright 2006 Gleim Publications. C. Customers purchasing with cash receive a 10% discount.115 -. Inc.117 -. Allowances such as trade-ins reduce list prices. D.Source: Publisher The halo effect may diminish the accuracy of the evaluation of employees. Labrador uses all of the following discount methods except A. Age. criminal record (except for the purpose of giving a security clearance). C. In a recruiting interview. Allowances. Trade (functional) discounts are offered to other members of the marketing channel for performing certain services. one may not ask about the applicant’s marital status. Answer (B) is incorrect because it is a discount offered by Labrador. A manager rates some employees as very good and some as very poor. Which of the following is an example? A. All personnel who work together are rated within the same narrow range. Number of children. kind of military discharge. Cash discounts encourage prompt payment. Answer (C) is incorrect because it is a discount offered by Labrador. Customers who purchase supplies such as nails in bulk receive discounted prices.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [277] Gleim #: 2. Seasonal discounts are offered for sales out of season. Answer (A) is incorrect because age may not be asked in a recruiting interview. The most recent behavior overshadows overall performance. Answer (A) is incorrect because it is a discount offered by Labrador. Answer (D) is correct. Kind of military discharge. Quantity discounts. height and weight. B. They help smooth production. D. Answer (C) is incorrect because the kind of military discharge cannot be asked in a recruiting interview.Source: Publisher Questions about which of the following can legally be asked in recruiting interviews? A.

significant. Answer (C) is incorrect because the evaluation system should be unbiased. Vendors use the same identification methods. The movement of all parts is controlled. Linear programming. Regression analysis. D. Unbiased.118 -. and practical. Significant. [280] Gleim #: 2. The evaluation system should be as objective. easy to use. Answer (C) is incorrect because the recency effect is when the most recent behavior overshadows overall performance. and efficient as possible. and subassemblies. Inc. components. Printed for Pol Mirafuentes Page 126 .Source: IIA.Source: IIA. The halo effect diminishes the accuracy of an evaluation when a manager’s judgment on one positive trait affects the rating of other traits. B. but it is not necessary that it be highly structured.Source: Publisher Which of the following is not a characteristic of an effective evaluation system? A. C. adapted An advantage of using bar codes rather than other means of identification of parts used by a manufacturer is that A. Copyright 2006 Gleim Publications. such as raw materials. The system should be relevant. Answer (B) is correct. C. B. Relevant. Answer (B) is correct. clearly understood. Answer (D) is incorrect because the central tendency effect is when all personnel who work together are rated within the same narrow range. The movement of parts is easily and quickly recorded.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because this is not an example of the halo effect. Answer (D) is correct. Answer (C) is incorrect because each vendor has its own part-numbering scheme. B. Answer (A) is incorrect because the movement of parts can escape being recorded with any identification method. A reason to use bar codes rather than other means of identification is to record the movement of parts with minimal labor costs. Answer (D) is incorrect because each vendor has its own identification method. Capital budgeting. Highly structured. which is unlikely to correspond to the buyer’s scheme. D.119 -. Answer (B) is incorrect because the evaluation system should be significant. Answer (A) is incorrect because the evaluation system should be relevant. unbiased. [282] Gleim #: 2. adapted An appropriate technique for planning and controlling manufacturing inventories. [281] Gleim #: 2. Vendors can use the same part numbers. although vendors in the same industry often cooperate to minimize the number of bar-code systems that they use. D. Materials requirements planning.120 -. whose demand depends on the level of production is A. C.

Answer (B) is incorrect because the supplier may ask for a concession in its selling price. Answer (D) is correct. Critical path method analysis.Source: IIA. However. both the costs per order and the holding costs are estimates. adapted If a just-in-time purchasing policy is successful in reducing the total inventory costs of a manufacturing company. resulting in a reduction in the carrying cost. which can be programmed into the computer.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. [284] Gleim #: 2. Answer (D) is incorrect because linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints. Materials requirements planning (MRP) is an integrated computer-based system designed to plan an control dependent-demand manufacturing inventories. Answer (D) is incorrect because decision analysis involves selecting the best option from alternatives. [283] Gleim #: 2. However. It assumes the forecasted demand for materials is typically dependent upon some other factor. the manufacturing company will be receiving fewer materials at any point in time. An increase in purchasing costs and a decrease in stockout costs. Answer (B) is incorrect because regression analysis is a statistical procedure for estimating the relation between variables. If those estimates are varied to determine how much the changes affect the optimal EOQ. Answer (B) is correct. the ordering costs are likely to decrease. the cost of quality would not necessarily be affected by the just-in-time purchasing system. An increase in purchasing costs and a decrease in quality costs. B. Forecasting model. [285] Gleim #: 2. An increase in stockout costs and a decrease in carrying costs. An increase in quality costs and a decrease in ordering costs. such an analysis would be called a A. which of the following combinations of cost changes would be most likely to occur? A. which would raise the manufacturer’s purchasing costs. In this situation.Source: IIA. Answer (A) is incorrect because the supplier may ask for a concession in its selling price. An economic order quantity (EOQ) sensitivity analysis involves varying the holding costs per unit and/or the order costs to determine how much the changes affect the optimal EOQ. the company will be receiving fewer materials at any point in time.Source: IIA. Answer (C) is incorrect because capital budgeting is used for analyzing and evaluating long-term capital investments. Sensitivity analysis. D. Inc. adapted In an economic order quantity (EOQ) model. B. increasing the likelihood of stockout and thereby resulting in an increase in stockout costs. D. Decision analysis. Printed for Pol Mirafuentes Page 127 . increasing the likelihood of stockout and thereby resulting in an increase in a reduction in the carrying cost. this is an example of which of the following product mix pricing strategies? Copyright 2006 Gleim Publications. C.121 -. However.123 -. Answer (A) is incorrect because forecasting models involve projecting data over time or developing regression models when time series data are not available. At the same time. Answer (C) is incorrect because with fewer purchase orders being processed by the manufacturer. which would raise the manufacturer’s purchasing costs.122 -. adapted When film is sold for use with a camera. C. Answer (C) is incorrect because critical path method involves project scheduling. the average inventory will be less. the cost of quality would not necessarily be affected by the just-in-time purchasing system.

or marketing mix lines. Inc. Answer (D) is incorrect because product bundles are combinations of products sold together at a reduced price. The captive products will therefore be priced well above the storage and delivery costs. B. C. Market follower strategy. Answer (B) is incorrect because optional products are those offered for sale along with the main product.124 -. product. Answer (A) is incorrect because there are no additional costs incurred other than storage and delivery for the development of this product. adapted Which of the following hiring procedures provides the most control over the accuracy of information submitted on an employment application? A. Specializing in serving customers overlooked or ignored by major competitors is a market niche strategy. Product bundle pricing. rather than on the main product that is sold at a low price. Copyright 2006 Gleim Publications. the manufacturer will make a profit on any price over the cost of storage and delivery.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. pricing. Market challenger strategy. D. This strategy specializes along market. Captive product pricing. D. such as season tickets for a theater. Answer (C) is incorrect because market follower strategies are used by runner-up companies that follow competitor’s product offers. Market leader strategy. adapted A competitive marketing strategy in which a firm specializes in serving customers overlooked or ignored by major competitors is called a A. Optional product pricing. Products are bundled in order to promote the sale of certain items that consumers might not otherwise purchase. Sellers often make their money on the captive products. Printed for Pol Mirafuentes Page 128 . Letters of recommendation which attest to the applicant’s character must be mailed directly to the hiring organization rather than being submitted by the applicant. B. The price must exceed storage and delivery costs. C. D. They are unlikely to have zero production cost so the seller must receive a price above the storage and delivery costs for such products. Answer (C) is correct.Source: IIA. Market niche strategy. Answer (D) is correct. customer. Therefore.Source: IIA. The combined price of the bundle must be low enough to encourage consumers to buy the bundle. [286] Gleim #: 2. By-product pricing. but must recover production costs and provide some profit for the seller. Answer (B) is incorrect because market challenger strategies are followed by runner-up companies that aggressively attack competitors to get more market share. B. and market programs. [287] Gleim #: 2. Applicants are required to submit unofficial copies of their transcripts along with the application as verification of their educational credentials. C. Captive products are those that must be used along with the main product. The hiring organization calls the last place of employment for each finalist to verify the employment length and position held. Applicants are required to sign that the information on the applicant is true and correct as a confirmation of the truth of the information in the application.125 -. Answer (A) is incorrect because market leader strategies are employed by the major competitors that dominate a market.

This practice relies on a supplier who is willing to take the responsibility for storing the needed inventory and shipping it to arrive on time. Calling the last place of employment for candidates to verify information represents an independent verification of employment since the hiring organization is performing the verification process. Suppliers are more willing to provide this type of service when they have many competitors. The annual cost of carrying inventory equals the average inventory level times the cost per unit of inventory times the cost of capital. C. In addition. Answer (B) is incorrect because total ordering costs will increase.12]. Reduce total carrying costs. Answer (B) is correct. This is not an independent verification. If a seller has good enough control of demand schedules to know exactly when goods are needed. putting fraudulent return address information on the letters. [288] Gleim #: 2. Answer (C) is incorrect because 300 is obtained by using the order size rather than the average inventory level. D. Answer (B) is incorrect because 180 is obtained by using the total annual quantity rather than the average inventory level and by not multiplying by the unit price.Source: CIA 596 I-4 A perpetual inventory system uses a minimum quantity on hand to initiate purchase ordering procedures for restocking.126 -. Thus. Answer (C) is incorrect because there is nothing to prevent the applicants from writing the letters themselves. Answer (D) is incorrect because if an applicant is going to lie about information.Source: CIA 590 IV-51 With regard to inventory management. No safety stocks are held. If the entity has a cost of capital of 12%. Have no impact on total ordering costs. the transcript is unofficial. Answer (D) is incorrect because 900 is based on the total annual quantity rather than the average inventory level. The average inventory level is the order quantity divided by 2. C. Inventory carrying costs can sometimes be transferred to suppliers. 150 180 300 900 Answer (A) is correct.500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of 5 per unit. In reviewing the appropriateness of the minimum quantity level established by the stores department.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the applicant is providing the transcript. B. Inc. making it very easy to change the information and send a photocopy of the altered transcript. [290] Gleim #: 2. B.127 -. the annual cost of carrying inventory is 150 [(500 ÷ 2) × 5 × . leading to a loss of independence. D.Source: CIA 594 IV-37 An entity sells 1. the internal auditor is least likely to consider Copyright 2006 Gleim Publications. and mailing them.128 -. there is no reason to believe that the applicant will not sign the applicant’s own name to the fraudulent information. an increase in the frequency of ordering will normally A. Have no impact on total carrying costs. Answer (D) is incorrect because total carrying costs are reduced. its annual cost of carrying inventory is A. Answer (A) is incorrect because total ordering costs will increase. orders can be placed so that goods arrive no earlier than when actually needed. Answer (C) is correct. Printed for Pol Mirafuentes Page 129 . [289] Gleim #: 2. Reduce the total ordering costs.

variable cost per purchase order. year 1 balance sheet date because of the A. Printed for Pol Mirafuentes Page 130 . Hence. Copyright 2006 Gleim Publications. Inc. with an invoice for 70. Optimal order sizes determined by the economic order quantities model. B. The attribute used to measure a long-term receivable or payable is the present or discounted value of its future cash flows. C. Answer (A) is incorrect because historical cost is used to measure property. Matching principle. The basic economic order quantity (EOQ) model is based on the following variables: demand. the cost should be deferred and matched with the revenues of the following period. The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. B. D.2 -. However. Current cost.000 should be reported as a deferred cost at the December 31. catalogs were printed for use in a special promotion in January year 2. Reliability principle. Cost principle. Thus. Answer (C) is incorrect because reliable information is free of error and bias and is representationally faithful. Answer (B) is incorrect because seasonal variations in demand directly affect the minimum quantity available.000 attached. Stockout costs. year 1. minimum stocking levels do not affect the EOQ.1 -. C. [291] Gleim #: 3. and variable unit carrying cost. they will not contribute to an inflow of economic benefits until the next period. Because the catalogs are still on hand at the balance sheet date. C. Answer (D) is correct.Source: CIA 597 IV-1 The measurement basis most often used to report a long-term payable representing a commitment to pay money at a determinable future date is A. Revenue recognition principle. Net realizable value. Seasonal variations in forecasting inventory demand. Answer (B) is incorrect because the revenue recognition principle determines the period in which revenue is recognized.Source: CIA 593 IV-25 In December year 1. Answer (C) is incorrect because short-term receivables and some inventories are reported at net realizable value. Answer (C) is correct. Answer (A) is incorrect because stockout costs are directly affected by the quantity on hand. B. The 70. Expenses should be associated with the revenues that they help to create. D. plant. Answer (A) is correct. including lost customers. Payment was made in January year 2. Historical cost. and equipment and most inventories. The catalogs were delivered by the printer on December 13. Answer (D) is incorrect because storage space and potential obsolescence directly affect stocking levels. it is usually combined with other measurement bases (attributes). Answer (D) is incorrect because the cost principle states that cost is the usual basis for recording most assets and liabilities. [292] Gleim #: 3. Matching is the simultaneous or combined recognition of revenues and expenses resulting directly and jointly from the same transactions or other events. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Available storage space and potential obsolescence. Answer (B) is incorrect because some inventories are measured at current (replacement) cost. Present value of future cash flows.

fraud is abnormal.g. a fully depreciated asset was sold in the current year at a material gain. Inc. D. As an adjustment to prior periods’ depreciation on the statement of changes in equity. Answer (D) is incorrect because the transaction is not the correction of an error in the financial statements of a prior period. reciprocal transactions (e. the loss would be recognized as a write-off of accounts receivable. Answer (A) is correct. Revenues occur in the course of ordinary activities. recording the item as a receivable. losses on inventory shrinkage are ordinary. B. For example. C. a sale of plant assets). is not consistent with the substance of the event. Realizable value. although some inventory shrinkage is expected in the normal course of processing. For example. In the other revenues and gains section of the current income statement.000 inventory theft but are not able to make restitution.Source: CIA 591 IV-44 The assets of a liquidating entity should be shown on the balance sheet at their A. the item should be recorded as a loss.Source: CIA 595 IV-29 Assume that employees confessed to a 500. How should this material fraud be shown in the company’s financial statements? A. Losses are typically displayed separately. Recorded directly to retained earnings because it is not an income-producing item.5 -. theft). and they are not treated as separate financial statement elements. Answer (D) is incorrect because losses are included in the determination of net profit or loss.4 -. Losses may or may not occur in the course of ordinary activities. the gain on the sale of a plant asset is not an operating item and should be classified in an income statement with separate operating and nonoperating sections in the other revenues and gains section. Answer (B) is incorrect because the asset sold was not stock in trade. or from holding assets or liabilities. Fair market value. D. C.. then writing it off. [295] Gleim #: 3. Their essential nature is the same. Because they cannot pay. [294] Gleim #: 3. Copyright 2006 Gleim Publications. Income includes revenue and gains. D. Initially classified as an accounts receivable because the employees are responsible for the goods. gains may occur from the sale of noncurrent assets. they may result from nonreciprocal transactions (e. Current cost. Included in cost of goods sold because the goods are not on hand.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [293] Gleim #: 3.3 -. Answer (A) is correct. and it would cause the least amount of attention. Classified as a loss and shown as a separate line item in the income statement. Undepreciated historical cost. Their essential nature is the same. Hence..g. In the extraordinary item section of the current income statement. This gain most likely should be reported A. B. Thus. Gains may or may not occur in the course of ordinary activities. B.Source: CIA 1192 IV-37 Because of inexact estimates of the service life and the residual value of a plant asset. Answer (B) is incorrect because no restitution will be made. Answer (C) is incorrect because. Expenses include losses. Printed for Pol Mirafuentes Page 131 . Answer (C) is incorrect because extraordinary items are not reported in the financial statements or notes. As part of sales revenue on the current income statement. C. and they are not treated as separate financial statement elements. Thus.

Printed for Pol Mirafuentes Page 132 . Answer (C) is correct. not financial reporting. assuming that those individuals have a reasonable understanding of business and economic activities. In connection with the purchase. D.Source: CIA 592 IV-29 An entity with total assets of 100. C. Materiality and going concern. Answer (B) is incorrect because assessing the adequacy of internal control is a function of internal auditing. donors.000 and net profit of 9. and uncertainty of future cash flows. D.7 -.000.6 -. which is the amount of cash currently obtainable by sale in an orderly disposal. B. Reliability and comparability. When liquidation appears imminent. timing. [297] Gleim #: 3. historical cost is inappropriate for balance sheet reporting. and the going concern assumption is no longer valid. and other users for decision making. B. Answer (D) is incorrect because providing information on compliance with established procedures is a function of internal auditing. Answer (B) is incorrect because an entity facing liquidation is expected to dispose of its assets in a “forced” or “distressed” sale and is unlikely to realize the fair value amount. (2) is helpful to current and potential investors and creditors and other users in assessing the amount. Answer (C) is incorrect because evaluating management results compared with standards is a function of internal auditing.000 purchases staplers with an estimated life of 10 years for 1. Answer (A) is correct. C. not financial reporting. Inc. creditors. Answer (D) is incorrect because current cost is only appropriate when the going concern assumption is applicable and the effects of changing prices are to be measured and reported in the financial statements. Providing information useful to investors.000. Providing information on compliance with established procedures. Evaluating management results compared with standards. not financial reporting.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a going concern should report assets at their undepreciated historical cost. The net realizable value of the assets is the appropriate amount for reporting purposes. Materiality and the balance between cost and benefit. and (3) discloses economic resources. When liquidation is imminent. Assessing the adequacy of internal control. Copyright 2006 Gleim Publications. They are to provide information that (1) is useful to those making investment and credit decisions. the most appropriate valuation method for assets is realizable value. the company debits miscellaneous expense. and the changes therein. The objectives of financial reporting are concerned with the underlying goals and purposes of accounting. This scenario is most closely associated with which of the following concepts or principles? A.Source: CIA 1190 IV-27 An objective of financial reporting is A. claims to those resources. [296] Gleim #: 3. Relevance and neutrality.000.

the expedient procedure of expensing the 1. Losses are extraordinary charges to income. [299] Gleim #: 3. Employee is paid. C. the cost of producing the information about depreciation expense over 10 years for the staplers probably is higher than the benefits of the information for decision making. Product is sold.000. This direct relationship is exemplified by the sale of a product. D. which of the following best describes the relation between expenses and losses? A. Work is performed. wasting assets should be capitalized and depreciated. Financial statements must be comparable for the same entity over time and also among different entities. The benefits should exceed the cost of information. Expenses are recognized if the costs are directly associated with the earning of particular income items. Thus.Source: CIA 1191 IV-29 To comply with the matching principle. Losses are material items. B. Answer (D) is correct. However. free from error and bias.000. reliable information must be neutral. This process is often called matching. whereas expenses are ordinary charges to income. Answer (C) is incorrect because direct labor cost is a product (inventoriable) cost that is normally not recognized until sale. [298] Gleim #: 3. C. Answer (C) is incorrect because comparability is a principal qualitative characteristic.Source: CIA 1192 IV-38 In recording transactions. the cost of labor services of an employee who participates in the manufacturing of a product normally should be charged to the income statement in the period in which the A.8 -. The balance between benefit and cost is a pervasive constraint. Answer (B) is incorrect because direct labor cost is a product (inventoriable) cost that is normally not recognized until sale. Losses are expenses that may or may not arise in the course of ordinary activities. the recognition of an expense (cost of sales) for the sacrifice of the product to a customer. Product is completed. Copyright 2006 Gleim Publications. whereas expenses are immaterial items. Matching is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. Thus. the effect on the financial statements of expensing rather than capitalizing and depreciating the staplers is clearly not material given that they cost 1. not a qualitative characteristic. The direct labor cost of manufacturing the product is absorbed by the finished goods inventory and is not recognized until sale. Printed for Pol Mirafuentes Page 133 . The choice of treatment is not likely to influence the decisions of financial statement users. B. Specifically. that is. This transaction results in revenue (sales revenue) for receipt of cash or a receivable.000 should be followed.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the going-concern principle relates to circumstances in which there is doubt as to the viability of the enterprise. Reliability provides assurance that the information is reasonably free from error and bias and represents what it purports to represent.000 and the enterprise has total assets of 100. Recognition of expenses occurs concurrently with recognition of increases in liabilities or decreases in assets. Information is relevant if it permits users to predict the outcome of future events or confirm or correct their prior expectations. Answer (B) is incorrect because relevance and reliability are two of the principal qualitative characteristics of information in financial statements. In principle. and a decrease in inventory. Answer (D) is correct.9 -. Inc. Answer (A) is incorrect because direct labor cost is a product (inventoriable) cost that is normally not recognized until sale. D. whereas losses can never be prevented. Expenses can always be prevented. Information is relevant if it permits users to predict the outcome of future events or confirm or correct their prior expectations.

11 -. losses may result from the sale of noncurrent assets or from natural disasters. The following information is also available: Beginning of Year Accounts receivable Unearned revenue $120.” Expenses include losses. C. Posting.000 deducts rather than adds the $60. Losses meet the definition of expenses but may or may not occur in the course of ordinary activities. reversing. Thus.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because not all losses are extraordinary items.Source: CIA 1195 IV-3 The correct order of the following steps of the accounting cycle is A. B. Posting. or at least not in the short run.000 $645.Source: CIA 597 IV-12 A service enterprise keeps its accounting records on a cash basis.10 -. [301] Gleim #: 3. Posting. closing. adjusting. and most expenses are material. Expenses are defined as “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity. reversing. closing.000 adds the $15. For example. Some losses can be prevented. Expenses include items arising in the course of ordinary activities.000 15.000 unearned revenue + $60. Answer (D) is incorrect because $675.000 increase in accounts receivable).000 $675.000 Answer (A) is incorrect because $525. They are not reported in the financial statements or notes. Printed for Pol Mirafuentes Page 134 . posting. Copyright 2006 Gleim Publications.000 ($600. Inc. D. Answer (B) is incorrect because losses may be immaterial. Answer (D) is incorrect because some expenses cannot be prevented. reversing.000 increase in unearned revenue. Answer (C) is correct. Answer (B) is incorrect because $555. [300] Gleim #: 3. During the recent year. Adjusting. C.000 $555. $525.000 What was the amount of service revenue for the year on an accrual basis? A. adjusting. other than those relating to distributions to equity participants. adjusting. closing.000 increase in receivables. the enterprise collected $600. Answer (C) is correct.000 cash collected – $15.000 deducts the increase in receivables and adds the increase in unearned revenue. reversing. The amount of service revenue for the year on an accrual basis equals $645.000 0 End of Year $180. D. B. losses are not treated as separate elements.000 from customers. closing.

12 -. This transaction has not been recorded.000 On October 1. Dividends of 30.600 180. Answer (C) is incorrect because dividends is closed directly to retained earnings.000 38. Answer (C) is incorrect because reversing entries are made after adjustments and closing entries.000 to renew its only insurance policy for a 3-year period beginning on that date.700 have been incurred but not paid as of December 31.000 30. so the entry is a debit to retained earnings and a credit to dividends. At December 31. the development of a trial balance. closing.000 60. it must be closed at the end of the period.000 12. Retained earnings Dividends B. and making reversing entries (optional).000 171. but has not yet been entered on the books.000 30.900. 20X4. the enterprise paid 18. Answer (B) is correct. Dividends Income summary 30. Answer (D) is incorrect because posting is done prior to adjusting.000. The balance in this account is closed directly to retained earnings. journalization. posting from the journals to the ledgers. 20X4. Answer (D) is incorrect because dividends is closed directly to retained earnings by a credit. The entry to close the dividends account would be A. adjustments to produce an adjusted trial balance. Outstanding checks amounted to 6. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because adjusting entries are made prior to closing.000 were declared and distributed during the year.000 30.000 14. statement presentation. Assuming an account entitled “dividends” or “dividends declared” is debited when dividends payable is credited on the declaration date.000 30. Part of its unadjusted trial balance at December 31 is as follows: Cash Prepaid insurance Property.000 Answer (A) is correct. Copyright 2006 Gleim Publications.000 80.400 3. and equipment Accumulated depreciation Accounts payable Share capital Retained earnings Rental revenue Salaries and wages expense Utilities expense 17. taking a postclosing trial balance (optional).000 32. Dividends Retained earnings C. Printed for Pol Mirafuentes Page 135 . [302] Gleim #: 3. Answer (B) is incorrect because the closing entry should credit dividends and debit retained earnings. The order of the steps in the accounting cycle is identification and measurement of transactions and other events required to be recognized. 20X4. plant.000 30. the balance per bank statement was 12.000 30. [Fact Pattern #17] An enterprise is in the equipment rental business.Source: CIA 596 IV-5 An entity has made all necessary adjusting entries and is now closing its accounts for the period.000 30. Salaries and wages of 1. Income summary Dividends D. Interest of 40 was credited to the enterprise’s account by the bank during December. The effect of declaring and paying dividends is to reduce retained earnings.

The insurance policy in effect at the beginning of the year expired and was renewed during the year.Source: CIA 597 IV-4 (Refers to Fact Pattern #17) What amounts should be reported for prepaid insurance and insurance expense in the annual financial statements prepared at December 31? Prepaid Insurance A.000 20. Answer (B) is correct. and total insurance expense is 5. Salaries & wages expense Income summary B.600 beginning balance in the prepaid insurance account should be expensed. Hence.100 (3. Salaries & wages payable Salaries & wages expense C.100 Insurance Expense 1.700 1. Answer (B) is incorrect because the entry shown is a reversing entry that could be made at the beginning of the subsequent period.500 5.700 1. not adjusting entries. the entire 3. The debit balance in prepaid insurance at year-end is therefore 16. B.14 -.600.700 1. D.500 (18. [304] Gleim #: 3. 16. Answer (C) is correct. The amount of the prepayment on the new policy to be expensed is 1.000 – 1.700 for unpaid salaries and wages is to debit an expense account and credit a liability account.500 16.13 -. [305] Gleim #: 3.700 1. Inc.700 1.700 1.600 1.500). Answer (D) is incorrect because prepaid insurance should be credited and insurance expense debited for 3.Source: CIA 597 IV-6 (Refers to Fact Pattern #17) The journal entry required to close the utilities expense account is Copyright 2006 Gleim Publications.15 -. Salaries & wages expense Salaries & wages payable D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [303] Gleim #: 3.500).000 ÷ 36-month duration of the policy)]. Answer (C) is incorrect because insurance expense should be recognized for the last 3 months of the year.Source: CIA 597 IV-5 (Refers to Fact Pattern #17) The required adjusting entry at December 31 related to salaries and wages is A. Income summary Salaries & wages payable 1. Answer (D) is incorrect because the debit should be to an expense account. C.500 Answer (A) is incorrect because the existing balance in the prepaid insurance account should be expensed.500 18.700 Answer (A) is incorrect because the income summary account is used for closing entries.100 3. The adjusting entry to record an accrued expense of 1.600 + 1.700 1.500 [3 months elapsed × (18. An expense incurred but not yet paid is an accrued expense. Printed for Pol Mirafuentes Page 136 .

Rental revenue Utilities expense D. They are optional entries made for the sake of convenience in recording the transactions of the period. Answer (B) is incorrect because reversing entries are made at the beginning of the next accounting period. Reversing entries are made at the end of the next accounting period. Copyright 2006 Gleim Publications.000 14. The normal balance of an expense account is a debit.000 14. Answer (B) is correct. Reversing entries are identical to the adjusting entries made in the previous period.Source: CIA 1195 IV-27 The practice of recording advance payments from customers as a liability is an example of applying the A. Historical cost principle.16 -. C.Source: CIA 1195 IV-4 Which of the following statements is the best description of reversing entries? A. [307] Gleim #: 3. Such offsetting is not good practice. Revenue recognition principle. Answer (C) is incorrect because reversing entries are the exact opposite of the adjustments made in the previous period. Utilities expense Income summary B. Income summary Utilities expense C. Answer (D) is correct. they must be the exact opposite of the adjustments made in the previous period. Monetary unit assumption. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Answer (C) is incorrect because an expense account should not be closed to a revenue account. Going concern assumption.000 14. Reversing entries are made at the beginning of a period to reverse the effects of adjusting entries made at the end of the preceding period.000 14.17 -. C.000 Answer (A) is incorrect because an expense account should be credited in a closing entry. therefore. D. Utilities expense Retained earnings 14. The recording of reversing entries is a mandatory step in the accounting cycle. D. Inc. Answer (D) is incorrect because an expense account should be credited in a closing entry. B. [306] Gleim #: 3.000 14. Answer (A) is incorrect because reversing entries are optional. after recording regular transactions of the period. Printed for Pol Mirafuentes Page 137 . All income statement account balances are closed either to a summary account (such as income summary or revenue and expense summary) or to retained earnings. and the income summary account should be debited. Reversing entries are the exact opposite of the adjustments made in the previous period. an expense account is credited in a closing entry. In order for reversing entries to reverse the prior adjustments.000 14.000 14.

December 31. the company expects warranty costs to be incurred evenly over the life of the warranty contracts.19 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the going concern assumption is that the business will have an indefinite life. and the customer is automatically given a 1-year warranty. 20X5. In years 20X4 and 20X5. or 185. 20X3. The company’s sales revenue for 20X4 would be A. The customer has only one warranty claim during the 3-year period.000). 145. the income should be recognized on the straight-line basis over the life of the extended warranty contract. Inc. Copyright 2006 Gleim Publications. the 20X4 unearned revenue and subtracts.000 equals the cash receipts for 20X4. Answer (C) is incorrect because the income should be recognized evenly over the life of the contract. Recognition of revenue occurs when the flow of future economic benefits to the enterprise is probable and such benefits are reliably measurable.000 during 20X4. Because warranty costs are expected to be incurred evenly over the life of the warranty contracts. At the end of 20X3. It is not related to the timing of the claims. D.000 165. Answer (C) is incorrect because 175. 20X3.Source: CIA 596 IV-4 An entity had cash receipts from sales of 175. Answer (A) is incorrect because the recognition of income from the sale of the extended warranty is deferred until the extended warranty period begins. The company will recognize income from the sale of the extended warranty A.000 Answer (A) is incorrect because 145. [309] Gleim #: 3. the 20X3 receipts for which revenue was earned in 20X4. Answer (D) is incorrect because income is recognized over the life of the warranty. Recording advance payments as a liability reflects a determination that the receipt of future economic benefits is not sufficiently certain to merit revenue recognition.000 185.000 + 40. The sales revenue earned in 20X4 equals 20X4 cash receipts. all of which was earned in 20X4. extending the coverage for an additional 2 years to the end of 20X5. B. On January 1. plus the revenue earned from cash receipts in 20X3. Printed for Pol Mirafuentes Page 138 . [308] Gleim #: 3. C.000 was unearned at the end of 20X4. minus any receipts in 20X4 for which the revenue has not yet been earned.000 adds.18 -.000 175.000 equals 20X4 revenue from 20X4 sales. of which 30. Answer (B) is correct.000 – 30.Source: CIA 1194 IV-24 An entity sells a durable good to a customer on January 1. Answer (D) is correct. Answer (C) is incorrect because the historical cost principle reflects the practice that many assets and liabilities are accounted for and reported on the basis of acquisition price. At the time of the original sale. given that the enterprise has not yet performed its obligations. when the warranty expires. the company had 40. C. The customer also buys an extended warranty package. Answer (B) is incorrect because the monetary unit assumption is that money is the common denominator by which economic activity is conducted and that the monetary unit provides an appropriate basis for accounting measurement and analysis. rather than adds. D. Answer (D) is correct. rather than subtracts. B. and the claim occurs during 20X4. Answer (B) is incorrect because 165. At the time of the claim in 20X4.000 of unearned revenue.000 (175. not at expiration.

Inc. ABC bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. which of the following is(are) only recognized in proportion to the cash collected on the sales during the period? A. Thus. On the date the final cash collection is received. Sales and cost of sales and selling expenses. Answer (D) is incorrect because only the gross profit is deferred on sales for which cash has not yet been collected. Answer (D) is incorrect because the revenue should be recognized at the point of performance of the service. Billing is mailed. Hence. the gross profit on sales (sales – cost of sales) is not recognized until cash is collected. B. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably. Sales and cost of sales. In proportion to the cash collections.Source: CIA 597 IV-10 Using the cost-recovery method of revenue recognition.22 -. which includes revenue and gains. Answer (C) is incorrect because only the gross profit is deferred on sales for which cash has not yet been collected. ABC should recognize revenue from its catering services at the date when a A. The proportion of cash collected on the sales during the accounting period determines the proportion of the gross profit on those sales that is recognized during the period. After cash collections equal to the cost of goods sold have been received.21 -. [311] Gleim #: 3. [312] Gleim #: 3.20 -. Luncheon is served.Source: CIA 595 IV-11 If sales are accounted for using the installment method. which is identified in the Framework for the Preparation and Presentation of Financial Statements as an underlying assumption of financial accounting. The revenue should be recognized at the date the service was performed. profit on an installment sale is recognized A. Customer places an order. Answer (A) is incorrect because the certainty and measurability criteria are not met when the customer places an order. the entity has substantially accomplished what it must do to be entitled to future economic benefits when it serves the luncheon. To wait until the receivable is collected is to ignore the accrual basis of accounting. It should then accrue a receivable and revenue.Source: CIA 590 IV-26 ABC operates a catering service that specializes in business luncheons for large corporations. C. D. Answer (B) is correct. B. Sales and cost of sales and administrative expenses. B. Under the installment method. Customer’s payment is received.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [310] Gleim #: 3. Sales. Income. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers. ABC requires customers to place their orders 2 weeks in advance of the scheduled events. D. D. Answer (C) is incorrect because the date for billing is a matter of administrative procedure and convenience. Printed for Pol Mirafuentes Page 139 . Copyright 2006 Gleim Publications. Answer (A) is incorrect because sales and cost of sales are recognized in proportion to cash collections. C. C. Answer (B) is correct. Conceptually. both sales and cost of sales are deferred. On the date of the installment sale.

g. Thus. income. e. Recognition of an element of financial statements (e.Source: CIA 1190 IV-28 On February 1. revenue is recognized for a sale of goods when the entity has transferred the significant risks and rewards of ownership. a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits. Answer (B) is incorrect because the installment basis recognizes revenue in proportion to the cash collections.24 -.000 and revenue of 0 should be recognized for year 1. and the cost or value of the item must be measurable with reliability. Revenue Recognition. which includes revenue and gains. the entity has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably.000 110. to deliver the software or to refund the customer’s money. reflect these criteria. Under IAS 18.000 120. after the cash collections equal the cost of sales. Progress billings will be sent to the customer at quarterly intervals. the amount can be reliably measured. year 1 a computer software firm agrees to program a software package. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably. it is probable that the economic benefits will flow to the entity. Under the cost-recovery method. The software is accepted by the client June 1. no revenue is recognized until cash payments by the buyer exceed the seller’s cost of the merchandise sold. and transaction costs can be reliably measured. This method is appropriate when collection of the revenue is very uncertain..000 on the first of each month are to be made. Answer (C) is correct. which includes revenue and gains) requires that two criteria be met. Answer (D) is incorrect because income. [313] Gleim #: 3. and the receipt of future economic benefits is not sufficiently certain to merit income recognition. the stage of completion can be reliably measured. How much year 1 revenue should be recognized? A. a liability for 100. C. the entity has not substantially completed what it must do to be entitled to the benefits represented by the advance payment.Source: CIA 1193 IV-28 A building contractor has a fixed-price contract to construct a large building.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the accrual basis recognizes revenue on the date of the installment sale. Inc. Answer (C) is incorrect because income. which includes revenue and gains.. revenue is to be recognized for any further collections. B. For a sale of services. D. Printed for Pol Mirafuentes Page 140 . that is. Twelve payments of 10. it is probable that the economic benefits will flow to the entity. income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. 0 100.000 Answer (A) is correct. year 2. [314] Gleim #: 3. It is estimated that the building will take 2 years to complete.23 -. and the costs incurred and the costs to complete can be reliably measured. Answer (B) is incorrect because income. NOTE: This analysis assumes that the sale of the software is a sale either of goods or of services for which the appropriate conditions have not been met. The usual procedures for income recognition. that income be earned. year 1. with the first payment March 1. revenue is recognized when revenue can be reliably measured.g. It must be probable that any future economic benefit associated with the item will flow to or from the entity. which includes revenue and gains. Accordingly. However. Answer (D) is incorrect because. Which of the following describes the preferable point for revenue recognition for this contract if the outcome of the contract can be estimated reliably? Copyright 2006 Gleim Publications. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably. Thus.

year 1. Cost of goods sold expense and administrative expenses. C. Answer (C) is incorrect because the cash basis is inappropriate.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. After the contract is signed. (3) contract costs to complete and stage of completion can be measured reliably.000. B. 0 6. [316] Gleim #: 3. C. Inc. and (4) contract costs can be clearly identified and measured reliably so that actual and estimated costs can be compared. An accrual method.000 Copyright 2006 Gleim Publications. As progress is made toward completion of the contract.26 -. B. [315] Gleim #: 3. Income tax expense and administrative expenses. year 1. assets totaled 270.Source: CIA 1196 IV-5 At January 1. and liabilities amounted to 171.000.000 9. at a minimum. At December 31. The “single step” is the one subtraction necessary to arrive at net profit or loss. certain line items must be presented. D. D. and owner withdrawals totaled 75. When the contract is completed. Extraordinary items are not reported. Answer (B) is correct. (2) it is probable that the economic benefits of the contract will flow to the enterprise. D. Answer (A) is incorrect because revenue is not recognized until progress has been made toward completion. The multiple-step income statement matches operating income and expenses separately from nonoperating items.000 12. Printed for Pol Mirafuentes Page 141 .000. should be used. B. Answer (C) is incorrect because both formats separate cost of goods sold expense and administrative expenses.000. The IASs do not require a particular income statement format.000. that is. Answer (D) is incorrect because the completed-contract method is not a permissible method. The amount of net profit for year 1 was A. Operating and nonoperating data. The effect on income taxes of extraordinary items and the effect on income taxes of profit or loss from ordinary activities. For a fixed-price contract. Under the percentage-of-completion method. Answer (D) is incorrect because intraperiod income tax allocation procedures must be applied to both formats.Source: CIA 590 IV-32 The major distinction between the multiple-step and single-step income statement formats is the separation of A. and its liabilities amounted to 120. the percentage-of-completion method.25 -. revenues and expenses are recognized based on the stage of completion at the balance sheet date if the outcome of the contract can be estimated reliably. owner investments amounted to 72. As cash is received. Answer (A) is correct.000. the outcome can be estimated reliably if (1) total revenue can be measured reliably. C. The single-step income statement provides one grouping for income items and one for expense items. a sole proprietorship’s assets totaled 210. Answer (B) is incorrect because both formats separate income tax expense and administrative expenses. although. During year 1.

000 is the difference between beginning and ending equity without taking into consideration the capital transactions with. and net profit of 10 for the year just ended.5 tax rate)]. B. B. Answer (B) is incorrect because 135 is 150% of the gross margin. If the gross margin is 50% of sales.000)]. Decrease Decrease No effect No effect (2) Reflected on Statement of Cash Flows as a(n) Investing outflow Operating or financing outflow Financing or investing outflow Operating outflow Copyright 2006 Gleim Publications. 90 135 150 180 Answer (A) is incorrect because 90 is the gross margin. Accordingly. Answer (C) is incorrect because 150 assumes profit before tax equals 50% of net profit. [317] Gleim #: 3.000 of liabilities).0 – . D. interest expense of 20. sales equals 180 (90 gross margin ÷ . Net profit or loss may be derived using the basic accounting equation (assets = liabilities + equity). Answer (D) is correct. G&A expenses.000 [99. the owner.000 – 171. the level of sales for the year just ended was A. D. profit before interest and tax must have been 40 (20 profit before tax + 20 interest).000. and distributions to. net profit must have been 12.000 investment – 75.5).28 -.000 – 3.000 withdrawals). [318] Gleim #: 3. general and administrative expenses of 50.Source: CIA 596 IV-44 An entity has a 50% gross margin.Source: CIA 1193 IV-33 Which combination below explains the impact of credit card interest incurred and paid during the period on (1) equity on the balance sheet and (2) the statement of cash flows? (1) Effect on Equity on Balance Sheet A.27 -. Net profit equals sales minus cost of sales. interest.000 (72.000 mistakenly deducts the 72. C. Equity at 1/1/year 1 was 90.000). and the gross margin (sales – cost of sales) must have been 90 (40 profit before interest and tax + 50 G&A expenses). Because owner transactions decreased net assets by 3. If the corporate tax rate is 50%. Inc. Answer (B) is incorrect because 6. and tax.000 and adds the 75. Printed for Pol Mirafuentes Page 142 . profit before tax must have been 20 [10 net profit ÷ (1.000 (210. Equity at 12/31/year 1 was 99.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the enterprise did have a net profit.000 – (90. Answer (D) is correct.000 of assets – 120. Answer (C) is incorrect because 9.000 (270. Given a 50% tax rate. C.

and income or expense related to financing or investing activities. Answer (D) is incorrect because the direct method reports major classes of gross cash receipts and payments from operating activities. [320] Gleim #: 3. Answer (C) is incorrect because payment of cash dividends is a use of cash for an operating or financing activity. However. they may also be treated as operating items to help determine the enterprise’s ability to pay dividends from operating cash flows. Printed for Pol Mirafuentes Page 143 . Only the direct method. the payment of cash dividends appears in the <List A> activities section as a <List B> of cash. To arrive at this amount. C. C. deferrals or accruals of past or future operating cash flows.29 -. Answer (B) is correct. Both the direct and indirect methods. the indirect method adjusts net profit or loss for the effects of noncash transactions. B. According to IAS 7. cash payments for interest made by an enterprise that is not a financial institution may be classified on the statement of cash flows as an outflow of cash from operating or financing activities. List A A. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because interest payments are classified as an operating or financing outflow on the statement of cash flows. Which methods of reporting cash flows from operating activities will supply that information? A. D. Answer (D) is incorrect because credit card interest charges reduce equity. Inc. Answer (B) is correct. Answer (C) is incorrect because credit card interest charges reduce equity. Interest incurred is classified as interest expense on the income statement.30 -. Operating or investing Operating or financing Investing or financing Investing List B Source Use Use Source Answer (A) is incorrect because payment of cash dividends is a use of cash for an operating or financing activity. Neither method. Copyright 2006 Gleim Publications.Source: CIA 1195 IV-34 In the statement of cash flows. which in turn reduces equity on the balance sheet by reducing retained earnings.Source: CIA 1192 IV-32 A reader of a statement of cash flows wishes to analyze the major classes of gross cash receipts and gross cash payments from operating activities. dividends paid may be treated as a cash outflow from financing activities because they are a cost of obtaining resources from owners. Only the indirect method. The indirect presentation adjusts net profit or loss to the same amount of net cash from operating activities that would be determined in accordance with the direct method. supplies information about major classes of gross cash receipts and payments related to operating activities. Answer (B) is correct. The statement of cash flows may report cash flows from operating activities in either an indirect or a direct format. The direct format reports the major classes of operating cash receipts and cash payments as gross amounts. B. rather than the indirect method. Answer (C) is incorrect because the direct method. According to IAS 7. Answer (D) is incorrect because payment of cash dividends is a use of cash for an operating or financing activity. Answer (A) is incorrect because only the direct method supplies information about major classes of gross cash receipts and payments related to operating activities. [319] Gleim #: 3.

000 80.000 220.Source: CIA 596 IV-10 The comparative balance sheet for an enterprise that had net profit of 150. Answer (C) is incorrect because 150.000 fails to add to net profit the reduction in accounts receivable.000 + 20. The payment of cash dividends is regarded as a cash flow from a financing activity.000 400.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [321] Gleim #: 3. However. Moreover. Inc.000 200.000 = 20. Answer (B) is correct.000 115.000 for the year ended December 31.000). Copyright 2006 Gleim Publications.000 – 80. Accordingly.000 350.000 (150.000 – 80. the decrease in accounts receivable (220. and paid 125.000 If dividends paid are treated as a cost of obtaining financial resources.000 Answer (A) is incorrect because 70.000 subtracts the reduction in receivables and adds the reduction in payables. B.000 140.000 350.000 90. the amount of net cash from operating activities during 20X4 was A. D.000 160.31 -. 70. Printed for Pol Mirafuentes Page 144 .000) indicates a cash outflow (payment of pre-20X4 liabilities) that also is not reflected in 20X4 net income. C.000) during the period represents a cash inflow (collections of pre-20X4 receivables) not reflected in 20X4 net profit.000 125. net cash from operations was 90. Net profit is adjusted to determine the net cash from operations.000 400.000 12/31/X3 180.000 – 200.000 is net profit.000 130. Hence.000 210.000 150.000 = 80. it is not a reconciling item. the decrease in payables (160. 20X4.000 of dividends during 20X4 is as follows: 12/31/X4 Cash Accounts receivable Total assets Payables Share capital Retained earnings Total 150. Answer (D) is incorrect because 210.

plus purchases.000 ending inventory).000 payments to suppliers – 62.000 180.000 335. C. plant.000 338.000) 140. minus ending inventory. Cost of goods sold equals beginning inventory.000 200. 5.000 89. B. [323] Gleim #: 3.000 507.000 8.000 1.000 Dec. 3.000 (15. Equipment was acquired for 65. Thus.000 (3.000 Copyright 2006 Gleim Publications. 4.000 of cash payments to suppliers equaled purchases. Answer (D) is incorrect because 180.000 beginning accounts payable).Source: CIA 1196 IV-14 (Refers to Fact Pattern #18) Cash collections from customers in year 2 were A.000 Answer (A) is correct. 147. D.000 of accounts receivable was written off. Interest expense was 20.000 200. [322] Gleim #: 3.000 ending accounts payable + 180.000 Liabilities and Equity: Trade accounts payable Interest payable Bonds payable Unamortized bond discount Equity Total Liabilities and Equity Additional information for year 1: 62. Purchases equal 167.000 (4.000 295.000 results from assuming that 180.000 95.000 167.000) 454. 31. Depreciation expense was 30.000. year 2 60.000 (49. To determine cost of goods sold.000 344. cost of goods sold equals 147.000 (120.000 (10.000.000 purchases – 140.Source: CIA 1196 IV-13 (Refers to Fact Pattern #18) Cost of goods sold in year 2 was A.000 340.000) 257.000) 507. year 2 are presented below: Dec.000 is the amount of cash payments to suppliers.000 beginning inventory + 167. and equipment Accumulated depreciation Total Assets 50.000. Cash payments to suppliers of merchandise were 180. 31. year 1 and December 31.000) 199. Answer (B) is incorrect because 160.000 (102.000 (119.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #18] Balance sheets on December 31. purchases must be calculated. Inc.000) 120. 2. 6.000 49. Sales revenue was 338. B. 341.32 -.000 160. 3.000 11. year 1 Assets: Cash Accounts receivable Allowance for uncollectible accounts Inventory Property. Printed for Pol Mirafuentes Page 145 .000 454.000 equals purchases.000.33 -. D. C. Answer (C) is incorrect because 167.000.

Answer (C) is incorrect because 20.000 ending PPE).000 (95.000 beginning interest payable + 15.000 20. and equipment disposed of in year 2 was A. Answer (D) is incorrect because 335.Source: CIA 1196 IV-16 (Refers to Fact Pattern #18) Cash interest payments in year 2 were A. <List A> must be <List B> cash payments for goods along with other adjustments. The interest payable credited in year 1 was 15.000 beginning accumulated depreciation + 30. Answer (B) is incorrect because 338.000 acquisitions – 340. Answer (B) is incorrect because 17. the cash interest payment was 12. plant.000 ending accumulated depreciation).000 is the difference between ending and beginning accumulated depreciation. In year 2. Answer (B) is correct. 8. B. C.000 (102.000 (20.34 -.000 includes the 3. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Thus.36 -. Answer (D) is incorrect because 32. Thus.000 Answer (A) is correct. 7. [325] Gleim #: 3. Answer (D) is incorrect because 25.000 12.000 20.000).000 – 3.000 (8.000 is the sales revenue for the year.000 cost of PPE – 13. Printed for Pol Mirafuentes Page 146 .000 is the interest expense plus the amortized discount. B.Source: CIA 1196 IV-15 (Refers to Fact Pattern #18) The carrying amount (cost minus accumulated depreciation) of property.Source: CIA 595 IV-2 In the determination of cost of goods sold.000 beginning PPE + 65.000 is the interest expense for year 1. Answer (C) is incorrect because 20. D. Answer (C) is incorrect because 344. Cash collections from customers equals beginning accounts receivable. cash collections from customers were 341.000 Answer (A) is incorrect because 8. The accumulated depreciation is 13.000 25. Copyright 2006 Gleim Publications.000 is sales revenue minus accounts written off.000 is the cost of the PPE disposed. C.000 amortized bond discount).000 interest payable credited in year 1 – 11.000 (295.000 (20. plus sales revenue. minus ending accounts receivable.000 – 89. The cost of PPE disposed of is 20.000 32.000 17.000 accumulated depreciation). [324] Gleim #: 3. minus accounts written off.000 depreciation expense – 119.35 -. the carrying amount of PPE disposed of is 7.000 interest expense – 5.000 ending interest payable).000 + 338.000 results from using the change in the PPE account without acquisitions minus the accumulated depreciation. D.000 of accounts written off. [326] Gleim #: 3.000 is the beginning interest payable.

000 for December of the current year. An increase in prepaid salaries indicates that salaries expense is less than the cash paid for salaries. An increase in accounts payable A decrease in accounts payable An increase in inventory A decrease in inventory List B Added to Added to Added to Subtracted from Answer (A) is correct.000 Answer (A) is incorrect because 154. Inc. [327] Gleim #: 3.38 -. The following data are from its records: Dec.000 214. B.000 subtracts the increase in prepaid salaries instead of adding it and adds the 30.000 increase in salaries payable instead of subtracting it. cash payments. Answer (B) is incorrect because a decrease in accounts payable must be subtracted from. not added to. Answer (D) is incorrect because 226.000 adds the 30. An increase in salaries payable indicates that salaries expense is more than the cash paid for salaries.000 226. Answer (C) is incorrect because an increase in inventory must be subtracted from. B.37 -.000 The amount of cash payments for salaries during December of the current year was A. To convert from the cash basis (cash payments) to the accrual basis (cost of goods sold).000 Nov. an increase in accounts payable must be added to cash payments for goods to determine net purchases. Thus.Source: CIA 593 IV-44 In reconciling net profit on an accrual basis to net cash from operating activities.000 salaries expense + 6.000 166. C. 154.000 (190. Answer (C) is incorrect because 214. D.000 increase in salaries payable instead of subtracting it. not subtracted from. Answer (D) is incorrect because a decrease in inventory must be added to. Net purchases is then adjusted for the change in inventory to determine cost of goods sold. 30 40. C. D.Source: CIA 1196 IV-1 A corporation reported salaries expense of 190. Answer (B) is correct. not added to. 31 Prepaid salaries Salaries payable 46.000 170. what adjustment is needed to net profit because of (1) an increase during the period in prepaid expenses and (2) the periodic amortization of premium on bonds payable? Copyright 2006 Gleim Publications.000 increase in prepaid salaries – 30. the amount of cash payments for salaries was 166.000 increase in prepaid salaries instead of adding it. [328] Gleim #: 3. Printed for Pol Mirafuentes Page 147 .000 subtracts the 6.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) List A A.000 increase in salaries payable). cash payments to calculate cost of goods sold.000 140. cash payments to calculate cost of goods sold.

Depreciation for an interim period represents an estimate. Answer (C) is incorrect because extraordinary items are not reported in the financial statements or notes.. [330] Gleim #: 3. D. the amortization of premium on bonds payable causes a reduction of interest expense but does not increase cash. Answer (C) is incorrect because amortization of premium on bonds payable requires a deduction from net profit in the reconciliation. its disposal qualifies to be reported. Copyright 2006 Gleim Publications. Inc. Which of the following is the proper treatment of the disclosures that should be made after the announcement? A. thus.e.Source: CIA 1193 IV-34 An entity has publicly announced a detailed. Answer (D) is incorrect because disclosures begin with the current period.39 -. Answer (A) is incorrect because the component is to be terminated (discontinued). C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) (1) Increase in Prepaid Expenses A. Add Add Deduct Deduct (2) Amortization of Premium on Bonds Payable Add Deduct Add Deduct Answer (A) is incorrect because the increase in prepaid expenses requires a deduction from net profit in the reconciliation. [329] Gleim #: 3. Answer (B) is incorrect because the increase in prepaid expenses requires a deduction from net profit in the reconciliation. As an extraordinary item.Source: CIA 591 IV-38 Which of the following is a unique reporting problem associated with the determination of the results of operations for an interim period? A. Thus. Cost of goods sold for an interim period reflects only the amount of product cost applicable to sales revenue recognized in the interim period. An extraordinary loss occurring in the second quarter must be prorated over the last three interim periods of the year. C. B. therefore. and a deduction is needed in the reconciliation. Also. Answer (B) is correct. As a prior-period item. As a discontinued operation. net profit exceeds net cash from operating activities.40 -. They are not clearly distinct from ordinary activities. D. A separate major line of business or geographical operating area that is distinct for operational and reporting purposes is a component of an entity. i. D. B. C. net profit exceeded net cash from operating activities. As part of continuing operations. Answer (D) is correct. Printed for Pol Mirafuentes Page 148 . B. An increase in prepaid expenses indicates that cash outlays for expenses exceeded the related expense incurred. and a deduction is needed in the reconciliation. formal plan to dispose in its entirety of a component of the entity that represents a separate major line of business that is distinct operationally and financially. Advertising and similar costs expensed in one interim period may benefit other interim periods in the same annual period. when the criteria for classification of the DO as held for sale are met.

000 – 9.000 + 2.000). Accordingly. The difference between purchases and the amount paid to suppliers is the change in accounts payable. causing a decrease in cash.000 69. Thus.000 54. C. a statement of cash flows will report a net increase in cash of A. many entities expense the costs as incurred even though they may benefit other interim periods in the same annual period.000 – 55. otherwise. Answer (C) is incorrect because 54.000 results from subtracting the amortization and the decrease in receivables and adding the increase in inventories. Net profit Depreciation expense Amortization of intangibles Decrease in accounts receivable Increase in inventories Increase in accounts payable Increase in plant assets Increase in share capital Decrease in short-term notes payable 70. Inc.000 17. The depreciation amount for an interim period is simply a pro rata amount of the annual estimate. Answer (D) is incorrect because 69. But such a determination is difficult.000 results from adjusting net profit for the increase in plant assets and the increase in share capital only. Based on the information above.000 2. An increase in plant assets indicates an acquisition of plant assets.000 There were no disposals of plant assets during the year. Copyright 2006 Gleim Publications. Accordingly. costs such as advertising should be deferred in an interim period if the benefits extend beyond that period. To account for the difference between cost of goods sold (a deduction from net profit) and cash paid to suppliers. Costs and expenses other than product costs should be either charged to income in interim periods as incurred or allocated among interim periods based upon the benefits received. cash increased by 11. An increase in share capital represents a cash inflow and is added to net profit.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Answer (B) is incorrect because 17. inventories. Answer (C) is incorrect because the annual depreciation amount is an estimate.000 4. and accounts payable. Depreciation and amortization are noncash expenses and are added to net profit.000 55. D.000 – 47. the conversion of CGS to cash paid to suppliers requires deducting the inventory increase and adding the accounts payable increase. so it is deducted. Thus.000 net profit + 14. A decrease in receivables indicates that cash collections exceed sales on an accrual basis.000 1.000 + 4.Source: CIA 1188 IV-33 The following data were extracted from the financial statements of a company for the year ended December 31. The difference between CGS and purchases is the change in inventory.000 (70. so it is added to net profit. [331] Gleim #: 3.000 31. A decrease in short-term notes payable is deducted from net profit because it reflects a cash outflow. B.000 47. and deferral raises the additional issue of how the deferred costs should be allocated among quarters. Printed for Pol Mirafuentes Page 149 . a two-step adjustment of net profit is necessary.000 + 31.41 -. 11. they should be expensed as incurred.000 Answer (A) is correct.000 + 1. notes payable.000 14.000 9. Answer (B) is incorrect because the only product costs appropriate to expense in an interim period are the ones related to the revenue transactions recognized in the same interim period. Answer (D) is incorrect because extraordinary items are not reported in interim or annual statements.000 results from failing to make the adjustments for receivables.

C. Answer (B) is incorrect because no items described as extraordinary are not presented on the face of the income statement or in the notes. Answer (D) is correct. The rationale for this process is the A. A basic feature of financial accounting is that the entity is assumed to be a going concern in the absence of evidence to the contrary. A loss because of adjustments of accruals on long-term contracts. The difference in treatment is not large enough to influence users if the item is not material. D. Recognized equally over the second. Answer (B) is incorrect because the monetary unit assumption provides that all transactions and events can be measured in terms of a common denominator. by restating the first quarter. Monetary unit assumption. How should the gain be accounted for? A. Recognized in full in the second quarter. [333] Gleim #: 3. for instance. Answer (C) is incorrect because the materiality assumption simply implies that items of insignificant value may be expensed rather than capitalized and depreciated or amortized. B. None of the above. According to IAS 1. which is most likely to be classified as an extraordinary item in the income statement? A.42 -. Going concern assumption. Answer (C) is incorrect because no items described as extraordinary are not presented on the face of the income statement or in the notes. The going concern concept is based on the empirical observation that many entities have an indefinite life. A loss because of an expropriation of assets by a foreign government. Recognized only in the annual financial statements. Copyright 2006 Gleim Publications. Materiality assumption. Answer (A) is incorrect because the economic entity assumption provides that economic activity can be identified with a particular unit of accountability. the euro. Answer (D) is correct. C. and fourth quarters.43 -.Source: CIA 590 IV-35 Assuming all of the following involve material amounts.Source: CIA 1191 IV-42 An extraordinary gain occurs in the second fiscal quarter. C.Source: CIA 1192 IV-26 A newly acquired plant asset is to be depreciated over its useful life. “An entity shall not present any items of income and expense as extraordinary items. Recognized equally in each quarter. Inc.” [334] Gleim #: 3. The reporting entity is assumed to have a life long enough to fulfill its objectives and commitments and therefore to depreciate wasting assets over their useful lives. D. either on the face of the income statement or in the notes. Economic entity assumption. third. Answer (A) is incorrect because no items described as extraordinary are not presented on the face of the income statement or in the notes. A gain because of the disposal of assets associated with a discontinuing operation of a business. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [332] Gleim #: 3. B.44 -. B. Printed for Pol Mirafuentes Page 150 .

Answer (C) is incorrect because the net method requires a sales discount forfeited. the extraordinary gain should not be prorated.45 -. Answer (B) is incorrect because the gain should be recognized in full in the second quarter. C. an interest revenue account. B. Answer (B) is incorrect because the net method requires a sales discount forfeited but not a sales discount account. C. which of the following accounts will appear on the income statement if the net method of recording receivables is employed? Sales Discounts Sales Discounts A.000 30. [336] Gleim #: 3. 67. Hence.500 68. Additional data for this period follows: Net sales Accounts receivable beginning balance Allowance for bad debts beginning balance Accounts receivable written off Increase in net accounts receivable (after subtraction of allowance for bad debts) 100. or the full balance is due within 30 days (2/10. a sales discount is recorded and classified as an offset to sales in the income statement to yield net sales. Yes Yes No No Forfeited Yes No No Yes Answer (A) is incorrect because the net method requires a sales discount forfeited but not a sales discount account. D.000 Copyright 2006 Gleim Publications.000 70. However.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. If a discount is taken.000 5. Answer (D) is correct. B. Printed for Pol Mirafuentes Page 151 . D. [335] Gleim #: 3.000 How much cash was collected this period? A. n/30). such as sales discounts forfeited.000 68. Answer (C) is incorrect because the gain should be recognized in full in the second quarter.Source: CIA 1191 IV-34 An entity offers its customers credit terms of a 2% discount if paid within 10 days.000 (500) 1. is credited at the end of the discount period or when the payment is received.000. Answer (D) is incorrect because the gain should be recognized in full in the second quarter. no items of income or expense are presented as extraordinary on the income statement or in the notes.46 -. If some customers take advantage of the cash discount and others do not. Accordingly. the application of the net method requires a sales discount forfeited but not a sales discount account. The gross method accounts for receivables at their face amount. The net method records receivables net of the applicable discount. If the payment is not received during the discount period.Source: CIA 1193 IV-41 An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense was 2. Gains and losses similar to those that would not be deferred at year-end should not be deferred to later interim periods of the same year. Inc.

The table below includes information about the level of installment sales.000 Copyright 2006 Gleim Publications.000 – 30. what was the amount of accounts receivable written off as uncollectible during the year? A. [Fact Pattern #19] An entity sells goods on an installment basis.800 results from subtracting bad debt expense from the allowance account.000 10. the cost of the goods sold on installment. Hence. credit A/R) do not affect the computation of cash collected because the allowance and gross accounts receivable are reduced by the same amount.700. The cash collected equals net sales adjusted for the change in net accounts receivable (gross A/R – allowance for bad debts).700 beginning allowance + 500 recoveries + 2. D.000 bad debt expense)]. Printed for Pol Mirafuentes Page 152 .000 4.000 20. Inc. The 500 of recovered bad debts is accounted for by a debit to accounts receivable and a credit to the allowance account. [337] Gleim #: 3. During the past year.000 2.200 2.47 -. Write-offs (debit the allowance.000 accounts receivable at year-end resulted in a 5. The 2.000 bad debt expense is also credited to the allowance account.800 Answer (A) is incorrect because 1. 20X3 Installment sales Cost of installment sales Cash receipts on 20X3 sales Cash receipts on 20X4 sales Cash receipts on 20X5 sales 20X4 20X5 10.800 results from subtracting the recoveries and bad debt expense from the allowance account. C. Answer (D) is incorrect because 2. An increase in net accounts receivable implies that cash collected was less than net sales. recoveries on bad debts previously written off were correctly recorded at 500.000 ending balance for its allowance for uncollectible accounts and a bad debt expense of 2. The amount of accounts receivable written off as uncollectible is 2. cash collected was 70. Answer (D) is correct.000 2. If the beginning balance in the allowance for uncollectible accounts was 4.800 2. Moreover. All cash receipt amounts shown are net of any interest charges.000 4.000 4. credit the allowance) is not included in this calculation because it is already reflected in the net accounts receivable balance. recognition of bad debt expense (debit bad debt expense. Answer (C) is correct.000 1.000.000 results from subtracting the write-offs and the bad debt expense from the sum of net income and beginning net accounts receivable. and the cash receipts on installment sales for 20X3 through 20X5.000 ending allowance – (4.000 4. Answer (B) is incorrect because 68.000 deducts bad debt expense from the sum of net profit and beginning net accounts receivable.500 assumes a zero balance in the beginning allowance account and deducts bad debt expense from the sum of net profit and beginning net accounts receivable.000 6. B. Under the allowance method.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 67.000 5.000 (100.Source: CIA 1196 IV-33 An analysis of an entity’s 150.200 1. 1. Answer (C) is incorrect because 68. uncollectible accounts are written off by a debit to the allowance account and a credit to accounts receivable. Answer (B) is incorrect because 1.200 results from subtracting the recoveries instead of adding them.200 [5.000 increase in net A/R).

Source: CIA 596 IV-3 (Refers to Fact Pattern #19) The gross profit amount from 20X5 sales to be deferred to future years would be A. Accordingly.000) ÷ 10. This amount equals the 20X3 gross profit percentage multiplied by the cash receipts.000 3. and the amount realized is 2.000 is the amount of cash receipts during 20X3 on 20X3 installment sales. Answer (C) is incorrect because 50% is the gross profit on 20X5 installment sales.Source: CIA 596 IV-2 (Refers to Fact Pattern #19) The amount of gross profit to be recognized in 20X3 on 20X3 installment sales is A.000 is the total gross profit on 20X5 sales. [340] Gleim #: 3. Answer (D) is incorrect because 10.000 of 20X4 installment sales].49 -. B.000 equals total receipts for 20X4 and 20X5 on 20X4 sales. [339] Gleim #: 3. C. C.000 8. In 20X3.48 -. Copyright 2006 Gleim Publications.000 is the total gross profit on 20X3 installment sales.000 3.000 Answer (A) is incorrect because 2. Inc.000 sales – 10.000 cost). The rate of gross profit on 20X4 installment sales is 20% [(5. Answer (C) is correct. Answer (C) is incorrect because 3.000 is the realized gross profit on 20X5 sales. D.50 -. 2. C. cash receipts were 2.000 – 2. Printed for Pol Mirafuentes Page 153 . or 800 {[(10.200 is the amount of the total gross profit on 20X3 installment sales that is deferred to future periods.Source: CIA 596 IV-1 (Refers to Fact Pattern #19) The rate of gross profit on 20X4 installment sales is A.000] × 2. Answer (D) is incorrect because 80% is the ratio of the cost of 20X4 installment sales to 20X4 installment sales. D.000 (10. B.000 10. The total gross profit on 20X5 sales is 10.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [338] Gleim #: 3.000 of 20X4 installment sales – 4.000).000 – 10.000 Answer (A) is correct.000}. Answer (D) is incorrect because 4. Answer (B) is incorrect because 2.000] × 4. Answer (B) is incorrect because 40% is the gross profit on 20X3 installment sales. The gross profit realized is the gross profit on the portion of sales for which payment has been received. D.000) ÷ 20.000 cost of 20X4 installment sales) ÷ 5. B. 800 2. the amount deferred is 8. 20% 40% 50% 80% Answer (A) is correct.000 {[(20.000 – 6. Answer (B) is incorrect because 3.200 4.000 from 20X3 installment sales.000 of 20X5 cash receipts}.000 (20.

an entity may recognize revenue from a sale of goods at the time of sale only if Copyright 2006 Gleim Publications.86% 28. C.43% Answer (A) is incorrect because 22. or 15.000 in the third year.57% 48. Answer (B) is incorrect because 28.Source: CIA 1196 IV-42 At the end of September. [342] Gleim #: 3. The buyer of the inventory is a new firm with no credit history.000 that had an inventory cost of 40. Answer (D) is incorrect because 71.Source: CIA 1195 IV-15 When a right of return exists.43% is the proportion of outstanding receivables that are from 0 to 60 days old at the end of September. Receivables from August sales still outstanding at the end of September are in the 31-to-60-day age group.86% is the proportion of receivables in the 0-to-30-day age group at the end of September.000 in the second year.000) – 40.57% is the proportion of receivables in the 61-to-90-day age group at the end of September.000 in the first year. C. If the cost-recovery method of revenue recognition is used.52 -. D.000 Answer (A) is incorrect because. the amount of gross profit to be recognized in the second year is A. Printed for Pol Mirafuentes Page 154 . B. composed as follows: Still Outstanding at the End of September 100 170 80 Month July August September Credit Sales 600 900 500 The percentage of receivables in the 31-to-60-day age group at the end of September is A.000]. under the cost-recovery method.000 is the payment received in the second year. Inc.53 -.000 45. The terms of the sale involve payments receivable of 10.000 is the profit to be recognized without consideration of the payment received in the first year. This group represents 48. Answer (C) is correct.000. D. The profit recognized in the second year equals the cumulative payments received minus the seller’s cost. B. Answer (B) is incorrect because 5.Source: CIA 595 IV-12 An entity sells inventory for 80. 22. an entity has outstanding accounts receivable of 350 on third-quarter credit sales. and 25. 45. [343] Gleim #: 3.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [341] Gleim #: 3.51 -. 0 5.000 + 45. Answer (D) is incorrect because 45.57% 71. Answer (C) is correct.57% of total receivables [170 ÷ (100 + 170 + 80)].000 15.000 [(10. profit is recognized in the second year when cash payments by the buyer exceed the seller’s cost of merchandise.

Answer (B) is incorrect because the proceeds of the sale are reduced by the fair value of the recourse obligation. C. the calculation is adjusted for the fair value of the asset or liability. Reduced by the fair value of the recourse obligation. One condition for recognition of revenue from the sale of goods is the transfer of the significant risks and rewards of ownership. C. and the reacquisition price is fair value. C. Answer (D) is incorrect because returns may be material if they can be reliably estimated. the proceeds of the sale are reduced by the fair value of the recourse obligation (a new financial liability). However. The transferor is entitled and obligated to repurchase the asset. providing the entity does not have control. and the asset is readily obtainable in the market. Answer (A) is correct. if the entity can reliably estimate future returns and recognizes a liability for returns based on experience and other pertinent information. The amount of future returns can be reliably estimated. The seller retains the risks and rewards of ownership. When the transfer does not meet these criteria. Answer (A) is incorrect because the proceeds of the sale are reduced by the fair value of the recourse obligation. Recorded at the historical cost of the assets obtained. revenue may be recognized at the time of sale if the other conditions for revenue recognition are also met. the transfer is accounted for as a collateralized borrowing. Recorded at fair value for the assets obtained and liabilities incurred. Copyright 2006 Gleim Publications.54 -. B. The transferor may reacquire the asset. Retention of significant risk may occur when. Printed for Pol Mirafuentes Page 155 . periodic profit or loss will include the difference between the carrying amount transferred and the proceeds. The entity derecognizes financial assets if it has transferred substantially all of the risks and rewards of ownership. B.Source: CMA 1287 3-26 If receivables transferred with recourse qualify for derecognition. After derecognition.Source: Publisher A transferor entity most likely should continue to recognize a transferred financial asset if A. Accounted for as a collateralized borrowing. [345] Gleim #: 3. and the buyer is uncertain about the probability of return. Answer (C) is incorrect because this contingency is an example of retention of significant risk. Derecognition also is appropriate when the entity neither has transferred nor retained substantially all the risks and rewards of ownership. Answer (B) is incorrect because the risks and rewards of ownership must be transferred. the buyer may rescind the purchase for a reason stipulated in the contract. The seller believes returns will not be material. and the transferee receives a lender’s return. The transferee may sell the full fair value of the asset. The transferor has an option to reacquire the asset. D. Answer (C) is incorrect because the proceeds of the sale are reduced by the fair value of the recourse obligation. for example. Answer (D) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Inc. B.55 -. plus or minus any prior adjustment reflecting the fair value of the asset that had been reported in equity. [344] Gleim #: 3. The buyer resells the goods. Thus. If a new financial asset is created or a new financial liability is assumed. D. the proceeds from the transfer are A. D.

D. C. Financial assets or liabilities at fair value through profit or loss include those held for trading. A transferor does not derecognize the financial asset if it is entitled and obligated to repurchase or redeem the asset. An entity derecognizes a financial asset if it has transferred substantially all of the risks and rewards of ownership. Financial assets or liabilities held for trading. D. Yes Yes No No Loans and Receivables Yes Yes No No Availablefor-Sale Financial Assets Yes No Yes No Financial Assets Held for Trading No No Yes Yes Copyright 2006 Gleim Publications.57 -. Answer (B) is incorrect because held-to-maturity investments have fixed or determinable payments and a fixed maturity. Loans and receivables. the transferor lacks control. Available-for-sale financial assets. C. which financial assets with quoted market prices in an active market are measured at fair value? Held-toMaturity Investments A. Answer (C) is incorrect because a financial asset should be derecognized despite the transferor’s option to reacquire it at fair value at the date of reacquisition. the entity must have a positive intent and ability to hold such investments to maturity. B. a financial asset is held for trading if it is included in a portfolio with a recent pattern of short-term profit taking. Answer (D) is incorrect because available-for-sale financial assets are nonderivatives.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a financial asset should be derecognized despite the transferor’s right to reacquire it if the asset is readily obtainable in the market. Derivatives also are deemed to be held for trading unless they are designated and effective as hedging instruments.Source: Publisher Subsequent to their initial recognition. They do not fall within one of the other classifications. Held-to-maturity investments. Inc. Answer (B) is incorrect because. Answer (C) is incorrect because loans and receivables are not derivatives.Source: Publisher Derivatives that are not hedging instruments are always classified in which category of financial instruments? A. Answer (D) is correct. Answer (A) is correct. providing the entity does not have control. and the terms of this transaction in effect allow the transferee to obtain a lender’s return on the assets it receives in exchange for the transferred financial asset. Moreover. when the transferee has the ability unilaterally to sell the entire asset to an unrelated third party without transfer restrictions.56 -. Printed for Pol Mirafuentes Page 156 . Derecognition also is appropriate when the entity neither has transferred nor retained substantially all the risks and rewards of ownership. B. [347] Gleim #: 3. [346] Gleim #: 3. Regardless of intent.

[348] Gleim #: 3.59 -.000 Beginning inventory was A. Inc. available-forsale. Thus. Printed for Pol Mirafuentes Page 157 . [349] Gleim #: 3. the gain or loss not arising from foreign exchange transactions or impairment A.000 900.000 25.000 85. Answer (C) is correct.000 Copyright 2006 Gleim Publications. May be recognized in profit or loss or directly in equity.Source: CIA 597 IV-15 A retail entity maintains a markup of 25% based on cost.000 80. Answer (D) is incorrect because available-for-sale and held-for-trading financial assets are measured at fair value unless they do not have quoted market prices in an active market and their fair values cannot be reliably measured. and held-for-trading financial assets are measured at fair value.Source: Publisher Assuming an available-for-sale financial asset that is not part of a hedge is remeasured to fair value at the balance sheet. Answer (D) is incorrect because a gain or loss on an available-for-sale financial asset is normally recorded directly in equity. The accumulated remeasurement gain or loss is included in profit or loss when the asset is derecognized. Answer (B) is correct. C. Unquoted equity instruments whose fair value is not reliably measurable are reported at cost.000 265. Must be recognized directly in equity. B. derivative.000 110. Must be recognized in profit or loss if the result is a loss and directly in equity if the result is a gain. Subsequent measurement of financial assets is normally at fair value. The entity has the following information for the current year: Purchases of merchandise Freight-in on purchases Sales Ending inventory 690.58 -. Loans and receivables and held-to-maturity investments are measured at amortized cost using the effective interest rate method. D. Must be recognized in profit or loss. Answer (B) is incorrect because available-for-sale and held-for-trading financial assets are measured at fair value unless they do not have quoted market prices in an active market and their fair values cannot be reliably measured. B. D. Answer (A) is incorrect because a gain or loss on a financial asset or liability classified as at fair value through profit or loss is recognized in profit or loss.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because available-for-sale and held-for-trading financial assets are measured at fair value unless they do not have quoted market prices in an active market and their fair values cannot be reliably measured. C. Answer (C) is incorrect because a gain or loss on an available-for-sale financial asset is normally recorded directly in equity. 40. A gain or loss on an available-for-sale financial asset that is not part of a hedge is recognized directly in equity through the statement of changes in equity except for impairment losses and foreign exchange gains and losses.

Answer (C) is correct. [351] Gleim #: 3. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest net profit. LIFO uses the earliest acquisition costs to price the ending inventory. D.000 EI – 690. Answer (C) is incorrect because weighted average averages inventory. B. [350] Gleim #: 3. under specific identification. Answer (B) is correct. Answer (B) is correct.000 (900. It is not permitted by the IFRSs.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 40. other factors held constant. B. minus ending inventory. Answer (D) is incorrect because FIFO approximates current cost for ending inventory. the beginning inventory must have been 85. Thus. D. Ending inventory is highest under FIFO because the older. so it results in a lower net profit than FIFO. Inc. First-in. The result is a higher cost of goods sold and lower net profit than under FIFO.000 omits the freight-in from the computation of cost of goods available for sale. Consequently. and LIFO approximates current cost of goods sold.Source: CIA 597 IV-16 Which inventory pricing method generally approximates current cost for each of the following? Ending Inventory A. first-out (LIFO). Cost of goods sold equals beginning inventory. C.000 purchases – 25. the newest (most expensive) items are not necessarily in the ending inventory. FIFO approximates current cost for ending inventory.000 sales ÷ 1. assuming all other variables remain constant? A.000 is based on a 25% markup on sales.Source: CIA 596 IV-11 The cost of materials has risen steadily over the year. Cost of goods sold equals beginning inventory.000 uses the sales figure for cost of goods sold. cost of goods sold will be lowest when the ending inventory is highest. Answer (D) is incorrect because 265. Answer (A) is incorrect because LIFO yields the lowest net profit. Weighted average. less expensive items are deemed to have been sold. Copyright 2006 Gleim Publications.60 -. plus purchases (including freight-in). Given that sales reflect 125% of cost. Answer (D) is incorrect because. Specific identification. cost of goods sold must equal 720. Answer (C) is incorrect because 110. first-out (FIFO). plus purchases. Accordingly. It is not permitted by the IFRSs.000 CGS + 80. Net profit will be higher when cost of goods sold is lower. C.61 -.000 freight-in). FIFO assigns the most recent purchase prices to ending inventory and the earliest purchase prices to cost of goods sold. FIFO LIFO FIFO LIFO Cost of Goods Sold FIFO FIFO LIFO LIFO Answer (A) is incorrect because LIFO approximates current cost of goods sold. leaving the more expensive items in the ending inventory. and LIFO approximates current cost of goods sold. Last-in. Printed for Pol Mirafuentes Page 158 . minus ending inventory.25). Answer (B) is incorrect because FIFO approximates current cost for ending inventory.000 (720.

Thus. Inc. not the seller’s. Copyright 2006 Gleim Publications. Answer (D) is incorrect because 1. [353] Gleim #: 3. although the debit to cost of goods sold is acceptable. Inventory over and short Inventory B. Printed for Pol Mirafuentes Page 159 . and faulty record keeping.000 on hand at December 31. 20X3. Cost of goods sold Retained earnings appropriated for shortages Answer (A) is correct.082. The goods shipped FOB destination were improperly excluded from the seller’s ending inventory. a separate entry is needed to adjust the perpetual inventory amount. Which of the following demonstrates that adjusting entry? A. 20X4. inventory because title and risk of loss pass at the time and place of shipment.000. 20X3. the credit should be to inventory.62 -. Goods costing 122. 20X3. and faulty record keeping. Answer (B) is incorrect because 1.204.000 Answer (A) is incorrect because 1. These goods were properly excluded from ending inventory. Thus. They were expected to be received by the customer on January 5.000 (1.122. Thus.000 1. Also. This amount is reported as an adjustment of cost of goods sold or as an other expense on the income statement. The entry to record a write-down is a debit to inventory over and short and a credit to inventory. Answer (B) is incorrect because a difference between a physical count and a perpetual inventory balance is common.Source: CIA 1193 IV-31 A physical inventory count showed an entity had inventory costing 1. Reasons include normal and expected shrinkage. C. any appropriation of retained earnings would also have to involve the unappropriated retained earnings account. Reasons include normal and expected shrinkage.000 1.000 1. it is not an extraordinary item.000.122. D. the correct ending inventory is 1.000 excludes the goods shipped FOB destination and fails to exclude the goods shipped FOB shipping point. Answer (D) is incorrect because.000 goods shipped FOB destination).204.082. breakage.63 -. 20X3. shoplifting. The title and risk of loss did not pass until the time and place where the goods reached their destination and were duly tendered. breakage. 20X4.Source: CIA 1191 IV-31 When a perpetual inventory system is used and a difference exists between the perpetual inventory amount balance and the physical inventory count. A.000.000 beginning balance + 122. shoplifting. Extraordinary loss due to write-down of inventory Inventory C. They were expected to be received by the customer on January 4.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [352] Gleim #: 3. Answer (C) is correct.000. Compute the correct ending inventory to be reported on the shipper’s balance sheet at December 31. B.000.000 excludes the goods shipped FOB destination. Extraordinary loss due to write-down of inventory Allowance for inventory shortages D. 1. it is not an extraordinary item. shipped to a customer free on board (FOB) destination December 30.000 includes the goods shipped FOB shipping point. shipped to a customer free on board (FOB) shipping point on December 28. The goods shipped FOB shipping point should be counted in the buyer’s.000. Answer (C) is incorrect because a difference between a physical count and a perpetual inventory balance is common. Excluded from this amount were the following: Goods costing 82.

first-out (FIFO) method of inventory valuation is A. [354] Gleim #: 3.000 700 1. Inc. 3.Source: CIA 596 IV-17 (Refers to Fact Pattern #20) The ending inventory balance under the first-in.200 700 1. B.20) + (200 × 2. Hence. Answer (B) is correct. B.000 @ 2.700 units of ending inventory are valued at the most recent prices.050 3. Printed for Pol Mirafuentes Page 160 .Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #20] Illustrated below is a perpetual inventory card for the current year.320 1. C.150 3. C.Source: CIA 596 IV-18 (Refers to Fact Pattern #20) The cost of goods sold under the specific identification method of inventory valuation is A. Under the FIFO method.700 Additional Information: The entity had no opening inventory.050 is the ending inventory under the specific identification method.430 Answer (A) is incorrect because 3.150 [(1.000 @ 1.65 -.64 -.20 500 1. the ending inventory is 3. D.000 units purchased November 24. Answer (D) is incorrect because 3. D.65 1. The items sold on July 8 were purchased on May 5. The items sold on March 15 were purchased on January 12.65) + (500 × 2.230 is the ending inventory under the weighted-average method.600 1. 1. and 200 units purchased January 12.00)]. 500 units purchased May 5.430 is the ending inventory under the LIFO method. [355] Gleim #: 3. Ending inventory is assumed to include 1. Date January 1 January 12 March 15 May 5 July 8 November 24 Units Purchased Units Sold Units Balance 0 1. the 1.520 1.230 3.000 × 1. Answer (C) is incorrect because 3.700 Copyright 2006 Gleim Publications.00 300 500 @ 2.

Answer (D) is correct. the effect on per-unit gross profit is a reduction of 6.Source: CIA 1196 IV-22 An entity started in 20X4 with 200 scented candles on hand at a cost of 3. [357] Gleim #: 3.320 is the cost of goods sold under the LIFO method. Answer (D) is incorrect because an increase is permissible only to the extent of a prior writedown. Answer (B) is correct. Answer (C) is incorrect because 1.Source: CIA 1192 IV-43 An entity had the following selected per-unit data relating to work-in-process: Selling price Completion costs Historical cost Replacement cost Normal gross profit Selling cost 100 10 91 108 20 5 In comparison with historical cost. Given that historical cost is 91 and NRV is 85 (price of 100 – 10 completion cost – 5 selling cost).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 1.20)].600 is the cost of goods sold under the FIFO method. Answer (C) is incorrect because a reduction of 26 results from treating normal gross profit as if it were a completion or selling cost.30 --3. Reduction of 6.20 per unit. The cost of goods sold under the specific identification method is therefore 1.00 per unit. NRV equals selling price minus completion and selling costs. Answer (A) is incorrect because no effect implies that NRV is at least as high as cost.67 -. C.00 each. B.50 each. The remaining 500 units were purchased on May 5 at a cost of 2.10 --3. Printed for Pol Mirafuentes Page 161 . the 300 units sold on March 15 were purchased on January 12 at a cost of 2. Answer (B) is incorrect because 1.520 is the cost of goods sold under the weighted-average method. D. Increase of 5. No effect. This amount is the writedown expensed. the gross profit for 20X4 would be Copyright 2006 Gleim Publications.00 --Quantity Sold 150 --100 --200 --300 If the entity uses periodic FIFO inventory pricing. The following schedule represents the purchases and sales of candles during 20X4: Transaction Number 1 2 3 4 5 6 7 Quantity Purchased --250 --200 --350 --Unit Cost --3. Of the 800 units sold during the period.00) + (500 units × 2. These candles sell for 7.66 -. Inc. [356] Gleim #: 3. what will be the per-unit impact on gross profit of measuring ending inventory? A. Reduction of 26. Inventories are measured at the lower of cost or net realizable value (NRV).700 [(300 units × 2.

Source: CIA 1196 IV-9 The following data are available from the records of a department store for the year ended December 31.000 5. 8.445 {beginning inventory (200 units × 3.805 [sales (750 units × 7.920 Answer (A) is incorrect because 2.000 1.00) – cost of goods sold of 2. the gross profit for 20X4 using FIFO is 2. Printed for Pol Mirafuentes Page 162 .400 8. B. the department store’s merchandise inventory at December 31. Answer (B) is correct.755 2. Moreover.000 6. Inc. The cost of goods sold is 2. as of January 1.854 2. The FIFO method assumes that the first goods purchased are the first goods sold and that ending inventory consists of the latest purchases. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.755 equals sales minus purchases.10) + (350 units × 3.854 uses a weighted-average ending inventory and part of the cost of goods sold calculation.000 46. 20X3.50) + purchases [(250 units × 3.00)] – ending inventory (250 units × 3. 20X3 Purchases Markups (net) Markdowns (net) Sales At retail 9. is A.445]. 20X3: At cost Merchandise inventory. 2.920 uses a periodic LIFO inventory value.68 -.805 2.30) + (200 units × 3.000 13. Thus.000 Using the retail method to approximate valuation at lower of average cost or net realizable value. Answer (D) is incorrect because 2.600 Copyright 2006 Gleim Publications. whether the inventory system is periodic or perpetual does not affect FIFO valuation. [358] Gleim #: 3.000 4.00)}. C.000 33. D. C. Answer (C) is incorrect because 2.000 48. B.

December 31. Answer (B) is incorrect because.000 is computed by including the net markdowns in the cost-to-retail ratio. Printed for Pol Mirafuentes Page 163 . List A A.600 42.000 1.000 – 40. 20X3 is 5. depreciation in the second year will be <List B>. 20X3 Purchases Markups. second-year depreciation will be 26.000) 8.000 40. and equipment? Copyright 2006 Gleim Publications. the depreciation base is reduced by the amount of depreciation already taken in the first year. B. Thus. 20X3.000)].000 Sales Markdowns.000 60. net 9.70 5. January 1. It cost 100. Answer (D) is correct.000 Answer (A) is incorrect because depreciation in year two will be 20.69 -.000 × 20% × 2). net Inventory at retail. the cost of the inventory at December 31.000 16. 20X3 [359] Gleim #: 3. 20X3 Cost-to-retail ratio (42. Answer (C) is incorrect because 6.Source: CIA 595 IV-15 An entity is depreciating an asset with a 5-year useful life.000 under the straight-line method.000 (48. C. The version of the retail method that approximates a lower-of-average-cost-or-NRV valuation includes markups but not markdowns in the cost-to-retail ratio. first-year depreciation expense is 40. Answer (D) is correct. December 31.70 -. under the SYD method.600.000 Retail 13. D.000 46.667 [(4 ÷ 15) × 100. Answer (B) is incorrect because 8. Cost Inventory.000 is the inventory at retail at December 31. depreciation expense in year two is 24. [360] Gleim #: 3.000) Inventory at cost. plant. Thus.000 × .000 33.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 8.000 ÷ 60. 20X3. Accordingly.000 24.000) (4.000 is based on the 100% diminishing-balance method. If the <List A> method is used. The 200% diminishing-balance method uses twice the straight-line rate.000 and has no residual value.000 [(2 × 20%) × (100. Inc.Source: CIA 595 IV-10 Which of the following is not an appropriate basis for measuring the cost of property.400 neglects to subtract the net markdowns to compute the merchandise inventory at retail at December 31.000 (100. Sum-of-years’-digits Sum-of-years’-digits 200% diminishing-balance 200% diminishing-balance List B 20. In the second year. Answer (C) is incorrect because 16.000].

Answer (C) is incorrect because at the end of the estimated useful life of a depreciable asset. regardless of the depreciation method used. Answer (A) is incorrect because the purchase price. Yes Yes No No Sum-of-the-Years'Digits (SYD) Yes No Yes No Answer (A) is incorrect because at the end of the estimated useful life of a depreciable asset. The purchase price. They should be treated as reductions in the price of the land. the accumulated depreciation will equal the original cost of the asset under which of the following depreciation methods? DiminishingBalance A. C. as a result. Answer (D) is correct. but it is inappropriate to recognize the proceeds related to site preparation immediately in profit or loss. regardless of the depreciation method used. Accordingly. Answer (B) is correct. D. freight costs. future economic benefits will be received. and installation costs of a productive asset should be included in the asset’s cost. Periodic diminishing-balance depreciation is calculated without regard to residual value. should be recognized immediately as income. At the end of the estimated useful life of a depreciable asset. the amount of accumulated depreciation should equal the depreciable cost (original cost – estimated residual value). such as from the sale of cleared timber. items of property. Directly attributable costs include site preparation. Answer (C) is incorrect because subsequent costs are added to the carrying amount of an item of PPE if it is probable that. Answer (D) is incorrect because all costs of construction should be included as a part of the asset’s cost. Copyright 2006 Gleim Publications. architect and equipment fees. should be considered as part of the asset’s cost. D.71 -. and installation costs of a productive asset are included in the asset’s cost.Source: CIA 1196 IV-10 A depreciable asset has an estimated 20% residual value. plus purchase taxes) and the directly attributable costs of bringing the assets to working condition for their intended use. B. and equipment (PPE) that meet the recognition criterion are initially measured at cost. from excavation to completion. At the end of the asset’s estimated useful life. The costs of improvements to equipment incurred after its acquisition should be added to the asset’s cost if they increase future service potential. regardless of the depreciation method used. the amount of accumulated depreciation should equal the depreciable cost (original cost – estimated residual value). and the costs are reliably measurable. Accordingly. Printed for Pol Mirafuentes Page 164 . etc. the amount of accumulated depreciation should equal the depreciable cost (original cost – estimated residual value). All costs incurred in the construction of a plant building. The cost includes the purchase price (minus trade discounts and rebates. freight costs. regardless of the depreciation method used. Inc. costs of removing the assets and restoring the site. but the asset is not depreciated below its residual value. installation. Answer (B) is incorrect because at the end of the estimated useful life of a depreciable asset. B. initial delivery and handling. the amount of accumulated depreciation should equal the depreciable cost (original cost – estimated residual value). The SYD method uses a depreciable base equal to cost minus residual value. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. plant. Proceeds obtained in the process of readying land for its intended purpose. the cost of land includes the cost of obtaining the land and readying it for its intended uses. [361] Gleim #: 3.

prior to the end of its estimated useful life. The acquisition cost of the land was 75.000 as determined by a professional appraisal. for cash. the journal entry to record the disposition of the land is A. Answer (B) is incorrect because the revaluation surplus is not transferred through profit or loss. the entry is to debit land and credit revaluation surplus for 125. If the entity has not chosen to adopt the cost model for measurement of property.73 -. This amount should be determined by a professional appraisal. [363] Gleim #: 3. Expense Land B. plant.Source: CIA 1195 IV-22 An entity sells a piece of machinery.000 200. Inc. An item of PPE is carried at cost minus any accumulated depreciation and impairment losses. so it should be carried at its revalued amount. the asset should be removed from the balance sheet.000.000 125.000 200. The sale price is less than the carrying amount of the asset on the date of sale.000 200. Land is not depreciated.Source: CIA 596 IV-22 An entity donated land to a municipality for a park. and the resulting loss (revalued carrying amount of 200. and the market value at the time of the donation was 200.000 125. and equipment subsequent to initial recognition.000.000) should be included in profit or loss.000 125. Donation expense Land Income 75. Upon derecognition.000 75.000 Answer (A) is incorrect because the revaluation of the land must be recognized.000 125. Under the allowed alternative treatment.000 75. Printed for Pol Mirafuentes Page 165 . Accordingly.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [362] Gleim #: 3. Land Revaluation surplus Expense Land D.000 125. Land Revaluation surplus Revaluation surplus Income Expense Land C. The revaluation increased the carrying amount and is therefore credited directly to equity as revaluation surplus.000 125. Answer (C) is correct.000 125. an item of PPE may be carried at a revalued amount equal to fair value at the revaluation date minus any subsequent accumulated depreciation and impairment losses.000 – 0 net disposal proceeds = 200.72 -. The entry that the entity uses to record the sale is Copyright 2006 Gleim Publications.000 200. The entire surplus may be transferred to retained earnings (but not through profit or loss) when the asset is derecognized. Answer (D) is incorrect because the revaluation surplus is not transferred through profit or loss.000 200.

machinery Machinery D. 10% 25% 20% 70% Answer (A) is incorrect because 10% is the amount expensed in the last year.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. the percentage of the total depreciable cost that will be expensed in the third year is A. Answer (C) is incorrect because accumulated depreciation should be debited.Source: CIA 1193 IV-42 In making a cash flow analysis of property. Inc. Answer (C) is correct. Answer (D) is incorrect because an expense and accumulated depreciation should be debited. B.000.000 was sold for a gain of 1. Under the SYD method. Printed for Pol Mirafuentes Page 166 . The term “expenses” includes losses. Answer (B) is incorrect because 25% is the percentage expensed each year under the straight-line method. [364] Gleim #: 3. Because the sale price was less than the carrying amount of the asset on the date of sale. plant. The term “expenses” includes losses. Cash Accumulated depreciation -.machinery Expense-disposal of machinery Answer (A) is correct. D.machinery Expense-disposal of machinery Machinery B.75 -. The machinery account and the related accumulated depreciation account are eliminated by a credit and a debit. For the third year. respectively.000 and related accumulated depreciation of 30.machinery Income-disposal of machinery Machinery C. the portion expensed is 20% [2 ÷ (1 + 2 + 3 + 4)]. If the carrying amount of PPE increased by 80. a loss on disposal should be recognized in profit or loss.000 during the period. Cash Accumulated depreciation -.Source: CIA 1196 IV-29 If an entity employs the sum-of-the-years’-digits (SYD) method of depreciation for an asset with an estimated useful life of 4 years. Cash Expense-disposal of machinery Accumulated depreciation -. The cash account is debited for the amount of the sale proceeds. the internal auditor discovered that depreciation expense for the period was 10. Cash Machinery Accumulated depreciation -. Answer (B) is incorrect because a loss on disposal should be recognized in profit or loss. and equipment (PPE). [365] Gleim #: 3. Answer (D) is incorrect because 70% is the total amount expensed in the first 2 years. the amount of the depreciable cost that is expensed each year is the remaining useful life at the beginning of that year divided by the sum of the years of useful life.74 -.000. PPE with a cost of 50. C. how much PPE was purchased this period? Copyright 2006 Gleim Publications.

000 60. installation.000 to be used as a landfill to service its trash collection contracts with nearby cities for the next 20 years. Borrowing costs incurred after the asset is prepared for its intended use are expensed even if the allowed alternative treatment of such costs is followed.000 includes the borrowing costs. Answer (C) is correct. the depreciation expense is 192.000 excludes the delivery. Answer (D) is incorrect because 119. 91. The carrying amount of the PPE account.000 double counts depreciation expense and deducts the gain. Compute the depreciation on the equipment for the first year assuming an estimated service life of 5 years.000 204.000. The following facts pertain: Purchase price Delivery cost Installation cost Cost of trial-runs Interest charges for first year 800.000 [(800. exciting ride and financed it through the manufacturer.000 40. Answer (C) is correct.Source: CIA 1196 IV-32 On January 1.000 total decrease + 80. B. is increased by the cost of purchases and decreased by the carrying amount of items of PPE sold and depreciation. [366] Gleim #: 3.77 -.000 184. Under the straight-line method.000 delivery cost + 70.000 110. Answer (D) is incorrect because 204.000 70.000 The straight-line method is to be used. Answer (B) is incorrect because 100. net of accumulated depreciation. balance sheet for the quarry? Copyright 2006 Gleim Publications. and trial-run costs.000 Answer (A) is incorrect because 160.000 100. Printed for Pol Mirafuentes Page 167 .000 of depreciation. the annual depreciation expense for an asset equals the asset’s amount (cost – residual value) divided by the asset’s estimated useful life. or 20. A.000 accumulated depreciation). The entity depletes the quarry using the units-of-production method based on a surveyor’s measurements of volume of the quarry’s pit. 160. The cost of the asset includes its price and the directly attributable costs of bringing it to working condition for intended use. 110. Thus. B. D. and by the 10.000 ignores the carrying amount of items sold and includes the gain in the computation.000 (50. The net PPE decreased by the carrying amount of items sold.000 192.000 cubic yards when purchased and 350. C. Answer (B) is incorrect because 184.000 ignores the depreciation expense for the period. This amount was 500. What is the net amount that should be shown on the entity’s December 31. 20X4.000 119.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. 20X0. C. and the asset otherwise satisfies the criteria for capitalization of such expenses.000 installation cost + 40.000 purchase price + 50.000 50. [367] Gleim #: 3.000 Answer (A) is incorrect because 91.000 cost – 30.000 trial-run cost) ÷ 5-year estimated service life].Source: CIA 1193 IV-38 A theme park purchased a new. Inc. an entity purchased an abandoned quarry for 1.76 -.000 (30. D. If PPE still increased by 80.000 excludes the trial-run cost.200.000 increase) of equipment must have been purchased.000 cubic yards at year-end 20X4.

and equipment account.200.900 5 years 2. [369] Gleim #: 3.000 is the purchase price of the quarry.000 If the old and new equipment are dissimilar. future economic benefits will be received. and reduced operating costs future economic benefits. 100. Answer (C) is incorrect because allocation is not an accepted procedure.500 Copyright 2006 Gleim Publications.200. C. Inc. as a result. Answer (A) is incorrect because the cost should be capitalized.000 840.500. improved output quantity or quality. B. The 350.000 360.000 in cash.Source: CIA 592 IV-28 An entity installed an assembly line in 20X0.000]. Printed for Pol Mirafuentes Page 168 .Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Establish a separate account for the 100. Debit the cost to the property.000 900.000 equals {1. Answer (D) is incorrect because 360. 1.700 51. C. The automation increased the market value and productive capacity of the assembly line but did not affect its useful life.000 results from using straight-line depletion.000 was invested to automate the line.Source: CIA 1196 IV-18 An entity purchased new equipment on July 1. B. B. Four years later.200. Answer (B) is incorrect because 900. having a list price of 52. The net amount reported as an asset for the quarry using this method is 840.000 Answer (A) is incorrect because 1. plant. Report it as an expense in 20X4.000]}. the entity will record the new equipment at A. The following information pertains to the old equipment: Cost on January 1. D. Allocate the cost of automation between the asset and accumulated depreciation accounts. An extended useful life. 20X4 38. not the volume depleted.000 ÷ 500.000 [(350. [368] Gleim #: 3. Answer (C) is correct. Subsequent costs are added to the carrying amount of an item of PPE if it is probable that.100 48. Answer (D) is correct.79 -. D. 20X4.900 16. The units-of-production method allocates cost based on output. 45. Answer (B) is incorrect because the same account should be used.200.000 total cubic yards) × 1. Proper accounting for the cost of the automation should be to A. 20X1 Estimated useful life Residual value Fair value on July 1. The entity traded old equipment that was being depreciated using the straight-line method and paid 35.000) × 1. D.78 -.000.200.000 52.000 – [(350.000 cubic yards ÷ 500.000 cubic yards is the volume remaining in the quarry’s pit at year-end 20X4. C. and the costs are reliably measurable.

If that life is indefinite but not infinite. The cost of what is received in an exchange of similar or dissimilar items of PPE is recorded at fair value unless the exchange lacks economic substance or the fair value of what is given or received is not reliably measurable. Answer (C) is correct. They include the costs of establishing a new legal entity. Answer (B) is incorrect because start-up costs are expensed when incurred. Inc. Trademarks. D. Patents. Answer (D) is incorrect because 52. including fees of attorneys. B. Thus.700 equals the carrying amount of the old equipment after being depreciated for 3. [372] Gleim #: 3.5 years plus cash paid for the new equipment.” Inventory is a tangible asset. Hence.000 (16. B.82 -. goods on consignment are not intangible assets. or processes.100 equals the carrying amount of the old equipment after being depreciated for 4 years plus the cash paid for the new equipment. Answer (A) is correct. Unless the precise length of that life is not known.000).81 -. and the pre-operating costs of new operations. Copyright 2006 Gleim Publications. [371] Gleim #: 3.80 -. such as legal and secretarial costs. Capitalized and amortized. Unless the pattern of consumption of the economic benefits of the asset is not reliably determinable.Source: CIA 595 IV-25 Which of the following is not considered to be an intangible asset? A. Answer (B) is incorrect because 48. products. C. B. Capitalized. pre-opening costs of an entity’s new business facility. Expensed when incurred.000 + 35. or 51. the entity will record the new equipment at the fair value of the old asset plus cash paid. C. Expenditures on start-up activities are expensed when incurred unless they are included in the cost of an item of property.Source: Publisher A recognized intangible asset is amortized over its useful life A. Intangible Assets. defines an intangible asset as “an identifiable nonmonetary asset without physical substance. Capitalized and deferred until liquidation of the business. Answer (C) is incorrect because copyrights are intangible assets. [370] Gleim #: 3. C. and equipment.500 is the list price of the new equipment. plant. Answer (B) is incorrect because patents are intangible assets. Printed for Pol Mirafuentes Page 169 . should be A. D. because of the indefinite life of the business. Goods on consignment. IAS 38. but not amortized. If that life is determined to be finite. Copyrights. Answer (D) is correct. Answer (A) is incorrect because start-up costs are expensed when incurred.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 45.Source: CIA 593 IV-32 The costs of start-up activities. D. Answer (D) is incorrect because trademarks are intangible assets. Answer (C) is incorrect because start-up costs are expensed when incurred.

directly or indirectly. Economic entity assumption. and any infringement of a patent is a basis for a lawsuit.84 -. The useful life of an intangible asset is indefinite if no foreseeable limit exists on the period over which it will contribute. e. A patent is the exclusive legal right to use or sell an invention. Inc. [374] Gleim #: 3. Thus. and software. not at historical cost net of amortization. D. If the pattern of consumption of the economic benefits of such an intangible asset is not reliably determinable.g. D. that is.. [373] Gleim #: 3. C. Anti-merger laws. or composition of matter. Answer (D) is correct. B. Answer (D) is incorrect because a recognized intangible asset is not amortized if its useful life is indefinite. Monetary unit assumption. to the reporting entity’s cash flows. Historical cost assumption. Copyright. Answer (B) is correct. A patent may be given to any new and useful process. Answer (B) is correct. but they do not affect the design of new products. such as a device or process.83 -. Going concern assumption. the straight-line amortization method is applied. Copyright 2006 Gleim Publications. B. C. If an entity is not a going concern. Minimum standards for product warranties. Answer (A) is incorrect because the economic entity assumption is that every entity’s affairs are separate from those of its owners. Every business is assumed to be a going concern that will continue operating indefinitely. Answer (D) is incorrect because the historical cost principle deems cost to be the most objective and reliable measure. Answer (A) is incorrect because a copyright provides legal protection for tangible expressions of ideas.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because an intangible asset is amortizable if its useful life is finite. if the precise length of the useful life is not known. Answer (C) is incorrect because. machine. unless the useful life is determined to be indefinite.Source: CIA 595 IV-71 The restriction that manufacturers should not market a new product that is illegally similar to that of another company’s product is due to which public policy instrument? A. A recognized intangible asset is amortized over its useful life if that useful life is finite. Thus. Patent laws. Printed for Pol Mirafuentes Page 170 . liquidation values are not important. songs. Answer (C) is incorrect because the monetary unit assumption provides that all transactions and events can be measured in terms of money. manufacture. its intangible assets are reported at liquidation values.Source: CIA 590 IV-25 The amortization of intangible assets with finite useful lives is justified by the A. patent laws require that entities not design new products that are illegally similar to those of other entities that enjoy patent protection. Answer (B) is incorrect because laws establishing minimum warranty standards do not limit the similarity of product offerings. an intangible asset with a finite useful life is amortized over the best estimate of its useful life. novels. Answer (C) is incorrect because anti-merger laws can affect the ability of one entity to acquire another entity producing similar products if the result will be to lessen competition.

Evaluation of process alternatives. Answer (D) is incorrect because the purchase price of 4.000.000 and that its fair value minus cost to sell was 275. Inc. Accordingly. D. B. Design of tools involving new technology.85 -. At December 31. Research is “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding” (IAS 38). Answer (C) is incorrect because construction of a preproduction prototype is a development activity. Chertco acquired a patent for 500. 0 450. The fair value of XYZ’s identifiable assets on this date was 550.550. D. The asset has no residual value. On this date. Chertco estimated that the discounted future net cash inflows from the patent would be 325. [377] Gleim #: 3.Source: Publisher On January 1. B.000. 175.Source: CIA 593 IV-43 MNO purchased all of XYZ’s 100.000) fair value of the identifiable assets and liabilities by 450.87 -.000 + 550. Printed for Pol Mirafuentes Page 171 .86 -. C.000.000 (40 × 100. Answer (B) is correct.000. Evaluation of process alternatives is an activity typically classified as research.000.Source: Publisher Which of the following is not classified as a development activity? A.000 25.000.000 550.000 carrying amount by 1.000 – 2. D. B.000 and total liabilities of 2.000 Answer (A) is incorrect because cost in excess of fair value of the identifiable assets and liabilities is reported as goodwill. Construction of a pilot plant.000.000.000 50. a significant change in the business climate caused Chertco to assess the recoverability of the carrying amount of the patent. [376] Gleim #: 3.000 and using the straight-line method began amortizing it properly over its estimated useful life of 10 years. C. XYZ’s balance sheet showed total assets of 5.000 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [375] Gleim #: 3. Chertco should recognize an impairment loss of A. Answer (B) is incorrect because construction of a pilot plant is a development activity. Goodwill is recognized as an asset equal to the excess of the cost over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired. 20X2.000.000 outstanding common shares for 40 per share on August 31. This excess is goodwill.000 is the excess of fair value over the carrying amount of the identifiable assets and liabilities on the seller’s books. Answer (D) is incorrect because the design of tools involving new technology is an activity typically classified as development. 20X5. The amount that should be reported on MNO’s consolidated balance sheet on August 31 for goodwill is A. 20X5. for the year ended December 31. Answer (C) is incorrect because 550.000.000 exceeds the seller’s 3.000. Answer (A) is correct.000 (5.000 greater than their carrying amount.000. Construction of a preproduction prototype.000. The cost of 4.000) is in excess of the 3. C.000 0 Copyright 2006 Gleim Publications.

At the end of the contract year after all of the services have been performed. The recoverable amount is the greater of fair value minus cost to sell (275. If the subscriber has any problems between the regularly scheduled application dates. Recognition of an element of financial statements (e. The entity should determine whether the carrying amount exceeds the recoverable amount. Answer (C) is incorrect because 25. B.Source: CIA 1192 IV-27 A company provides fertilization. Related flights occur. Tickets are issued. Answer (C) is incorrect because a sufficient degree of certainty that economic benefits will flow to the enterprise does not exist when the ticket is issued. [378] Gleim #: 3. D. C.. that is. Answer (B) is incorrect because a sufficient degree of certainty that economic benefits will flow to the enterprise does not exist when the reservations are booked or confirmed.g. which includes revenue and gains) requires that two criteria be met. and the cost or value of the item must be measurable with reliability.89 -. [379] Gleim #: 3.000) or value in use (the present value of expected cash flows from the asset. Some subscribers elect to pay for an entire year because the company offers an annual price of 540 if paid in advance. which occurs when the related flight takes place. plants.88 -. Answer (A) is incorrect because a sufficient degree of certainty that economic benefits will flow to the enterprise does not exist when the reservations are booked or confirmed. Inc. Passenger reservations are confirmed. B. the company’s personnel will promptly make additional service calls to correct the situation. It must be probable that any future economic benefit associated with the item will flow to or from the enterprise. and disease control services for a variety of trees. Copyright 2006 Gleim Publications. Evenly over the year as the services are performed. Thus. When the cash is collected. Passenger reservations are booked. D. income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. that income be earned. For 50 per month. Chertco should recognize no impairment loss because the estimated discounted future net cash inflows (325.Source: CIA 593 IV-27 An airline should recognize revenue from airline tickets in the period when A. the company should recognize the related revenue A. and shrubs on a contract basis. The recognition criteria are not met with respect to the collections from sales of airline tickets until the receipt of future economic benefits is sufficiently certain. At the end of the fiscal year.000 is the excess of the estimated discounted future net cash inflows over the fair value minus cost to sell. For a subscriber who pays the annual fee in advance. e.000}. The usual procedures for income recognition. the company will visit the subscriber’s premises and apply appropriate mixtures. Answer (B) is incorrect because 50. Answer (D) is correct.000 – [4 years × (500. insect control. income.g. C.000) exceed the carrying amount {500. Answer (D) is correct.000 is the excess of the carrying amount over the fair value minus cost to sell. Such certainty exists when the airline performs the contracted-for service. reflect these criteria. when the related flights occur. Thus.000 ÷ 10 years)] = 300..000 assumes no amortization. The critical event in the earning process for the airline is the delivery of the service to the customer.000). Printed for Pol Mirafuentes Page 172 . or 325.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 175.

Additional information: The balance of opening inventory was 140. Answer (C) is incorrect because revenue from services rendered is recognized when the services have been performed. A portion of the services is performed monthly.000 230. [Fact Pattern #21] A company had the pre-closing trial balance at December 31 shown.000 750. Printed for Pol Mirafuentes Page 173 .000 Copyright 2006 Gleim Publications. a portion of the related revenue should be recognized monthly rather than waiting until the entire contract year is complete. The long-term debt pays interest at a rate of 10% per annum. plant. D. The assets classified as property. Straight-line depreciation is used by the company.000 600.000 200. and equipment (exclusive of land) have a 10-year estimated useful life and were 1 year old at the start of the current year.000.Source: CIA 594 IV-2 80.000 900.000. plant. Answer (D) is incorrect because a portion of the related revenue should be recognized monthly rather than waiting until the entire fiscal year is complete. C. Thus.000 500. In the situation presented. Cash Accounts receivable Inventory Gross property.000 670. Answer (B) is correct.000 200.90 -. and equipment Accumulated depreciation Accounts payable Long-term debt Share capital Retained earnings (Jan. 1) Sales revenue Purchases Administrative expenses [380] Gleim #: 3. B.000 2. the performance of the service (monthly spraying) is so significant to creating a sufficient certainty of an increase in future economic benefits that revenue should not be recognized until delivery occurs.000 620. The debt was issued on July 1 of the current year and originally had 5 years to maturity. the company will report cost of goods sold of A. which includes revenue and gains. 440. payable every 12 months. The most common time at which these two conditions are met is when the product or merchandise is delivered or services are rendered to customers.000 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a liability is recognized when the cash is collected prior to the rendition of the service. Income. Inc.000 (Refers to Fact Pattern #21) On the year-end financial statements.000.000 60. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably.000 100.000 530.

Answer (D) is incorrect because the post-closing trial balance is prepared after adjusting entries and the adjusted trial balance are completed. C. cost of goods sold is 440. the enterprise recorded depreciation of 30. 2. and prepare reversing entries (optional). C. prepare an adjusted trial balance. Using the straight-line method of depreciation over a service life of 10 years with no residual value. Inc. prepare and post adjusting journal entries.000. Answer (C) is incorrect because 670. B. post to the ledger(s) from the journals. The accounting cycle may be summarized as consisting of nine steps: record the period’s transactions in the appropriate journals. prepare an unadjusted trial balance.000 is obtained by reversing the opening and closing inventory figures.000 for the year ending 12/31/X1.000 + 530. plus purchases. The fair value of the asset at 12/31/X1 is not reliably measurable but is estimated to be 310. Printed for Pol Mirafuentes Page 174 . and equipment. Cost of goods sold equals beginning inventory.91 -. If the enterprise uses the appropriate treatment for the measurement of property. 4 Answer (A) is correct. Hence. Answer (B) is incorrect because the preparation of reversing entries is the last step in the accounting cycle.000. 1.000 – 230.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. B. an enterprise acquired a plant asset for 300. and equipment subsequent to initial recognition. 3. minus ending inventory.Source: CIA 591 IV-43 On 1/1/X1. rather than subtracting. Answer (D) is incorrect because 900.000 omits closing inventory from the calculation. 1. [381] Gleim #: 3. 1.000). Report the excess of the fair value over the carrying amount in equity as revaluation surplus. Not report the excess of the fair value over the carrying amount. D. prepare the financial statements. D. Answer (B) is incorrect because 620.000 adds. 3.92 -.Source: CIA 594 IV-3 (Refers to Fact Pattern #21) Which is the correct order of the following four steps in the accounting cycle? Step 1 Step 2 Step 3 Step 4 prepare adjusting journal entries take a post-closing trial balance prepare an adjusted trial balance prepare reversing entries A. plant. [382] Gleim #: 3. prepare and post the closing entries. the balance sheet prepared on 12/31/X1 will A. 2. 4 4. Report the excess of the fair value over the carrying amount as goodwill. take a post-closing trial balance. 2. Answer (C) is incorrect because the adjusted trial balance is prepared after adjusting entries are made.000 (140. 2 3. plant. closing inventory. 3. 4 1. Report the excess of the fair value over the carrying amount as part of property. Copyright 2006 Gleim Publications.

C. Answer (D) is incorrect because the balance sheet reports on financial position at a moment in time. Which financial statement should ABC primarily use to assess the amounts. Answer (A) is incorrect because the statement of income is prepared on an accrual basis and is not meant to report cash flows.000 [300. and equipment subsequent to initial recognition as an asset is at cost minus any accumulated depreciation and impairment losses. plant. Historical cash flow data indicate the amount. It is also a means of verifying past cash flow assessments and of determining the relationship between profits and net cash flows and the effects of changing prices. Answer (B) is incorrect because the statement of changes in equity is prepared on the accrual basis. the measurement of property. Thus. and certainty of future cash flows. and certainty of future cash flows of XYZ Company? A. [384] Gleim #: 3.93 -. Balance sheet. B. Copyright 2006 Gleim Publications. This information helps investors. D. Printed for Pol Mirafuentes Page 175 . D. depreciation expense should be presented as A.000 – (300. An increase in the carrying amount after a revaluation is credited directly to equity as revaluation surplus.Source: CIA 1192 IV-30 The management of ABC Corporation is analyzing the financial statements of XYZ Corporation because ABC is strongly considering purchasing a block of XYZ ordinary shares that would give ABC significant influence over XYZ. and other users to assess the enterprise’s ability to generate cash and cash equivalents and the needs of the enterprise to use those cash flows. Statement of changes in equity. An item of property. Answer (C) is incorrect because an excess of fair value over the carrying amount of a plant asset is not reflected in conventional financial statements if the fair value is not reliably measurable. Answer (C) is correct. A deduction from net profit in converting net profit or loss to net cash flows from operating activities. Answer (D) is correct.94 -. timing. and equipment may be carried at a revalued amount equal to fair value minus any subsequent accumulated depreciation and impairment losses. revaluation is not allowed when the fair value is not reliably measurable. The plant asset should be reported at its carrying amount of 270. Statement of cash flows. However. C. A statement of cash flows provides information about the cash receipts and cash payments of an enterprise during a period. Income statement. plant. timing. Inc. B. An outflow of cash. An inflow of cash. creditors. An addition to net profit in converting net profit or loss to net cash flows from operating activities. Answer (B) is incorrect because an excess of fair value over the carrying amount of a plant asset is not reflected in conventional financial statements if the fair value is not reliably measurable.Source: CIA 1191 IV-32 In a statement of cash flows (indirect method).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because an excess of fair value over the carrying amount of a plant asset is not reflected in conventional financial statements if the fair value is not reliably measurable.000 ÷ 10 years)]. [383] Gleim #: 3.

depreciation (a noncash expense) is added to net profit or loss. In the reconciliation of net profit or loss to net cash from (used by) operations. Income statement as a change in accounting policy. Depreciation is a noncash operating expense. gains and losses. These adjustments include such items as depreciation. Answer (B) is incorrect because depreciation is a noncash operating expense. Related disclosures report the effects of noncash investing and financing activities. The applicable tax rate was 20%. The purchase and the sale of property. operating activities. Answer (C) is correct. Income statement as a single amount for a discontinued operation. Depreciation. What financial statement is this? A. The result of this transaction may appear on the A. Inc. a noncash expense. Income statement. D. Net cash flow from (used by) operating activities may be reported indirectly by removing from net profit or loss the effects of (1) deferrals of past operating cash flows. Printed for Pol Mirafuentes Page 176 . B. it will reconcile net profit or loss to net cash from (used in) operating activities. Answer (D) is incorrect because depreciation should be added.96 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because depreciation does not involve an inflow or outflow of cash. depreciation. D. If the statement is presented using the indirect method. C. Answer (D) is incorrect because the statement of changes in equity does not include captions for operating and investing activities and depreciation. Statement of cash flows. B. Balance sheet. (2) accruals of expected future operating cash flows. is included in this presentation. Income statement as an extraordinary item.Source: CIA 592 IV-35 A financial statement includes all of the following items: net profit.Source: CIA 592 IV-36 An enterprise decided to sell a separate major line of its business. C. A statement of cash flows is a required financial statement. Balance sheet as a fundamental error. changes during the period in trade receivables. investing. Answer (A) is incorrect because the balance sheet does not include periodic net profit or loss or depreciation expense. and (4) noncash transactions.95 -. [386] Gleim #: 3.000 and had a net carrying amount of 70. and financing activities. but the process of depreciating such assets is not defined as an investing activity. changes in inventory. Answer (B) is incorrect because the income statement does not have captions for operating and financing activities. Answer (C) is correct. and financing activities. [385] Gleim #: 3. amortization of bond discount and bond premium. plant. The assets were sold for 100. and changes in accounts payable and accrued liabilities. (3) income or expense items related to financing and investing cash flows. Statement of changes in equity. amortization of patents. It provides information about cash receipts and payments by reporting the cash effects of an enterprise’s operating.000. and equipment constitute investing activities. Copyright 2006 Gleim Publications.

the amount of gross profit recognized in year 1 was 150 [600 × (100 cost incurred ÷ 400 estimated total cost)]. Answer (C) is correct. Actual gross profit was therefore 700 (1. Answer (B) is incorrect because gross profit recognized in year 2 is 550.Source: CIA 1191 IV-40 A company uses the percentage-of-completion method and reports the following: Year 1 Construction costs Estimated cost to complete at year-end 100 300 Year 2 200 0 The contract price is 1. Inc. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a fundamental error is no longer recognized under IFRSs. Answer (D) is incorrect because gross profit recognized in year 2 is 550. A component of an entity consists of operations and cash flows that are clearly distinguishable from the rest of the entity for financial reporting as well as operationally. should be considered as part of the asset’s cost. and equipment? A. The project was completed in year 2 at an additional cost of 200. total cost was expected to be 400 (100 incurred + 300 estimated cost to complete). from excavation to completion. C. All costs incurred in the construction of a plant building. Answer (C) is correct.98 -. A discontinued operation (DO) is a component of an entity that has been disposed of or meets the criteria for classification as held for sale. Copyright 2006 Gleim Publications. and estimated total gross profit was 600 (1. Printed for Pol Mirafuentes Page 177 . B. Answer (B) is incorrect because extraordinary items are not recognized. [387] Gleim #: 3.000 price – 400 estimated total cost). D. It is (1) a separate major line of business or geographical operating area. C. B. Answer (D) is incorrect because accounting policies guide the preparation and presentation of financial statements. plant. What is the gross profit recognized in year 2? A. Hence.97 -. At the end of year 1. Gross profit recognized in year 2 is 550 (700 total – 150 recognized in year 1). (2) part of a single plan to dispose of such a line or area. A single amount is disclosed on the face of the income statement equal to the sum of (1) after-tax profit (loss) on DOs and (2) after-tax gain (loss) on (a) remeasurement of noncurrent assets (or disposal groups) classified as held for sale at fair value minus cost to sell or (b) disposal of the assets or disposal groups that constituted the DO.000 – 300 actual total cost). or (3) a subsidiary acquired solely for resale. 150 400 550 800 Answer (A) is incorrect because gross profit recognized in year 2 is 550.Source: CIA 594 IV-30 Which of the following is not an appropriate basis for measuring the historical cost of property. The cost should include the purchase price without a deduction for trade discounts. [388] Gleim #: 3. Delivery and handling costs and installation costs of a productive asset should be included in the asset’s cost. The costs of improvements to equipment incurred after its acquisition should be added to the asset’s cost if they provide future economic benefits exceeding the originally assessed standard of performance.000.

retains a 10% commission and the paid advertising costs. ABC ships the goods to DEF. Only then are the recognition criteria for a sale of goods satisfied: the enterprise has transferred the significant risks and rewards of ownership. and remits the cash due ABC. Under a consignment arrangement. and transactional costs can be reliably measured. installation.Source: CIA 590 IV-31 DEF is the consignee for 1. and XYZ pays 2. plant.000 for local advertising costs that are reimbursable from ABC. it is probable that the economic benefits will flow to the enterprise. This amount includes the purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. Answer (C) is incorrect because the revenue recognition criteria for sales of goods are not met in a consignment until the consignee sells the goods to a third party. [390] Gleim #: 3. [389] Gleim #: 3. XYZ notifies ABC of the sales. DEF receives the goods from ABC. recognition occurs when notification is received that the consignee has sold the goods. Accordingly. B.000 on consignment to XYZ Stores. The purchase price is determined by adding any import fees and nonrefundable purchase taxes and subtracting any trade discounts and rebates.99 -.000 units of product X for ABC Company. and dismantling and removing the asset and restoring the site. all costs of construction of a building are included in its initially recorded cost because they are directly attributable costs of bringing the asset to its working condition for its intended use. Select the journal entry that appropriately records the notification of sale and the receipt of cash by ABC. Answer (C) is incorrect because subsequent expenditures should be added to the carrying amount if it is probable that they will result in future economic benefits exceeding the originally assessed standard of performance. The goods are in the physical possession of the consignee but remain the property of the consignor and are included in the consignor’s inventory. professional fees (e.000 cash. Inc. Hence.000 units when A. ABC pays 3. site preparation. Answer (B) is incorrect because the revenue recognition criteria for sales of goods are not met in a consignment until the consignee sells the goods to a third party. Printed for Pol Mirafuentes Page 178 . for example. Directly attributable costs include costs of. Answer (D) is incorrect because the costs of a self-constructed asset are determined in the same way as those of an acquired asset. the consignor ships merchandise to the consignee who acts as agent for the consignor in selling the goods. ABC should recognize the revenue from these 1.000 of freight costs to a transport company. The agreement between DEF and ABC is signed. By the end of the period.100 -. Revenue and the related cost of goods sold from these consigned goods should only be recognized by the consignor when the merchandise is sold and delivered to the final customer.. the amount can be reliably measured. initial delivery and handling. the enterprise has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods. C. DEF sells the goods and informs ABC of the sale.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because directly attributable costs of bringing the asset to working condition for its intended use are included in its cost. three fourths of the consigned merchandise has been sold for 50. An asset classified under property. D.Source: CIA 1193 IV-37 ABC Manufacturing Company ships merchandise costing 40.g. those of architects and engineers). Answer (B) is correct. and equipment is measured initially at cost. Answer (A) is incorrect because the revenue recognition criteria for sales of goods are not met in a consignment until the consignee sells the goods to a third party. Copyright 2006 Gleim Publications. Answer (D) is correct.

500. Monthly payments start January 1.102 -. What is the effect of this transaction on the December 31. 50.000 rental fee for a parking lot it leases. 47 increase. a company prepaid the 72.000 ÷ 1. Answer (C) is incorrect because the 10% commission and the advertising costs are ignored in this answer. Consequently.000 50.Source: CIA 1189 IV-9 On January 31. 33 increase. the freight costs will be included in the determination of net profit when cost of goods sold is recognized.000 5.000 2. 114 increase.000 sales – 2.000 for 1. [392] Gleim #: 3. Answer (C) is incorrect because 67 is the cost of goods sold [(1. not the profit.01 × (1.101 -. D. Answer (D) is incorrect because 114 {100 + [.000 Answer (A) is incorrect because the freight was paid earlier in the period and would have been recorded then by a credit to cash and a debit to inventory. 20X3. Answer (A) is incorrect because 33 is the net profit effect excluding interest revenue of 14 [. ABC debits the cash received 43.000 43. The advertising and commission expenses are debited for 2. The rental fee covered a 3-year period beginning February 1. Finally.01 × (1.000 50. a company using the installment sales method sold goods that cost 1.000 of gross revenue is credited. 20X3 financial statements for each of the following? Copyright 2006 Gleim Publications.500 – 100)]. 67 increase. Cash Revenue from consignment sales D.500 – 100) balance for 1 month is 14. the effect on profit is 47 (33 + 14). [391] Gleim #: 3.000 advertising – (. The buyer paid 100 down.000) ÷ 1. respectively.000 3.Source: CIA 592 IV-34 On December 1.000) sales commission].10 × 50. B. Answer (B) is correct.000 45.000 5. the effect on profit for year 1 is A.000 50. Cash Advertising expense Commission expense Freight expense Revenue from consignment sales B. Cash Commission expense Revenue from consignment sales 40.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Interest accrued on the 1. year 2.000 and 5. year 1. Interest accrues at 1% per month on the unpaid balance.000 5. Cash Advertising expense Commission expense Revenue from consignment sales C.400 (1.500]. To the nearest dollar.000 2. C.500 – 1. 20X3.000 [50.000. Answer (B) is correct.500 – 100)]} is the total revenue. The gross profit margin is 33 1/3% [(1. Answer (D) is incorrect because the reimbursable advertising costs are ignored in this answer. Printed for Pol Mirafuentes Page 179 . Inc.000 50.000 50. so the amount of profit from the 100 down payment recognizable in year 1 is 33 (rounded). Thus.500) × 100].

These criteria are met when the certificates are redeemed or expire because the liability for redemptions will then decrease and economic benefits will be reliably measurable. Answer (A) is incorrect because there is no basis for such an allocation.103 -. In the period the certificates expire.Source: CIA 1189 IV-29 A department store sells gift certificates that may be redeemed for merchandise. 22. 20X3 to December 31.000 Prepaid Expenses 72.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Current Expenses A. C. [394] Gleim #: 3. In the period the certificates are redeemed or in the period they expire if they are allowed to lapse. The 72.000 should be debited to current expenses (11 months × 72. [393] Gleim #: 3. should not be recognized until an increase in future economic benefits related to an increase in an asset or a decrease in a liability is sufficiently certain and can be measured reliably. D. 0 22. In the period the certificates are sold.104 -.000 is the expense recognized for 12 months instead of the 11 months from January 31. Answer (C) is incorrect because revenue is also recognized when certificates are redeemed. Answer (C) is incorrect because 24.000 24. In 20X3. Goodwill. future economic benefits are neither sufficiently certain nor reliably measurable.000 0 Answer (A) is incorrect because the expenses relating to the current year need to be recognized. Each certificate expires 3 years after issuance. which includes revenue and gains. C.000 50. when the certificates are sold.000 ÷ 36). Development. Answer (D) is correct. Printed for Pol Mirafuentes Page 180 . B. C. The store has not yet performed its obligations created by the sales of gift certificates. Inc. Research. Answer (D) is incorrect because only those expenditures related to the current year should be expensed. Answer (B) is correct. Copyright 2006 Gleim Publications. Equipment. D. Income.000 should be deferred as prepaid expense.000 rental fee should be recognized as expense evenly over the 36-month duration of the lease. Answer (B) is incorrect because. 20X3.000 72. Evenly over 3 years from the date of issuance. and 50.000 48. D.Source: CIA 1185 IV-20 Which of the following costs is most likely to be expensed immediately rather than recognized as an asset? A. B. The revenue from the gift certificates should be recognized A. B.

The enterprise cannot demonstrate at this stage that future economic benefits are probable. although only 1 million of that amount had been collected by year-end. [395] Gleim #: 3. 20X3.106 -. the ability to use or sell it. and engineering estimates indicated that the office tower was 30% complete at year-end. 3.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because an internally generated intangible asset may arise from the development (but not the research) phase of asset generation. 4 million of construction costs were incurred. Construction began immediately upon the signing of the contract and was expected to take 3 years to complete.000 is based on the engineering estimate of the stage of completion. Copyright 2006 Gleim Publications. Hence. Inc. However.000. a construction company signed a contract with a property management firm involving the construction of a large urban office tower.000 is based on the original estimate of contract costs.000. This amount equals costs incurred plus recognized profit. [396] Gleim #: 3. Answer (B) is incorrect because items of equipment that qualify for asset recognition are initially measured at cost.000]. Printed for Pol Mirafuentes Page 181 .000. D. Under the cost-to-cost approach to determining the stage of completion of the contract. The total price of constructing the tower was agreed to be 10 million with 2 million being paid on the date of the agreement. in 20X3 the amount of revenue it will recognize on the long-term contract will be A. [Fact Pattern #22] On January 1.000. the stage of completion equals contract costs incurred to date divided by the most recent estimate of total contract costs.705.882 5. Answer (D) is correct. B. 20X3. the revised estimate of total construction costs was 8.000 is based on the percentage of total revenue billed to date. Answer (B) is correct.705. and the ability to make a reliable measurement of development expenditures for the asset. Answer (D) is incorrect because 6. the intent to complete and use or sell the asset.000 4.000 6.000) × 10. The depreciable amounts of these assets are then allocated as expense (unless included in the carrying amount of other assets) over their useful lives. the revenue to be recognized in the first year is 4. During the year ended December 31. the difference between revenue recognized to date and contract billings at the end of 20X3 will be shown on the December 31.000. 20X3 balance sheet as a <List A> of <List B>.000. The original estimate of total construction costs was 8 million. It is not amortized.000. C. No intangible asset resulting from research should be recognized.000 ÷ 8.000 Answer (A) is incorrect because 3.500.882 [(4. Answer (C) is incorrect because 5. An asset is recognized if the enterprise demonstrates the technical feasibility of completing the asset. At year-end. Research expenditures should be expensed when incurred.5 million and the property management firm had been billed a further 4 million.Source: CIA 1194 IV-8 (Refers to Fact Pattern #22) If the construction company uses the percentage-of-completion (cost-to-cost basis) method of revenue recognition. the availability of resources to complete development and to use or sell the asset. Answer (C) is incorrect because goodwill arising from a business combination that meets the definition of an acquisition is recognized as an asset. impairment of goodwill is recognized as a loss.000.105 -. If the company uses the percentage-of-completion method (cost-to-cost basis).Source: CIA 1194 IV-9 (Refers to Fact Pattern #22) Assume that the construction company recognizes 2 million of revenue for the long-term contract in 20X3. how it will generate probable future economic benefits.

the enterprise presents an asset. It represents unearned revenue. the parking and storage facility that was purchased for 150. that recognized profit was 300. the enterprise presents a liability. and the cost of materials has risen steadily over the year.000 4. the assumption that 2 million of revenue was recognized under the percentage-of-completion method (cost-to-cost basis) necessarily includes the assumption that the stage of completion was 20% (2 million ÷ 10 million). the excess billings equal 4.000.000 4.000 Answer (A) is incorrect because an excess of billings over the sum of costs and recognized profits is a liability.000.000. Several decisions have to be made regarding the appropriate accounting and reporting practices for this company. Relevant information for several of these items is described in the following list of transactions and events: At year-end. a new landscaping firm acquired a fleet of vehicles. Answer (B) is incorrect because an excess of billings over the sum of costs and recognized profits is a liability. None of the bad debts are expected to be recovered. all the necessary tools and equipment. At the end of 20X3.000. If the amount of progress billings exceeds costs incurred plus recognized profits minus recognized losses.000 equals cash collected. Inc.000. and the first set of year-end financial statements are being prepared. maintenance contracts were sold in December at very reasonable prices.000.000 is the amount of cash collected. and that costs to date were 1.000 [20% × (10 million – 8. The physical flow of inventory is first in.000. C. D. 10% bank loan.000.000 of revenue (costs to date + recognized profit) and had submitted billings of 6. [Fact Pattern #23] On January 1. During the first year of operations.000.7 million (20% × 8. and 1. Answer (D) is correct.5 million)].000. Interest payments of 5.000 1. Printed for Pol Mirafuentes Page 182 .000.000. is 100.000 are due on October 1 and April 1 of each year during the 5-year term of the loan.000 has a fair value of 250. The gross amount due from (to) customers for contract work is an asset (liability).000. this amount is listed as a current liability. It began operations immediately.5 million). On April 1.107 -. It is now the end of the first year of operations.000. Copyright 2006 Gleim Publications. If the amount of costs incurred plus recognized profits minus recognized losses exceeds progress billings. the company arranged a 100. the company had recognized 2. Half of the uncollected overdue amounts are estimated to be uncollectible. [397] Gleim #: 3. given that 5% is the industry average level of bad debts.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) List A A. and a parking and storage facility. The year-end balance of accounts receivable. Current asset Current asset Current liability Current liability List B 1. Answer (C) is incorrect because 1. Thus. the company experienced a 5% bad debt rate on credit sales. Total credit sales for the year were 400. B. To promote sales for the coming year.000.Source: CIA 1194 IV-25 (Refers to Fact Pattern #23) The company will recognize revenue from the December sale of the maintenance contracts in the <List A> year if it selects <List B> basis reporting. first out. Because the billings exceed revenue recognized. NOTE: Given a 10 million fixed price and 8. provided that the customers paid cash. which includes uncollected overdue accounts.5 million of total costs.

000 250. Because the customers paid cash for the maintenance contracts in the first year. revenue is recognized when the cash is received. the estimated bad debt expense will be <List B>.109 -. Printed for Pol Mirafuentes Page 183 . [399] Gleim #: 3. for example.000 20. C. D. B. Answer (B) is correct. 150. the revenue received in the first year is recognized in the first year.000 Copyright 2006 Gleim Publications.Source: CIA 1194 IV-27 (Refers to Fact Pattern #23) If the company uses the <List A> approach to estimate bad debt expense. B. installation. List A A. site preparation.000 50.g.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) List A A. The purchase price is determined by adding any import fees and nonrefundable purchase taxes and subtracting any trade discounts and rebates. List A A. not to the valuation basis for property. plant. Services will be provided in year two.000 250. C. under cash-basis accounting. if the accrual basis is used.000 100. Answer (B) is incorrect because. Under the cash basis of accounting.000 List B Matching Historical cost Going concern Revenue recognition Answer (A) is incorrect because the matching principle requires the recognition of related revenues and expenses in the same accounting period. B. An asset classified under property. Answer (C) is incorrect because the going-concern assumption is that the enterprise will continue in existence indefinitely..Source: CIA 1194 IV-26 (Refers to Fact Pattern #23) The company will report a value of <List A> for the parking and storage facility if it prepares financial reports consistent with the <List B> principle. The services are provided and the revenue recognition criteria are met after year one.108 -. Answer (D) is incorrect because accrual-basis accounting recognizes the revenue in year two. Answer (C) is incorrect because. plant. [398] Gleim #: 3. that is the year in which the revenue should be recognized. Answer (D) is incorrect because revenue recognition principles refer to the timing of revenue recognition. Balance sheet Balance sheet Income statement Income statement List B 20. Inc. and equipment is measured initially at cost. D. C. and dismantling and removing the asset and restoring the site.000 150. Directly attributable costs include costs of. and equipment. initial delivery and handling. First First Second Third List B Cash Accrual Cash Accrual Answer (A) is correct. D. This amount includes the purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. professional fees (e. those of architects and engineers). revenue received for the maintenance contracts is recognized after the first year.

Answer (C) is incorrect because changes in accounts payable are not included in the calculation of net sales. B.112 -.000 (400. Journalization. Copyright 2006 Gleim Publications. Inc. C. B.000 7. Answer (D) is incorrect because 12. bad debt expense is 20. interest expense for the first year of operations is A. Using the income statement approach. [401] Gleim #: 3.500 Answer (A) is incorrect because 5. Answer (C) is incorrect because 10.000 (100.000 is the interest expense for a full year. Answer (C) is correct. Answer (D) is incorrect because 50. [400] Gleim #: 3. 5. Adjustments. <List A> must be <List B> cash receipts from customers. Answer (B) is correct. To convert from the cash basis (cash receipts) to the accrual basis (net sales). List A A. Printed for Pol Mirafuentes Page 184 . [402] Gleim #: 3. Answer (D) is incorrect because changes in accounts payable are not included in the calculation of net sales. Identification and measurement of transactions. the bad debt expense is determined using a percentage of total credit sales. D.000 12.110 -. the increase in net accounts receivable must be added to cash receipts from customers.000 credit sales × 5% estimated bad debt rate).000 payment made on October 1 plus the three months’ accrued interest at year-end. or 7. C. Under this approach. An increase in accounts receivable An increase in accounts receivable An increase in accounts payable An increase in accounts payable List B Added to Subtracted from Added to Subtracted from Answer (A) is correct.000 × 50%). D. Thus.500).000 (100. Answer (B) is incorrect because a decrease in receivables would be subtracted from cash receipts.Source: CIA 1194 IV-28 (Refers to Fact Pattern #23) If the company reports expenses on an accrual basis. D. the amount estimated to be uncollectible is 50. Answer (B) is incorrect because the balance sheet approach estimates bad debts as a portion of overdue accounts estimated to be uncollectible. Under this approach.000 is the estimated bad debt expense using the balance sheet approach. The interest expense for the first year equals the 5.Source: CIA 595 IV-3 Which of the following steps in the accounting cycle is completed later than the others? A. B.Source: CIA 595 IV-1 To calculate net sales. C. Posting.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the balance sheet approach estimates bad debts as a portion of overdue accounts estimated to be uncollectible.000 × 50%).000 + 2.111 -.500 10.000 is the interest expense under the cash basis. the amount estimated to be uncollectible is 50.500 (5.500 is equal to 15 months of interest.

journalization occurs second.000.000 If the company uses the percentage-of-completion method of accounting for this contract.200. Office supplies Office supplies expense B. the adjusting entry on December 31 will be A. the development of a trial balance. of the steps listed. Answer (B) is incorrect because. Because the initial entry recorded the entire purchase to a nominal account.000 1.113 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. posting occurs third. Year-end information related to the contract is as follows: Year 1 Estimated total cost Cost incurred Billings Collections 2. Office supplies expense Office supplies C.200.000 600.000 worth of office supplies on January 1st and had 15.000. If the initial purchase of supplies entry on January 1st was to debit office supplies expense and to credit cash for 50.000.000. Answer (C) is incorrect because.000) 100. B. D. Answer (D) is incorrect because the closing entry would have been to debit expense and credit a prepaid asset if the initial entry had been to a real account. not 35. statement presentation. [404] Gleim #: 3.000 Year 3 2.000 15.000. closing.000 700.000 15.000 15.000 Answer (A) is correct.000 1. [403] Gleim #: 3.000 400. the year-end adjusting entry must debit a prepaid asset to reflect the remaining supplies on hand of 15.000 200. Printed for Pol Mirafuentes Page 185 .000 35.Source: CIA 1196 IV-11 A company began work on a long-term construction contract in year 1.000 900. journalization. and making reversing entries (optional). Office supplies Office supplies expense D.000 of office supplies still on hand at yearend. Office supplies expense Office supplies 15.000 350.000. C.000. The contract price was 3.Source: CIA 595 IV-4 A company purchased 50.000 1.000.000 Copyright 2006 Gleim Publications.000 of supplies that were not used during the period. Answer (D) is incorrect because the identification and measurement of transactions is the first step in the accounting cycle.000 1.114 -. The order of the steps in the accounting cycle is identification and measurement of transactions and other events required to be recognized.000 35. Answer (C) is incorrect because the appropriate amount is 15.000.000 800. posting from the journals to the ledgers. Answer (B) is incorrect because the reversing entry is to debit expense and credit a prepaid asset.000 Year 2 2. the gross profit to be recognized in year 1 is A. The adjusting entry must also credit (reduce) expenses for the 15. Inc. of the steps listed.000.000 35. adjustments to produce an adjusted trial balance.000 35. (100. taking a post-closing trial balance (optional).200.

recognition occurs when notification is received that the consignee has sold the goods.000. Another 5 barrels were returned to the vendor by the manufacturer for credit. 3.000 Answer (A) is incorrect because 3.Source: CIA 591 IV-52 A project is expected to result in the following adjustments over the next year: Cash sales increase by 400.116 -. D. When the outcome of a contract can be reasonably estimated. and transactional costs can be reliably measured. At the end of July.000 is the difference between billings and costs incurred.000.000 is the difference between billings and collections. Printed for Pol Mirafuentes Page 186 . Answer (C) is incorrect because 200.000 ÷ 2. The total relevant net cash flows during that year are Copyright 2006 Gleim Publications. During August. Expenses (except depreciation) increase by 180. the enterprise has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods. Inc.000 12. the manufacturer had 40 barrels of ink on consignment.000 – 2. the percentage-of-completion method recognizes revenue based on the stage of completion of the contract.Source: CIA 1196 IV-30 A vendor sells specialty inks on consignment to a manufacturer of colored paper at a price of 200 per barrel. Answer (C) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because (100. C.000 4. the consignor ships merchandise to the consignee who acts as agent for the consignor in selling the goods.000 does not include the 40 barrels consigned in July or deduct the 5 barrels returned.000. The goods are in the physical possession of the consignee but remain the property of the consignor and are included in the consignor’s inventory. what is the amount of unearned revenue contained in the vendor’s accounts receivable from the manufacturer? A. Assume the corporate tax rate is 34%.000. In this consignment arrangement. [405] Gleim #: 3. Accordingly. Answer (D) is correct. Thus.000. The gross profit for year 1 is the anticipated gross profit on the contract times the completion percentage. Depreciation increases by 80. Revenue and the related cost of goods sold from these consigned goods should only be recognized by the consignor when the merchandise is sold and delivered to the final customer.5 returns) x 200]. One typical method for estimating the stage of completion is the calculation of ratio of the contract costs incurred to date to the estimated total costs.000 [(40 consigned + 50 consigned . Accordingly. Only then are the recognition criteria for a sale of goods satisfied: the enterprise has transferred the significant risks and rewards of ownership.000 [(3.000).000) × 35%]. gross profit for year 1 is 350.115 -.000 does not reflect the 5 barrels returned. The 5 barrels returned are not included in unearned revenue because they constitute a return of consigned goods. the amount can be reliably measured. [406] Gleim #: 3. so the revenue is recognized for these barrels. Under a consignment arrangement. The vendor records revenues when the barrels are shipped and makes no adjusting entries to record unearned revenues until the December 31st closing of the books. the vendor consigned 50 barrels and received payment for 30 barrels.000.000 does not include the 40 barrels consigned in July. Answer (D) is incorrect because 12. The percentage-ofcompletion at year-end on the cost-to-cost basis is 35% (700.000) is the difference between costs incurred and collections.30 paid for . Answer (B) is incorrect because 100. Payment is made to the vendor in the month the manufacturer uses the barrels in production.000 11. At the end of August. B. the amount of inappropriately recognized revenue is 11. Answer (B) is incorrect because 4. it is probable that the economic benefits will flow to the enterprise. 30 barrels have been paid for.

000.000 nondepreciation expenses increase – 80.000.117 -.000.118 -. Ten percent of each year’s sales are on credit that will be paid the following year. and the increase in net cash inflows will be 172. Answer (B) is correct. The cash inflows from last year’s credit sales are estimated to be 3. The cash inflows from this year’s sales are expected to be 36.000. Copyright 2006 Gleim Publications. D. a total cash inflow of 39. B.400 equals the increase in after-tax net profit. B.400 140.000 – 47.Source: CIA 597 IV-32 The management discussion and analysis section of a company’s annual report typically contains A. The increase in pre-tax net profit is 140. [408] Gleim #: 3.000 depreciation). Hence.000 172.000 equals cash sales minus expenses other than depreciation. C. Answer (C) is incorrect because 15 million excludes the 3 million cash inflow that resulted from last year’s credit sales. A discussion of the future prospects of the company. [407] Gleim #: 3.000 – 51. cash outflows are estimated at 51.000 Answer (A) is incorrect because 92. 15 million.000 is the increase in pre-tax net profit. Assume the company begins this year with a zero cash balance.000 (90% × 40.600).000 (39. taxes will increase by 47. 8 million. A description of the company’s primary business and segments. which is a noncash expense. the company will have a cash deficit of A. C.000 cash sales increase – 180.000.000. the net cash outflow is anticipated to be 12.000 for the current year. Printed for Pol Mirafuentes Page 187 .000). C. Inc. D. materials. B. D.000).000. All of the answers are correct. Ignoring depreciation. and other expenses of 51 million.000 (400.000.400 220.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. 17 million.600 (34% × 140. Labor.000 – 180. Answer (B) is incorrect because 140.000. Answer (D) is incorrect because 220. 12 million. At the end of this year. taxes.000.000 (10% × 30. A discussion of the company’s operating results. Answer (D) is incorrect because 17 million includes depreciation when estimating cash outflows. Answer (C) is correct.000).Source: CIA 590 IV-55 A company had 30 million in total sales last year and expects 40 million in total sales this year.000). Thus. The company anticipates the following expenses for this year: Depreciation of 5 million. Answer (A) is incorrect because 8 million includes next year’s payments on this year’s sales in the estimation of this year’s cash inflows. 92.400 (400.

the cost of the machine can be determined by multiplying one payment by the A. Answer (D) is correct.1436 × 100. and a discussion of the future prospects of the company are included.000 114.650). providing a breakdown of net sales and income by segment.650 is the present value of 100. Answer (C) is incorrect because a description of the company’s primary business and segments. D. The present value of a future amount equals that amount divided by the interest factor for the given discount period and discount rate. Future value of an annuity due of one currency unit. is 46.650. a discussion of the company’s operating results.000 is the present value of 214. D.000 due at the end of eight years.Source: CIA R98 IV-36 The present value of 100. Printed for Pol Mirafuentes Page 188 . The MD&A section addresses capital resources. Answer (B) is incorrect because the cost at the date of purchase is the present value of an ordinary annuity. [409] Gleim #: 3. Answer (A) is incorrect because the cost at the date of purchase is the present value of an ordinary annuity.000 must be 214. The cost of the machine is the present value of the annuity (the series of equal periodic payments). The interest factor for the present value of 1 due in 8 years and discounted at 10% is 2. Using an interest rate of 10%. The cost therefore equals the periodic payment times the interest factor for an ordinary annuity of one currency unit for a specified number of equal periodic payments discounted at a given interest rate.360 is the interest earned. B. Present value of one currency unit.000 invested for the same length of time and at the same rate? A.000 discounted at 10% for 8 years. Inc. It also contains prospective information on economic trends and market changes. a discussion of the company’s operating results.000). and their potential effects on the company’s future performance. Answer (C) is incorrect because the cost at the date of purchase is the present value of an ordinary annuity.360 discounted at 10% for 8 years.650 100. Future value of one currency unit.120 -. Thus. and operating results. the MD&A section typically includes a description of the company’s primary business and segments. B.000 ÷ 46. at 10%. [410] Gleim #: 3.360 214.Source: CIA R98 IV-41 A company purchased a new machine on an installment payment plan and is to make equal annual payments beginning one year from the date of purchase. What is the approximate value of 100. Copyright 2006 Gleim Publications. Answer (B) is incorrect because 100. Answer (D) is correct. C.360 (2. the future value of 100. Answer (D) is correct.119 -. Management must also identify trends and discuss significant events and uncertainties.1436 (100. 46. and a discussion of the future prospects of the company are included. The annuity is an ordinary annuity because the payments begin one period after the date of purchase. Answer (B) is incorrect because a description of the company’s primary business and segments. a discussion of the company’s operating results. Present value of an ordinary annuity of one currency unit. and a discussion of the future prospects of the company are included. It reviews the operating results of the company. liquidity.360 Answer (A) is incorrect because 46.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a description of the company’s primary business and segments. Answer (C) is incorrect because 114. C. Thus.

Earned income. [413] Gleim #: 3. C. Expired cost. The prepayment does not meet the income recognition criteria because the future inflow of economic benefits is not sufficiently certain given that the enterprise has not done what is required to be entitled to those benefits. provides guidelines for interim reporting stating that enterprises A. D. May use estimates based on sales margins for interim inventory valuation although a different method is used for annual reporting. C. C.122 -. Answer (A) is correct. Answer (D) is incorrect because the customer has a prepaid expense (expense paid but not incurred). Essentially the same reporting methods should be used for interim and annual financial statements. However. the amount received in advance is considered a liability (unearned income) because it represents an obligation to perform a service in the future arising from a past transaction. Accrued income. Answer (C) is incorrect because the same accounting policies should be applied in the interim statements as in the annual statements. Answer (A) is correct. BEPS and DEPS must be reported. Prepaid expense. For example. Printed for Pol Mirafuentes Page 189 . Interim Financial Reporting. Estimates based on sales margins may suffice. Must determine income tax expense by applying progressive tax rates to income on a quarterly basis.121 -. IAS 34 states that complete inventory-taking and valuation may not be required at interim dates. Need not disclose basic and diluted earnings per share each quarter. D. Accordingly. Unearned income.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [411] Gleim #: 3. The exterminator has not performed the related services for the customer. B.Source: CIA 1196 IV-4 The purpose of an entry that contains a debit to prepaid property taxes and a credit to property tax expense is to recognize a(n) A. Answer (D) is incorrect because the same accounting policies should be applied in the interim statements as in the annual statements. May prorate extraordinary items over four quarters. Select the term that appropriately describes this situation from the viewpoint of the enterprise. A. Answer (B) is incorrect because income tax expense is based on the estimated annual effective income tax rate. Prepaid income. Answer (B) is incorrect because the income is not earned. Thus. D. Answer (C) is incorrect because accrued income has met the recognition criteria but has not been received.Source: CIA 1193 IV-30 An enterprise that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months’ service at the beginning of each new quarter.123 -. B. Thus. Accrued expense.Source: Publisher IAS 34. B. the preparation of interim financial reports ordinarily requires a greater use of estimates. Copyright 2006 Gleim Publications. an extraordinary item is to be reported in the interim period in which the gain or loss occurred. [412] Gleim #: 3. Prepaid expense. Inc.

This adjusting entry defers expense recognition to the future period in which the property taxes apply.g. the enterprise has not substantially completed what it must do to be entitled to the benefits represented by the advance payment.125 -. income. B. However. Thus. which includes revenue and gains) requires that two criteria be met. It must be probable that any future economic benefit associated with the item will flow to or from the enterprise. Accrued revenue. D. increases equity. Contra asset amount. therefore. that income be earned. C.Source: CIA 597 IV-3 What are the effects of an adjusting entry used to accrue revenue from credit sales? Assets A. Answer (B) is incorrect because the obligation is current. a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits. and has no effect on liabilities. and has no effect on liabilities. that is. Answer (B) is correct. and the receipt of future economic benefits is not sufficiently certain to merit income recognition. reflect these criteria. An entry debiting prepaid property taxes and crediting property tax expense is needed at the balance sheet date when prepayments are initially recorded in an expense account. Answer (D) is incorrect because the payment has not met the income recognition criteria. income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability.. Answer (B) is incorrect because the entry records an asset.124 -. Answer (D) is incorrect because the accrual of revenue increases assets. e. Answer (C) is incorrect because a contra account reduces the valuation of the related account. increases equity. increases equity. the obligation is expected to be settled in the normal course of the operating cycle or is due to be settled within 12 months. The advance payment should be reported in the manufacturer’s current-year balance sheet as a(n) A. [414] Gleim #: 3. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Recognition of an element of financial statements (e. C.. Noncurrent liability.g. Answer (C) is incorrect because the accrual of revenue increases assets.Source: CIA 597 IV-14 A manufacturer receives an advance payment for special-order goods that are to be manufactured and delivered within the next year. Answer (C) is incorrect because the entry records an asset. Printed for Pol Mirafuentes Page 190 . Answer (D) is incorrect because the entry records an unexpired cost (an asset). Current liability. and has no effect on liabilities. Inc. Decrease Increase No effect No effect Liabilities No effect No effect Decrease Increase Equity Decrease Increase Increase Decrease Answer (A) is incorrect because the accrual of revenue increases assets. D. Thus. and the cost or value of the item must be measurable with reliability. Accordingly. Copyright 2006 Gleim Publications. The journal entry to accrue revenue requires a debit to a receivable account and a credit to a revenue account. The usual procedures for income recognition. [415] Gleim #: 3. to deliver goods or to refund the customer’s money. Answer (A) is correct. the accrual of revenue increases assets and equity. The delivery of goods is to take place within a year of the balance-sheet date.

000 600.Source: CIA 594 IV-1 80.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [416] Gleim #: 3. The remaining 2 million should be reported as a liability. and equipment Accumulated depreciation Accounts payable Long-term debt Share capital Retained earnings (Jan. Answer (B) is incorrect because the liability at the end of 20X3 is 2 million.000.126 -.000 200.000 500.000 1.000 ÷ 6 months)]. plant. The income recognition criteria are not met with respect to the season ticket collections until the receipt of future economic benefits is sufficiently certain. but uses accelerated depreciation for tax purposes.000. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements? Copyright 2006 Gleim Publications. Inc.000 60. the enterprise should A. Answer (D) is incorrect because the enterprise should report income of 1 million in 20X3 and 2 million in 20X4.127 -. D. Printed for Pol Mirafuentes Page 191 . the enterprise collected 3 million from season-ticket sales for the 20X3-20X4 season. The season lasts from November through April. Cash Accounts receivable Inventory Gross property. 1) Sales revenue Purchases Administrative expenses [417] Gleim #: 3. Report income of 1 million on its 20X4 income statement.000. and equipment have a 10-year estimated useful life and were 1 year old at the start of the current year.000 2.000 530. Accordingly. The collections represent a liability (unearned income). Report a liability for unearned income of 2 million on its December 31. with 10 games played each month. Such certainty exists with respect to collections related to the games played as of the balance sheet date. In 20X3. plant. B. Answer (A) is correct. the enterprise should recognize 1 million as income in 20X3 [2 months × (3.000 750. The long-term debt pays interest at a rate of 10% per annum. The assets classified as property.000 200.000 230. Based on this information.Source: CIA 597 IV-28 An enterprise that owns a new professional basketball team sells season tickets to its team’s games. Answer (C) is incorrect because the enterprise should report income of 1 million in 20X3 and 2 million in 20X4. Its fiscal year-end is December 31. 20X3 balance sheet.000 (Refers to Fact Pattern #24) The enterprise uses straight-line depreciation for financial reporting purposes.000 100. [Fact Pattern #24] An enterprise had the pre-closing trial balance at December 31 shown below. Straight-line depreciation is used. payable every 12 months. The debt was issued on July 1 of the current year and originally had 5 years to maturity. 20X3 balance sheet. Report income of 3 million on its 20X3 income statement. Report a liability for unearned income of 3 million on its December 31.000. C. Additional information: The balance of opening inventory was 140.

Consequently. Moreover. Accumulated depreciation. Copyright 2006 Gleim Publications. taxable income will be lower than financial net income. Printed for Pol Mirafuentes Page 192 . C. tax-basis retained earnings will be less than that in the general purpose financial statements. This amount is unaffected by depreciation. plant. and equipment. Answer (A) is incorrect because the balance of accumulated depreciation is higher in the tax-basis financial statements. plant. Because the tax basis uses an accelerated method. and equipment is recorded in the gross property. Answer (C) is correct. and equipment account. Retained earnings. B. Answer (B) is incorrect because depreciation expense is a noncash charge. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. plant. Gross property. The cash balance is unaffected by the depreciation method used. depreciation expense and accumulated depreciation will be greater. Cash. Answer (D) is incorrect because the historical cost of property. Inc.

000 1.010.000 890.000 950. B.Source: CIA 594 IV-5 (Refers to Fact Pattern #25) The enterprise will report year-end total assets of A.400 970 430 30 400 200 200 150 100 250 [418] Gleim #: 3.600 1. Inc.000 1. 800. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #25] An entity’s financial statements for the current year are presented below: Balance Sheet Cash Accounts receivable Inventory Net fixed assets Total Accounts payable Long-term debt Share capital Retained earnings Total 100 200 50 600 950 140 300 260 250 950 Statement of Income and Retained Earnings Sales Cost of goods sold Gross profit Operations expenses Operating profit Interest expense Profit before tax Income tax Net profit Plus Jan.000 Copyright 2006 Gleim Publications. 1 retained earnings Minus dividends Dec. Printed for Pol Mirafuentes Page 193 . D. 31 retained earnings 3.128 -.

000 50.000 EI + 600. Income summary Retained earnings B. Retained earnings Income summary 140. and equipment – 120. Printed for Pol Mirafuentes Page 194 . Answer (B) is correct. Answer (C) is incorrect because accrued interest is 50. Interest payable Interest expense D.000 240. Interest expense Cash C. Answer (B) is incorrect because the debt pays annual interest on July 1.000.000.000].130 -. Retained earnings Income summary C.000 [(600.Source: CIA 594 IV-6 (Refers to Fact Pattern #24) Assume that the enterprise reports cost of goods sold of 200.000 ÷ 10 years) × 2 years]. [419] Gleim #: 3. so accrued interest is only 50.000 accumulated depreciation).000 240. Because interest is payable on July 1.010. The debt was issued on July 1 and has been outstanding for only 6 months. plant.000 50.000 100.000 for the current period.000 and interest expense of 10. Total assets equal 890.000 240. Answer (D) is correct.000 50.000 280. Also.Source: CIA 594 IV-4 (Refers to Fact Pattern #24) Which adjusting entry should be used at year-end to account for interest expense on the long-term debt? A. the adjusting entry should be Interest expense Interest payable 50.000 100.000 × 10% × (6 ÷ 12) = 50.000 100.000 [420] Gleim #: 3.000.000 cash + 100. The payable is also recognized in the current period.000 (80.000 Copyright 2006 Gleim Publications. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 800. Income summary Retained earnings D.000 A/R + 230.000 240.000 50. Interest expense equals the face amount of the debt multiplied by the interest rate and the fraction of the year the debt was outstanding [1. Answer (C) is incorrect because 950.000 gross property. Total accumulated depreciation at the end of the second year is 120.000 uses the beginning balance of inventory. Interest expense Interest payable B. The year-end total assets can be determined by summing all of the assets and deducting accumulated depreciation (including the current year’s depreciation).129 -. 6 months’ interest is accrued and expensed in the current period.000 omits second-year depreciation from the calculation.000 Answer (A) is incorrect because the debt has been outstanding for only 6 months. The final closing entry required to ensure that current earnings are incorporated into year-end retained earnings is A. Interest expense Interest payable 100. Answer (D) is incorrect because 1.000 50. Also assume a 50% tax rate on corporate earnings.000 140. and no cash outlay is required at year-end. Thus. interest expense is debited and interest payable is credited.000 280.000 omits total accumulated depreciation from the calculation.

000 interest – 200. B.Source: CIA 597 IV-55 An entity has excess capacity in production-related property. B. Answer (A) is incorrect because the going concern assumption is that the business will have a long life. Answer (C) is incorrect because depreciation on salespersons’ vehicles is not a cost of production and is therefore a period cost. Monetary unit assumption.132 -.000 [(1. it is appropriate to record the advance payment as a liability of the company. Answer (B) is correct.000]. [421] Gleim #: 3. which states that revenue should not be recognized until it is earned. D. Answer (B) is incorrect because the monetary unit assumption is that money is the common denominator by which economic activity is conducted. and equipment. Inc. Answer (D) is incorrect because the salary of a sales manager is not a cost of production and is therefore a period cost. Going concern assumption. C. the full capacity sales level is Copyright 2006 Gleim Publications.Source: IIA.5) × 280.000 (750. Answer (A) is incorrect because insurance on the corporate headquarters building is not a cost of production and is therefore a period cost. It does not relate directly to the practice of recording unearned revenues as liabilities.131 -. [422] Gleim #: 3. The salary of a sales manager. Since the amount received in cash has not yet been earned. It does not relate directly to the practice of recording unearned revenues as liabilities. Current period pretax net income equals 280. adapted Which of the following is a product cost for a manufacturing company? A. after-tax net income credited to retained earnings equals 140.133 -. Revenue recognition principle. Property taxes on a factory. Printed for Pol Mirafuentes Page 195 . [423] Gleim #: 3. This is an example of the revenue recognition principle. adapted The practice of recording advanced payments from customers as liabilities is an application of the A. labor.0 – . Answer (C) is incorrect because administrative expenses were omitted.000 sales – 200.000 CGS – 60.000 depreciation – 10. C. Period costs are expensed immediately because no direct relationship between cost and revenue exists. Answer (D) is incorrect because administrative expenses were omitted and the journal entry is reversed.Source: IIA. Product costs such as material. Depreciation on a salesperson’s vehicle. Answer (C) is incorrect because the historic cost principle is the requirement that most assets and liabilities be accounted for and reported on the basis of acquisition price.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Thus. If in a given year these assets are being used to only 80% of capacity and the sales level in that year is 2 million. Answer (D) is correct. Insurance on the corporate headquarters building. and that the monetary unit provides an appropriate basis for accounting measurement and analysis. plant. and overhead attach to the product and are carried in future periods if the revenue from the product is recognized in subsequent periods. Historic cost principle.000 administrative expenses). This does not relate directly to the practice of recording unearned revenues as liabilities. Answer (B) is incorrect because income taxes are omitted and the journal entry is reversed. D.

000.000 Credit Sales 50.000.000. September 30 cash balance Collections Disbursements Ending balance Necessary borrowing Targeted ending balance 23. Cash disbursements in October are projected to be 94.000 from September credit sales + 30. C. D. D. B.000 on October 31.000 equals the actual sales.000) 9.000 Answer (A) is incorrect because 1.000) (14.500.000.000 (2. Answer (D) is incorrect because 10.000. To reach its targeted cash balance on October 31. the entity will need to borrow A. full capacity sales equals 2.600. Printed for Pol Mirafuentes Page 196 . Answer (D) is incorrect because the entity will need to borrow 6.000 55.000 16.000 from October cash sales) in October.000 11.000.000.000. Inc.000.000.000 Answer (A) is incorrect because the entity will need to borrow 6.000 2.000 Answer (C) is incorrect because the entity will need to borrow 6. [424] Gleim #: 3. Full capacity sales equals actual sales divided by the percentage of capacity at which PPEs were operated.000 equals actual sales divided by the proportion of unused capacity.Source: CIA 1191 IV-14 Actual and projected sales of an entity for September and October are as follows: Cash Sales September (actual) October (projected) 20. it will have to borrow 6.000 80. Thus. Answer (B) is correct.000 30. Copyright 2006 Gleim Publications. The September 30 cash balance is 23. 1. Answer (B) is incorrect because 2.000 (50.000 15.000 10.134 -.000 6.000 All credit sales are collected in the month following the month in which the sale is made.600.000 (94. To maintain a minimum cash balance of 15.000 2. This entity will collect 80. Answer (C) is correct.500. 0 6. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C.000.000 ÷ 80%).000 is 80% of the actual sales.

000 gain). minus residual value. C. The accumulated depreciation was 400.000 (600. [427] Gleim #: 3. The selling price of the machine was A.000. Answer (D) is incorrect because 465. Inc. B. 20X1.000. 35.000 205. [426] Gleim #: 3.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [425] Gleim #: 3.000 + 75.000 115. The entity reported a gain on the sale of the machine of 75.000 240. Answer (C) is incorrect because 365.000 equals the gain plus the residual value. 20X1. The machine was sold on December 31. Copyright 2006 Gleim Publications.000). 20X3.000 loss equals cost. C.000. Thus. in exchange for cash should A. The carrying amount equals cost minus accumulated depreciation. the machine was sold for 535.000. depending on the provisions of the transfer agreement. The gain or loss that should be recorded on the disposal of this machine is A. 280. Printed for Pol Mirafuentes Page 197 . or 205.000 on that date.000 sales price). B. The accumulated depreciation related to the machine was 495.137 -. minus selling price.000 loss equals cost minus selling price.000 loss. Answer (B) is correct.000 gain equals selling price.000 (1.000 is the carrying amount.136 -. Thus.000 – 535.000 {[(1.000).000 in its income statement for the fiscal year ending December 31. The company uses straight-line depreciation.Source: CIA 597 IV-34 An entity purchased a machine on January 1. Not be recorded until all of the receivables have been collected.000. 465.000 – 495. the selling price was 280.Source: CIA R98 IV-39 A transfer of receivables.000 equals carrying amount. plus residual value. On December 31. B. 65. C.000. minus residual value. the loss was 65. Answer (D) is incorrect because 115. Answer (C) is incorrect because 205. minus carrying amount. Be recorded as a borrowing transaction.000 Answer (A) is correct. Be recorded as a sale or a borrowing transaction.000 (700. The machine was depreciated using the straight-line method and had a residual value of 40.000 loss. with recourse. D. Answer (B) is incorrect because 240. The selling price minus the carrying amount of the machine equals the gain or loss. plus gain. D.135 -.000 (205. D. Be recorded as a sale of receivables.000.000 gain.000 – 100. Answer (A) is incorrect because 35.000) ÷ 9 years] × 4 years}. 365.000 – 400.000. The machine had an estimated useful life of 9 years and a residual value of 100. 20X1 for 1. so the carrying amount was 600.Source: CIA 597 IV-33 An entity purchased a machine for 700.000 loss.

000 equals 10% of the face amount due. the rights expire. with the proceeds of the sale reduced by the fair value of the recourse obligation (a new financial liability).Source: CIA 1190 IV-46 On January 1.139 -.000 was made with the balance of 100.500 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the transferor must recognize cash and either a sale or a borrowing.000 35. B.289 is the balance due in 3 years minus the balance outstanding during the year divided by 3 [(100.000). Answer (C) is incorrect because certain conditions must be met before a sale may be recognized.132. B. An entity derecognizes a financial asset (or a part thereof) when it loses control of the contractual rights the asset represents.000 126. Answer (D) is incorrect because a sale may be recognized if certain conditions are met.138 -. Answer (B) is correct. or the entity surrenders the rights.513 Answer (A) is correct. A down payment of 200. Answer (D) is incorrect because 27.132) of interest for the year.20 (10% × 75. 3. whether loss of control has occurred depends on the positions of both the transferor and the transferee.289 10.000 What is the forgone sales revenue from inventory shrinkage? A. 7. At an interest rate of 10%. Moreover. for example. for example. if the entity may reacquire the asset (unless it is readily obtainable in the market or the price is fair value) or when the transferor is entitled and obligated to repurchase or redeem at a price giving the transferee a lender’s return. an entity recorded the purchase of an asset correctly at 275. Answer (B) is incorrect because 8. What is the year 1 interest to record on the payable? A.000 170. C. D. D. the transfer of receivables with recourse is accounted for as a sale.513 8. Inc.513 equals the interest rate times the cost of the asset (275.132 (275. The balance outstanding during the year was 75.132) ÷ 3].Source: CIA 589 IV-35 The following facts are presented for an entity that uses the retail inventory method: Cost Beginning inventory Purchases Sales Ending inventory (per physical count) at retail prices 28.132 × 10%).000 – 75. Answer (C) is incorrect because 10. Printed for Pol Mirafuentes Page 198 .000 Copyright 2006 Gleim Publications. Control is not lost. if the transferee may freely sell or pledge the full fair value of the asset.132 – 200.000 27. [428] Gleim #: 3. [429] Gleim #: 3.000 due in 3 years at an imputed annual interest rate of 10%. C. When the conditions above are met. Control is lost when the entity realizes the rights to the benefits of the contract.000 45.000 Retail 40.000 180. year 1.000 45. Control ordinarily is lost when the transferee may obtain the benefits of the asset.513. the entity should accrue 7.

credit accounts payable).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 3. Accounts payable Freight-in Cash C.000 equals the estimated ending inventory at cost. the payable is initially credited at the discounted amount. Under the net method.000 30 1. The seller was responsible for delivery to the shipping point.02) = 980].000 220.000 (170.010. a total of 1. Answer (C) is incorrect because this entry would have been made at the invoice date if the gross method had been used.000) 5.010 1. Inc. The entity records purchases at the net amount. The journal entry to record payment 8 days after the invoice date is A. Printed for Pol Mirafuentes Page 199 . Purchases Freight-in Accounts payable 1. Answer (D) is incorrect because this entry was made at the invoice date.030 980 30 1.000 (45. Answer (D) is incorrect because 45.000 of inventory on account. The seller was responsible for delivery to the shipping point. Because this method requires detailed inventory records to be kept at retail.000 gross amount of inventory on account with terms of 2% discount if paid within 10 days. Copyright 2006 Gleim Publications. and the goods arrived on January 3.010 1. the buyer’s remittance to the seller includes the freight cost of 30 and the discounted price of the merchandise [1.000) 50. The advantage is that a physical inventory can be taken at retail without the necessity of counting individual items at cost. Answer (B) is correct.000 equals the actual ending inventory at retail. with freight of 50 paid at destination by the buyer. Accounts payable Cash B. Because the payment was within the discount period and freight was prepaid.0 – .010 Answer (A) is correct. Accounts payable needs to be debited for the entire amount (including freight of 30) owed to the seller.000 × (1.140 -.000 180.000 Answer (C) is incorrect because 35. [430] Gleim #: 3. 20X2. The retail inventory method converts ending inventory at retail to cost by applying a cost-retail ratio. [Fact Pattern #26] An entity with a December 31 year-end purchased 2. 20X1. with freight of 30 prepaid by the seller. lost sales revenue (at retail) caused by inventory shrinkage can be calculated using the following retail data: Beginning inventory Purchases Goods available for sale Sales Estimated ending inventory Actual ending inventory Inventory shrinkage 40.500 is the inventory shrinkage at cost. Answer (B) is incorrect because freight-in was debited at the invoice date (debit freight-in and purchases. Purchases Freight-in Accounts payable D.Source: CIA 592 IV-30 An entity purchased 1.010 980 30 1. The invoice date was December 27.

000 @ 6.000 computes all 12. Answer (B) is incorrect because no inventory should be included in the 20X1 financial statements. Freight-in should also not be recorded until 20X2.000 is the ending inventory balance under LIFO.000 units remaining. Answer (C) is correct. so they should not be included in 20X1 inventory.000 12.000 @ 5 6. [432] Gleim #: 3.000 14. The goods did not arrive until after year-end.000 21.000 @ 7 2. Copyright 2006 Gleim Publications.050 0 2. The first-in-first-out (FIFO) method assumes that the oldest units are used first and the newest units remain in inventory.000 @ 6 3. Inc. D. Because the company has 12.759 is the ending inventory balance under the weighted average method.000 units of ending inventory at the most recent purchase price of 7.142 -. 1 If the company uses the first-in-first-out (FIFO) method of inventory valuation. C. What is the correct amount of inventory and freight-in relating to this purchase on the 20X3 financial statements? Inventory A.000 × 6.000 Date Jan.000 8. Answer (D) is incorrect because no inventory should be included in the 20X1 financial statements.Source: CIA 594 IV-18 A merchandising company had the following inventory related transactions in its first year of operations: Purchases in Units 10. 1 Nov.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [431] Gleim #: 3. 0 2.000 Sales in Units Balance in Units 10.000 × 7) + (7.750 [(5. ending inventory equals 78. Title and risk of loss passed to the buyer at the destination. Answer (D) is incorrect because 84.000 Answer (A) is incorrect because 62. B. Printed for Pol Mirafuentes Page 200 . 62. 1 March 1 May 1 July 1 Sept. and freight-in should be recorded in 20X2. D.25)].Source: CIA 592 IV-33 (Refers to Fact Pattern #26) Now assume the terms required the seller to deliver to the destination instead of the shipping point.000 5.750 84. C.000 70.141 -.000 Freight-In 0 0 50 50 Answer (A) is correct. Answer (C) is incorrect because freight-in should be recorded in 20X2.25 12.000 16. Answer (B) is incorrect because 70. and the seller incurred the expense of delivery to that point.759 78. 1 Dec. B.000 9.000 13. its ending inventory balance (rounded) will be A.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

[433] Gleim #: 3.143 -- Source: CIA 597 IV-13 An entity has appropriately used the installment method of accounting since it began operations at the beginning of the current year. The following information pertains to its operations for this year: Installment sales Cost of installment sales Collections on installment sales General and administrative expenses 1,200,000 840,000 480,000 120,000

The amount of gross profit deferred at the end of the current year should be

A. B. C. D.

720,000 288,000 216,000 144,000 Answer (A) is incorrect because 720,000 is the year-end balance of installment accounts receivable. Answer (B) is incorrect because 288,000 applies the gross profit percentage to the sum of cost of sales and general and administrative expenses. Answer (C) is correct. The gross profit on installment sales is 360,000 (1,200,000 installment sales – 840,000 cost of installment sales). Accordingly, the gross profit percentage is 30% (360,000 gross profit ÷ 1,200,000 installment sales), and the amount of gross profit deferred at the end of the current year is 216,000 [30% × (1,200,000 installment sales – 480,000 collections)]. General and administrative expenses have no effect on the computation of realized gross profit or deferred gross profit. They are to be classified as operating expenses on the income statement in the period in which they are incurred. Answer (D) is incorrect because 144,000 treats general and administrative expenses as costs of installment sales.

[434] Gleim #: 3.144 -- Source: CIA 594 IV-17 The cost of materials has risen steadily over the year. The entity uses its newest materials first when removing items from inventory. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest net profit, all other variables held constant?

A. B. C. D.

Last-in-first-out (LIFO). First-in-first-out (FIFO). Weighted average. Specific identification. Answer (A) is incorrect because the last-in-first-out (LIFO) method assumes that the most recent and costliest units have been removed from inventory. If costs rise steadily during the accounting period, this method will result in the lowest inventory balance, the highest cost of goods sold, and the lowest net profit. LIFO is not permitted. Answer (B) is correct. The first-in-first-out (FIFO) method assumes that the oldest and hence least costly units are used first, and the newest and most costly items remain in inventory. This method will result in the highest inventory balance if costs rise steadily during the accounting period. Accordingly, FIFO results in the lowest cost of goods sold and the highest net profit. Answer (C) is incorrect because the weighted-average cost method averages the costs of all inventory items and results in a lower inventory balance and net profit than does the FIFO method. Answer (D) is incorrect because specific identification charges the actual cost of each unit to cost of goods sold each period, leaving as inventory the actual cost of all items still in inventory. Given that the newest and most costly items are removed from inventory first, the inventory balance and net profit will be lower than that obtained using FIFO estimation.

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Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology
(1347 questions)

[435] Gleim #: 3.145 -- Source: CIA 593 IV-35 An entity uses the retail method of inventory estimation for interim reporting purposes. Management expects some normal shrinkage in the inventory because of theft. What effect will the failure to consider this shrinkage have on the computation of (1) the cost-retail ratio, and (2) the estimated ending inventory at retail?

(1) Effect on CostRetail Ratio A. B. C. D. No effect No effect Overstatement Overstatement

(2) Effect on Estimated Ending Inventory at Retail No effect Overstatement Overstatement Understatement

Answer (A) is incorrect because shrinkage has no effect on the ratio but should be deducted in arriving at the estimated ending inventory at retail. Answer (B) is correct. The retail method of inventory estimation applies a cost-retail ratio to the ending inventory at retail to determine ending inventory at cost. The ratio equals goods available at cost divided by goods available at retail. Normal inventory shrinkage is deducted from the retail amount of goods available because the goods are not available. However, abnormal amounts of theft, etc., are deducted in arriving at both the cost and retail amounts. The reason for the difference in treatment is that normal but not abnormal inventory losses are anticipated and included in selling price (retail value). Accordingly, failure to account for normal inventory shrinkage has no effect on the calculation of the cost-retail ratio but overstates ending inventory at retail. Answer (C) is incorrect because shrinkage has no effect on the ratio but should be deducted in arriving at the estimated ending inventory at retail. Answer (D) is incorrect because shrinkage has no effect on the ratio but should be deducted in arriving at the estimated ending inventory at retail. [436] Gleim #: 3.146 -- Source: CIA 1193 IV-29 An entity purchases office equipment for 525,000 on account. Select the appropriate journal entry to record this transaction.

A. Office expense Accounts payable B. Office equipment Accounts payable C. Accounts payable Office expense D. Accounts payable Office equipment

525,000 525,000 525,000 525,000 525,000 525,000 525,000 525,000

Answer (A) is incorrect because the charge should be to an asset account rather than an expense account. Answer (B) is correct. The purchase of office equipment represents the acquisition of an asset. An increase in an asset is recorded by a debit. The purchase on account increases liabilities. An increase in a liability is recorded by a credit. Answer (C) is incorrect because an increase in accounts payable is recorded by a credit. The purchase of equipment results in an asset that is recorded by a debit to an asset account. Answer (D) is incorrect because an increase in a liability is recorded by a credit. An increase in an asset is recorded by a debit.

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[437] Gleim #: 3.147 -- Source: CIA 592 IV-27 An entity acquired an item of property, plant, and equipment with an estimated useful life of 5 years for 15,000 at the beginning of year 1. For financial statement purposes, how would the depreciation expense calculated using the 200% diminishing-balance method compare with that calculated using the sum-of-the-years’-digits method in year 1 and year 2, respectively?

Year 1 A. B. C. D. Lower Lower Higher Higher

Year 2 Lower Higher Lower Higher

Answer (A) is incorrect because 200% diminishing-balance depreciation is higher in year 1. Answer (B) is incorrect because 200% diminishing-balance depreciation is higher in year 1 and lower in year 2. Answer (C) is correct. 200% diminishing-balance is an accelerated depreciation method that determines periodic depreciation expense by multiplying the carrying amount at the beginning of each period by a constant rate that is equal to twice the straight-line rate of depreciation. Each year the carrying amount of the asset decreases by the depreciation expense recognized. Residual value is ignored in determining the carrying amount except as a floor beneath which the asset may not be depreciated. SYD depreciation multiplies a constant depreciable amount (cost - residual value) by the SYD fraction. The SYD fraction’s numerator is the number of years of remaining useful life (n). The formula to compute the denominator in the SYD method is (n(n+1)) ÷ 2. For a 5-year estimated useful life, the denominator of the fraction is 15 [5(5 + 1) ÷ 2].

200% DB: SYD:

Year 1 Year 2 Year 1 Year 2

= = = =

15,000(.4) = 6,000 9,000(.4) = 3,600 15,000(5 ÷ 15) = 5,000 15,000(4 ÷ 15) = 4,000

Answer (D) is incorrect because 200% diminishing-balance depreciation is lower in year 2. [438] Gleim #: 3.148 -- Source: CIA 1196 IV-36 Which of the following is a noncash item?

A. B. C. D.

Administrative expense. Interest expense. Income tax expense. Depreciation expense. Answer (A) is incorrect because administrative expense is a cash charge. Answer (B) is incorrect because interest expense is a cash charge. Answer (C) is incorrect because income tax expense is a cash charge. Answer (D) is correct. Depreciation expense is a noncash charge. It represents the allocation of the historical cost of assets to the time periods in which they are used to generate revenues.

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[439] Gleim #: 3.149 -- Source: CIA 590 IV-45 An entity purchased the following for 120,000: Seller’s Carrying Amount Land Building 50,000 100,000 Estimated Fair Value 60,000 90,000

The land should be recorded at

A. B. C. D.

40,000 48,000 50,000 60,000 Answer (A) is incorrect because 40,000 assumes the purchase price allocation is based on carrying amounts instead of fair values. Answer (B) is correct. An item of PPE is initially measured at its cost. Accordingly, the cost, which equals the 120,000 purchase price, should be allocated between the land and the building based on their respective fair values. The cost of the land should be recorded at 48,000 {120,000 × [60,000 ÷ (60,000 + 90,000)]}. Answer (C) is incorrect because 50,000 is the seller’s carrying amount of the land. Answer (D) is incorrect because 60,000 is the estimated fair value of the land.

[440] Gleim #: 3.150 -- Source: Publisher Whenever an entity must use net realizable value rather than cost to value an inventory item, the inventory account is reduced and the account “expense due to decline of inventory to net realizable value” is increased. The balance of this account is reflected as a separate item on the

A. B. C. D.

Balance sheet as a deduction from inventory. Income statement as an extraordinary loss. Income statement as a deduction from gross profit on sales. Income statement as an operating expense. Answer (A) is incorrect because the write-down is expensed in the period in which the writedown occurs. Answer (B) is incorrect because the loss is ordinary. Answer (C) is correct. If a separate expense account is not used, the ending inventory will be reduced directly and the result will be an increase in cost of goods sold. No separate disclosure of the inventory writedown will appear in the income statement. The effect is to hide the loss in cost of goods sold. If the separate expense account is used, it appears on the income statement as a deduction from gross profit (sales – cost of goods sold). One advantage is that cost of goods sold is not misstated. Answer (D) is incorrect because the writedown is not treated as a selling or administrative expense.

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[441] Gleim #: 3.151 -- Source: CMA 1292 2-5 Aston Company acquired a new machine at a cost of 200,000 and incurred costs of 2,000 to have the machine shipped to its factory. Aston also paid 4,500 to construct and prepare a site for the new machine and 3,500 to install the necessary electrical connections. Aston estimates that the useful life of this new machine will be 5 years and that it will have a residual value of 15,000 at the end of that period. Assuming that Aston acquired the machine on January 1 and will take a full year’s depreciation, the proper amount of depreciation expense to be recorded by Aston if it uses the 200% diminishing-balance method is

A. B. C. D.

74,000 84,000 80,000 80,800 Answer (A) is incorrect because 74,000 assumes that the depreciable amount is the invoice price minus residual value. Answer (B) is correct. Items of property, plant, and equipment (PPE) that meet the recognition criteria are initially measured at cost. The cost includes the purchase price (minus trade discounts and rebates, plus purchase taxes) and the directly attributable costs of bringing the assets to working condition for their intended use. Hence, the depreciable amount is 210,000 (200,000 invoice price + 2,000 delivery expense + 4,500 site preparation + 3,500 electrical work). Under the 200% DB method, residual value is ignored at the beginning. Thus, the full 210,000 will be subject to depreciation. Given a 5-year life, the annual straight-line rate is 20%, and the 200% DB rate will be 40%. Depreciation for the first year is therefore 84,000 (40% × 210,000). Answer (C) is incorrect because the depreciable amount of the machine was 210,000, not the 200,000 invoice price. Answer (D) is incorrect because 80,800 assumes a depreciable amount of 202,000, but the site preparation and electrical costs are part of that cost.

[442] Gleim #: 3.152 -- Source: CMA 683 1-13 An entity often factors its accounts receivable. The finance company requires an 8% reserve and charges a 1.5% commission on the amount of the receivable. The remaining amount to be advanced is further reduced by an annual interest charge of 16%. What proceeds (rounded to the nearest dollar) will the entity receive from the finance company at the time a 110,000 account that is due in 60 days is turned over to the finance company?

A. B. C. D.

81,950 83,630 96,895 99,550 Answer (A) is incorrect because the proceeds would be determined by reducing the 110,000 by 9.5% (8% reserve + 1.5% commission) and then reducing that amount by the interest expense [16% × (60 ÷ 360)]. Answer (B) is incorrect because the proceeds would be determined by reducing the 110,000 by 9.5% (8% reserve + 1.5% commission) and then reducing that amount by the interest expense [16% × (60 ÷ 360)]. Answer (C) is correct. The factor will hold out 8,800 (8% × 110,000) as a reserve against returns and allowances and 1,650 (1.5% × 110,000) as a commission. That leaves 99,550 to be advanced to the seller. However, interest at the rate of 16% annually is also to be withheld. For 60 days that interest would amount to approximately 2,655 (assuming a 360-day year). The proceeds to be given to the seller equal 96,895 (99,550 – 2,655). Answer (D) is incorrect because the proceeds would be determined by reducing the 110,000 by 9.5% (8% reserve + 1.5% commission) and then reducing that amount by the interest expense [16% × (60 ÷ 360)].

[443] Gleim #: 3.153 -- Source: Publisher Under IAS 2, Inventories, all of the following should be disclosed when reporting inventories except

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A. B. C. D.

The use of the lower-of-cost-or-net-realizable-value method, if applicable. The cost formulas used. The carrying amount of inventories in classifications appropriate to the entity. An estimated amount of obsolete inventory included in the total inventory valuation. Answer (A) is incorrect because disclosures should include the accounting policies applied, such as the lower-of-cost-or-NRV method. Answer (B) is incorrect because disclosures should include the cost formulas used. Answer (C) is incorrect because disclosures should include the amounts for classifications of inventory appropriate to the entity. Answer (D) is correct. According to IAS 2, Inventories, disclosures about inventories include, for example, the accounting policies applied in measuring inventories, including the cost formulas used; total carrying amount; carrying amount for each classification appropriate to the entity; carrying amount of items carried at fair value minus costs to sell; amount of any reversal of writedowns recognized as income; reasons for such a reversal; and carrying amount of inventory pledged as security. Thus, the disclosures under IAS 2 include the carrying amount of inventories carried at NRV, not the amount of obsolete inventory.

[444] Gleim #: 3.154 -- Source: Publisher Subsequent measurement of trade receivables is at

A. B. C. D.

Fair value through profit or loss. Cost. Amortized cost. Fair value through equity. Answer (A) is incorrect because initial measurement of financial assets and liabilities is at fair value. Subsequent measurement of assets or liabilities held for trading and of certain other designated items is at fair value through profit or loss. Answer (B) is incorrect because unquoted equity instruments whose fair value is not reliably measurable are reported at cost. Answer (C) is correct. According to IAS 39, subsequent measurement of financial assets (including derivatives that are assets) is at fair value with certain exceptions. Loans and receivables and held-to-maturity investments are measured at amortized cost using the effective interest method. Unquoted equity instruments whose fair value is not reliably measurable are reported at cost. Answer (D) is incorrect because a gain or loss on an available-for-sale financial asset is recognized directly in equity until the asset is derecognized. Available-for-sale financial assets and liabilities are nonderivatives not designated as such or not falling within one of the other categories: (1) items at fair value through profit or loss, (2) held-to-maturity items, or (3) loans and receivables.

[445] Gleim #: 3.155 -- Source: CIA 1194 IV-19 A new machine has an initial cost of 300,000, an estimated useful life of 2,000 hours of use over a 3-year period, and an estimated residual value of 70,000. Usage rates are estimated as 500 hours in the first year, 700 hours in the second year, and 800 hours in the third year. Depreciation expense in year two under the sum-of-the-units method of depreciation will be

A. B. C. D.

57,500 75,000 80,500 105,000

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Answer (A) is incorrect because 57,500 is the depreciation expense for year one. Answer (B) is incorrect because 75,000 is the expense for year one calculated without subtracting the residual value. Answer (C) is correct. Depreciation expense equals cost minus residual value, times the quotient of estimated hours of use in year two divided by the total estimated hours of use. Thus, depreciation expense is 80,500 [(300,000 – 70,000) × (700 hours ÷ 2,000 hours)]. Answer (D) is incorrect because 105,000 results from not subtracting the residual value. [446] Gleim #: 3.156 -- Source: CIA 595 IV-9 What is the journal entry recorded upon the sale of an item of property, plant, and equipment (PPE) that was sold for cash in excess of its carrying amount?

A. No journal entry is required. B. Debit cash Debit accumulated depreciation Debit income on disposal of PPE Credit PPE C. Debit cash Debit PPE Credit accumulated depreciation Credit income on disposal of PPE D. Debit cash Debit accumulated depreciation Credit PPE Credit income on disposal of PPE Answer (A) is incorrect because depreciation must be taken up to the date of disposition and all amounts relating to the retired asset should be eliminated. Answer (B) is incorrect because the gain should be recorded as a credit. Answer (C) is incorrect because the PPE account should be credited, and accumulated depreciation should be debited. Answer (D) is correct. The journal entry to record the sale of an item of PPE for cash in excess of its carrying amount should debit the cash account to record the sale proceeds received. Accumulated depreciation should be eliminated by debiting an amount equal to depreciation accumulated up to the start of the current accounting period plus any depreciation that has accumulated between the start of the current period and the date of disposal. Finally, the PPE account should be credited to eliminate the original cost of the asset. The gain should be recorded as a credit and recognized as income on the income statement. [447] Gleim #: 3.157 -- Source: CIA 595 IV-13 An entity had 1,000 units of opening inventory that cost 10 per unit. On May 1, 1,000 units were purchased at a cost of 11 each, and on September 1 another 1,000 units were purchased at a cost of 12 each. If 2,000 units were sold during the year, the company will report cost of goods sold of <List A> if the <List B> method of inventory valuation is used.

List A A. B. C. D. 22,000 23,000 21,000 22,000 LIFO

List B Weighted average FIFO FIFO

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Answer (A) is incorrect because cost of goods sold is 22,000 under the weighted-average method. Under LIFO, cost of goods sold is 23,000 (12,000 + 11,000). The 2,000 most recently purchased units are presumed to have been sold. Answer (B) is incorrect because the weighted-average unit cost of all items available for sale is 11 [(10,000 + 11,000 + 12,000) ÷ 3,000]. Given that 2,000 units were sold, cost of goods sold is 22,000 (2,000 × 11) under this method. Answer (C) is correct. Under FIFO, the first items purchased are presumed to be the first sold. Given that 3,000 units were available and 2,000 units were sold, FIFO cost of goods sold must have been 21,000 [(1,000 × 10) BI + (1,000 × 11) May 1 purchase]. Answer (D) is incorrect because FIFO cost of goods sold is 21,000. Under the weighted-average method, cost of goods sold is 22,000. [448] Gleim #: 3.158 -- Source: CIA 595 IV-17 An entity sold a depreciable asset in the middle of the fifth year of its estimated 10-year useful life. The original cost of the asset was 100,000, and it was being depreciated on the straight-line basis. If the asset was sold for 80,000, the gain on the sale will be

A. B. C. D.

20,000 25,000 30,000 35,000 Answer (A) is incorrect because 20,000 omits depreciation for the first half of the fifth year. Answer (B) is correct. The gain on the sale is the difference between the sale proceeds and the undepreciated cost of the asset. Depreciation must be taken up to the time of sale. Assuming that residual value is 0, annual depreciation is 10,000 (100,000 ÷ 10 years). Thus, the gain is 25,000 {80,000 – [100,000 – (4.5 years × 10,000)]}. Answer (C) is incorrect because 30,000 results if 5 full years of depreciation are taken. Answer (D) is incorrect because 35,000 results from subtracting accumulated depreciation from the sale proceeds.

[449] Gleim #: 3.159 -- Source: CIA 595 IV-22 Which of the following changes in accounting policies resulting from a significant change in the expected pattern of economic benefit will increase net profit?

A. B. C. D.

A change from FIFO to LIFO inventory valuation when costs are rising. A change from FIFO to weighted-average inventory valuation when costs are falling. A change from accelerated to straight-line depreciation in the later years of the depreciable lives of the assets. A change from straight-line to accelerated depreciation in the early years of the depreciable lives of the assets.

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Answer (A) is incorrect because a change to LIFO is not allowed. Answer (B) is correct. According to IAS 16, Property, Plant, and Equipment , a change in depreciation method resulting from a significant change in the expected pattern of economic benefits is accounted for as a change in estimate, that is, prospectively. In a period of falling costs, FIFO results in higher cost of goods sold than the weighted-average method. FIFO includes the higher, earlier costs in cost of goods sold, whereas the weighted-average method averages the later, lower costs with the higher, earlier costs. Thus, a change from FIFO to weighted-average costing reduces cost of goods sold and increases reported net profit. Answer (C) is incorrect because, in the later years of the depreciable life of an asset, accelerated depreciation results in lower depreciation expense than does the straight-line method. A change to straight line increases depreciation expense and reduces reported net profit. Answer (D) is incorrect because, in the early years of the depreciable life of an asset, straight-line depreciation results in lower depreciation expense than accelerated depreciation. A change to accelerated depreciation increases depreciation expense and reduces reported net profit. [Fact Pattern #27] An entity had the following account balances in the pre-closing trial balance:

Opening inventory Closing inventory Purchases Transportation-in Purchase discounts Purchase allowances Returned purchases

100,000 150,000 400,000 6,000 40,000 15,000 5,000

[450] Gleim #: 3.160 -- Source: CIA 1195 IV-5 (Refers to Fact Pattern #27) The entity had net purchases for the period of

A. B. C. D.

340,000 346,000 370,000 376,000 Answer (A) is incorrect because 340,000 omits transportation-in from the calculation. Answer (B) is correct. Purchase discounts, allowances, and returns are subtractions from purchases because they are reductions of cost. Transportation-in is an addition because it increases cost. Thus, net purchases equals 346,000 (400,000 + 6,000 – 40,000 – 15,000 – 5,000). Answer (C) is incorrect because 370,000 omits transportation-in and adds, rather than subtracts, purchase allowances. Answer (D) is incorrect because 376,000 adds, rather than subtracts, purchase allowances.

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[Fact Pattern #28] An entity has 8,000 units in inventory on January 1, valued at 10 per unit. During the year, the entity sold 25,000 units and purchased inventory as follows:

Date April 1 July 1 October 1

Quantity Purchased 15,000 units 10,000 units 12,500 units

Unit Price 8 9 10

[451] Gleim #: 3.161 -- Source: CIA 1195 IV-18 (Refers to Fact Pattern #28) If the entity uses the weighted-average method of inventory valuation, cost of goods sold for the period will be

A. B. C. D.

186,978 197,000 228,023 235,000 Answer (A) is incorrect because 186,978 is the value of ending inventory under the weighted-average method. Answer (B) is incorrect because 197,000 is the ending inventory under the FIFO method. Answer (C) is correct. Under the weighted-average method, the weighted-average cost per unit is multiplied by the number of units sold to determine the cost of goods sold for the period. The total units available for sale equaled 45,500 (8,000 + 15,000 + 10,000 + 12,500). The total cost of all units available for sale was 415,000 [(8,000 × 10) + (15,000 × 8) + (10,000 × 9) + (12,500 × 10)]. Thus, the weighted-average cost per unit of inventory was 9.1209 (415,000 ÷ 45,500), and cost of goods sold was 228,023 (25,000 × 9.1209). Answer (D) is incorrect because 235,000 is the cost of goods sold under the LIFO method.

[452] Gleim #: 3.162 -- Source: CIA 1196 IV-8 The following information is available for an entity for the quarter ended March 31, of the current year: Merchandise inventory, as of January 1 of the current year Sales Purchases

30,000 200,000 190,000

The gross profit margin is normally 20% of sales. What is the estimated cost of the merchandise inventory at March 31, of the current year?

A. B. C. D.

20,000 40,000 60,000 180,000

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Answer (A) is incorrect because 20,000 is the difference between sales for the period and cost of goods available for sale. Answer (B) is incorrect because 40,000 is the amount of gross profit. Answer (C) is correct. The gross profit margin percentage is given as 20% of sales. Hence, cost of goods sold must have been 160,000 [200,000 sales × (1.0 – .2)]. The estimated cost of the inventory at March 31, 2004 is computed as follows:

Inventory, 1/1 Purchases Cost of goods available for sale, 3/31 Estimated cost of goods sold Estimated inventory at 3/31

30,000 190,000 220,000 (160,000) 60,000

Answer (D) is incorrect because 180,000 results from subtracting the gross profit from cost of goods available for sale. [453] Gleim #: 3.163 -- Source: CIA 596 IV-27 On January 1 of year 1, an entity purchased a piece of equipment for 250,000 that was originally estimated to have a useful life of 10 years with no residual value. Depreciation has been recorded for 3 years on a straight-line basis. On January 1 of year 4, the estimated useful life was revised so that the equipment is considered to have a total life of 20 years. Assume that the depreciation method and the useful life for financial reporting and tax purposes are the same. The depreciation expense in year 4 on this equipment would be

A. B. C. D.

8,750 10,294 12,500 14,706 Answer (A) is incorrect because 8,750 is the result of depreciating the remaining carrying amount over 20 years rather than the remaining 17 years. Answer (B) is correct. In year 4, the carrying amount at the start of the period will be amortized over the revised estimated years of useful life. The depreciation recognized during years 1 through 3 was 75,000 [3 years × (250,000 ÷ 10)]. Thus, the carrying amount at the beginning of year 4 was 175,000, and year four depreciation based on the revised estimated useful life is 10,294 [175,000 ÷ (20 – 3)]. Answer (C) is incorrect because 12,500 results from accounting for the change in estimate retroactively. Answer (D) is incorrect because 14,706 results from depreciating the original carrying amount over the revised estimate of remaining useful life.

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[Fact Pattern #29] An entity had the following opening and closing inventory balances during the current year:

1/1 Finished goods Raw materials Work-in-progress The following transactions and events occurred during the current year: 300,000 of raw materials were purchased, of which 20,000 were returned because of defects. 600,000 of direct labor costs were incurred. 750,000 of production overhead costs were incurred. 90,000 105,000 220,000

12/31 260,000 130,000 175,000

[454] Gleim #: 3.164 -- Source: CIA 596 IV-14 (Refers to Fact Pattern #29) The cost of goods sold for the current year ended December 31 would be

A. B. C. D.

1,480,000 1,500,000 1,610,000 1,650,000 Answer (A) is correct. Cost of goods sold equals cost of goods produced (CGP) adjusted for the change in finished goods. CGP equals the sum of raw materials used, direct labor costs, and production overhead, adjusted for the change in work-in-progress. Raw materials used equals 255,000 (105,000 BI + 300,000 purchases – 20,000 returns – 130,000 EI). Thus, CGP equals 1,650,000 (255,000 RM + 600,000 DL + 750,000 OH + 220,000 BWIP – 175,000 EWIP), and CGS equals 1,480,000 (1,650,000 CGP + 90,000 BFG – 260,000 EFG). Answer (B) is incorrect because 1,500,000 results from not subtracting purchase returns when calculating raw materials used. Answer (C) is incorrect because 1,610,000 fails to deduct the ending balance of raw materials when calculating raw materials used. Answer (D) is incorrect because 1,650,000 is the cost of goods produced.

[455] Gleim #: 3.165 -- Source: CIA 596 IV-15 (Refers to Fact Pattern #29) Without prejudice to your answer to any other question, assume that cost of goods sold for the current year ended December 31 is 2,000,000. Inventory turnover on total inventory for the entity would be

A. B. C. D.

2.04 times. 3.54 times. 4.08 times. 4.82 times.

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one effect on the year-end financial statements would be that A. [457] Gleim #: 3. The 1. Answer (B) is incorrect because 3.000 BWIP + 260.54 times results from using the year-end inventory balances only. C. cost of goods produced is overstated.166 -.000 each.000 average total inventory). raw materials used is overstated. with the first installment due December 31 of the current year. if the ending inventory of raw materials is understated. Net profit is overstated. If the ending inventory of raw materials is understated.000 on January 1 of the current year. D. Answer (D) is incorrect because 4. and cost of goods sold is overstated.82 times results from using the opening inventory balances only. and cost of goods produced is overstated. Answer (B) is correct.000 EFG + 130. and net income is understated. Answer (C) is incorrect because working capital is higher when the balances of current assets are higher.000 cash and a noninterest-bearing note with a face amount of 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 2.000 EWIP) ÷ 2].04 times results from adding all inventory balances.000 ERM + 175. D. opening and closing. Hence. Inventory turnover is the ratio of cost of goods sold to the average inventory balance.Source: CIA 593 IV-42 A plot of land is acquired in exchange for 250.000 BRM + 220. if the ending inventory of raw materials is understated. cost of goods sold is overstated. Answer (D) is incorrect because. B. Cost of goods sold is overstated. Printed for Pol Mirafuentes Page 213 .Source: CIA 596 IV-16 (Refers to Fact Pattern #29) If the entity’s raw materials inventory as of December 31 of the current year (ending inventory) was miscounted and the true figure was higher than 130.167 -. (1) what market rate should be used to account for interest for the current year and (2) what should be done in future years when there is a change in prevailing interest rates? (2) Impact of Change in (1) Market Rate Used to Compute Interest Expense for the current year A.000 assumed CGS ÷ 490. If the raw materials inventory balance is understated. With regard to imputing interest on this note. Cost of goods produced is understated.000 BFG + 105.000 [(90. [456] Gleim #: 3. raw materials used is overstated.000. The total average inventory is 490. Rate prevailing at January 2 Rate prevailing at January 2 Rate prevailing at December 31 Rate prevailing at December 31 Prevailing Interest Rates in Future Periods on Rate Used to Account for This Note Ignore change in rate Use new market rate Ignore change in rate Use new market rate Copyright 2006 Gleim Publications. Answer (C) is correct.000. Inc.000 is payable in installments of 250. Answer (A) is incorrect because.000. total inventory turnover is 4.000. B. working capital will also be understated. Working capital is overstated.08 times (2. to obtain the denominator of the turnover ratio. C.

Answer (C) is incorrect because determination of the imputed interest rate is made at the time the debt instrument is issued. Subsequent to initial recognition. Inc. Determination of the imputed interest rate is made at the time the debt instrument is issued. [458] Gleim #: 3. not necessarily the prime rate.168 -. If these prices are not reliably determinable. Answer (C) is correct. C.Source: CIA 1193 IV-44 An entity issued a noninterest bearing note payable due in 1 year in exchange for land. Inventory shrinkage must be considered in risk models involving inventory valuation. Inventory shrinkage expense. Which of the following statements is true concerning the accounting for the transaction? A. Answer (D) is correct. the fair value is estimated by discounting the future cash payments at an imputed rate equal to the prevailing market rate for a similar instrument (e. D. Annual sales forecasts. Answer (C) is incorrect because the proper discount rate is the prevailing rate for similar notes. most financial liabilities are measured at amortized cost using the effective interest method. Vendor pricing policies. Product warranty policies. the entity should measure it at its cost. term. and changes in vendor pricing policies would not necessarily affect valuation. Consequently. No interest should be recognized on the note. The amount of inventory loss through shrinkage directly affects inventory valuation.Source: IIA. and the land should be recorded at the present value of the note. The land should be recorded at the future value of the note. Copyright 2006 Gleim Publications. that is. Answer (A) is incorrect because warranties are not a part of inventory valuation. The price at the time of purchase is the only price that matters in inventory valuation. Answer (A) is incorrect because the value of the land will be overstated if it is recorded at future value. Printed for Pol Mirafuentes Page 214 . B. The fair value ordinarily is determined by reference to the transaction price or other market prices. B. Interest on the note should be imputed at the prime rate. Answer (B) is incorrect because any subsequent changes in prevailing interest rates are ignored. and the land should be recorded at the discounted value of the note. Answer (B) is incorrect because interest should be recognized on the note. and type of rate) of an issuer with a similar credit rating. Exceptions are those (1) classified as at fair value through profit or loss or (2) arising when a transfer of a financial asset does not qualify for derecognition or is accounted for on a continuing involvement basis (IAS 39).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. and interest should be imputed at the prevailing rate on similar notes. [459] Gleim #: 3. similar as to currency. and the land should be recorded at the present value of the note. Answer (D) is incorrect because sales forecasts do not affect inventory valuation. When a financial liability is initially recognized. and any subsequent changes in prevailing interest rates are ignored. Interest on the note should be imputed at the prevailing rate for similar notes. Answer (D) is incorrect because determination of the imputed interest rate is made at the time the debt instrument is issued. C.g. D. present value is the proper valuation. a change in the prevailing market rate does not affect the measurement of the noninterest-bearing note given for the land..169 -. the fair value of the consideration received. Answer (B) is incorrect because vendor pricing policies have no effect on inventory valuation until goods are purchased. The fair value of the land is not reliably determinable. adapted Which must be part of any risk model involving inventory valuation? A.

00 8.50) + (5.500 $85. Printed for Pol Mirafuentes Page 215 .000 units purchased is : (5. The following purchases are made during the year: Units Purchased January 1 April 1 July 1 October 1 5.000 units × $8) = $77. first out (FIFO) method of inventory valuation. The cost of the most recent 10. so the items remaining in inventory are assigned the cost of the earliest purchases: (5. first-out (FIFO) inventory valuation.000 units × $7. The most recent items purchased are assumed to be sold first. the ending inventory balance will be A. first-out (LIFO) method of inventory valuation.000 units are assigned a value of $86.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [460] Gleim #: 3.500. The average cost of items purchased is: [$10 (5.000) + $8 (5. Answer (D) is incorrect because this solution is the ending inventory balance under the last-in. adapted On January 1.000.000 Unit Cost $10. B.00 7. Inc.250 $95.00 9.000 units × $8) = $85. The average cost of all items purchased is used to calculate the ending inventory balance. C. $77.000) + $7.50 (5. Under first-in.000 units × $10) + (5. Answer (B) is incorrect because this solution is the ending inventory balance under the specific identification method if the units remaining in inventory at year end were identified as having been purchased on April 1 and July 1: (5.170 -. a company has no opening inventory balance. D.000 5.250.000.000 units × $9) = $95. Copyright 2006 Gleim Publications.000 5.000 $86.000) + $9 (5.000 Answer (A) is correct.000)] ÷ 20.000 5.000 units in inventory on December 31. the 10. If the company uses the first in. Answer (C) is incorrect because this solution is the ending inventory balance under the average cost method.625 per unit so 10.000 units × $9) + (5.000 = $8.000 units in ending inventory are assumed to have been the most recent items purchased.Source: IIA.50 There are 10.

Interest equals 10% of the long-term debt. and gross profit must be 356.000 100.667 PBIT + 40.667 gross profit ÷ 30% gross profit rate).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #30] At the end of the accounting period.000 300.667 uses a gross profit percentage of 40%. Answer (C) is correct.000 administrative expense + 50.890 1.118.667 calculates profit before tax as profit divided by the tax rate. Printed for Pol Mirafuentes Page 216 .000 1. 891. D. Copyright 2006 Gleim Publications. Thus.000).100. Profit before tax equals 166.000).000 depreciation). Gross profit equals 30% of sales. dividing gross profit by 30% yields sales.667 (266. C. an entity has the partially completed financial statements shown as follows. Sales is therefore 1.890 (356. PBIT must equal 266.000).000 [461] Gleim #: 3.0 – 40% tax rate)]. Answer (D) is incorrect because 1.000.466.667 (166.171 -. Inc.000 fixed assets ÷ 10 years = 50.667 + 100. Income Statement: Sales Cost of goods sold Gross profit Administrative expense Depreciation expense Profit before interest and tax Interest expense Profit before tax Tax expense Profit Balance Sheet: Current assets Other assets Total assets Current liabilities Long-term debt Equity Total liabilities and equity Additional Information: Gross profit percentage = 30% Tax rate = 40% Annual interest cost on long-term debt = 10% Return on total assets = 3% Fixed assets originally cost 500. Hence.667 [100.000 profit ÷ (1.Source: CIA 1195 IV-12 (Refers to Fact Pattern #30) The entity had sales for the period of 40.000.188. Gross profit equals profit before interest and tax (PBIT) plus administrative expense (given as 40.000 A. or 100.000 (10% × 1.667 1.000) and depreciation (500. Working capital = 2.000 calculates profit before tax as profit divided by the tax rate and also calculates sales as gross profit divided by the tax rate.000. B.000 1.667 Answer (A) is incorrect because 891. Answer (B) is incorrect because 1.466.100.000 and are being depreciated over 10 years on a straight-line basis.

Answer (D) is incorrect because 3. [463] Gleim #: 3.000.000 [10. Copyright 2006 Gleim Publications. Consequently. D. the gross profit on the 100.333 3. 9. total assets equals 3. C. Printed for Pol Mirafuentes Page 217 . If Lawson accepts this opportunity.000 (30.000) divided by total assets.333 (3. Current assets must therefore equal 3.000 other assets). Answer (C) is incorrect because after-tax profit will increase by 6. Answer (A) is incorrect because after-tax profit will increase by 6. Inc.000.000 equals working capital minus long-term debt.333 is the amount of total assets. 10.172 -.000 of collection expense. B. riskier group of customers.333. and collection costs will be 5%.Source: CIA 1195 IV-13 (Refers to Fact Pattern #30) The entity has current assets of A. D. Answer (B) is correct. after-tax profit will increase by 6. the uncollectible expense is expected to be 15%.000 by selling to a new.173 -. C.333 total assets – 300.333 3. Return on total assets (3%) equals profit (100.333 Answer (A) is incorrect because 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [462] Gleim #: 3.000. Manufacturing and selling expenses are 70% of sales.000.000.000).333 (100.000. 4.000)]. Assuming 15.000 (30% × 100. has the opportunity to increase annual sales 100.000 – 20.Source: CMA 1290 1-30 Lawson Ltd.000 ÷ .03).333 is the sum of total and other assets.000). Consequently. the after-tax profit will increase by A. Answer (C) is incorrect because 3. Manufacturing and selling costs exclusive of bad debts equal 70% of sales. the increase in pre-tax profit will be 10.333.000 of bad debts and 5.633.633. Hence.000 3.000. Answer (B) is correct. 6. Based on sales.333.000.000 – (40% × 10. Answer (D) is incorrect because after-tax profit will increase by 6.333.000 increase in sales will be 30.033. B. 1. and the effective tax rate is 40%.000.033.

500. 219.000 [294. Answer (D) is incorrect because 469.000 60.000 20X1 1.000 100.000 588.000 100. [464] Gleim #: 3.000 750.000 adds rather than subtracts the increase in receivables and the decrease in payables. the company had an average collection period for 20X2 of Copyright 2006 Gleim Publications.000 – 200.000 294.000 650.000) – (275.000 344.000 244.000 294.000 does not consider the changes in accounts receivable and payable.000 50.000)].000 Answer (A) is correct.000 – (300. The cash provided is 219. An increase in receivables is a noncash component of profit.175 -.Source: CIA 1196 IV-37 (Refers to Fact Pattern #31) In 20X2. [465] Gleim #: 3. plus depreciation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #31] An entity has the following income statements: 20X2 Sales Cost of goods sold Gross profit Selling and administrative expense Depreciation expense Profits before interest and taxes Interest expense Profit before taxes Income tax (50%) Profit Selected balance sheet items are as follows: 20X2 Year-end Accounts receivable Accounts payable Assume a 365-day year in any calculations. Printed for Pol Mirafuentes Page 218 . minus the decrease in accounts payable.000 700. B. Answer (B) is incorrect because 244.000 688. D.000 275.000 220.000 469. A decrease in accounts payable is added when adjusting cost of goods sold to reflect cash paid to suppliers. Cash provided by operations equals profit. Answer (C) is incorrect because 344.000 250.000 + 50.000 50.174 -.000 62.000 1. Thus. Inc.000 220.000 440.000 800.000 – 250. C. it is subtracted when adjusting profit to arrive at cash provided by operations.Source: CIA 1196 IV-38 (Refers to Fact Pattern #31) Based on the 20X2 year-end balance of accounts receivable and the 20X2 income statement.000 20X1 Year-end 200.400.000 A. minus the increase in accounts receivable.000 does not consider the changes in accounts receivable and payable and subtracts depreciation. the entity had cash provided by operations of 300.000 540.

Gains and losses arising from changes in fair value of a derivative classified as a fair value hedge are included in the determination of profit or loss in the period of change. Answer (C) is incorrect because a forecast transaction is a transaction that is expected to occur for which no firm commitment exists. 73 days. An unrecognized firm commitment. B. Printed for Pol Mirafuentes Page 219 . profit or loss of the period of change is affected only by the net gain or loss attributable to the ineffective portion of the hedge. The variable cash flows of a recognized asset.500. Firm commitment. 78 days. Answer (C) is correct. Answer (B) is incorrect because 52 days is the average collection period for 20X1. The variable cash flows of a forecast transaction. Thus. A fair value hedge includes a hedge of an exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. B. Answer (D) is incorrect because the effective portion of gains and losses on these hedges is included in equity. A net investment in a foreign entity.000 accounts receivable ÷ (1.000 sales ÷ 365 days)]. They are offset by losses or gains on the hedged item attributable to the risk being hedged. The average collection period for 20X2 is 73 days [300.53 per pound for delivery in 90 days.000 pounds of Colombian coffee at $2. Answer (A) is incorrect because a financial instrument does not involve the delivery of a product. Answer (C) is correct.Source: Publisher The effective portion of a gain arising from an increase in the fair value of a derivative is included in profit or loss in the period of change if the derivative is appropriately designated and qualifies as a hedge of A. Financial instrument. that specifies all significant terms and includes a disincentive for nonperformance. 49 days. B. [466] Gleim #: 3.Source: Publisher Garcia Corporation has entered into a binding agreement with Hernandez Company to purchase 400. Answer (B) is incorrect because the effective portion of gains and losses on these hedges is included in equity. C. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C. D. D. 52 days.177 -. Answer (A) is incorrect because the effective portion of gains and losses on this hedge is reported as a component of equity. [467] Gleim #: 3. Copyright 2006 Gleim Publications. Answer (A) is incorrect because 49 days uses accounts receivable from 20X1 instead of 20X2. Answer (B) is correct. not a hedge of an exposure to risk. D. Forecast transaction. A firm commitment is an agreement with an unrelated party. binding on both parties and usually legally enforceable. Such a hedge minimizes the risk associated with fixed cash flows. Fair value hedge. This contract is accounted for as a A. Answer (D) is incorrect because 78 days uses 20X1 annual sales. C.176 -. Answer (D) is incorrect because the purchase commitment is an exposure to risk.

Source: Publisher On October 1. and specifies how contributions are to be determined. D.000). List A A. Gains and losses arising from changes in fair value of a derivative classified as a fair value hedge are included in the determination of profit or loss in the period of change. B. The employer is required to contribute a certain amount each period based on the plan’s formula. [469] Gleim #: 4. Thus.000 ($350. Bordeaux should recognize a net effect on 20X1 profit or loss of A. profit or loss of the period of change is affected only by the net gain or loss attributable to the ineffective aspect of the hedge. Thus.178 -. Answer (D) is incorrect because the decrease in the fair value of the hedged assets is a gross effect. a calendar-year-end firm. the fair value of the hedged assets has decreased by $350. invested in a derivative designed to hedge the risk of changes in fair value of certain assets. $0 $25. and the fair value of the derivative has increased by $325. employees have the benefit of gain and the risk of loss. Bordeaux. They are offset by losses or gains on the hedged item attributable to the risk being hedged. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [468] Gleim #: 3.Source: CIA 595 IV-16 The defined postemployment benefit obligation of an entity includes benefit obligations to <List A> employees at <List B> salary levels.2 -. [470] Gleim #: 4. Inc. The employer bears the risk of the plan’s investment performance. and allocated forfeitures of other participants’ benefits. the postemployment benefits received by employees are defined by the plan’s formula. under a defined benefit plan.000 $325. Postemployment benefits received by employees are defined by the plan’s formula. D. A defined contribution plan provides benefits in exchange for services. The derivative is structured to result in an effective hedge. Postemployment benefits depend only on contributions. Inc. 20X1. On December 31.000. some ineffectiveness may result. C.000 Answer (A) is incorrect because the effect on profit or loss is equal to the ineffective portion of the hedge. The employer and employees are required to contribute equal amounts to the fund. A hedge of an exposure to changes in the fair value of a recognized asset or liability is classified as a fair value hedge. currently valued at $1. However. Answer (B) is incorrect because the employees bear the risk of the plan’s investment performance. provides an account for each participant. Answer (C) is incorrect because. Vested Vested Vested and nonvested Vested and nonvested List B Current Future Current Future Copyright 2006 Gleim Publications. Answer (D) is incorrect because equal contributions are not required for a defined contribution plan. Answer (A) is correct.Source: CIA 597 IV-21 Which of the following statements is true for a defined contribution postemployment benefit plan? A. The ineffective portion is equal to $25. C. Answer (B) is correct. returns on investment. B.1 -.. Answer (C) is incorrect because the increase in the fair value of the derivative is a gross effect.000 – $325. B.000. Printed for Pol Mirafuentes Page 220 . 20X1.5 million. D.000 $350.

or age. Defined benefit plan. Answer (A) is incorrect because past service cost relates to benefits for employee service provided prior to the adoption or amendment of a defined benefit plan. [472] Gleim #: 4. Answer (C) is correct. D. Vested benefits.Source: Publisher An employer sponsors a defined postemployment benefit plan. Net unrecognized actuarial losses and unrecognized past service cost. the defined benefit liability to be recognized in the balance sheet is greatest when the employer has A. Moreover. Answer (B) is incorrect because the defined postemployment benefit includes both vested and nonvested benefits and is calculated at future levels. No unrecognized actuarial gains or losses and unrecognized past service cost. Answer (B) is incorrect because a defined benefit plan provides a defined benefit based on one or more factors. The possibility that nonvested projected benefits will not vest is a factor in the measurement of the DBO. Copyright 2006 Gleim Publications. Answer (D) is incorrect because. Printed for Pol Mirafuentes Page 221 . Past service cost.3 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the defined postemployment benefit includes both vested and nonvested benefits and is calculated at future levels. B. but it does not affect the existence of the obligation. the employer does not recognize an additional minimum liability. Additional minimum liability. Inc. and estimates of future changes in state benefits that affect the level of plan benefits. Past service cost is amortized as an expense over the average period until the benefits are vested. the benefits defined in the plan. Answer (C) is incorrect because the defined postemployment benefit includes both vested and nonvested benefits and is calculated at future levels. such as level of compensation. Net unrecognized actuarial gains and no past service cost. the benefits arising from any constructive obligation beyond the terms of the plan. Net unrecognized actuarial losses and no past service cost. vesting affects the accounting for past service cost. Vested benefits are those earned postemployment benefits owed to an employee that are not contingent upon the employee’s continued service. C. D. Answer (D) is correct. The measurement of a postemployment benefit obligation includes estimates of future salary increases. under IAS 19. [471] Gleim #: 4. C.4 -.Source: CIA 1189 IV-44 An employee’s right to obtain postemployment benefits regardless of whether (s)he remains employed is known as his/her A. years of service. If the given amount of the present value of the defined benefit obligation exceeds the given amount of the fair value of plan assets. Whether benefits have vested affects the measurement of the employer’s defined benefit obligation but not its existence. B.

it represents an asset.000 Copyright 2006 Gleim Publications.000 5.000 145. Current service cost.000 includes only the current service cost component. minus unrecognized past service cost. interest cost. C. B. past service cost (recognition in full of vested amounts and amortization of nonvested amounts).000 excludes the amortization of the actuarial loss.000 40.000 145.000 140. Components of the expense are current service cost. interest cost. Answer (D) is incorrect because net unrecognized actuarial gains increase the liability. Inc.000 135. unrecognized past service cost. the expected return on plan assets.000 excludes the past service cost. Ltd. Net unrecognized actuarial losses and unrecognized past service cost decrease the liability.: Current service cost Expected return on plan assets Interest cost on defined benefit obligation Amortization of net actuarial loss Past service cost 120. 120. if the excess of the DBO over the fair value of plan assets is constant. However. Answer (C) is incorrect because 140.000 (30. minus the fair value of plan assets at the balance sheet date.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. The amount of the defined benefit liability recognized equals the present value of the defined benefit obligation at the balance sheet date.000 5. D. net unrecognized actuarial gains will increase the liability. Answer (B) is incorrect because 135. If this amount is negative. [473] Gleim #: 4. Answer (B) is incorrect because net unrecognized actuarial losses decrease the liability. the maximum that may be recognized for such an asset is the sum of unrecognized actuarial losses.5 -. plus (minus) unrecognized actuarial gains (losses).000 10. the application of this section should not result in a gain being recognized solely because of an actuarial loss or past service cost in the current period or in a loss being recognized solely because of an actuarial gain in the current period.000) 40. Moreover. Answer (D) is correct. Answer (C) is incorrect because net unrecognized actuarial losses and unrecognized past service cost decrease the liability. and the past service cost increase the expense.000 Answer (A) is incorrect because 120.000 30. Current service cost Return on plan assets Interest cost Amortization of actuarial loss Past service cost Expense 120.000 10.Source: Publisher The following information relates to the activity of the defined postemployment benefit plan of Twain Publishers. Thus. Printed for Pol Mirafuentes Page 222 .000 Twain’s expense recognized in the income statement is A. and the present value of future refunds from the plan or reductions in future contributions. The expected return on plan assets decreases the expense. the amortization of actuarial loss.

000 should be recognized immediately to reflect the vested benefits and amortization of the nonvested benefits equals 50. Past service cost arising from the plan amendment includes 400. At year-end.000 – 150. No other actuarial gains and losses have occurred.000 (200. and the expected long-term rate of return on plan assets was 12%. Inc.000.000.000 ÷ 4). If the average period until vesting is 4 years.250. Answer (C) is correct.000. On the last day of the fiscal year.000 is the result of using the full 200.750 2.Source: Publisher At end of the year. Answer (D) is incorrect because 600. The corridor amount is 150.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [474] Gleim #: 4.000 higher than had been expected.Source: Publisher For an entity with a defined postemployment benefit plan. At a minimum.000).500 (50. The defined benefit plan’s assets had a fair value of 1.7 -. Emper Corporation amended its defined postemployment benefit plan.750 is the result of using 125. No unrecognized net cumulative actuarial gain or loss existed. 50.000. Benefits paid equaled 100. The benefits become vested after 6 years of service. the present value of the DBO was 200.000 fair value of plan assets). Given that no other gain or loss has occurred.000 liability loss without regard to the corridor amount and assumes an amortization period of 10 years instead of 20. C.000 (200.000.000.000 greater than estimated (a 200.000 includes nonvested benefits not yet required to be amortized. If the average remaining working life is 20 years. and the amount to be amortized is therefore 2. the fair value of plan assets at the beginning of the year was 500.000 3.000 450.000.000 600.000 Answer (A) is incorrect because 50. a total of 450. [475] Gleim #: 4.500.000 is the amount of the nonvested benefits. C. postemployment benefits.000 (10% of the greater of 1. D.500 0 Answer (A) is incorrect because 20.500.000 of the liability loss must be amortized over the average remaining working life beginning the year following the loss.000 (10% × 1. Past service cost is the increase in the present value of the DBO related to prior employee service that arises in the current period from the introduction of.6 -. Answer (C) is correct. 400.250. resulting in an increase in the present value of the DBO. D. 20. and the entity made 120. [476] Gleim #: 4. Printed for Pol Mirafuentes Page 223 .000. which was 200. the minimum past service cost to be recognized in the first year is A.000 of benefits that are already vested and 200.000 is the periodic amortization of nonvested benefits. Employer’s defined benefit obligation (DBO) was determined to be 1.8 -. B.000 present value of the DBO or 1.000 of nonvested benefits. The actual return on plan assets was Copyright 2006 Gleim Publications.000 ÷ 20 years of average remaining working life). the minimum required amortization of the unrecognized net actuarial gains and losses in the next year will be A. Answer (B) is incorrect because 200. the unrecognized actuarial net loss to be amortized beginning next year is 200. the fair value of plan assets was 620. B. amortization of the cumulative unrecognized net actuarial gains and losses must be included as income or expense if. as of the close of the prior period. Answer (B) is incorrect because 3. Accordingly. that unrecognized gain or loss exceeds 10% of the greater of the present fair value of the DBO or the fair value of plan assets.000 plan assets) as the corridor amount instead of 150.000 liability loss).Source: Publisher At the start of its current fiscal year.000 in contributions. Answer (D) is incorrect because 50. The discount rate was 10%. The amount outside the corridor is 50.000 200. or an amendment to.250.

000 is a nonsense number. C.000 omits past service cost from the calculation.000 75. [478] Gleim #: 4. On the date of the discontinuance.000. Answer (B) is correct.500. beginning of year Actual return 620. The unrecognized actuarial gain was reduced to 450. Answer (C) is incorrect because 900. the entity should recognize what net defined benefit liability immediately after the discontinuance? A. and the unrecognized past service cost was 100.000).000 100.000 [477] Gleim #: 4. The actual return on plan assets is equal to the difference between the fair value of plan assets at the beginning and the end of the year adjusted for contributions and benefits paid.000.000 (120.000 equals 10% of the beginning fair value.000 [10. 410.000 Answer (A) is incorrect because 410. The effect of the discontinuance was to reduce the present value of the DBO by 10%. D. Accordingly.10 -. the employees of that segment will not be able to earn additional benefits.Source: Publisher An entity that sponsors a defined benefit postemployment benefit plan has discontinued a segment of its business.000 950. Inc. 50.000 (9.000 omits the remaining unrecognized actuarial gain.000.000. Share-Based Payment. B.000 Answer (A) is incorrect because 50.000. Printed for Pol Mirafuentes Page 224 . and previously unrecognized related actuarial gains and losses and past service cost. The unrecognized past service cost was reduced to 90.000. When a curtailment or settlement occurs. the present value of the DBO was 10.000 – 90. end of year Benefits paid Contributions FV. the present value of the DBO after the curtailment was 9.000 equals 12% of the beginning fair value. Answer (D) is incorrect because 950. Accordingly. FV. the fair value of the plan assets was 8. The fair value of plan assets was given as 8. Thus. As a result.000.000. D.Source: Publisher IFRS 2. A curtailment arises from a reduction in covered employees or amendment of the plan to reduce benefits for future service.000. Answer (D) is correct.000 60.000 + 450.500. normally requires entities to account for their share-based employee compensation plans in accordance with which of the following methods? Copyright 2006 Gleim Publications.000)].000. The portions of the unrecognized actuarial gain and past service cost related to the portion of the DBO that was eliminated also equaled 10%.000.000 is 10% of the present value of the remaining DBO. A settlement is a transaction that eliminates the DBO for part or all of plan benefits.000 – 8.000. the gain or loss recognized encompasses the change in the present value of the DBO. the actual return is 100.500. B.000 900.000 – (10% × 10.000. the change in the fair value of plan assets.9 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C. the net unrecognized actuarial gain was 500.000) (500.000) 100.000 100. the defined benefit liability immediately after the discontinuance was 860. Thus. Answer (B) is incorrect because 60.000 860. Answer (C) is incorrect because 75.

the date on which the options are exercised by employees. granted Morgan. Entities must account for share-based employee compensation plans in accordance with the fair-valuebased method except in the rare cases in which the fair value of the equity instruments is not reliably measurable at the measurement date (the grant date for transactions with employees and those providing similar services). In these rare cases. The earliest date on which both the number of shares to be issued and the option price are known. but do not define. The date on which the options are exercised by the employees. Answer (B) is incorrect because the earliest date on which both the number of shares to be issued and the option price are known. The market price of the shares was 50 on January 2. The date the corporation forgoes alternative use of the shares to be sold under option. by what net amount should equity increase as a result of the grant and exercise of the options? Copyright 2006 Gleim Publications. share options to buy 1. the date on which the options are exercised by employees. and the date the entity forgoes alternative use of the shares to be sold under option may coincide with. the measurement date. but do not define. Morgan exercised the options on December 31. and the date the entity forgoes alternative use of the shares to be sold under option may coincide with. Answer (C) is incorrect because the intrinsic-value method is allowed only in rare cases. If the intrinsic value-based method is followed because the fair value of the options is not reliably measurable. Answer (D) is incorrect because the intrinsic-value method is allowed only in rare cases.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Fair-ValueBased Method A. B. D. [480] Gleim #: 4. year 1. and the date the entity forgoes alternative use of the shares to be sold under option may coincide with. Answer (D) is incorrect because the earliest date on which both the number of shares to be issued and the option price are known. Answer (A) is correct. Printed for Pol Mirafuentes Page 225 . Under the fair-value-based method prescribed by IFRS 2. but do not define. The date on which options are granted to specified employees. Answer (C) is incorrect because the earliest date on which both the number of shares to be issued and the option price are known. Yes Yes No No Intrinsic-ValueBased Method Yes No Yes No Answer (A) is incorrect because the intrinsic-value method is allowed only in rare cases.Source: CIA 1195 III-58 On January 2. D. year 1 and 70 on the following December 31. year 1. compensation expense is measured at the grant date. The options call for a price of 20 per share and are exercisable for 3 years following the grant date. C. the measurement date.000 shares of Kine’s $10 par common stock. the date on which the options are exercised by employees. B. the measurement date. [479] Gleim #: 4. Answer (B) is correct. IFRS 2 requires entities to account for these plans in accordance with the intrinsic-value-based method. Inc. C.12 -. its president. Kine Co. This expense is based on the fair value of the award at that date and recognized over the vesting period.11 -.Source: Publisher The measurement date in accounting for shares issued to employees in share option plans accounted for in accordance with the fair value method prescribed by IFRS 2 is A. the period over which the vesting conditions are expected to be satisfied.

000 (1. [481] Gleim #: 4. year 3 is for 4. The year 3 entry would have been 5. the entity presumably expected at each balance sheet date for the first three years of the vesting period that all options would vest. International Entity entered into an equity-settled share-based payment transaction with its senior executives. B.000 shares × 20 exercise price) cash received and the 30. Answer (B) is incorrect because no retrospective adjustment is made.500.000.000 [20.000 50. The market prices of the options and the related shares on the grant date are 20 and 80. [482] Gleim #: 4. Answer (B) is incorrect because 30.000 share options has a four-year vesting period. January 1. Inc. D. The periodic expense varies only with the expected number of equity instruments expected to vest. The fair value of each share option is determined at the measurement date. When the options are exercised. Because the events causing 100 options not to vest occurred unexpectedly in year 4. December 31.000 options × 20) ÷ 4 years]. Answer (C) is correct. the asset amount is recognized on the lessee’s records as a(n) <List A> asset. Assuming that the vesting conditions were not met for 100 of the options because of unexpected events in year 4.000 common stock and 40. The measurement date is January 2. the entry to debit option expense at A. and the proportional expense recognized in each of the first three years was 5.000 recognized in years 1-3 – (100 × 20) not vested]. Thus. Answer (C) is incorrect because 50.000 would have been recognized at January 1.000 is the amount of compensation expense. which is the grant date for transactions with employees and others providing similar services. The exercise price is 85.000 results from calculating the increase in equity using the share price on the exercise date. December 31. the 20.000 total expected – 15.000 Answer (A) is correct.13 -.000 70. year 1.000. Copyright 2006 Gleim Publications.000 shares × (50 market price – 20 option price)].14 -. This award of 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. and the lease is classified as a <List B> lease. Answer (A) is incorrect because the year 4 expense is 3. Answer (D) is incorrect because 70.000 [(1.000 increase. year 1 is for 20. B. The net effect on equity is 0. This 30. The net effect on equity will be a 20.000 will be recorded as both compensation expense and options outstanding. year 4 is for 5. Printed for Pol Mirafuentes Page 226 .000 additional paid-in capital.000 [1. year 1.000.000 based on a then-expected total expense of 20.Source: CIA 1195 IV-28 If a lease agreement transfers substantially all of the risks and rewards of ownership of the asset to the lessee. C. year 1. the intrinsic value of the options is 30. year 2 is for 5. the fair value of each share option was set at its market price of 20 on January 1. December 31.000 options outstanding will be allocated to share capital as 10.000 30. C.000. Answer (D) is incorrect because 20. 20.Source: Publisher On January 1.000 is the increase in the equity without regard to the compensation expense. respectively. year 1 if the options had vested immediately. Total expected expense was therefore 20.000. At that date. D.

[483] Gleim #: 4. the lease is a rental arrangement and is called an operating lease.15 -. Printed for Pol Mirafuentes Page 227 . B.Source: CIA 595 IV-27 Which of the following statements about a finance lease is false? A. IAS 38. specifically does not apply to leases that are within the scope of IAS 17. Accordingly. and the lessee’s payments include both principal and interest components. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) List A A. When a lease agreement transfers the risks and rewards of ownership of the asset to the lessee. the lease should be accounted for as a sale-purchase. Answer (D) is incorrect because. B. Obtains use of the asset only under a finance lease.. A lease is a rental or sub-purchase arrangement between a lessor (the owner or seller of the property) and a lessee (the renter or purchaser).e. Finances the transaction through the leased asset only under a finance lease. the lease is treated as a finance lease because the transaction is in essence an installment purchase. if it transfers substantially all of the risks and rewards of ownership. Intangible Assets. The lessee records depreciation or finance cost allowance on the leased asset. [484] Gleim #: 4. Copyright 2006 Gleim Publications. Makes rent payments that are actually installment payments constituting a payment of both principal and interest only under a finance lease. Inc. a finance lease.16 -. the lessee records a depreciable asset and a liability. If the risks and rewards of ownership have not transferred. Tangible Intangible Tangible Intangible List B Finance Finance Operating Operating Answer (A) is correct. not an operating lease. i. Is using the lease as a source of financing only under an operating lease. if so. C. Moreover. Leases. Answer (B) is incorrect because the recorded asset is a tangible asset. C. D. The issue in all leases is whether the risks and rewards of ownership have been transferred from the lessor to the lessee. if it transfers substantially all of the risks and rewards of ownership. Answer (A) is incorrect because the lessee obtains use of the asset. In effect. B. the lease is a finance lease. A finance lease is therefore regarded as a tangible asset. The lessor records the leased item as an asset. Answer (C) is incorrect because the lessee makes payments to the lessor. The lessor capitalizes the net investment in the lease. Answer (C) is incorrect because. Answer (B) is incorrect because the lessee uses the lease as a source of financing under a finance lease. the lease is a finance lease. The lease arrangement represents a form of financing.Source: CIA 596 IV-32 Finance and operating leases differ in that the lessor A. C. Answer (D) is correct. D. the lessor provides financing for an installment purchase.

Answer (B) is correct. under a finance lease. the lessee has the option to purchase at a price expected to be sufficiently below the fair value of the exercise date that. Inc. Answer (B) is incorrect because B is the only operating lease in the set. the lessor removes the leased item from the books and records lease payments receivable regardless of whether the lessor is a manufacturer or dealer. [485] Gleim #: 4. It normally is classified as a finance lease if. (2) the lease contains a bargain purchase option. Lease C passes the economic life test. (1) the lease provides for the transfer of ownership of the leased asset by the end of the lease term. and lease D passes the recovery of investment test. (4) the present value of the minimum lease payments is at least substantially all of the fair value of the leased asset at the inception of the lease.e. C. A lease should be classified as a finance lease by a lessee if it transfers substantially all of the risks and rewards of ownership. Hence.. (3) the lease term is for the major part of the economic life of the leased asset. Lease A only. for example. Copyright 2006 Gleim Publications. or (5) the leased asset is such that it can be used only by the lessee without major modification.Source: CIA 596 IV-31 Which of the following leases ordinarily should be classified as a finance lease by the lessee? Lease A Lease B Lease C Lease D Contains a bargain purchase option? Lease term is for the major part of the economic life of the leased asset Present value of the minimum lease payments is substantially all of the fair value of the leased asset Leased asset usable only by lessor without major modification Yes No No No No No Yes No No No No Yes No Yes Yes No A. at the lease’s inception. The lessee records and depreciates the leased item under a finance lease. Answer (C) is incorrect because the lessee records depreciation on the leased asset under a finance lease. the leased asset is being purchased when a lease meets the criteria for capitalization. and D. When a transaction meets the criteria of a finance lease. C. so it qualifies as a finance lease. Answer (D) is incorrect because Lease A contains a bargain purchase option. Printed for Pol Mirafuentes Page 228 . D. exercise is reasonably certain. Answer (D) is incorrect because. B.17 -. Lease B only. the lessor recognizes a net receivable equal to the net investment in the lease: gross investment (minimum lease payments from the lessor’s perspective plus unguaranteed residual value) discounted at the interest rate implicit in the lease.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. it would normally be classified as a finance lease. Answer (A) is incorrect because Leases C and D are also finance leases. A lease is classified at its inception. Answer (C) is correct. If it were usable by the lessee (not the lessor) without major modification. i. Leases A. Lease A is a finance lease because the terms of the lease include a bargain purchase option. the lease agreement represents a form of financing. in essence. This process is separate from the accounting for the lease obligation. Leases C and D only.

The lessee’s minimum lease payments include required payments (excluding contingent rent and costs for services and taxes to be paid by and reimbursed to the lessor) during the lease term and the amount of a bargain purchase option. Printed for Pol Mirafuentes Page 229 . C. Answer (D) is incorrect because a guaranteed residual value is part of the lease contract. leased a machine to XYZ on January 1. Title to the asset will automatically pass to the lessee at the end of the lease term. beginning January 1 Implicit interest rate Present value of an annuity due of 1 discounted for 10 years at 10% Present value of 1 due in 10 years discounted at 10% 10 years 10 years 55. Other details are as follows: Lease term Useful life of the asset Cost of the leased asset to the lessor Annual payment payable at the beginning of each year. B.Source: CIA 585 IV-22 ABC entities.000 10.19 -.Source: CIA 1191 IV-44 At the inception of a finance lease. the journal entry to record the inception of this lease on the lessor’s books at January 1 is Copyright 2006 Gleim Publications. As part of minimum lease payments at future value of an annuity due. a manufacturer lessor. Answer (B) is incorrect because the guaranteed residual must be discounted to present value. The lessee records a finance lease as an asset and a liability at the inception of the lease at the fair value of the leased property (not to exceed the present value of the minimum lease payments). Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [486] Gleim #: 4. Answer (C) is incorrect because the guaranteed residual value must be discounted to present value. As part of minimum lease payments at future value. how should the lessee account for guaranteed residual value? A. D.000 10% 6. the minimum lease payments equal the sum of the minimum payments payable over the lease term and any amounts guaranteed by the lessee or by a party related to the lessee. The lease meets the criteria for a finance lease. As not a part of the lease contract. If no bargain purchase option exists. [487] Gleim #: 4.7590 . As part of minimum lease payments at present value. Answer (A) is correct.18 -.3855 Assuming the fair value of the asset is at least equal to the present value of the minimum lease payments.

000 32. the present value of the minimum lease payments computed at the interest rate implicit in the lease 5. As net investment. The cost of the leased asset (55. the payment structure is that of an annuity due.000 periodic payment times the present value of an annuity due of 1 discounted for 10 years at 10% (10.000 67. Copyright 2006 Gleim Publications. unearned finance income equals the difference between the gross investment and the sales price (100. the difference between the gross investment and the net investment (gross investment discounted at the interest rate implicit in the lease) 4.000 to 90. the initial 10.000 32.590 = 32. Leased machine Lease liability Cash 67.000 90.000 55.000 – 67.590 55. Lease payments receivable Cash Cost of sales Sales Inventory Unearned finance income--leases Answer (A) is incorrect because it is the lessee’s journal entry. Inc.000 10. the manufacturer-lessor should record 1. Sales revenue is therefore equal to the 10.000) must also be charged to cost of sales and credited to inventory. As sales revenue.000 90. Printed for Pol Mirafuentes Page 230 . the cost of the leased asset Because the first payment is made at the inception of the lease.000 55.000 45.000 55. For this finance lease. Answer (C) is incorrect because the lease should reflect both cost of goods sold and sales. the fair value of the asset or. at the inception of the lease.590 55.410). the minimum lease payments because there is no residual value 2. the difference between the gross investment in the lease (a debit to a receivable) and unearned finance income (a credit to a liability) 3. As gross investment.590 10. and the unearned finance income should be recorded as the difference between the gross lease payments receivable and the present value of this gross investment.000 10.590). Lease payments receivable Cash Cost of sales Inventory Unearned finance income--leases Sales C.7590 = 67. Given that cash is paid at the beginning of the year.000 × 6. not the netted gross profit on the lease.000 cash debit immediately decreases the gross investment in the lease (lease payments receivable) from 100.590 57.000. Lease payments receivable Cash Finance income Gross profit on lease Inventory D. As cost of goods sold.000 90. Answer (B) is incorrect because the sale should be recorded at the present value of the minimum lease payments. if lower. As unearned finance income. Finally.000 10. Answer (D) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.410 12.000 55.410 B.

the recorded gross investment is A. The expected residual value at the end of the lease term is 10. not the estimated economic life. the depreciable base for this finance lease is equal to the 240. not the estimated residual value. KW initially recorded the leased equipment at 240. Consequently.000 initially recorded minus the 50. noncancelable lease properly classified as a finance lease. Jones’s implicit interest rate is 12%.O. and any guaranteed residual value) and any unguaranteed residual value.000.000 100. C. is used as the denominator in the depreciation calculation. Answer (D) is incorrect because the residual value is added to. the undiscounted lease payments. Printed for Pol Mirafuentes Page 231 . The equipment had an estimated economic life of 5 years and an estimated residual value of 20. The expected residual value including guaranteed and unguaranteed portions equals 10.000. D. For a finance lease. must be subtracted from the amount initially recorded. The present value of 1 at the end of five periods is .20 -. Bush KW Ltd. not subtracted from.000. Answer (D) is incorrect because the term of the lease.000). which is the fair value at the lease date.000 47.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [488] Gleim #: 4. The five periodic payments of 20.F. C. Accordingly. The gross investment is the same regardless of whether any residual value is guaranteed.000. leased equipment under a 4-year.000 guaranteed residual value allocated equally over the 4-year lease term. Jones leased property to Smith for a 5-year period.000 72. the lessor should record the gross investment in the lease at the undiscounted sum of the minimum lease payments (the total of the lessee’s required payments. The gross investment should be 110. must be subtracted from the initially recorded amount.000 does not include the residual value in the gross investment. Answer (B) is incorrect because 100. Copyright 2006 Gleim Publications.000 – 50.567.500 44. Answer (B) is correct.000) ÷ 4 years]. Depreciation should be consistent with the accounting policy for owned assets. not the estimated residual value.000 (100. it should be fully depreciated over the shorter of the useful life or the lease term. The lease does not transfer ownership or contain a bargain purchase option. must be used as the denominator in the depreciation calculation.000 38.100 90. B. Hall On August 1. annual depreciation expense is 47. The cost of the property to Jones was 50. Thus.000 Answer (A) is incorrect because the guaranteed residual value. In accordance with the straight-line method used by KW for owned assets. Terms of the lease included a guaranteed residual value of 50.Source: J. The annual 20.Source: H.000. D.000 equal 100.000 Answer (A) is correct. not the estimated economic life. Absent a reasonable certainty that the lessee will own the asset at the end of the lease term. 55.000. and its depreciation policy for owned assets is to use the straight-line method. excluding contingent rent and costs for services and taxes to be paid by and reimbursed to the lessor. At the inception of the lease. the period of amortization should be the lease term. The lease does not transfer ownership or contain a bargain purchase option. Answer (C) is incorrect because the annual lease payments should be recorded at their undiscounted value.500 [(240. 110. Inc.605. Answer (C) is incorrect because the guaranteed residual value. The present value of an ordinary annuity of 1 for five periods is 3. the amount of depreciation that should be charged each year is A. [489] Gleim #: 4.000 + 10. and the term of the lease.000. B.000 lease payment is payable at the end of each year.21 -.

Source: CMA 1293 2-27 (Refers to Fact Pattern #32) Plantation should treat Lease A as a(n) A.000.000 in rental expense and 800 in executory costs to annual operations. charging the present value of the yearly rental expense to annual operations.Source: CMA 1293 2-28 (Refers to Fact Pattern #32) Plantation should treat Lease B as a(n) Copyright 2006 Gleim Publications. and taxes) of 800 to be paid by the lessee. charging 15. Answer (C) is incorrect because the actual cash outlay for rent. is charged to expense. Each lease is noncancelable. the lease term is for the major part of the useful life of the leased asset.000 annual rental expense with annual executory costs (e. charging 14.23 -. 15.000 3 years 5 years 3. the lease has a bargain purchase option..Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #32] On January 1.200 2. All payments required under these agreements are due on January 1 each year. An operating lease does not transfer the risks and rewards of ownership to the lessee.g.200 in rental expense and 800 in executory costs to annual operations. or the asset is usable only by the lessee without major modification. Operating lease.74 [490] Gleim #: 4. Printed for Pol Mirafuentes Page 232 . Lease A is nothing more than a rental arrangement.000 None 10% Lessee 800 6. maintenance. D. insurance. Inc.000 None 10.000. B. Lease A is an operating lease with a 15. and Plantation does not receive title to either leased property during or at the end of the lease term. Answer (D) is correct.76 Lease B Computer 4. Lessor Type of property Yearly rental Lease term Economic life Purchase option Renewal option Fair value at inception of lease Unguaranteed residual value Lessee’s incremental borrowing rate Executory costs paid by Annual executory costs Present value factor at 10% (of an annuity due) Lease A Oven 15. the present value of the minimum lease payments is at least substantially all of the asset’s fair value. Operating lease. Answer (A) is incorrect because Lease A does not qualify as a finance lease. Answer (B) is incorrect because rental expense is 15. Circumstances in which the risks and rewards of ownership are normally deemed to be transferred include the following: the lease transfers title to the lessee.400.000 10% Lessor 500 2. Operating lease. Finance lease with an initial asset amount of 101. [491] Gleim #: 4. C. Plantation Partners is planning to enter as the lessee into the two lease agreements described in the opposite column.000 10 years 15 years None None 125.22 -.

Answer (D) is correct. Operating lease.590 (2. The amount of deferred tax is based on tax rates in effect when temporary differences originate. Finance lease with an initial asset value of 10.960 includes the present value of the executory costs. the lessee treats a finance lease as similar to the purchase of an asset capitalized at the fair value of the leased asset or. If the present value of the minimum lease payments (calculated without guaranteed amounts or a bargain purchase option) is substantially all of the asset’s fair value. the lease should be capitalized. not for the asset. [493] Gleim #: 4. Answer (B) is incorrect because 10. Consequently.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. B. C. For example. For accounting purposes. D. which does not support the calculation and reporting of deferred income tax. charging 3. The present value of the minimum lease payments is therefore 9.74 × 3. which recognizes that future taxability and deductibility are important factors in the valuation of individual assets and liabilities. Inc.. Answer (A) is incorrect because this statement describes the deferred method of accounting for deferred income taxes. The appropriate amount of the initial asset value is the present value of the minimum lease payments calculated above.g. excluding contingent rent and executory costs (e. the lease normally is accounted for as a finance lease. plus any amounts guaranteed by the lessee or a related party.000 yearly rental – 500). Given that the executory costs associated with the lease are to be paid by the lessor. C. minimum lease payments equal the required payments plus the amount of the option. A finance lease is one in which the risks and rewards of ownership are transferred to the lessee. Answer (D) is incorrect because this statement describes the nonallocation or flow-through approach. The appropriate tax rate to be reported on the income statement is the tax actually levied in that year. The tax effects of temporary differences are not reported separately but are reported as adjustments to the amounts of specific assets and liabilities and the related revenues and expenses.500). Answer (C) is incorrect because this statement describes the net-of-tax method. B. D.960. Printed for Pol Mirafuentes Page 233 .25 -. if lower. a portion of the lease rental price is for those costs.24 -. the present value of the minimum lease payments. Answer (C) is incorrect because the lease meets the criteria of a finance lease.500 in rental expense and 500 in executory costs to annual operations. based on tax laws and rates enacted or substantively enacted as of the balance sheet date. which is substantially all of the fair value of the asset. If a bargain purchase option exists. Answer (A) is incorrect because the initial asset amount cannot exceed the fair value of the leased asset. a DTA or DTL is measured based on the average rates expected to apply in the periods when the TDs are expected to reverse. taxes and insurance). or 3. the annual minimum lease payment equals the annual payment minus the executory costs.Source: CMA 696 2-9 Which one of the following temporary differences will result in a deferred tax asset? Copyright 2006 Gleim Publications. If different rates apply to different taxable profit levels.590. meaning no deferred taxes would be reported. The amount of deferred tax is based on the tax rates expected to be in effect during the periods in which the deferred tax liability is settled or the deferred tax asset is realized. 10. Moreover. The lessee’s minimum lease payments include the required payments. The tax rate or tax base may vary with the manner of recovery or settlement. A DTA or DTL is measured at the rates expected to apply when it is realized or settled. [492] Gleim #: 4. Thus.200. Answer (B) is correct.200 is the fair value of the leased asset. Finance lease with an initial asset value of 9. one tax rate may apply if an asset is sold immediately and another may apply if it is to be recovered through continued use.Source: CIA 596 IV-75 Which one of the following statements best describes the asset-liability method of accounting for deferred income taxes? A. Finance lease with an initial asset amount of 10.500 (4. however.

. 40. Answer (B) is incorrect because recognizing installment income on the financial statements but not the tax return results in a taxable temporary difference. C. Because the tax is paid prior to recording accounting profits. Answer (A) is incorrect because using an accelerated depreciation method for determining taxable profit (tax loss) results in a deferred tax liability. Printed for Pol Mirafuentes Page 234 .Source: Publisher At December 31. Use of the straight-line depreciation method for determining accounting profit and an accelerated method for determining taxable profit (tax loss).000 0 What taxable and deductible amounts are related to these temporary differences? Taxable Amounts A.000 0 Copyright 2006 Gleim Publications.000 Deductible Amounts 70. The financial statements would show no income and no related tax expense because the rental payments apply to future periods.26 -. Answer (C) is correct. C.000 0 110. Inc. it represents an asset that will be recognized as an expense when income is finally recorded. B.000 40. Answer (D) is incorrect because recognizing prepaid expenses earlier on the tax return than on the financial statements (a situation akin to the accelerated depreciation of fixed assets) gives rise to a deferred tax liability. D. Advance rental receipts accounted for on the accrual basis for determining accounting profit and on a cash basis for determining taxable profit (tax loss) would give rise to a deferred tax asset. a calendar-year entity. A deferred tax asset records the deferred tax consequences attributable to deductible temporary differences and carryforwards. Prepaid expenses accounted for on the accrual basis for determining accounting profit and on a cash basis for determining taxable profit (tax loss).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. [494] Gleim #: 4. reported the following accounts for which the carrying amount differed from the tax base: Carrying Amount Depreciable assets (net) Deferred rental income 150. The tax return. B.000 Tax Base 80.000 40. Installment sale profits accounted for on the accrual basis for determining accounting profit and on a cash basis for determining taxable profit (tax loss).000 70. however. and a tax would be due in the year of receipt.000 110. SCM Ltd. would show the rent as income when the cash was received. D. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.

The tax base of a liability is the portion of the carrying amount that will not be deductible against future taxable economic benefits for tax purposes. the 70. The tax base of an asset is the amount deductible against future taxable economic benefits when the asset’s carrying amount is recovered. and repayment has no tax effects. A taxable (deductible) TD results in taxable (deductible) amounts in the future when the carrying amount of the asset or liability is recovered or settled. It will use an accelerated depreciation method for determining taxable profit or tax loss.28 -. future sacrifices to provide the rental service or refund amounts paid will result in future tax deductible amounts when the liability is settled.000 not taxable in the future). The tax base is the amount attributed for tax purposes to an asset or liability. The tax base is the amount attributed for tax purposes to an asset or liability.000. Thus.27 -. The tax base of an asset is the amount deductible against future taxable economic benefits when the asset’s carrying amount is recovered. Answer (D) is incorrect because the tax base is 1. and the related expense has been included in full in the determination of taxable profit.000. is taxable before being recognized in accounting profit. and the related interest revenue was included in full in the determination of taxable profit. D. The difference between the carrying amount of an asset or liability and its tax base is a temporary difference (TD). A loan receivable has a carrying amount of 1. The difference between the carrying amount of an asset or liability and its tax base is a temporary difference (TD).000.000. Accrued expenses have a carrying amount of 1. Trade receivables have a carrying amount of 1. The tax base of a liability is the portion of the carrying amount that will not be deductible against future taxable economic benefits for tax purposes. Answer (C) is incorrect because the taxable amount is 70.000 carrying amount – 1. such as rental income.Source: Publisher Which of the following results in a tax base of zero? A. and the related revenue has been included in full in the determination of taxable profit. Answer (D) is incorrect because the taxable amount is 70.000.000.000 tax base) related to the depreciable assets is classified as a taxable amount. For unearned interest revenue for which the related interest revenue was taxed on a cash basis. [Fact Pattern #33] An entity has purchased an asset with a 10-year useful life.000 and the deductible amount is 40.Source: CIA 1194 IV-69 (Refers to Fact Pattern #33) During the 10-year life of the asset. The tax base of revenue received in advance (a liability) is the portion of the carrying amount taxable in the future.000 and the deductible amount is 40. [495] Gleim #: 4.000 carrying amount – 0 tax base) related to the deferred rental revenue is classified as a deductible amount.000. The tax base of revenue received in advance (a liability) is the portion of the carrying amount taxable in the future.000 carrying amount – 80. B. the tax base equals zero (1.000. the 40.000.000. Answer (C) is correct. Answer (B) is incorrect because the tax base is 1.000 and the deductible amount is 40. Answer (B) is correct. A taxable (deductible) TD results in taxable (deductible) amounts in the future when the carrying amount of the asset or liability is recovered or settled. Unearned interest revenue has a carrying amount of 1. the entity will report as deferred tax an amount that Copyright 2006 Gleim Publications.000 temporary difference (40. Thus. Answer (A) is incorrect because the tax base is 1. Printed for Pol Mirafuentes Page 235 . C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the taxable amount is 70.000 temporary difference (150. For determining accounting profit. Inc. it will use straight-line depreciation. When income. [496] Gleim #: 4.

30 -. and a deferred tax liability will be recognized. An understatement of cash flows throughout the economic life of the asset. if cash flows are derived indirectly by adjusting net profit or loss reported in the financial statements. For example. C. In the early years. An overstatement of cash flows in the early years and then an understatement of cash flows in the later years of the economic life of the asset. Answer (D) is incorrect because cash flows are not affected by the method of depreciation used for reporting purposes.000 of taxable profit. [497] Gleim #: 4. B. Answer (A) is correct. and 35% for taxable profit in excess of 100.29 -. C. the cash inflow or outflow resulting from using an accelerated depreciation method to determine actual tax expense or benefit (the amount paid to or refunded by the taxing authority) is completely unaffected by the depreciation method used in the financial statements. Printed for Pol Mirafuentes Page 236 . peaks. the asset is depreciated more quickly for tax purposes than for financial reporting purposes. Inc. and then decreases to zero over the life of the asset. The cumulative deferred tax increases. C. Answer (C) is correct.000 of taxable profit. This temporary difference reverses in later years. Increases steadily for the 10 years.000 annually. cash flows should be the same.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. actual taxes payable will be less than tax expense reported in the financial statements. cumulative actual taxes paid will equal cumulative reported tax expense. in the early years.Source: Publisher Based on its current operating levels. or accounting principles generally accepted in a given country. B.5% 35% Copyright 2006 Gleim Publications. However. No effect on cash flow amounts. [498] Gleim #: 4.Source: CIA 1194 IV-70 (Refers to Fact Pattern #33) When determining cash flows accruing to the entity. the cash basis. so the deferred tax balance will be zero. Enacted tax rates for the tax jurisdiction in which Glucose operates are 15% for the first 50. Answer (B) is incorrect because the deferred tax liability will increase and then decrease. Cash flows are not affected by the basis of accounting used to prepare the financial statements. 15% 25% 27. D. Accordingly. Answer (C) is incorrect because cash flows are not affected by the method of depreciation used for reporting purposes. using financial statements prepared for tax purposes will result in A. D. D. Glucose LLC estimates that its annual level of taxable profit in the foreseeable future will be 200. Increases and then decreases. Answer (B) is incorrect because cash flows are not affected by the method of depreciation used for reporting purposes. 25% for the next 50. Answer (A) is incorrect because the deferred tax liability will increase and then decrease. Hence. different adjustments are necessary to arrive at the same cash flow amounts if different bases of accounting are used in the preparation of the financial statements. Answer (D) is incorrect because the deferred tax liability will increase and then decrease. By the end of the asset’s useful life. An overstatement of cash flows throughout the economic life of the asset.000. Decreases and then increases. Which tax rate should Glucose use to measure a deferred tax liability or asset? A. whether the financial statements are prepared based on the tax basis. B. Is constant.

120.000 taxable temporary difference. and 45. B.000.000 in year 2. a DTA or DTL is measured based on the average rates expected to apply in the periods when the TDs are expected to reverse. the objective is to use the enacted or substantively enacted tax rate(s) expected to apply to taxable profit in the periods in which the deferred tax liability or asset is expected to be settled or realized. deferred tax expense or income should be disclosed equal to the A. Accordingly.000 taxable temporary difference. Answer (A) is incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. Answer (B) is incorrect because 25% is the tax rate for taxable profit over 50. For tax purposes. In measuring a deferred tax liability or asset.5% Answer (D) is incorrect because 35% is the tax rate for taxable profit over 100. Answer (D) is incorrect because the total tax liability includes both the current and deferred tax expense or income for the year.000 = 27. Answer (C) is incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense.31 -. B. Inc. Answer (B) is correct. Decrease in the deferred tax assets.000 55. Answer (C) is correct.000.Source: Publisher On December 31. 150. C.000 deductible temporary difference.000 but less than 100.000 100. deferred taxes should be based on a A.000 ÷ 200. Increase in the deferred tax liabilities. the applicable tax rate is 27. year 1. warranty costs are not deductible until paid.000 55. 120. 40. year 1.000 in year 3.000 in year 4. Printed for Pol Mirafuentes Page 237 .500 12. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. [500] Gleim #: 4.000 deductible temporary difference. Health entities reported a 150. D.000 warranty expense in its income statement.000 50. Amount of the total tax liability. D. At December 31. For example.000 in year 1 and expected warranty costs of 35.32 -. The expense was based on actual warranty costs of 30.Source: Publisher When an entity reports deferred tax assets and liabilities. Taxable Profit 50. C.000 × × × Tax Rate 15% 25% 35% = = = 7.000 of taxable profit.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 15% is the tax rate for the first 50. Copyright 2006 Gleim Publications. [499] Gleim #: 4. Sum of the net changes in deferred tax assets and deferred tax liabilities. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. If different rates apply to different taxable profit levels.000 200. 150.5%.500 35.

000 equals the warranty expense. how should the balance of bonds payable be classified on the December 31. the amounts will be deductible. all required interest payments and sinking-fund payments due to date had been made on schedule. When the liability is settled through the actual incurrence of warranty costs. [502] Gleim #: 4. Deferred credit. Sales in year 1 and year 2 were 5 million and 7 million. C. Thus. the provision related to year 2 sales must be recognized in year 2 even if actual expenditures will not occur until year 3. Health entities should report a 120. The provision related to year 2 sales equals 350. B.Source: CIA 597 IV-29 An entity introduced a new product that carries a 2-year warranty against defects. It estimates that warranty costs will be 2% of sales in the year of sale and 3% of sales in the year following the year of sale.Source: CIA 590 IV-34 On December 31.000 equals the sum of 2% of year 2 sales and 3% of year 1 sales.000 warranty liability in its balance sheet. 2001) to accumulate the funds necessary to retire the bonds at their maturity.000 [7. Current liability. XYZ issued 5-year bonds with a face amount of 1 million. the tax base of the warranty liability is 0. not the payable. Inc.000 and 260.000. The result is a 120. Thus.000 350. Copyright 2006 Gleim Publications.33 -.34 -. respectively. On December 31.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.000 370. Answer (B) is incorrect because 290. Answer (D) is incorrect because the warranty costs will result in a deductible amount. the temporary difference should be classified as a deductible temporary difference. Interest is payable annually on December 31. Answer (C) is correct.000 temporary difference (120. According to the provisions of the bond indenture. The warranty liability is equal to the 150. D. Long-term liability. D. Contra to long-term investments.000 warranty cost actually incurred in year 1. Answer (B) is incorrect because 150. Because warranty costs are not deductible until paid. If the sinking-fund assets are properly classified as noncurrent.000 carrying amount – 0 tax base). B.000 × (2% for the year of sale + 3% for the year after the year of sale)]. 2004.000 290. Answer (D) is incorrect because 370. Printed for Pol Mirafuentes Page 238 . Answer (C) is incorrect because warranty costs will result in a deductible amount. 2004 balance sheet? A. At year-end year 1. C.000.000 equals the actual cost of servicing the warranty in year 1 and year 2.000 Answer (A) is incorrect because 260. XYZ was to make annual deposits into a bond sinking fund (beginning December 31.000 warranty expense minus the 30. The bonds carry a stated interest rate of 10% and were sold at par. 260. What provision for warranty costs must the entity recognize in year 2? A.000 is the actual cost of servicing the warranty in year 2. Actual costs of servicing the warranty in year 1 and year 2 were 110. and the 30. 2000. [501] Gleim #: 4.000 actual warranty costs is currently deductible. The warranty provision must be matched with revenue in the year of sale. respectively.

2004 balance sheet? Classification Table Bonds Payable Classification A Classification B Classification C Classification D Current liability Current liability Long-term liability Long-term liability Interest Payable Current liability Long-term liability Current liability Long-term liability A. Printed for Pol Mirafuentes Page 239 .Source: CIA 1192 IV-31 On August 1. Some current liabilities are included in the working capital employed in the normal operation cycle. income taxes. The product carries a 5-year warranty that covers both labor and materials charges. Classification C. Answer (B) is incorrect because the interest payable should be classified as a current liability. Answer (D) is incorrect because both the balance of bonds payable and interest payable should be classified as current liabilities. Any other liability is noncurrent. Classification B. 2000.35 -.g. an entity issued 5-year bonds with a face amount of 10 million. Answer (B) is incorrect because the bonds should be classified as a current liability. [503] Gleim #: 4.. e. Answer (A) is correct. The bonds carry a stated interest rate of 10% and interest is payable annually on July 31. D. The bonds are due within a year after the balance sheet date. and bank overdrafts. A current liability is an obligation that is expected to be settled within the normal operating cycle or is due to be settled within 12 months of the balance sheet date.Source: CIA 1193 IV-39 A manufacturer produces a quality product for which it charges a little more than some competing items but gives its consumers a more liberal warranty policy. B. Any other liability is noncurrent.36 -. Which is the appropriate classification of bonds payable and the related accrued interest payable on the December 31. Answer (C) is incorrect because the balance of bonds payable should be classified as a current liability. Classification D. Answer (D) is incorrect because the bonds are a liability and should not be put in an ambiguous category such as deferred credits. trade payables and accrued employee operating costs. A current liability is an obligation that is expected to be settled within the normal operating cycle or is due to be settled within 12 months of the balance sheet date. they should be classified and current. the classification of the sinking-fund assets is irrelevant to the classification of the bond payable. Classification A. and bank overdrafts. Under the IASs. Thus.. trade payables and accrued employee operating costs. Answer (C) is incorrect because offsetting assets and liabilities is rarely acceptable. It is due within a year after the balance sheet date. [504] Gleim #: 4. dividends.g. income taxes. the bonds payable should be classified as current because they are due to be settled within 12 months. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. e. C. Which of the following defines the appropriate method of accounting for the warranty? Copyright 2006 Gleim Publications. Given that the bonds payable and interest payable are due within 12 months. Some current liabilities are included in the working capital employed in the normal operating cycle. Current liabilities not settled within the normal operating cycle include the current part of interest-bearing debt. Current liabilities not settled within the normal operating cycle include the current part of interest-bearing debt. dividends.

Printed for Pol Mirafuentes Page 240 . A liability is a present obligation arising from past events. This unused entitlement arose from employee services rendered during the period and is accumulating.000 should occur.Source: CIA 1191 IV-41 At its balance sheet date. Whether a past event results in a present obligation is usually clear.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Only a disclosure should be made because recognition does not occur until the absences occur. D. 4 million coupons were distributed and 1 million coupons redeemed. A direct reduction to retained earnings of 100. Recognition of a provision. The obligation is recognized whether it is vesting (the employee is entitled to a cash payment for an unused entitlement upon leaving the entity) or not vesting.37 -. Thus. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event). Answer (C) is incorrect because the sales warranty method is appropriate for situations when a warranty is sold separately from the product.Source: CIA 1190 IV-37 A company allows customers to redeem 20 coupons for a toy (cost 3. Answer (C) is incorrect because a liability rather than an asset is recognized. Answer (D) is incorrect because the method of accounting for warranties for tax purposes is the cash basis. For short-term compensated absences. it is probable that an outflow of economic benefits will be necessary to settle the obligation. the timing of recognition depends on whether the benefits accumulate. Answer (B) is correct. B. The adjusting entry to accrue for unredeemed coupons at year-end is Copyright 2006 Gleim Publications. Tax basis. If the benefits for compensated absences accumulate. Hence. How should it be accounted for? A. [505] Gleim #: 4. Sales warranty. [506] Gleim #: 4. Answer (A) is incorrect because the cash basis calls for recognizing warranty expense as labor and materials are expended to satisfy the warranty. C.00). Answer (A) is incorrect because recognition occurs at the time of the absences if the benefits are not accumulating. Estimates are that 40% of coupons distributed will result in redemption. the settlement of which is expected to result in an outflow of resources embodying economic benefits. Since beginning the promotion this year. Inc. An asset of 100. for example) and that the outflow is probable (in these circumstances. Assuming that the amount of warranty costs can be reliably estimated (although they are uncertain in timing and amount compared with a trade payable. the entity should debit expense and credit liability for 100.000.000. D. Answer (B) is correct. It equals the additional amount expected to be paid as a result of the unused accumulated entitlement at the balance sheet date. and its amount can be reliably estimated. the expected cost of short-term compensated absences is recognized when services are rendered that increase the employees’ entitlement to future compensated absences. The cash basis is unacceptable for accounting purposes because it violates the matching principle. B. An expense should be recorded for 100. “more likely than not”).38 -. Answer (D) is incorrect because the expense is recognized in the income statement. C. Short-term employee benefits expected to be paid as a result of service rendered during the period ordinarily should be recognized as an expense and a liability (accrued expense). an entity reliably estimates that the expected cost of compensated absences resulting from short-term disability will be 100.000 because the entitlement accumulates and the employees have rendered services during the period that increase their future entitlement.000 should be recognized. The amount should not be discounted. A provision is a liability of uncertain timing and amount. the manufacturer’s contractual present obligation should result in recognition of a provision. Cash basis. it is clear from the circumstances that the entity’s sale of goods without warranty is an obligating event that resulted in a present obligation for the issuance of warranty costs.

Answer (D) is incorrect because the debit should be to an expense. [508] Gleim #: 4. the amount that has already been collected but pertains to future periods is best referred to as A. creating a provision of 90. deferred or unearned revenue is an amount that has been received but that has not met the recognition criteria for revenue. therefore. This deferral reflects the uncertainty of the reliable measurement of the future economic benefits. which is revenue not yet received. Sales Provision for premiums 90. Revenue is recognized (reported as revenue) in the period in which the recognition criteria are met.800.000 (30. Premium expense Provision for premiums B. Of those. although an expense should be accrued.000 1. Deferred subscriptions revenue (a liability account). The promotion requires 20 coupons to receive one toy. Precollected revenue is deferred revenue.6 million.000 90. Income. An expense and a provision should be accrued for the coupons still outstanding that are expected to be redeemed.000 Answer (A) is correct. At the balance sheet date. Answer (C) is incorrect because the revenue will be recognized in future periods when forthcoming issues of the magazine are published and distributed to the subscribers.800.000 × 3.000 90. Accrued subscriptions revenue (an asset account). and the amount is incorrect. 40%. is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease in a liability can be reliably measured. are estimated to be redeemable.00).Source: CIA 1192 IV-29 The publisher of a popular magazine offers a special discounted price for a 3-year subscription.000 (600. Premium expense Provision for premiums D. Of the 4 million coupons distributed.000 1. C. Answer (D) is incorrect because there is no such thing as a precollected receivable. A subscription receivable (an asset) would arise from accrued revenue. so 30. which is an amount received that has not met the recognition criteria (classified as a liability). and 600. Printed for Pol Mirafuentes Page 241 . Earned subscriptions revenue (a revenue account). The average customer stays with the entity 8 years. Each toy costs 3. B.00.800. Precollected subscriptions receivable (a deferred asset account). the amount applicable to future periods is deferred. when it is received in advance. D. Sales Provision for premiums C.000 1. which includes revenue and gains.000 more are expected to be redeemed. Answer (C) is incorrect because. Answer (B) is correct. Answer (A) is incorrect because an accrued revenue is revenue that has met the recognition criteria but has not been received.000 90.000 1.40 -. The uncertainty arises because the entity still must satisfy an obligation to perform in the future before it is entitled to the future economic benefits.000 ÷ 20) more toys will be required.39 -. The amount received in advance is considered a liability because it represents a present obligation arising from a past event. How should these deposits be shown on the financial statements? Copyright 2006 Gleim Publications.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. 1 million have already been redeemed. Accordingly. Inc. [507] Gleim #: 4. the amount is incorrect.800. Answer (B) is incorrect because the debit should be to an expense. or 1.Source: CIA 592 IV-38 A cable television entity receives deposits from customers that are refunded when service is terminated.

An expired expense. How should this information be reported in the December 31.5 million. you encounter an adjusting journal entry recorded at year-end that contains a debit to rental revenue and a credit to deferred rental revenue. An accrued revenue. D. The purpose of this journal entry is to record A. Other revenue.5 million. The journal entry described indicates that collection has been made. Answer (C) is incorrect because deposits are liabilities. The final decision on the recall is expected to be made in March 2005. Answer (A) is incorrect because deposits meet the definition of liabilities. C. Revenue is income that arises in the ordinary activities of the entity. not revenue. B. Copyright 2006 Gleim Publications. Inc. An unexpired expense. Answer (C) is incorrect because the entry concerns a revenue rather than an expense transaction. D. C. [509] Gleim #: 4. 2004 financial statements? A. B. the settlement of which is expected to result in an outflow of resources embodying economic benefits. A deferred revenue is a revenue item that has been received but has not met the recognition criteria. Answer (A) is incorrect because an accrued revenue has met the recognition criteria but has not yet been received. not revenue. not equity items.5 million. B. Income is an increase in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity (excluding transactions with owners). Liability. Answer (D) is correct. As an appropriation of retained earnings of 2. As an adjustment of the opening balance of retained earnings equal to 2. an automobile manufacturer believes it is probable that it will be required to recall its products. C. The cost of the recall is reliably estimated to be 2. Operating revenue. The journal entry described in the question is an adjusting entry to transfer an amount from the revenue account to a liability (deferred revenue) account. Income is an increase in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity (excluding transactions with owners). D.42 -.41 -. It should not be disclosed because it has not yet happened. Answer (B) is incorrect because the entry concerns a revenue rather than an expense transaction. [510] Gleim #: 4. The deposits should therefore be recorded as liabilities. Customers’ deposits must be returned or credited to their accounts.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. An adjusting entry is therefore required at year-end to transfer any remaining amount that does not qualify for revenue recognition. Share capital.Source: CIA 590 IV-28 In performing an audit.Source: CIA 597 IV-36 Because of a defect discovered in its seat belts in December 2004. Printed for Pol Mirafuentes Page 242 . The initial collection of cash in advance from the tenant was apparently recorded by a credit to revenue. The equity of an entity is the residual interest in the assets of an entity that remains after deducting its liabilities. Revenue is income that arises in the ordinary activities of the entity. Answer (B) is incorrect because deposits meet the definition of liabilities. Liabilities are present obligations arising from past events.5 million and a provision of 2. Answer (D) is correct. As a loss of 2. A liability.5 million.

the amount within the reliable estimate of the range of the obligation that will be recognized will vary from country to country. [511] Gleim #: 4. it is probable that an outflow of economic benefits will be necessary to settle the obligation. No estimate of loss within this range is more likely than any other. Premiums offered to customers. it should be recognized by a charge to income. Answer (A) is incorrect because the criteria for recognition of a provision have been met.Source: CIA 596 IV-25 Which one of the following will usually be accounted for by recognizing a provision? A. Consequently. Make no journal entry at this time. a provision should be recognized. including a reliable estimate of the range of the obligation. Moreover. and its amount can be reliably estimated.43 -. Thus. the company must recognize a loss and a liability for 2. the board was aware that a new law would require the entity to fit smoke filters to its factories within the next year.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Printed for Pol Mirafuentes Page 243 . C. No such filters have been fitted. Answer (C) is incorrect because the loss is not deferred. A provision is a liability of uncertain timing or amount. and no loss may be charged to an appropriation of retained earnings. Copyright 2006 Gleim Publications. Recognize a provision of 1 million to 3 million depending on the applicable national accounting standards. D.44 -. A reliable estimate is that between 1 million and 3 million will probably be paid out. Answer (D) is incorrect because. [512] Gleim #: 4. A provision is a liability of uncertain timing or amount. it is accrued. but the entity must still recognize a loss and a provision. A law requires an airline to overhaul its aircraft once every 3 years. Inc. Answer (B) is incorrect because the loss is probable. D. it is probable that an outflow of economic benefits will be necessary to settle the obligation. The entity should A. Defer a provision of 1 million to 3 million depending on the applicable national accounting standards. if the loss is probable and can be reliably estimated. Disclose only a possible loss. and its amount can be reliably estimated. Answer (D) is correct. no part of the appropriation may be transferred to income. Just prior to the balance sheet date.5 million. Answer (B) is incorrect because such an adjustment is appropriate for fundamental errors and changes in accounting policies (under the benchmark treatments).Source: CIA 1192 IV-45 An entity is subject to warranty claims. Answer (C) is incorrect because an appropriation of retained earnings is permissible although not required. B. However. No implementation steps have been taken. the amount recognized should be the best estimate of the expenditure required to settle the obligation. As of the balance sheet date. B. C. the board decided to close a division. Moreover. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event). Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event).

000 Estimated provision for litigation loss 100. Answer (B) is incorrect because a provision is not recognized unless it is probable that an outflow of resources embodying economic benefits will be required to settle a present obligation arising from a past event. C. Printed for Pol Mirafuentes Page 244 . Make the following journal entry. the entity should A. a reliable estimate of the obligation should be feasible. B.000 Copyright 2006 Gleim Publications. Answer (C) is incorrect because a provision is not recognized unless it is probable that an outflow of resources embodying economic benefits will be required to settle a present obligation arising from a past event. The number of parties involved in the litigation is irrelevant. Neither make a journal entry nor disclose the lawsuits in a note because bad publicity will hurt the entity. In its financial statements. Answer (D) is correct.Source: CIA 589 IV-33 An entity has been sued for 100 million for producing and selling an unsafe product. [514] Gleim #: 4.000. Make the following journal entry. and disclose the existence of the lawsuit in a footnote. Moreover. for example. For example. If it arose after the date of the financial statements. Disclose the existence of the lawsuit in a note without making a journal entry. The ability to make a reliable estimate of the amount of loss. with respect to pending litigation. The entity could avoid the future expenditure by its future actions. Cost of goods sold 100. the same accounting treatment is applied whether a claim is brought by an individual or in a class action suit.45 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because no obligating event has occurred. The entity could avoid the future expenditure by its future actions. The number of parties involved in the litigation. The entity could avoid the future expenditure by its future actions. C. The probability of an unfavorable outcome. the amount of the obligation should be capable of reliable estimation. the entity can usually establish that it has a legal present obligation resulting from a past event and that an outflow of economic benefits is probable. Attorneys for the entity cannot reliably predict the outcome of the litigation.000. Answer (D) is correct. Inc. a provision may not be recognized in those statements.000 Estimated provision for litigation loss 100. [513] Gleim #: 4. and disclose the existence of the lawsuit in a note. upon redemption of coupons.000. if the entity has prior experience with such offers or information about the experience of similar entities.000.Source: CIA 595 IV-20 Which of the following is not a factor. D. When premiums are offered to customers. Answer (B) is incorrect because no obligating event has occurred. Answer (A) is incorrect because the time period in which the obligating event occurred is relevant. The time period in which the underlying cause of action occurred. that must be considered in determining whether a provision should be recognized? A.000 B. Estimated loss from litigation 100. Furthermore.46 -. D. Answer (C) is incorrect because no obligating event has occurred.

Instead. Copyright 2006 Gleim Publications. The vice-president reluctantly concludes that it is probable that the full amount of principal and interest will not be collected. Should be disclosed by an appropriation of retained earnings. No accounting or disclosure of a possible loss in value is necessary. the existing liability is disclosed as a contingent liability (unless the possibility of any outflow in settlement is remote). Answer (B) is incorrect because the contingent liability is required to be neither recognized nor disclosed.48 -. no liability is recognized. with a charge to the income statement. Contingency note disclosure of a possible impairment is required. Answer (B) is correct. A contingent liability is not recognized but is disclosed unless the possibility of the outflow is remote. What is the impact of this conclusion on the local bank’s current year financial statements? A. [516] Gleim #: 4. Answer (D) is incorrect because the contingent liability is required to be neither recognized nor disclosed. and auditors agree that the likelihood of an unfavorable ruling is remote. A contingent liability includes a present obligation for which an outflow of resources embodying economic benefits is not probable. D. with a charge directly to retained earnings. B. Need not be disclosed. The carrying amount of the mortgages should be reduced. Answer (A) is incorrect because the contingent liability is required to be neither recognized nor disclosed. The client has incurred net losses for the past 3 years and is now experiencing serious cash flow problems. B. This contingent liability A. lawyers. D. The bank’s largest client has mortgages on buildings in three cities. Should be disclosed in a note. Answer (C) is correct. Should be disclosed as a parenthetical comment in the balance sheet. Answer (D) is incorrect because a journal entry is made when the outflow in settlement is probable and can be reliably estimated. and the amount involved is material. C. no payments have been made on any of the three mortgages.Source: Publisher An entity is currently being sued by a customer.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a journal entry is made when the outflow in settlement is probable and can be reliably estimated. In the very rare case in which a reliable estimate of an obligation that otherwise qualifies for treatment as a provision cannot be determined.47 -.Source: CIA 597 IV-19 In November of the current year. Inc. Printed for Pol Mirafuentes Page 245 . The entity’s managers. C. [515] Gleim #: 4. For the past 6 months. The carrying amount of the mortgages should be reduced. the vice-president of a local bank reviews the bank’s mortgage portfolio prior to the December 31 year-end. Answer (C) is incorrect because a disclosure must be made of a contingent liability. A reliable estimate can be made of the costs that would result from a ruling unfavorable to the entity.

Consequently. [518] Gleim #: 4. is also 12%.Source: CIA 595 IV-19 An entity issues 10-year bonds with a face value of 1 million. 990. 2004 and bearing interest at an annual rate of 12% payable semiannually on January 1 and July 1. D. B. The excess of interest expense over the cash payment is the amount of discount amortized each period. Answer (D) is incorrect because interest expense exceeds the cash interest payment when bonds are issued at a discount. The reason is that the effective rate is higher than the nominal rate. The full interest amount will be paid each due date. the amount the issuing entity receives from the buyers of the bonds on that date is A.000 1. Answer (B) is incorrect because interest expense will increase over the term of the bonds. Interest expense will be less than the cash interest payment each period. is impaired if its carrying amount at the balance sheet date exceeds its estimated recoverable amount.Source: CIA 597 IV-30 If bonds are initially sold at a discount and the effective-interest method of amortization is used. A financial asset.49 -. The loss equals the difference between the carrying amount and the present value of the expected future cash flows discounted at the original effective interest rate. Interest expense in the earlier periods will be greater than interest expense in the later periods. Answer (C) is incorrect because the carrying amount should be reduced. Inc.50 -. The reason is that the effective rate is higher than the nominal rate. The market rate of interest on bonds of similar risk and maturity. Printed for Pol Mirafuentes Page 246 . B. such as a lender’s mortgage receivable.000. the interest expense increases over the term of the bond.000 1. Answer (A) is correct. C. and the charge should be included in net profit or loss.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the carrying amount should be reduced.020. Answer (D) is correct. the carrying amount increases. As the discount is amortized over the life of the bond. A. and the charge should be included in net profit or loss. If the bonds are issued on February 1.000 1. D. Answer (C) is incorrect because interest expense exceeds the cash interest payment when bonds are issued at a discount. Answer (B) is incorrect because the carrying amount should be reduced. Interest expense equals the carrying amount of the liability at the beginning of the period times the effective interest rate. 2004. Interest expense in the earlier periods will be less than interest expense in the later periods. The carrying amount of the asset should be reduced to its estimated recoverable amount directly or by crediting an allowance account.010. dated January 1. and the charge should be included in net profit or loss. The carrying amount of the liability equals the face amount of the bond minus the discount. The excess of interest expense over the cash payment is the amount of discount amortized each period. [517] Gleim #: 4. Interest expense will equal the cash interest payment each period. C. If it is probable that all amounts due on such a held-to-maturity investment (a financial asset carried at amortized cost) cannot be collected.000 Copyright 2006 Gleim Publications. with the same schedule of interest payments. the loss should be included in net profit or loss.

D. 20X2 and matures on July 1. On February 7.000 × 12%) ÷ 12]}.000 The 17% note payable was issued on October 1.000 is the result if 1 month of accrued interest is deducted from. An entity should remove a financial liability from its balance sheet only when it is extinguished.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 990. Answer (B) is incorrect because the excess of the reacquisition price over the net carrying amount of the old bonds is recognized in full in net profit or loss for the period. The difference between the carrying amount and the amount paid should be included in net profit or loss for the period. Answer (D) is incorrect because 1. for example. 20X4.51 -.000. the call premium of the refunded issue should be A. Printed for Pol Mirafuentes Page 247 . B.000 {1. 20X2 and matures on May 1. Amortized over the remaining original life of the extinguished issue. an entity had the following obligations that were expected to be refinanced: 17% note payable 15% note payable 140. 20X3. when the creditor is paid. On February 1. B. Recognized currently in net profit or loss. the amount received. rather than added to. 20X4.000. Inc. 20X4. or 1. Amortized over the life of the new issue.000 200. The 15% note payable was issued on May 1.000 Copyright 2006 Gleim Publications.Source: CIA 591 IV-36 At December 31. 20X4. Answer (B) is incorrect because the purchasers must pay for the accrued interest from the last interest date to the issue date. D. C. The amount the issuing entity receives on 2/1/04 is the face amount of the issue plus 1 month of accrued interest. 20X3 balance sheet is A. They will receive 6 months’ interest on July 1 despite holding the bonds for 5 months. C. Answer (C) is incorrect because an extraordinary item is income or an expense arising from events or transactions that are clearly distinct from the ordinary activities of the entity and are not expected to recur frequently or regularly.020. 0 140.000 340. Answer (C) is correct.000 balance of the 17% note payable was refinanced by issuance of a long-term debt instrument. The total amount of obligations that may be properly excluded from current liabilities on the entity’s December 31.Source: CIA 1191 IV-39 If bonds payable with a carrying amount equal to par value are refunded by use of a call provision. the entity entered into a noncancelable agreement with a lender to refinance the 15% note payable on a long-term basis.52 -. Answer (A) is incorrect because the excess of the reacquisition price over the net carrying amount of the old bonds is recognized in full in net profit or loss for the period.000 results from adding 2 months of accrued interest to the face amount. 20X4. the entire 140. Answer (D) is correct.000 200. The financial statements were authorized to be issued on March 1.000 + [(1. Recognized currently in net profit or loss as an extraordinary item. [520] Gleim #: 4. [519] Gleim #: 4.010.

Printed for Pol Mirafuentes Page 248 .000 90.000. [522] Gleim #: 4.000 11. Liability Receivables Gain D.000 liability on the books. Thus. interest-bearing liabilities due to be settled within 12 months should nevertheless continue to be classified as noncurrent if the original term exceeded 12 months. Answer (A) is incorrect because payment to a third party such as a trust (also known as an in-substance defeasance) does not by itself extinguish the obligation absent a legal release. Liability Receivables Gain 110. C. An extinguishment and derecognition of the old debt and recognition of new debt occurs when the borrower and lender exchange debt instruments with substantially different terms. Derecognition of a financial liability (or a part thereof) occurs only by means of extinguishment.000 1.000 will be due. the entity intends to refinance on a long-term basis.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 340. Answer (B) is incorrect because the terms should be substantially different. In 12 months.Source: Publisher An entity most likely may derecognize a financial liability if it A. Answer (D) is incorrect because payment to a third party such as a trust (also known as an in-substance defeasance) does not by itself extinguish the obligation absent a legal release. Answer (C) is incorrect because the 17% note is also excluded from current liabilities. This condition is satisfied only when the debtor pays the creditor or is legally released from primary responsibility either by the creditor or through the legal process. Liability Receivables Gain B. Transfers amounts in a transaction that meets the requirements of an in-substance defeasance.000 100.Source: CIA 1192 IV-44 An entity has a 100.000 (140. when the respective discounted cash flows differ by at least 10%. that is. Liability Receivables Gain C.000 Copyright 2006 Gleim Publications. Some noncurrent. Answer (C) is correct. B. D.000 90.000 99. [521] Gleim #: 4.000 20.54 -. 110. and its intent is supported by an agreement to refinance or reschedule payments.000) may be excluded from current liabilities. Answer (B) is incorrect because the 15% note is also excluded from current liabilities. What is the journal entry today? A. Exchanges debt instruments with the lender with substantially different terms. Inc.000 10. This agreement must be consummated before the financial statements are authorized for issue.000 110.000 + 200.000 may be excluded from current liabilities.53 -. Answer (D) is correct.000 100. The entity negotiates settlement of the debt today by exchanging customer receivables with a carrying amount of 90. Exchanges debt instruments with the lender with substantially similar terms. 340.000 99. Transfers amounts to a trust to be used to repay the obligation. including 10% interest.

In effect. Answer (C) is incorrect because the liability should not be increased by the 10% interest rate.Source: CIA 1186 IV-30 On May 1. Answer (B) is incorrect because this amount is not expensed. The difference is a gain. Inc. The bonds are dated January 1. C.. unamortized issue costs. Answer (D) is correct. Answer (B) is incorrect because the amortization of a premium on bonds payable reduces interest expense. Printed for Pol Mirafuentes Page 249 . This condition is met when the debtor discharges the debt by paying the creditor.000 balance. the debit balances of unamortized bond discount. Answer (A) is incorrect because this amount is not expensed. Amortize them over a period not to exceed 40 years. 500 of its 12%. [524] Gleim #: 4.000 bonds. receivables). B.56 -. so net profit or loss is decreased. an entity issued.57 -. Expense them in the period bonds are converted. the amortization of a premium on bonds payable reduces the interest expense. so net profit or loss is increased. Receivables with a 90. Amortize them over the remaining life of the issue retired.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the liability and receivables should not be increased by the 10% interest rate. D. it reduces the amount at which the shares are issued. the liability should be debited for its 100. Answer (B) is incorrect because the receivables should not be increased by the 10% interest rate. D. Interest expense is increased. C.000 balance are given up. Answer (C) is incorrect because this amount is not expensed. and credit cash paid. and conversion costs should be considered reductions in the net carrying amount at the time of conversion.g. The conversion of debt into common shares is ordinarily based upon the carrying amount of the debt at the time of issuance. unamortized issue costs. 20X4. Interest income is decreased. 20X4 and mature on January 1. so net profit or loss is decreased. Answer (C) is incorrect because interest income is not affected by the amortization of a premium on bonds payable.55 -. Answer (D) is correct.Source: Publisher What is the preferred method of handling unamortized discount. Because the carrying amount is based on all related accounts. In effect. 20X9. B. Interest income is increased. Consequently. 1. such as with cash.Source: CIA 1196 IV-19 How will profit or loss be affected by the amortization of a premium on bonds payable? A. [525] Gleim #: 4. The entry is to debit interest expense. these items should be reflected as reductions in the share premium in excess of par account. Charge them to share premium in excess of the par value of the shares issued. Answer (D) is incorrect because interest income is not affected by the amortization of a premium on bonds payable. it reduces the amount at which the shares are issued. thereby increasing profit or loss. Thus. goods. Consequently. In effect. debit bond premium. Interest is payable semiannually on January 1 and July 1. or services. Answer (A) is correct. so that account should be credited. at 103 plus accrued interest. so net profit or loss is increased. Interest expense is decreased. An entity may derecognize a financial liability when it is extinguished. other financial assets (e. and the costs of implementing a conversion of debt into common shares? A. it reduces the amount at which the shares are issued. [523] Gleim #: 4. The journal entry to record the issuance of the bonds and the receipt of the cash proceeds is Copyright 2006 Gleim Publications.

No gain or loss because no extinguishment occurred. A gain of 30.000 of accrued interest was forgiven. The 15. a 500.000 35.000 10.000. Answer (D) is incorrect because the premium on bonds payable should not include interest payable. Inc. and interest payable should be credited.000 500.000 15.000 in cash (515.000 credit to either interest payable or interest expense.000. B.000 + 20.000).000 500.000 Answer (A) is incorrect because the bond premium is 15.000 535. a 15.000 credit to bonds payable.000 (500 × 1. The face amount of the 500 bonds is equal to 500. Because of financial difficulty.982.000 face value × 12% stated rate × (4 ÷ 12)]. A loss of 30.000).000 525. Answer (B) is incorrect because interest payable should be 20. the issuer is also entitled to receive accrued interest for the 4 months between the prior interest date and the issuance date.Source: Publisher Debtor owes Bank on a 10-year. The issuing company will therefore receive 535. 15% note in the amount of 100. and the note is due today. Answer (C) is correct.000 20.000 (103% × 500. Copyright 2006 Gleim Publications.000 debit to cash.000). Cash Interest payable Bonds payable Premium on bonds payable B. Debtor properly records A. A gain of 45. The accrued interest is 20. D.000 35. Accordingly. Cash Bonds payable Premium on bonds payable 515.000 [500 bonds × 1. C. Printed for Pol Mirafuentes Page 250 .000 500. Cash Bonds payable Premium on bonds payable Interest payable D. Payments are to be made annually at year-end. Debtor has been unable to make annual interest payments for the past 2 years. Because the bonds were issued between interest payment dates.000 535.000 premium is the difference between the cash issuance proceeds and the face amount of the bonds.000 [500.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The cash proceeds excluding interest from the issuance of the bonds are 515.03).000 accrued interest. Bank legally agreed to restructure Debtor’s debt as follows: The 30.000 × .58 -. The present value of the payments using the prevailing rate for similar instruments of an issuer with a similar credit rating is 84.000 credit to premium.000 15. Cash Bonds payable Premium on bonds payable Interest payable C.018. [526] Gleim #: 4. At the date of the restructuring.000 (500. and a 20. Debtor was given 3 more years to pay off the debt at 8% interest. The resulting journal entry includes a 535.000 20.000. plus 30.000 × .000 500.12 × (4 ÷ 12)].

the face amount of the note is not equal to its fair value or present value. Answer (B) is incorrect because 30.982). Printed for Pol Mirafuentes Page 251 . 20X2 in exchange for property it sold. an extinguishment occurred.000 – 84.000 note on January 1. [527] Gleim #: 4. 5% and 5%. An extinguishment and derecognition of the old debt and recognition of new debt occurs when the borrower and lender exchange debt instruments with substantially different terms. respectively? A.59 -. a gain should be recognized.000 due immediately) and the new debt (given as 84. and credit gain (45.000).982). 20X3 and January 1. When the nominal interest rate on a note is not equal to the prevailing market rate for this type of note. the present value of the note should be determined by discounting the 190.000 maturity value and the 9. Moreover. a gain should be recognized. Copyright 2006 Gleim Publications. Answer (D) is incorrect because the market rate of interest at the issuance date should be used to calculate the amount of interest income. 12% and 14%. Answer (C) is correct. when the respective discounted cash flows differ by at least 10%. 190. A substantial modification of terms is also accounted for as an extinguishment. 12% and 12%. Hence. 20X4. In this case. 0% and 5%. debit discount on note payable (15. Given that 12% was the prevailing rate of interest for a note of that type at the issuance date. D. that is. Moreover. What interest rates should be used to calculate the amount of interest income from this transaction for the years ended December 31.500 annual interest payments using an appropriately imputed rate of interest. when the face amount is also due. According to the terms of the note. C. This transaction qualifies as an extinguishment based on a substantial modification of terms because the discounted cash flow from the old debt (130. credit note payable (100. Answer (D) is incorrect because the terms were substantially different. The entry is to debit the extinguished liability for accrued interest and principal (130. Answer (C) is correct.000 is the difference between the sum of the existing liabilities and the face amount of the note with modified terms. The prevailing rate of interest for a note of this type was 12% at the beginning of 20X2 and 14% at the beginning of 20X3.Source: CIA 1185 IV-15 An entity received a 2-year.982 gain (130. Answer (B) is incorrect because the market rate of interest at the issuance date should be used to calculate the amount of interest income. B. The difference between the carrying amount (including unamortized costs) of a liability (or part thereof) that has been extinguished or transferred and the amount paid is included in net profit or loss. the difference between the carrying amount extinguished and the amount paid (the present value of the new debt instrument determined by discounting the cash outflows at the prevailing rate for similar instruments of an issuer with a similar credit rating). the amount included by Debtor in net profit or loss at the date of the restructuring is a 45. This condition is satisfied only when the debtor pays the creditor or is legally released from primary responsibility either by the creditor or through the legal process. Inc. 20X2 and 20X3.018) differ by at least 10%.000). that is. Answer (A) is incorrect because the market rate of interest at the issuance date should be used to calculate the amount of interest income.018). 12% should be used to determine both the fair value and the interest income during the life of the note.000 is the difference between the sum of the existing liabilities and the face amount of the note with modified terms. Thus. interest of 5% is payable annually on January 1.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 30. There was no established exchange price for the property. regardless of fluctuations in prevailing interest rates. Derecognition of a financial liability (or a part thereof) occurs only by means of extinguishment.

000 shares issued and outstanding Share premium from issuance of common shares Retained earnings Total equity 400. Given net profit of 42.Source: CIA 597 IV-2 During the year.000.000 – 155. retained earnings must have increased by 25.000 2.000 equals the increase in assets minus the sum of the increases in share capital accounts and net profit. B. 100.040. an entity’s balance sheet accounts increased by the following amounts: Assets Liabilities Common shares Share premium 180. Share premium from issuance of common shares is reduced by 32. an entity had the following equity accounts: Common shares.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [528] Gleim #: 4. Common shares is reduced by 20.000 shares were reacquired for 30 per share.000 (180.000 – 25. Answer (D) is incorrect because 67.61 -.000). B.000 + 15.000 ignores the 15.000 33. C. 2. Copyright 2006 Gleim Publications.000. Assets equals liabilities plus equity. the sum of liabilities and equity must also have increased by 180. year 2.000 common shares outstanding was issued at a price of 26. The amount of dividends declared was A. Which of the following correctly describes the effect of the acquisition of the treasury shares? A.000 67.000 increase in share premium. The only other change in retained earnings was for the declaration of cash dividends. D.000. D.000). C.000 17. Inc.000 1.000.000 Each of the 40. Printed for Pol Mirafuentes Page 252 .000 equals net profit plus the increase in net assets other than from owner contributions. The retained earnings account balance is reduced by 8. and share premium increased by 155.000 Answer (A) is incorrect because 2.000. Answer (C) is incorrect because 33.000 15. Answer (B) is correct.000.000.000 (50. [529] Gleim #: 4.Source: CIA 591 IV-37 At December 31.000 640.000).000 50. 10 par.000 90.000 shares authorized.60 -. Because liabilities. dividends declared must have been 17. 40. Total equity is reduced by 60.000 Net profit for the year was 42. Given an increase of 180. 2.000 (42.000 in assets.000. On January 2. The cost method is used in accounting for these treasury shares.000 + 90. year 1. share capital.

000 20.000 300.000 300.000 20. year 1.000 (30 × 2.000 shares issued) Share premium on common shares Share premium on preferred shares Retained earnings 500.000 20.000 The preferred shares are cumulative and nonparticipating.000. 10. Preferred shares Loss on redemption of preferred shares Retained earnings Cash Share premium: preferred D.000 500. Answer (C) is incorrect because retained earnings is not affected by treasury share acquisitions when the cost method is used.000 30.000 30.000 550. Inc.000 550.Source: CIA 1188 IV-36 At December 31.000 500.000 30.000). and has a call price of 55 per share. Preferred shares Share premium: preferred Retained earnings Cash 500.000 50.000 shares = 60.000 640. The balance of the treasury shares account is classified as a contra equity item. Answer (B) is incorrect because share premium is not affected when treasury shares are acquired and accounted for by the cost method.000 550.000 550. Thus. [530] Gleim #: 4.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the common shares account balance is not affected when treasury shares are acquired.000 20. The journal entry to record the redemption of all preferred shares on January 2.000 600. 50. Using the cost method.62 -. Preferred shares Share premium: preferred Discount on preferred shares Cash B.000 Copyright 2006 Gleim Publications.000 500.000 500. the acquisition of the treasury shares reduces total equity by 60. Printed for Pol Mirafuentes Page 253 . the journal entry to record the acquisition of the treasury shares includes a debit to treasury shares for 60.000 shares issued) 8% preferred shares (50 par. an entity has the following account balances: Common shares (10 par. Preferred shares Share premium: preferred Loss on redemption of preferred shares Cash C. year 2 pursuant to the call provision is A. Answer (D) is correct.

000 excess of cash paid over the carrying amount of the redeemed shares should be debited to retained earnings. retained earnings must also be debited for the difference of 30. Answer (D) is incorrect because the procedure is acceptable only if the appropriation is shown within the equity section of the balance sheet. Dividends are payable on the date they are declared. The exercise of the call provision resulted in the redemption of the 10. C. The procedure used by entity X is A.000.000 excess of cash paid over the carrying amount of the redeemed shares should be debited to retained earnings.63 -. Answer (D) is correct. debit share premium: preferred for 20. C. a share dividend requires a formal journal entry in the financial accounting records because share A. But an appropriation of retained earnings is acceptable to disclose the self-insurance policy if.000 preferred shares issued and outstanding at the call price of 550. Answer (A) is incorrect because an appropriation of retained earnings for self-insurance is permissible. Prohibited for external reporting purposes. Acceptable if the amount is shown outside the equity section of the balance sheet. Splits increase the relative carrying amount of an individual’s share holdings.000 (10.Source: CIA 580 IV-8 Unlike a share split.64 -. and credit cash for 550. B. D. Accrual of an expense prior to the occurrence of the event for which an entity is self-insured should not be permitted. [532] Gleim #: 4.000 (550. Printed for Pol Mirafuentes Page 254 . To eliminate the carrying amount of the preferred shares and recognize the cash paid in this transaction. Answer (C) is incorrect because fire losses may never be charged against the appropriation of retained earnings. This rule holds because the fair value of the property diminishes only if the event actually occurs. Acceptable provided that fire losses are charged against the appropriation.000 carrying amount of the preferred shares) is charged to retained earnings. Dividends increase the relative carrying amount of an individual’s share holding. [531] Gleim #: 4. D. the required journal entry is to debit preferred shares for 500. when a fire loss occurs. Answer (B) is correct. the entry appropriating retained earnings is reversed. Copyright 2006 Gleim Publications. Answer (C) is incorrect because the premium on the preferred shares must be debited for only 20.000. Answer (B) is incorrect because the 30.000 cash – 520. and the loss is charged against income of the period of loss and not against retained earnings.000 shares × 55 call price per share). B.000.000. Dividends represent a transfer from retained earnings to share capital.Source: Publisher Entity X effects self-insurance against loss from fire by appropriating an amount of retained earnings each year equal to the amount that would otherwise be paid out as fire insurance premiums.000. The difference of 30. Moreover. Acceptable provided that fire losses are not charged against the appropriation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the 30. No loss is reported because an Interpretation of IAS 32 does not permit the recognition of a gain or loss on transactions involving an entity’s own shares. Inc.

Source: Publisher Early in its fiscal year. D.000 Answer (A) is incorrect because 350. for a total of 410.000.000 410. Answer (D) is correct.000 rights over the sale price of 1. If an entity has cumulative preferred shares.000 is based on a flat rate of 1 per share.000 shares). Inc.000 rights over their fair value. Starr acquired 2. 350. cash.000) + (3. Printed for Pol Mirafuentes Page 255 . Starr sold 50% of the warrants several weeks later. 3. all preferred dividends for the current and any unpaid prior years must be paid before any dividends can be paid on common shares. Answer (D) is incorrect because Starr should recognize a realized gain for the excess of the price over the carrying amount.000 – 47.000 shares of 5% cumulative.750.000 shares of Pack common shares for 54.000.000 (2 years × 5% × 100 par × 6.000 (1.50 × 2.000. The realized gain is therefore 625 [4.250 ({(49 × 1.000 rights. Answer (B) is incorrect because share splits have no effect on total equity or on the carrying amount of an individual shareholder’s investment. 100 par value preferred shares outstanding and 200. The recipient of share purchase warrants should allocate the carrying amount of the shares owned between those shares and the rights based on their relative fair values.66 -.000 is the common shares dividend.000) ÷ [(49 × 1.000 of cumulative dividends for 20X2.000 625 500 0 Answer (A) is incorrect because 3.000) and 6. The total preferred dividends that must be paid equal 60. Answer (C) is incorrect because 500 equals the excess of the sale price of 1. B. In the same transaction. Copyright 2006 Gleim Publications. The board of directors last declared dividends for the year ended May 31.000 – (6.750 × 50%)].000 is the excess of the fair value of 2.50 per warrant. Two of the warrants are required to purchase one additional Pack common share.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because share dividends have no effect on total equity or on the carrying amount of an individual shareholder’s investment. or property. The board of directors is declaring a dividend for common shareholders equivalent to 20% of net profit. Thus. 20X4.65 -. C. [533] Gleim #: 4. Answer (C) is incorrect because dividends. B.750 (54. and the common dividend is 350. whether of shares.000 common shares outstanding. are usually payable on a date different from the declaration date.000 × 20%). D. 20X2. Answer (B) is incorrect because 380. The market price of the warrants was 3. respectively. For the year ended May 31. The total amount of dividends to be paid by UK at May 31. it recognized a realized gain of A. The purpose of a share dividend is to provide evidence to the shareholders of their interest in accumulated earnings without distribution of cash or other property. Starr purchased 1.000 206. Share dividends are typically accounted for by a transfer from retained earnings at fair value. [534] Gleim #: 4. Answer (D) is correct. If the proceeds received by Starr equaled 4.000 380. Answer (C) is incorrect because 206. UK had net profit of 1. The market price without the warrants was 49 per share. the amounts to be allocated to the common shares and warrants are 47. C.000)]} × 54.Source: CMA 695 1-11 Entity UK has 6.250). Answer (B) is correct.000.000 detachable share purchase warrants.000 omits the 30. and there were no dividends in arrears. 20X4 is A.750.

List A A. The amount of goodwill entity A will record on the acquisition date is Copyright 2006 Gleim Publications. Inc. Answer (C) is correct. The first is a share split giving each shareholder two new shares for each share formerly held. D. The higher number of shares in the split will result in a lower earnings per share than will result from the share dividend. [535] Gleim #: 4. [537] Gleim #: 4.69 -. B. Increase Increase Decrease Decrease List B More Less More Less Answer (A) is incorrect because the split results in a greater number of shares outstanding and a lower EPS than results from the share dividend.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #34] An entity has issued 1. Answer (C) is incorrect because par value per share does not change following a share dividend.000 common shares with a par value of 10. Answer (B) is incorrect because par value per share decreases following a share split.000. Answer (D) is correct. At the time of the acquisition. Answer (D) is incorrect because the split results in a greater number of shares outstanding and a lower EPS than results from the share dividend. the par value per outstanding share will <List B>. The second is to declare and distribute a 10% share dividend. D.Source: CIA 1194 IV-51 (Refers to Fact Pattern #34) Under the share <List A>. liabilities.100.000. Answer (B) is incorrect because the split results in a greater number of shares outstanding and a lower EPS than results from the share dividend.000.Source: CIA 1194 IV-50 (Refers to Fact Pattern #34) The share split proposal will <List A> earnings per share by <List B> than will the share dividend proposal. the net fair value of the identifiable assets. Dividend Split Dividend Split List B Increase Increase Decrease Decrease Answer (A) is incorrect because par value per share does not change following a share dividend. and contingent liabilities recognized had a carrying amount of 900.000. The 10% share dividend will increase the number of outstanding shares to 1.000. List A A. B.000 and a fair value of 800.Source: CIA 595 IV-24 Entity A acquires entity B for 1. Printed for Pol Mirafuentes Page 256 . [536] Gleim #: 4.67 -. and its credit balance in retained earnings is 5. A share split results in a lower par value per share because the total number of shares increases but the total par value of outstanding share does not change. Two proposals are under consideration.68 -. The share split will double the number of shares outstanding to 2. C. C.

Source: CIA 1194 IV-21 A corporation acquires a 30% voting interest in another corporation. 0 100. Consolidated. In this situation. [538] Gleim #: 4.000 Answer (A) is incorrect because goodwill must be recorded. Printed for Pol Mirafuentes Page 257 . Copyright 2006 Gleim Publications. Answer (A) is incorrect because the lower-of-cost-or-market method is not generally used for equity investments. Lower-of-cost-or-market. D. the ability to exercise significant influence is presumed.000). C.70 -. If an investor can exercise significant influence over an investee. Answer (B) is incorrect because the cost basis is used when the investor cannot exercise significant influence over the investee (it has less than 20% of the voting power of the investee) and market prices are not readily available. Equity.000 – 800. When a corporation owns 20% or more of the voting power of the investee. C. and contingent liabilities recognized.000. goodwill is 200. Answer (B) is incorrect because 100. Answer (C) is correct. Consequently.000 200.000 equals goodwill plus the excess of the carrying amount over fair value. Cost.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. the long-term investment is generally accounted for on the investor corporation’s books using which of the following reporting methods? A. liabilities. Answer (D) is correct.000 is the excess of the acquisition cost over the carrying amount. Inc.000 (1.000 300. D. Answer (D) is incorrect because 300. Goodwill equals the excess of the acquisition cost over the acquirer’s interest in the net fair value of the identifiable assets. B. the investment should be accounted for by the equity method. B. Answer (C) is incorrect because consolidated reporting is ordinarily required only when the investor controls the investee.

Goodwill is the excess of the cost over the net fair value of the acquired identifiable assets. No payments have been made on the debt by year-end. and goodwill is $200 ($900 cost – $700). Answer (B) is incorrect because $50 is based on carrying amounts. B. Eliminate 100% of the receivable and the payable but not any related interest.000. Answer (A) is incorrect because goodwill is positive. This net fair value equals the sum of cash. Inc. X lent Y 1. Printed for Pol Mirafuentes Page 258 . Eliminate 90% of the receivable.Source: CIA 596 IV-30 A conglomerate company acquired 100% of the net assets of a target company for 900 cash. Answer (C) is correct. liabilities. C. D. C. plant. B.000. minus liabilities. Copyright 2006 Gleim Publications. and contingent liabilities recognized.050 Fair Value 100 200 200 400 900 Current liabilities Share capital Retained earnings Total liabilities and equity 200 200 650 1. D.72 -.71 -. and the related interest.Source: CIA 1191 IV-46 Entity X owns 90% of entity Y. not negative. Hence. [540] Gleim #: 4.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [539] Gleim #: 4. Proper accounting at year-end in the consolidated financial statements would A. and PPE. $(200) $50 $200 None of the answers are correct. Target Company (as of acquisition date) Carrying Amount Cash Receivables Inventory Property. Answer (D) is incorrect because the goodwill recorded is $200. the net fair value acquired is $700. inventory. the payable. receivables. and equipment (net) Total assets 100 200 150 600 1. the payable. Eliminate 100% of the receivable.050 200 The amount of goodwill to be recorded by the conglomerate company related to its purchase of the target company is A. and the related interest. Eliminate 90% of the receivable and the payable but not any related interest. Early in the year. The target company’s balance sheet just prior to the acquisition is presented below.

74 -. Which of the following trends related to the reported amounts for (1) interest expense and (2) carrying amount of the bonds would you expect to find? Interest Expense A.Source: CIA 590 IV-41 At December 31 of year 1. B.000 new units under warranties reliably estimated at 100 per unit. D.73 -. The difference between interest expense and the nominal interest is the premium amortization for the period. D. the entity sold 1. reciprocal balances. Answer (D) is incorrect because the interest expense is a decreasing amount each period. In a consolidated balance sheet. Answer (B) is incorrect because the interest must be eliminated.000.000 loan should be eliminated in the preparation of the year-end consolidated balance sheet. Warranty expense for year 2 should be A.000 50. The carrying amount is the par value plus the balance of the unamortized premium. C. an entity had a provision of 40.000 100. It is computed by applying a constant rate to a decreasing carrying amount.Source: CIA 593 IV-37 An entity issues bonds payable at a premium. interest expense is a decreasing amount each period because a constant rate is applied to a decreasing carrying amount. It is computed by applying a constant rate to a decreasing carrying amount. [542] Gleim #: 4. Answer (D) is incorrect because all aspects of the transaction must be eliminated. 40. When the effective interest rate method is used. Answer (C) is incorrect because all aspects of the transaction must be eliminated. such as receivables and payables. During year 2. Answer (C) is correct. Constant amount Increasing amount Decreasing amount Decreasing amount Carrying Amount Constant amount Decreasing amount Decreasing amount Constant amount Answer (A) is incorrect because the interest expense is a decreasing amount each period. all effects of the 1. You are analyzing the effects of using the effective interest rate (constant yield) method in accounting for the bonds over their 10-year life. C. Inc.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.000 Copyright 2006 Gleim Publications. [541] Gleim #: 4.000 90. Thus. The actual parts and labor warranty expenditures for year 2 were 90.000. Thus. Answer (B) is incorrect because the interest expense is a decreasing amount each period. B. Printed for Pol Mirafuentes Page 259 . between a parent and a consolidated subsidiary should be eliminated in their entirety regardless of the portion of the subsidiary’s shares held by the parent. interest expense equals the effective rate (a constant rate) times the carrying amount at the beginning of the period. It is computed by applying a constant rate to a decreasing carrying amount.000 for the “Estimated Liability under Warranties” account.

Copyright 2006 Gleim Publications. It must be possible to determine a reliable estimate of the amount of the obligation. I and II only. II and III only. B. The exact date payable must be known. [543] Gleim #: 4. Answer (C) is incorrect because 90. III.Source: CIA 593 IV-33 An entity has the following contingencies at a balance sheet date: I.000 is the beginning liability balance. II. it is probable that an outflow of economic benefits will be necessary to settle the obligation. a provision should be recognized for warranty expense in the period in which the matching revenue is recorded. and III. An obligation for decommissioning costs of a nuclear reactor may. Answer (D) is correct. Answer (A) is incorrect because the exact payee does not have to be known. the likelihood of an outflow of resources is remote. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event). C. It must be reasonably possible that an outflow of resources will be required to settle the obligation. Thus. but probably will not. D. Accordingly. Inc. I and III only.76 -. C. and its amount can be reliably estimated. The entity is jointly and severally liable for an obligation arising from a lawsuit. require an outflow of resources.000 units). [544] Gleim #: 4. II. Answer (C) is incorrect because the resource outflow must be probable. B.000 equals current-year expenditures.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 40. I.000 equals actual expenditures minus the beginning liability. Which of the above items must be disclosed in the notes to the financial statements? A. it is probable that an outflow of economic benefits will be necessary to settle the obligation.000 (100 × 1. A provision is a liability of uncertain timing and amount. Answer (B) is incorrect because 50. and its amount can be reliably estimated. but probably will not. Printed for Pol Mirafuentes Page 260 . The exact payee must be known. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event). require an outflow of resources. Answer (D) is correct. An obligation for clean-up costs relating to environmental damage may. D.75 -. the debit to warranty expense and the credit to provision for warranty expense in year 2 is 100. Answer (B) is incorrect because the exact date payable does not have to be known.Source: CIA 594 IV-22 Which of the following is required in order for an entity to record a provision? A.

Answer (B) is incorrect because items I and II but not III should be disclosed. 1. and its amount can be reliably estimated. Increase equity by 2.Source: CIA 1186 IV-29 The proper classification of noncurrent. D. interest-bearing obligations scheduled to mature within 1 year of the balance sheet date but that are expected to be refinanced on a long-term basis should be to Copyright 2006 Gleim Publications. for 18 per share. 80.000.000 shares issued and outstanding Share premium Retained earnings 800. Answer (C) is incorrect because the purchase of treasury shares reduces equity by the cost of the shares. the journal entry to record the purchase of the treasury shares is Treasury shares Cash The journal entry to record the sale is Cash Treasury shares Share premium from treasury shares 17. Inc. On January 5 of year 2. none of the circumstances in the question meet the recognition criteria for a provision. [545] Gleim #: 4. each is treated as a contingent liability.000 1. The effect of the purchase and sale of the 1. Hence.000 17. it is probable that an outflow of economic benefits will be necessary to settle the obligation.000 treasury shares was to A. C. Answer (B) is incorrect because the purchase of treasury shares reduces equity by the cost of the shares. [546] Gleim #: 4.000. 10 par. Answer (D) is incorrect because the purchase of treasury shares reduces equity by the cost of the shares. Not change equity. Answer (A) is correct.000. and the sale of treasury shares increases equity by the amount received.000.000 shares authorized.000 400. 100.000 All shares outstanding were issued in a prior period for 15 per share. which requires disclosure unless the possibility of the outflow of resources is remote. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation resulting from a past event (called an obligating event).000 Consequently. Thus. the net effect is to increase equity by 1.Source: CIA 593 IV-34 An entity had the following account balances at December 31 of year 1: Common shares.000 18. and the sale of treasury shares increases equity by the amount received. Increase equity by 3. These treasury shares were sold on February 6 of year 2. Answer (C) is incorrect because items I and II but not III should be disclosed. Using the cost method.000 17.000 shares were purchased for the treasury for 17 per share.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.78 -. Printed for Pol Mirafuentes Page 261 .77 -. and the sale of treasury shares increases equity by the amount received.000 500. B. Answer (D) is incorrect because items I and II but not III should be disclosed. Increase equity by 1.

000 58.000 of payments leaves an unpaid balance of 28.000 Answer (A) is incorrect because the account balance is found by subtracting the actual expenditures from the total expense.Source: CMA 689 3-11 On March 26. the entity intends to refinance on a long-term basis.50 per share. C. It was 23 per share on April 30. 12.000). Answer (A) is incorrect because exclusion is only appropriate when the intent to refinance is properly supported. C.000 (70. The treasury shares were acquired in January. Answer (C) is correct.000 30.000. [548] Gleim #: 4.000 At the end of year 2.000 28. This agreement must be consummated before the financial statements are authorized for issue. Some noncurrent.000). Printed for Pol Mirafuentes Page 262 .000 in year 2. Exclude from the current liabilities classification those obligations that have been refinanced on a long-term basis after the balance sheet date but before the financial statements are authorized to be issued.000 400.79 -. 24. [547] Gleim #: 4. with 40% of the expenditures occurring during the first year and 60% during the second year. Exclude all such obligations from the current liabilities classification.000 Year 1 2 Sales 300. The market price on March 26 was 21. and recorded at cost when the market price was 25 per share. D. If the warranty expense is 10% of sales.Source: CMA 688 3-25 In year 1. Sales and actual warranty expenditures for year 1 and year 2 were as follows: Actual Warranty Expenditures 12. The exchange took place on April 30. Inc. B. and its intent is supported by an agreement to refinance or reschedule payments. Voorhees introduced a new line of computer products that carry a 2-year warranty against defects and workmanship. Include in the current liabilities classification only those obligations that have actually been refinanced on a long-term basis after the balance sheet date but before the financial statements are authorized to be issued.000 (10% × 700.000 was paid in year 1 and 30.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Exclude from the current liabilities classification those obligations management wishes to exclude because they intended to convert them to long-term obligations. Answer (B) is incorrect because exclusion is proper in these circumstances given that the intent to refinance has been supported. Zepher entities contracted with a consultant for services to be performed during the period from March 26 through April 30 in exchange for 10. D. The per share amount recorded for the services should have been Copyright 2006 Gleim Publications. Answer (D) is incorrect because management’s intent is not sufficient for exclusion.80 -. Answer (B) is incorrect because the account balance is found by subtracting the actual expenditures from the total expense. The 42. The entity estimates that the total warranty cost will be 10% of sales. interest-bearing liabilities due to be settled within 12 months should nevertheless continue to be classified as noncurrent if the original term exceeded 12 months. Of that 70.000 – 42. Answer (D) is correct.000 46.000 treasury shares. Answer (C) is incorrect because the account balance is found by subtracting the actual expenditures from the total expense. the balance in the estimated accrued warranty liability account will be A. B. the total expense for the 2 years is 70.

the entry is to debit services for 21. In this case. Treasury shares of 28. Answer (C) is incorrect because the services should be measured at the fair value on the date of the exchange. Shrinking annual interest expense over the term of the bonds.000. The par value is 5 per share. C. Retained earnings of 6. Because no gain or loss is recognized on transactions in treasury shares. Copyright 2006 Gleim Publications. Share premium of 6. B.50) × 10. Answer (B) is incorrect because the services should be measured at the fair value on the date of the exchange. The journal entry to record a sale at 33 per share is Cash Treasury shares Share premium 33. not retained earnings.500 (21. Answer (C) is incorrect because share premium should be credited for only 6.500 [(25 – 21.00 25. Thus. the services to be received should have been measured on that date based on the price of the shares. Paid-in capital in excess of par of 28. and credit treasury shares for 25. A transaction is typically measured at the fair value of the consideration given up unless the fair value of the consideration received is more clearly evident. The shares had originally been issued at 12 per share and had been repurchased at 27 per share.00 Answer (A) is correct.25 23. so the market price of the treasury shares must be used.000.000 [550] Gleim #: 4.Source: CIA 596 IV-24 The effective-interest method and the straight-line method of amortizing a bond discount differ in that the effective-interest method results in A.000]. Answer (A) is incorrect because share premium should be credited when using the cost method. 21.000).50 22.000 treasury shares at 33 per share. Under the cost method. [549] Gleim #: 4. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.000 (25 × 10.000). D.50 × 10. The entry to record the reissuance using the cost method should include a credit to A. the date of the agreement to trade the shares for services.81 -. Answer (B) is incorrect because the repurchase price was 27 per share. No information is given about the value of the services. B.000 shares). debit retained earnings or share premium from treasury share transactions for 3.000 27. Escalating annual interest expense over the term of the bonds.000 (27 × 1. Answer (D) is incorrect because the services should be measured at the fair value on the date of the exchange. B. Printed for Pol Mirafuentes Page 263 .000 6.000. or 21. D.82 -.Source: CMA 689 3-13 Muncie sold 1. C. D. Inc. This price was 21.50 per share.000. treasury shares are carried at cost. Constant annual interest expense over the term of the bonds. Higher total interest expense over the term of the bonds.000. cost is 27.50 on March 26. Answer (D) is correct.

000 480.000 bond at 96% of its face amount. Answer (C) is incorrect because annual interest expense would decrease if a premium were being amortized. [551] Gleim #: 4. Answer (D) is incorrect because the straight-line method results in constant annual interest expense.000 100. [552] Gleim #: 4.83 -. D.000 20.000.000 cash on the issuance of the bond. Under the effective-interest method. Cash Discount on bonds payable Bonds payable D.000 500.Source: CIA 596 IV-21 The unit selling price of a new entity’s product is 10. respectively. interest expense for each period equals the effective interest rate times the carrying value of the bond issue. The 20.000 65.000. or maturity. Cash Premium on bonds payable Bonds payable 480. B.000. amount of the bond issued. the amount to be paid at maturity.000 20. C. Answer (B) is correct.000 in years one and two.000 Copyright 2006 Gleim Publications.000 and 65. Printed for Pol Mirafuentes Page 264 . the credit to bonds payable is 500.000 discount should be debited. The amount charged to warranty expense during the second year of operation is A. Actual payments for warranty claims were 10. Cash Bonds payable B.000.000 500.000. an entity issued a 10-year 500. a 20.000 480. 25.000 500. Answer (C) is correct.000 Answer (A) is incorrect because the entry to bonds payable is based on the face. payable on January 1 and July 1. The buyers are provided with a 2-year warranty that is expected to cost the entity 250 per unit in the year of the sale and 750 per unit in the year following the sale.000 480.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the two methods of amortization result in the same total interest expense over the term of the bonds.84 -. As the discount is amortized. the carrying value rises and interest expense increases. Answer (B) is incorrect because the discount should be recognized. Hence. Answer (D) is incorrect because the debit to cash is 480. The entity sold 80 units in the first year of operation and 100 units in the second year.000 difference is recorded as a discount on bonds payable (a debit) and is amortized over the life of the issue.Source: CIA 596 IV-23 On January 1. and the credit to bonds payable is 500. Inc. Cash Bonds payable C. The entity received 480. The bond bears interest at 12%.000 85. The difference between the amount received on issuance and the face amount is recorded as a premium or discount on bonds payable. Its face amount is 500. The entry to record the issuance of the bond on January 1 is A.000 500.

Answer (B) is incorrect because 65.000 (250 + 750). The total estimated warranty cost per unit is 1.. It does not generate additional capital. [553] Gleim #: 4.86 -. Increase the entity’s total assets. Inc. Cash is paid out and shareholders’ equity is decreased. Answer (D) is incorrect because options purchased and exercised through option exchanges are transactions between individual investors not affecting the entity whose shares are involved. Answer (B) is incorrect because conversion of convertible bonds to common shares simply replaces debt with outstanding common shares. Meet the share availability needs of a potential merger. B. 100 units were sold. Under the accrual method. Answer (B) is incorrect because the purchase of treasury shares decreases assets. Moreover. Answer (D) is correct.000 is the expected amount of warranty claims for the first year of second-year sales. D. Answer (C) is correct. management may believe the shares are selling for a low price for no apparent reason. These include meeting the needs created by potential mergers or pension and profit-sharing plans.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 25. Equity but not debt is reduced by the acquisition. Conversion of convertible bonds to common shares.87 -. The theory of this treatment is that an entity cannot own itself. Answer (A) is incorrect because the purchase of treasury shares increases the debt-to-equity ratio. C. not as a marketable security. an entity has excess cash and can find no better investment than its own shares. An entity has many reasons to repurchase its own shares. [555] Gleim #: 4.g. so the warranty expense recognized is 100. Warrants are options that permit the holder to buy shares for a stated price. B. management may want to buy out a dissident shareholder. a purchase may not only be a good investment but may also support the market price of the shares. Answer (C) is incorrect because 85. a convertible bond has a Copyright 2006 Gleim Publications. Answer (C) is incorrect because treasury shares are recorded as a reduction of equity. In year two. Two-for-one share split. Their exercise results in inflows and the issuance of shares.Source: CIA 1191 IV-59 Which of the following brings in additional capital to the firm? A.000. Answer (A) is incorrect because a share split is merely an accounting action that increases (or occasionally decreases) the number of shares outstanding. Also. Answer (D) is correct. C. Exercise of warrants.85 -. the total estimated warranty costs are charged to operating expense in the year of sale.Source: CMA 689 1-9 A sound justification for an entity’s repurchase of its own shares (e.Source: CIA 595 IV-40 Compared with another bond with the same risk and maturity but without a conversion feature. Lower the debt to equity ratio of the firm.000 is the actual amount of claims in the second year. Thus. Sometimes. [554] Gleim #: 4. Printed for Pol Mirafuentes Page 265 .000 is the expected amount of warranty claims in the second year. Reduce the idle cash and increase marketable securities. Exercise of options purchased through an option exchange. D. treasury shares) is to A.

If disclosure would be misleading. Interest is payable at the end of each year of the bonds’ 5-year term. Lower coupon rate. the disclosure should not be made. Higher coupon rate. C. A contingent asset is a possible asset arising from past events and the existence of which will be confirmed only by uncertain future events not wholly within the entity’s control. Recognized when disclosure in the notes to financial statements only could be misleading. Answer (D) is correct. A contingent asset is not recognized because the income may not be realized.Source: Publisher On the first day of the current fiscal year. D. Convertible bonds are convertible at the holder’s option into the issuer’s common shares at a specified price. C. The fair value of the bonds’ equity component is not determinable. B. Answer (A) is incorrect because the face amount is not a distinguishing feature of convertible bonds. Answer (B) is incorrect because contingent assets are not recognized. respectively. not higher. the nominal annual interest rate is 7%. Not recognized under any circumstances.89 -. Printed for Pol Mirafuentes Page 266 . B.100 and 3.Source: CMA 692 2-21 A contingent asset is A. Answer (C) is incorrect because convertible bonds have lower. The present values of 1 for 5 periods at 7% and 9% are .000 bonds. and the market annual interest rate for similar nonconvertible debt is 9%.890. A contingent asset is not recognized but should be disclosed if an inflow of economic benefits is probable. D. Answer (A) is incorrect because contingent assets are not recognized. Recognized when condemnation awards are probable or can be reliably estimated. [557] Gleim #: 4. An example is a potential recovery on a legal claim with an uncertain outcome. respectively.650. Answer (C) is incorrect because contingent assets are not recognized. Recognized when damages to be awarded in a copyright infringement suit are highly probable.713 and .88 -. What is the entry for the initial recognition of the convertible bonds? Copyright 2006 Gleim Publications. each of which is convertible into 100 common shares of the issuer. Lower face amount. Higher face amount.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The present values of an ordinary annuity of 1 for 5 periods at 7% and 9% are 4. if realization is virtually certain. coupon rates. The face amount of each bond is 1. Answer (D) is correct. Answer (B) is incorrect because the face amount is not a distinguishing feature of convertible bonds. the asset is not contingent and may be recognized. [556] Gleim #: 4.000. They have a lower coupon rate than nonconvertible bonds because they offer investors a chance for capital gains. However. Disclosures include a description of the contingent asset and an estimate of its financial effects. entity XXX issued 1. Inc.

300 [(.000.700 [(1. Accumulated depreciation.000. Thus. This amount would then be subtracted from the amount of the compound instrument as a whole to determine the carrying amount of the equity feature. This method is appropriate when the fair value of the equity feature is not determinable. Cash Bonds payable Share capital-equity component of convertible debt D.000 × . Cash Bond discount Bonds payable 1. [558] Gleim #: 4.000.90 -. Cash Bond discount Bonds payable Share capital-equity component of convertible debt C. which is also the bond discount given that the convertible bonds were issued at par. Gross fixed assets.000 77.000 par × 1. The total assigned initially to the instrument as a whole equals the fair value of the consideration received.650).890].000. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements? A.000. the present value of the principal repayment discounted at the market rate of 9% is 650.000. the cash flows from the bonds should be discounted at the market rate.000 713. Answer (B) is correct.000 1.000 bonds) proceeds – 922. Inc.000.300. Answer (C) is incorrect because the cash flows from the bonds should be discounted at the market rate.000 287. Copyright 2006 Gleim Publications.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.000 287.000 Answer (A) is incorrect because the IASs require that the debt and equity components of a compound instrument be separately presented on the issuer’s balance sheet. and their total is 922. Printed for Pol Mirafuentes Page 267 .000 77. The residual amount assignable to the equity feature is therefore 77.000 (1.300 assigned to the debt component].000.Source: IIA. C. However.000 1.700 1. B. D. For example. Retained earnings.000. and the equity feature should be separately presented.07 × 1. One approach is to assign to the less easily measurable component a residual amount after determining the amount of the more readily measurable component. The initial total carrying amount of convertible debt or of debt instruments issued with detachable share purchase warrants should be allocated between the debt instruments and the equity feature. and these debt and equity components should be separately accounted for. adapted A company uses straight-line depreciation for financial reporting purposes.000.000 713. the IFRSs do not stipulate a method for making the allocation.000 1. the present value of the interest payments discounted at 9% is 272.700 1.000) × 3. Cash. Cash Bonds payable B. Answer (D) is incorrect because the proceeds equaled 1. the future payments on the financial liability might be discounted at the market rate for a similar instrument without an equity feature. but uses accelerated depreciation for tax purposes.

It is based on new information and is not an error correction. Answer (B) is incorrect because interest expense increases from one period to the next. C. D. B. Inc. due to an increased carrying value as the discount is amortized over the life of the bond. Answer (B) is incorrect because depreciation expense is a non-cash charge. Answer (C) is correct. C. Interest expense equals the carrying value of the liability at the beginning of the period times the effective interest rate. since higher depreciation expense would be reported under accelerated depreciation than under straight-line depreciation. Equal the cash interest payment each period. The cash balance is unaffected by the depreciation method used. Answer (C) is incorrect because catch-up adjustments to prior reported amounts are retroactive. The excess is the amount of discount amortized each period. Answer (A) is correct. Answer (D) is incorrect because the historic cost of fixed assets is recorded in the gross fixed assets account. Answer (B) is incorrect because changes in accounting estimates are not errors. The carrying value of the liability equals the face value of the of the bond minus the discount. Catch-up adjustments related to amounts reported in prior periods. Retained earnings would therefore be lower for tax-reporting purposes than for general purpose financial reporting based on straightline depreciation. It results from reassessing the status and expected benefits and obligations related to assets and liabilities. The excess is the amount of discount amortized each period.91 -. The historic cost of the assets is unaffected by the depreciation method used. A change in accounting estimate adjusts the carrying amount of an asset or liability or the consumption of an asset. Answer (D) is correct. the carrying value increases. B. adapted If bonds are sold at a discount and the effective interest method of amortization is used. Answer (C) is incorrect because interest expense exceeds the cash interest payment. Changes in accounting estimates are accounted for prospectively. Copyright 2006 Gleim Publications. the interest expense increases over the life of the bond. Under accelerated depreciation. Reassessments of current status and future benefits and obligations. Answer (D) is incorrect because interest expense exceeds the cash interest payment. D. interest expense will A.92 -.Source: IIA. Answer (A) is incorrect because items are not classified as extraordinary under IFRSs. As the discount is amortized over the life of the bond. depreciation expense is higher and net income is lower. Printed for Pol Mirafuentes Page 268 . [559] Gleim #: 4. Be less than the cash interest payment each period. Consequently.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the balance of accumulated depreciation would be higher in the financial statements for tax purposes. [560] Gleim #: 4. Errors in reported amounts in prior periods. Increase from one period to another. Remain constant from one period to another. Extraordinary items.Source: CIA 1195 IV-24 Changes in accounting estimates are viewed as A.

Source: CIA 597 IV-22 The following financial statement notes are extracts from the audited financial statements of public entities. for machinery and equipment.Source: CIA 597 IV-20 On January 1. are a necessary part of preparing financial statements. the entity changed to the LIFO method of inventory valuation.000 Answer (A) is incorrect because 1. [562] Gleim #: 4. 20X5. Thus. Compute the entity’s 20X5 depreciation expense for the machine. residual values. Inc. [563] Gleim #: 4. and inventory obsolescence. The machine’s net carrying amount at January 1. D.000 cost – 4. Answer (B) is correct. C. Plant and equipment are now depreciated on a straight-line basis. Prior to 20X5.000 assumes a 2-year remaining useful life. a change in the estimate of the service lives of depreciable assets is a change in accounting estimate. However. Which note describes a change in accounting estimate? A. uncollectible accounts. The physical quantity of inventory.000 accumulated depreciation for 4 years). Answer (B) is incorrect because a change from diminishing-balance depreciation to straight-line depreciation is a change in accounting policy. 20X1. 20X5.000 assumes no change in estimate. they inevitably change as new events occur and as additional experience and information are obtained. Accordingly. B. The estimated useful life was 10 years.g. plant. When altered conditions require a change in estimate. it was estimated that the machine had a remaining useful life of 3 years. B. with no residual value. the FIFO method was used. Accounting estimates.. warranty costs. Answer (A) is correct.94 -.000 3. C. A change in accounting estimate is applied prospectively.000 (10. C. On January 1. The entity depreciates its property.93 -. Answer (D) is incorrect because LIFO inventory valuation is not permitted under IFRSs. D. A. B. it is accounted for prospectively. which of the following items requires that accountants estimate the effects of future conditions and events? A. Answer (C) is incorrect because 3.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [561] Gleim #: 4. and equipment using the straight-line method.000 6. The entity changed its amortization of capital assets based on a reassessment of the useful lives of the assets. an entity purchased a machine for 10. service lives. The purchase price for an acquired building. Thus. Answer (D) is incorrect because 6. the entity changed its rate of amortization from 5% and 6% to 8% and 10%.000 per year for the next 3 years. Answer (C) is incorrect because changing an accounting method due to a change in an IFRS is a change in accounting policy.000. 2005. The price of a marketable security. D. Effective January 1. Printed for Pol Mirafuentes Page 269 . Copyright 2006 Gleim Publications. the entity changed a method of accounting pursuant to a change in an International Financial Reporting Standard. 1. plant and equipment (other than customer service replacement parts) were depreciated using the diminishing-balance method.000 2. Prior to 20X5. The amount of recoverable mineral reserves. e.000 is the carrying amount at January 1. During the year.Source: CIA 596 IV-28 When financial statements are being prepared. depreciation expense is 2.95 -. 20X5 is 6.

Preparing financial statements requires estimating the effects of future events. Debit equipment Debit retained earnings Credit accumulated depreciation – equipment Debit equipment Debit accumulated depreciation – equipment Credit equipment Answer (A) is correct. the entity must debit equipment for its cost and credit accumulated depreciation for the depreciation expense appropriate for the first year of the estimated useful life. Retained earnings must be credited because the error understated profit or overstated loss in the prior period. D. To correct the prior-period material error. Printed for Pol Mirafuentes Page 270 . Inc.Source: CIA 1195 IV-23 In the prior accounting period. the entity must. the estimates will not depend on future conditions and events but on current conditions and measurement methods. warranty costs. [564] Gleim #: 4.Source: CIA 1188 IV-45 A retrospective voluntary change in an accounting policy in the current period should be accounted for in comparative reports by A. adjust the affected opening balances. Examples of items for which estimates are necessary are uncollectible receivables. Answer (C) is incorrect because retained earnings should be credited. periods benefited by a deferred cost. D. the entity records which entry? A. An adjustment directly to equity balances for the first period presented and restatement of other comparative amounts. Debit equipment Credit retained earnings Credit accumulated depreciation – equipment Debit retained earnings Debit accumulated depreciation – equipment Credit equipment B. To correct this material error in the single-period financial statements of the current period. Although some estimation of the correct amount may be required. C.96 -. Answer (B) is incorrect because the price of a marketable security can be calculated with certainty. and recoverable mineral reserves. No estimate is required. service lives and residual values of depreciable assets. Answer (D) is incorrect because accumulated depreciation and retained earnings should be credited. C. A line item on the current income statement for the cumulative effect of the change.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the purchase price for an acquired building can be ascertained with certainty. Hence. Answer (B) is incorrect because this entry is the reverse of the correct entry. Copyright 2006 Gleim Publications. Answer (D) is incorrect because the physical quantity of inventory as of the balance sheet date can be measured. inventory obsolescence. Presentation of pro forma comparative information. [565] Gleim #: 4. No estimate is required. an entity incorrectly expensed a newly purchased piece of equipment rather than establishing an asset balance and beginning to depreciate it over the estimated useful life of the item. B.97 -. Note disclosure only in the current period. in the single-period statements issued for the current period. Answer (C) is correct. Changes in estimates used in accounting are necessary consequences of periodic presentations of financial statements.

Accounting Policies. D. The entity should determine the cumulative effect on the opening and closing balance sheets for the earliest period for which it is practicable to do so. Retrospective application means adjusting the opening balances of equity for the first period presented and restating other comparative amounts. Inc. a voluntary change in accounting policy should be applied retrospectively unless any resulting adjustment that relates to prior periods is not reasonably determinable. Depreciation methods from straight-line to diminishing-balance. Thus.Source: CMA 681 3-24 An accounting change requiring retrospective treatment is a change in A. Reported as an adjustment to beginning retained earnings of the earliest period presented. C. Answer (D) is incorrect because retrospective application is required to the extent practicable. if it is not impracticable to apply the new policy retroactively. Included in the determination of profit or loss for the current period as a cumulative effect adjustment. how should the entity report the adjustment resulting from the change in accounting policy if the practicability criterion is met? A. Not disclosed in the financial statements. Disclosed as a separate type of depreciation expense. D. C. [566] Gleim #: 4. Retrospective application means adjusting the opening balances of equity for the first period presented and restating other comparative amounts. Answer (B) is correct. Copyright 2006 Gleim Publications.Source: CIA 595 IV-21 An entity changes its method of accounting for depreciation during the current year because it believes that the result will be reliable and more relevant information. B. A voluntary change in accounting policy is applied retrospectively unless it is impracticable to determine period-specific effects or the cumulative effect. Answer (B) is incorrect because reporting the cumulative effect in current profit or loss is not allowed. directly following depreciation expense for the current year.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. if distinguishing between a change in estimate and a change in accounting policy is difficult. the change is accounted for as a change in estimate and properly disclosed.98 -. Changes in Estimates and Accounting Errors . An accounting policy inseparable from a change in an accounting estimate. In its financial statements for the year. Answer (A) is incorrect because the residual value of equipment is a change in estimate that is accounted for on a prospective basis (in the future). Answer (C) is incorrect because the new policy should be retrospectively applied if practicable. Answer (D) is incorrect because a provision for warranty costs is a change in estimate that is accounted for on a prospective basis (in the future). Under IAS 8. B. Printed for Pol Mirafuentes Page 271 . Answer (C) is incorrect because retrospective application is required to the extent practicable. A change in depreciation methods is reported as a change in accounting policy. Answer (D) is incorrect because retrospective application means adjusting the opening balances of equity for the first period presented and restating other comparative amounts.99 -. [567] Gleim #: 4. Answer (B) is correct. A voluntary change in accounting policy is applied retrospectively unless it is impracticable. Answer (A) is incorrect because changes in accounting policies must be disclosed in the financial statements for the period. The residual value of equipment. the policy should be applied to comparative information as far back as practicable. A provision for warranty costs. Answer (C) is incorrect because.

100 -. Answer (D) is incorrect because profit will be underestimated. [570] Gleim #: 4. plus purchases.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [568] Gleim #: 4. profit for the period will be underestimated. D. B. C. Printed for Pol Mirafuentes Page 272 . The failure to record the increase in a liability account will result in an understatement of current liabilities leading to an overstatement of working capital. Overstatement of inventory. Answer (D) is correct. An accrued expense is an expense that has been incurred but not paid. D. B. List A A. Answer (B) is incorrect because cost of goods sold will be overestimated and profit will be underestimated.102 -. C. D. cost of goods sold will be overestimated for the period. The appropriate adjusting entry to record an accrued expense will increase an expense account and increase a liability account. B. Answer (C) is correct. Underestimated Underestimated Overestimated Overestimated List B Underestimated Overestimated Underestimated Overestimated Answer (A) is incorrect because cost of goods sold will be overestimated. the cost of goods sold for the period will be <List A> and net earnings will be <List B>.Source: CIA 1196 IV-31 Which of the following errors is not self-correcting over two accounting periods? A. Failure to record accrued wages. Copyright 2006 Gleim Publications. Failure to record prepaid expenses. There will be no effect on cash. C. Inc.Source: CIA 1196 IV-2 If ending inventory is underestimated due to an error in the physical count of items on hand.101 -. If ending inventory is underestimated. Cost of goods sold equals beginning inventory. If cost of goods sold is overestimated. The failure to record an accrued expense will result in an understatement of expenses leading to an overstatement of profit. Answer (B) is incorrect because the failure to record an accrued expense will result in an overstatement of profit. [569] Gleim #: 4. Answer (C) is incorrect because the failure to record an accrued expense will result in an overstatement of working capital. Failure to record depreciation.Source: CIA 1196 IV-3 The failure to record an accrued expense at year-end will result in which of the following overstatement errors in the financial statements prepared at that date? Profit A. No No Yes Yes Working Capital No Yes No Yes Cash Yes No No No Answer (A) is incorrect because the failure to record an accrued expense will result in an overstatement of profit and an overstatement of working capital and will have no effect on cash. minus ending inventory.

but no corresponding overstatement of expenses occurs in later years. Inc. respectively. Answer (B) is correct. respectively. On that date.70 on December 31. Answer (C) is incorrect because 1. 0 500 1. 20X2.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because understatement of accrued wages is a self-correcting error. when the spot rate was . future cost of goods sold will be overstated. respectively. is $1. 20X2. and future expenses will be understated.103 -. Yumi Corp. 20X3. The resulting gain or loss should ordinarily be included in determining profit or loss.55. the 20X2 transaction loss for Yumi Corp. Expenses are translated at the closing rate. Printed for Pol Mirafuentes Page 273 . How should the amounts in the foreign operation’s financial statements be translated into the presentation currency? A.000 units]. This operation maintains its books in its functional currency. which is not that of a hyperinflationary economy. the spot rate was . Future wage expense will be overstated. Thus. [571] Gleim #: 4. Answer (D) is incorrect because understatement of prepaid expenses (overstatement of expenses) is a self-correcting error. Answer (C) is incorrect because overstatement of inventory and the consequent understatement of cost of goods sold is a selfcorrecting error.000 units of the foreign entity’s local currency. Expenses are understated in the year of the error. It is the difference between the spot rate on the date the transaction originates (or the rate applied in the prior year) and the closing rate. Future wage expense will be overstated. Answer (D) is correct. D. Assets are translated at the exchange rates in effect at the translation dates.55 – 0. C. Answer (B) is incorrect because 500 results from using the rates at 12/31/X2 and 3/20/X3. 20X2? A.65. future cost of goods sold will be overstated. All amounts are translated at the closing rate for the most recent balance sheet date.Source: CPA 595 F-32 On September 22. A receivable or payable denominated in a foreign currency is adjusted to its current exchange rate at each balance sheet date.500 Answer (A) is incorrect because a loss resulted when the spot rate increased. A failure to record depreciation must be corrected because the effects of the error do not automatically reverse in future periods. D.500 [(0. Future wage expense will be overstated.000 1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31. C.70) × 10. B. future cost of goods sold will be overstated.Source: Publisher A reporting entity consolidates a foreign operation.104 -. [572] Gleim #: 4.000 results from using the rates at 9/22/X2 and 3/20/X3. and future expenses will be understated. Yumi paid the bill in full on March 20. B. purchased merchandise from an unaffiliated foreign entity for 10. and future expenses will be understated. Copyright 2006 Gleim Publications. Exchange differences are recognized in equity. The closing rate was .

B. An investor is a party to the venture who has joint control. B. Inc.000 10. the FCUs are reported at 12. At the balance sheet date. [574] Gleim #: 4. if any. Answer (B) is incorrect because the FCUs are reported at the spot rate on the balance sheet date. Answer (C) is correct. A joint venture “is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.000 12. An exchange difference arises when a given amount of one currency is translated into another currency at different exchange rates. The establishment of a separate financial structure is necessary when joint venturers own joint assets. Nonmonetary items measured at historical cost are reported at the rate on the transaction date. Thus. Answer (B) is incorrect because.105 -. consolidation is required.000 euros. Printed for Pol Mirafuentes Page 274 . monetary items are reported at the closing rate. XYZ Company records its nonmonetary items at historical cost. translation to a different presentation currency is at the closing rate for the most recent balance sheet for all amounts.500 Answer (A) is incorrect because the FCUs are reported at the spot rate on the date of the balance sheet. C. C. Exchange differences are recognized in a separate component of equity when they arise from translation of functional currency amounts into the presentation amounts.20 × 10. It also acquired land for 25. Answer (A) is incorrect because jointly controlled assets do not require the establishment of an organization or financial structure separate from the venturers. which is often the spot rate on the balance sheet date.000 27. Two venturers are not allowed to transfer assets and liabilities in a given line of business to a jointly controlled entity. D.000 27. Copyright 2006 Gleim Publications.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because assets and liabilities for each balance sheet presented are translated at the closing rate as of its date.000 (1.500 25. Answer (C) is correct.000) euros. The land had a value of 27.500 euros. Answer (C) is correct. Answer (D) is incorrect because an investor is a party to the venture who lacks joint control.000 euros. the spot rate for the FCU was $1. [573] Gleim #: 4. Answer (D) is incorrect because income and expenses for each income statement presented are translated at the exchange rates at the transaction dates (but an average rate may be used unless rates fluctuate greatly). Answer (B) is incorrect because the venturers may establish a separate entity in which each has an interest and that operates in the same manner as other entities if they choose to have a jointly controlled entity. D. direct effect on operational cash flows. XYZ Company purchased British pounds for 10. consolidation is required. 10.000 foreign currency units (FCUs) for 10.000 euros. When a jointly controlled entity becomes a subsidiary of the venturer.20 euros.000 Land 25. and the land is valued at the date of purchase. Such exchange differences are not recognized in profit or loss because they have little. if the functional currency is that of a hyperinflational economy.” When a jointly controlled entity becomes a subsidiary of the venturer. and the land is reported at 25.106 -.000 12. Answer (D) is incorrect because the land is reported based upon the historical cost on the purchase date.Source: Publisher On June 1 of the current year. Which of the following is the correct presentation of this transaction on XYZ Company’s balance sheet? FCUs A. At the end of XYZ Company’s fiscal year on December 31.Source: Publisher Which of the following is true with regard to joint ventures? A.

and goodwill will be recognized but not amortized.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [575] Gleim #: 4. for cash equal to the carrying amount of Scapula’s net assets. 20X5. If the building is to be used. managements of the two companies have discussed a possible combination of the two entities. Uniting of interests. Copyright 2006 Gleim Publications. D. acquired all the outstanding common shares of Scapula Co. The effect of recording the building at fair value in the consolidated balance sheet instead of its higher carrying amount on Scapula’s books will be to decrease future depreciation. except that the carrying amount of its building was more than fair value. Answer (A) is incorrect because the uniting-of-interests method is no longer an acceptable method of accounting for business combinations. Answer (B) is correct.S. Part purchase.107 -. C. A joint venture requires some form of separate accounting by each venturer. In preparing Proper’s December 31. assets acquired and liabilities assumed should be recorded at their fair values. under IFRS 3. D. it should be reported at fair value minus cost to sell. C. Answer (C) is correct. IFRS 3. but. and goodwill will be recognized but not amortized. what is the effect of recording the assets acquired and liabilities assumed at fair value and should goodwill amortization be recognized? Depreciation Expense A.Source: CPA 1192 T-33 To effect a business combination initiated on July 1. The carrying amounts of Scapula’s assets and liabilities approximated their fair values. Joint venture. If they do decide to combine.F. Under purchase accounting. If the building is to be sold. the resulting combination should be accounted for as a A.F. currently owns approximately 13% of the total of Annabelle’s outstanding voting common stock. requires that all business combinations within its scope be accounted for using the purchase method.Source: Publisher For the past several years. 20X5 consolidated income statement. A business combination is accounted for as a purchase regardless of the form of consideration given.108 -. Recently. [576] Gleim #: 4. Purchase.S. Proper Co. Company has invested in the common stock of Annabelle Company. this amount will be tested for impairment but not amortized. B. Answer (B) is incorrect because depreciation will decrease. Answer (D) is incorrect because depreciation will decrease. Inc. M. Business Combinations. Answer (C) is incorrect because accounting for a business combination as part purchase and part uniting of interests is not allowed. Printed for Pol Mirafuentes Page 275 . Answer (D) is incorrect because a business combination cannot be accounted for as a joint venture. M. The excess of the cost over fair value of the net assets acquired will be recognized as goodwill. part uniting of interests. B. and goodwill is not amortized. fair value is its current replacement cost for similar capacity unless expected use indicates a lower value to the acquirer. The differences between fair values and carrying amounts will affect profit or loss when related expenses are incurred. Lower Higher Lower Higher Goodwill Amortization Yes Yes No No Answer (A) is incorrect because depreciation will decrease.

000 is the amount of current assets.000) plant and equipment – 400.000 80. Copyright 2006 Gleim Publications. Pro rata reduction of the amounts assigned to all acquired assets and a gain for any unallocated portion. Inc. goodwill is 40. Printed for Pol Mirafuentes Page 276 . Samos had the following condensed balance sheet: Carrying Amounts Current assets Plant and equipment.000 cost and the 440.Source: CPA 590 T-33 In a business combination. B.) are not reduced. paid 600. net Liabilities Equity 80.000 (600. however.000).000 400.110 -. C. Answer (C) is correct. related to Samos’s acquisition. assets acquired and liabilities assumed should be recorded at their fair values. the sum of the amounts assigned by the acquiring entity to assets acquired and liabilities incurred and assumed exceeds the cost of the acquired entity.000 cost – 560. Reduction of the amounts assigned to current assets and a deferred credit for any unallocated portion.000 liabilities].000 current assets + (760. etc. IFRS 3 requires the reassessment of the identification and measurement of the acquiree’s assets.000 The fair value of the plant and equipment was 120.Source: CPA 593 II-8 Pellew Corp. 40.000 760. [578] Gleim #: 4. Under purchase accounting. D. What amount of goodwill. Gain immediately in profit or loss.000 is the difference between the 600. A business combination is accounted for as a purchase regardless of the form of the consideration given. B. At that time. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [577] Gleim #: 4. C.109 -.000 440. not as a deferred credit. liabilities. and given that other items are stated at fair value.000 160. D.000 + 120.000 more than its carrying amount. Answer (B) is incorrect because the allocated portion is reported as a gain. Answer (D) is incorrect because the amounts assigned to certain acquired assets (most financial assets.000 [80. in a business combination initiated and completed in December 2005. The excess should be reported as a A.000 120.000 Answer (A) is correct.000 is the amount plant and equipment is undervalued. Answer (B) is incorrect because 80. Before concluding that an excess over cost has arisen. and cost of the combination. The fair values and carrying amounts were equal for all other assets and liabilities.000 for the outstanding common stock of Samos Co. In a business combination. should Pellew report in its consolidated balance sheet? A. Answer (D) is incorrect because 160. and the values of the assets are not reduced below fair value. assets to be disposed of by sale. the fair value of the net assets acquired is 560. Answer (C) is incorrect because 120. Answer (A) is incorrect because a deferred credit is never recognized for the excess over cost. any excess over cost must be recognized immediately in profit or loss as a gain. Hence.000 carrying amount of the net assets. Deferred credit. After adjusting the net plant and equipment.

Source: CIA 1191 IV-45 The present value of future benefits payable as a result of work done before the introduction of. and liabilities are overstated. When a liability is paid. or amendment to. Assets. an entry debiting accounts payable and crediting cash is made. [581] Gleim #: 4. Past service cost is expensed on a straight-line basis over the average period until vesting. Answer (C) is correct. Answer (C) is incorrect because the defined benefit obligation (DBO) consists of future amounts required to settle the obligation arising from services provided by employees in the current and prior periods. Fair value of plan assets.Source: CIA 593 IV-36 An audit of an entity records for its first year of operations determined that the following errors were made at the balance sheet date: Failed to accrue 50. Assets. Hence. Printed for Pol Mirafuentes Page 277 . assets and liabilities will be understated. D. Assets and liabilities are understated. postemployment benefits is the A. or amendment to.000. Assets and net profit and equity are understated. whereas net profit and equity will be unaffected. B. Answer (D) is correct.111 -. Answer (A) is incorrect because the IASs provide for no additional minimum liability. and equity are understated. or an amendment to. The net effect of these errors was to overstate net profit by Copyright 2006 Gleim Publications. liabilities. Past service cost is the increase in the present value of the DBO related to prior employee service that arises in the current period from the introduction of. Failed to record depreciation expense on office equipment of 80.000. C. postemployment benefits. Past service cost. Answer (B) is incorrect because plan assets are assets held by a separate legal entity (fund) to be used to settle the employee benefit obligation. [580] Gleim #: 4. To the extent it is vested upon introduction of.112 -. and equity are unaffected. D. Answer (B) is incorrect because assets will be reduced.000 interest expense.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [579] Gleim #: 4. Answer (D) is incorrect because both assets and liabilities will be understated.113 -.000. Inc. If an entity erroneously pays a liability twice. Failed to amortize prepaid rent expense of $100. net income. Additional minimum liability. in error. the accounts payable and cash accounts will be understated by the amount of the liability. a plan. past service cost is immediately recognized. C. The effects of this mistake would be A. Defined benefit obligation. Failed to defer recognition of prepaid advertising expense of 60.Source: CIA 594 IV-15 Suppose that an entity has paid one of its liabilities twice during the year. Answer (A) is incorrect because the double payment of a liability does not affect expenses of the period so it does not affect net profit and equity. B.

understated Accrued expenses at December 31.114 -. 130.000. Printed for Pol Mirafuentes Page 278 . B. understated Inventory at December 31. C. 4. Overstated by 65. 2004: 10.000.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C. 2004 to be A. D. [Fact Pattern #35] An audit of an entity has revealed the following four errors that have occurred but have not been corrected: 1. Inventory at December 31.000 ignores the error related to prepaid advertising expense.000.000.000 170.000 Answer (A) is incorrect because 130.000 80.000 230.000 60. Copyright 2006 Gleim Publications.000.000 170. Understated by 45. Overstated by 72. The computation is as follows: Error Failure to accrue interest expense Failure to record depreciation Failure to amortize prepaid rent expense Failure to recognize prepaid advertising Totals Effect on Expense Understate Understate Understate Overstate Understate 50.000 Answer (C) is incorrect because 230. 2. Inc. Understated by 28.000 60. 2003: 40. overstated Depreciation for 2003: 7.000 100.000 80.000 170. 2004: 15. Answer (D) is incorrect because 290.000 treats the error related to prepaid advertising expense as an understatement of expenses.000 Effect on Net Profit Overstate Overstate Overstate Understate Overstate 50.Source: CIA 591 IV-45 (Refers to Fact Pattern #35) The errors cause the reported net profit for the year ending December 31.000.000.000 100. understated [582] Gleim #: 4.000.000 ignores the errors related to prepaid rent and prepaid advertising expense. 3.000 290. B. Answer (B) is correct. D.

The 15.000.000 of expenses for 2004 both overstated retained earnings as well as 2004 net profit. B. Answer (B) is correct. Overstated by 32.000 overstatement.000 overstatement. Present value of the minimum lease payments minus the unguaranteed residual value accruing to the lessor at the end of the lease term.000) overstatement. The omission of 7.000.000 because the amounts in ending inventory are excluded from cost of sales. The understatement of 2003 depreciation expense (a nominal account) has no effect on 2004 net income. The effect of the understatement of the 2003 year-end inventory (beginning inventory for 2004) was to overstate 2004 net profit by 40. The net effect of these errors was a 65.000. 2004 inventory overstated 2004 net income by 15. Finally. D.000 + 10.000 of expenses for 2004 overstated 2004 net income.115 -. The net investment in the lease is equal to the gross investment.116 -. [585] Gleim #: 4. The overstatement of the December 31. lease payments receivable. a party related to the lessee. Understated by 18. For a finance lease.Source: CIA 591 IV-46 (Refers to Fact Pattern #35) The errors cause the reported retained earnings at December 31. Answer (D) is incorrect because the net effect of these errors was a 65.Source: CMA 690 3-1 For a finance lease. Answer (C) is incorrect because the net effect of the errors was a 32. the lessor should record as the gross investment in the lease the amount of the minimum lease payments (payments plus either any bargain purchase option or any residual value guaranteed by the lessee.000 of depreciation overstated 2003 net income and 2003 and 2004 retained earnings. C.000 overstatement.000 + 15. Hence. the net effect of the errors on December 31. D.000 (40.000) overstatement. The 2003 inventory error reversed in 2004 (excluding tax considerations) and therefore had no effect on reported retained earnings at December 31. recorded by the lessor is equal to the A. 2004 to be A. [583] Gleim #: 4. Answer (C) is incorrect because the net effect of these errors was a 65. Difference between the present value of the minimum lease payments and the unearned finance income. minus unearned finance income. Answer (D) is incorrect because the gross investment is not adjusted for the time value of money or fair value. Answer (C) is correct. Overstated by 25. 2004. Answer (A) is incorrect because the net effect of the errors was a 32. the failure to accrue 10.000 + 0 + 10. [584] Gleim #: 4. Lower of 90% of the present value of the minimum lease payments or the fair value of the leased asset.117 -.000 + 7. Answer (B) is correct. Answer (A) is incorrect because the gross investment is not adjusted for the time value of money or fair value.000.000 overstatement.Source: CMA 690 3-2 Initial direct costs incurred by the lessor under a finance lease may be Copyright 2006 Gleim Publications. The reason is that beginning inventory is a component of cost of sales. or by a financially capable party unrelated to the lessor or the lessee) plus any amounts of unguaranteed residual value.000 overstatement. C.000. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the net effect of these errors was a 65. Answer (D) is incorrect because the net effect of the errors was a 32. 2004 retained earnings was a 32.000 overstatement.000 inventory error at year-end 2004 and the failure to accrue 10. Minimum lease payments plus the unguaranteed residual value accruing to the lessor at the end of the lease term. Inc. Answer (B) is incorrect because the gross investment is not adjusted for the time value of money or fair value. Printed for Pol Mirafuentes Page 279 .000 (0 + 15. the gross investment. Overstated by 65.

. sold at a markup of 25% of cost. 4.e. 2004. may be recognized immediately or allocated over the lease term. The present value of the minimum lease payments is 70. The initial direct costs of entering into a finance lease. Allocated over the economic life of the leased asset. B. The terms of the sale were n/30. The lease provides for the transfer of ownership of the asset by the end of the lease term. Thus. D. 5.118 -. As a result of the above. Deferred and allocated over the term of the lease in proportion to the recognition of rental income. Answer (B) is correct. 2003 was Copyright 2006 Gleim Publications. commissions and legal fees. a lease term that is 80% (8 ÷ 10) of the economic life of the asset will most likely result in classifying the lease as a finance lease. A finance lease transfers substantially all of the risks and rewards of ownership of the asset to the lessee. C. Johnson uses a periodic inventory system. Which of the situations below will most likely result in classifying the lease on the lessee’s books as a finance lease? A.g. Expensed in the period incurred. It normally is classified as a financial lease if.000 to Gibsen. for example. 3. e.119 -. C. Answer (A) is incorrect because a 7-year lease term is less likely to be for the major part of the economic life of the asset than an 8-year lease term.000 and a useful life of 10 years is being leased by an entity (lessee). at the lease’s inception. D. Answer (D) is incorrect because a present value of the minimum lease payments of only 70. Because of confusion about the shipping terms. i. [586] Gleim #: 4.. Printed for Pol Mirafuentes Page 280 .Source: CIA 589 IV-41 A new asset with a fair value of 100.000 is not substantially all of the fair value of the leased asset. exercise is reasonably certain. assuming that 80% is a “major part” of the economic life of the asset. 2003. The leased assets are such that they can be used only by the lessee without major modification. The lease term is 8 years. Johnson’s profit before income taxes for the year ended December 31. One possibility is to recognize the expense as incurred while also recognizing as income in the same period an equal amount of the unearned finance income.000. was included in Johnson’s inventory on December 31. The lease term is 7 years. The present value of the minimum lease payments is at least substantially all of the fair value of the leased asset at the inception of the lease. The lease term is for the major part of the economic life of the asset. A lease is classified at its inception. 2003. 2. Answer (C) is incorrect because a present value of the minimum lease payments of only 60. Johnson sold on account and shipped merchandise with a list price of 75. Subtracted from the gross investment in the lease. The merchandise arrived at Gibsen on January 5. [587] Gleim #: 4. Answer (B) is correct. the sale was not recorded until January of 2004 and the merchandise. FOB shipping point.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Answer (A) is incorrect because initial direct costs of a finance lease may be allocated over the lease term or recognized immediately. 1. Answer (D) is incorrect because initial direct costs of a finance lease are recognized immediately in income or allocated over the lease term.000. The present value of the minimum lease payments is 60.Source: CMA 1291 2-27 On December 31. The lease contains a bargain purchase option. the lessee has the option to purchase at a price expected to be sufficiently below the fair value of the exercise date that.000 is not substantially all of the fair value of the leased asset. Inc. Answer (C) is incorrect because initial direct costs of an operating lease may be deferred and allocated over the term of the lease in proportion to the recognition of rental income. B. A lease may be classified as either a finance lease or an operating lease by a lessee.

profit was understated by 15.000. December 31.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Understated by 18. exercise is reasonably certain. A lease may be classified as either a finance lease or an operating lease by a lessee. 2003 to correct for these omissions includes a Copyright 2006 Gleim Publications. Inc. Thus. which are considered material.000 (75.000 (75. B.000 instead of an account receivable of 75. the rental payments tend to approximate the cost of the leased property plus a return on the investment.000 and a markup on cost of 25%. Also.000. at the lease’s inception. 2001 December 31. Answer (A) is correct. Answer (B) is incorrect because income was understated by 15. The lease contains a bargain purchase option. the seller’s balance sheet reflected inventory of 60. Printed for Pol Mirafuentes Page 281 .000. 2. D.000. 4. B. Are used only by financial institutions. title to the goods and risk of loss passed to the buyer on December 31. 5. Given a selling price of 75.000. Overstated by 60. Answer (D) is incorrect because finance leases are used by entities in various industries. The lease provides for the transfer of ownership of the asset by the end of the lease term. Answer (B) is incorrect because finance leases are not normally cancelable. Answer (C) is incorrect because income was understated by 15. Answer (A) is incorrect because finance leases do not normally provide for maintenance service. The lease term is for the major part of the economic life of the asset. 2003 56. Colbeth entities has failed to accrue unpaid wages earned by workers during the last week of the year. Provide for maintenance service at no extra cost to the lessee. and the 75.000 – 60.000 64. 1.e. The leased assets are such that they can be used only by the lessee without major modification.000 sale should have been recorded on that date. A lease is classified at its inception. Have rental payments that are approximately equal to the amortized cost of the leased asset. The present value of the minimum lease payments is at least substantially all of the fair value of the leased asset at the inception of the lease.Source: CIA 592 IV-52 Finance leases are differentiated from operating leases in that finance leases normally A. Answer (D) is incorrect because income was understated by 15. Understated by 15.000 51..000 The entry on December 31. cost must have been 60.121 -.000 ÷ 1.000.120 -. 3.25).750. and profit before taxes must have been 15. D.Source: CMA 1293 2-10 For the past three years. the lessee has the option to purchase at a price expected to be sufficiently below the fair value of the exercise date that. were as follows.000. Are cancelable at any time upon request by the lessee. 2003. It normally is classified as a finance lease if. for example. assets were understated by 15. Understated by 75.000 and debit cost of goods sold for 60. Thus. Answer (C) is correct.000). Because the sale was unrecorded. [588] Gleim #: 4. C. C. The shipping term was FOB shipping point. 2002 December 31. [589] Gleim #: 4.000. A finance lease transfers substantially all of the risks and rewards of ownership of the asset to the lessee. i. The amounts omitted. Hence.000 because of the failure to credit sales for 75.000.

2003. The fixed assets were 1-year old at the start of the current year. The 2003 error overstated 2003 profit before taxes by 64.000 (64. and the entity incurred 25. an entity had 500.000) overstatement. and are being depreciated on the straight-line basis.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. 2003 opening balance sheet was as follows: Cash Accounts receivable Inventory Fixed assets (gross) Accum. Answer (C) is correct.Source: CIA 1194 IV-1 (Refers to Fact Pattern #36) The entity has a closing inventory balance of Copyright 2006 Gleim Publications. and credit wages payable for 64.000. Debit to wage expense for 13.000 920. The January 1. [590] Gleim #: 4.000 – 51.000.000 in sales revenue and purchased 150.000.000 400. Answer (A) is incorrect because 64. were originally estimated to have a 6-year useful life. The cost of goods sold was 250.000 (100. D. The entity has a 50% tax rate. resulting in the correction of the error over the 2-year period. debit retained earnings for 51.000 for the year. Expenses are understated in one year and overstated in the next.000 of inventory. Credit to retained earnings for 64.000.000.000. Debit to wage expense for 51. depreciation Net fixed assets Total assets Accounts payable Long-term debt Common shares Retained earnings Total liabilities and equity 120.000 The cost of long-term debt financing is 10% per annum. Consequently. The 2001 error overstated 2001 earnings and understated 2002 earnings by 56.000 920. Credit to wage expense for 64.000 is the total accrued wages payable. the net effect in 2003 of the 2002 and 2003 errors is a 13.000. payable in one installment on December 31 of each year. not the amount of the adjustment. Failing to record accrued wages is a self-correcting error.000 200.000 100. [Fact Pattern #36] During the year ended December 31.000 220. Inc. B.000 600. Answer (B) is incorrect because 51.000 100. The correcting entry is to debit expense for 13. Printed for Pol Mirafuentes Page 282 .122 -. The 2002 error overstated 2002 profit before taxes and understated 2003 profit before taxes by 51.000 was the correct wage accrual for 2002.000 200. The entity has a dividend payout ratio of 25%.000.000.000) 500.000 of general and administrative expenses. no correction is necessary for the 2001 error. Thus. C.000. Answer (D) is incorrect because retained earnings should be debited because of the overstatement of 2002 income.

500 is the after-tax net profit. Answer (C) is incorrect because 300. Copyright 2006 Gleim Publications.000 [500. Cost of goods sold equals beginning inventory. cost of goods sold is unaffected.Source: CIA 1194 IV-2 (Refers to Fact Pattern #36) If the entity had purchased a larger amount of inventory during the year. Ending inventory equals beginning inventory. 2003. Answer (D) is incorrect because 350. and the dividend payout is 10. ending inventory is 100.000 + 150.000). Hence.625 (25% × 42.000 sales – 250. [591] Gleim #: 4. C. B.000 CGS – 25.000].Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. after-tax net profit is 42.5) × 85.123 -. [592] Gleim #: 4. net profit is also unaffected.500). B. Answer (C) is incorrect because cost of goods sold and net profits are unaffected. Increase Increase Decrease No effect Net Profit Decrease Increase Increase No effect Answer (A) is incorrect because cost of goods sold and net profits are unaffected. Answer (D) is incorrect because 42. C.000 results from adding cost of goods sold to beginning inventory and subtracting purchases.000 (200.000 250.000 G&A expenses – (10% interest rate × 400. purchases and ending inventory should increase by the same amount. The entity has a dividend payout ratio of 25% of net profit. Answer (B) is incorrect because 21.500 [(1.000 300. If a purchase is made on December 31. plus purchases. Inc.Source: CIA 1194 IV-3 (Refers to Fact Pattern #36) The entity will pay dividends for the year of A.250 23. 10. Answer (B) is incorrect because cost of goods sold and net profits are unaffected. C. D. Thus.125 calculates net profit without subtracting the 100. Answer (B) is incorrect because 250.500 Answer (A) is correct.250 uses a 50% dividend payout ratio instead of 25%.625 21. D.000 depreciation expense. what is the effect on cost of goods sold and on net profit for the year? Cost of Goods Sold A.000 – 250. minus ending inventory. with the additional items being purchased on December 31. Thus. Profit before taxes is 85.125 42. Printed for Pol Mirafuentes Page 283 . D.000 fixed assets ÷ 6 years)].000 350. B. plus purchases. minus cost of goods sold.000 equals beginning inventory plus purchases. 100.000 Answer (A) is correct.000 is the cost of goods sold.124 -. Because cost of goods sold is unaffected. Answer (C) is incorrect because 23.0 – . Answer (D) is correct.000 LT debt) – (600.

127 -. A material error is one that could. not earnings retained in the business. Answer (A) is incorrect because errors are excluded from the determination of current period profit or loss. C. D. but dividends will increase. however. Inc. but dividends will increase. C. However. i. Answer (D) is incorrect because errors are adjustments of the current year’s opening balance of retained earnings and other relevant balances. The balance in the common shares account represents share capital.Source: CIA 1194 IV-40 A change in an accounting estimate is shown on the income statement A.. Answer (D) is incorrect because the common shares account is not affected. Dividends will increase. D. capital contributed by owners. if comparative statements are presented. They are corrected by restating comparative amounts for years when errors occurred. However. Only in the relevant account. Answer (B) is incorrect because the common shares account is not affected. comparative information should be restated only if practicable.Source: CIA 1194 IV-22 How are material prior-period errors in financial statements accounted for when comparative statements are issued? A. C. Printed for Pol Mirafuentes Page 284 . They are included in the determination of net profit or loss for the current period. but dividends will increase. B. B. Copyright 2006 Gleim Publications. the opening balances for the first period presented are restated. individually or collectively.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [593] Gleim #: 4. B. As a cumulative-effect adjustment. affect the decisions of users of the financial statements. Answer (B) is incorrect because prior-period financial statements need not be reissued. [594] Gleim #: 4. Answer (C) is correct. Prior-period financial statements are adjusted and reissued. In a separate section entitled extraordinary items. Increase Decrease No effect No effect Dividends Paid Increase Decrease Increase Decrease Answer (A) is incorrect because the common shares account is not affected. Answer (C) is correct.Source: CIA 1194 IV-6 (Refers to Fact Pattern #36) What would be the effect of a lower tax rate on the ending balance of common shares and on dividends paid for the year? Ending Balance of Common Shares A.e. the prior-period statements must be restated if it is practicable to do so. [595] Gleim #: 4.125 -. All material prior-period errors must be corrected retrospectively in the first set of financial statements issued after their discovery. In a separate section after continuing operations but before extraordinary items. D.126 -. This may be done by restating the comparative amounts for the prior periods when the error occurred. They are charged or credited directly to the closing balance of current-year retained earnings. It is not affected by a change in tax rate. If the error occurred prior to the first period presented. because they are a constant percentage of after-tax earnings.

Operating Operating Finance Finance List B 64% 00% 50% 64% Answer (A) is incorrect because 64% is the debt-to-assets ratio if the lease is a finance lease. so the debt-to-equity ratio is 100% (100 ÷ 100). debt of 175 (100 + 75).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Answer (B) is incorrect because 100% is the debt-to-equity ratio if the lease is an operating lease. The effect of the change is included in the same income statement classification as the previous estimate. Answer (D) is correct. Cost of goods sold for the period will be understated. Profit for the period will be understated. No cumulative effect of the change is recognized because estimates are accounted for prospectively. fixed assets of 175 (100 + 75). However. Purchases. both the asset and the obligation for future payments are recorded. D.128 -. Answer (B) is incorrect because changes in an accounting estimate are not extraordinary. Answer (C) is incorrect because changes in accounting estimates are shown only in the relevant accounts. [596] Gleim #: 4. C. Answer (C) is incorrect because cost of goods sold is unaffected by the error. Answer (C) is incorrect because 50% is the debt-to-assets ratio if the lease is an operating lease. The effect of the change is included in the same income statement classification as the previous estimate. which increase cost of goods sold. Cost of goods sold for the period will be overstated. that is. If it then leases a 75 asset in a(n) <List A> lease agreement. The entity would have current assets of 100. clearly distinct from the ordinary activities of the entity. so cost of goods sold is not understated or overstated for the period. The effect of the change is included in the same income statement classification as the previous estimate. If the lease is a finance lease. so cost of goods sold is not understated or overstated for the period. Answer (D) is incorrect because a change in an accounting estimate is only shown in the relevant account. A change in an accounting estimate is accounted for prospectively and is shown on the income statement only in the relevant account. Copyright 2006 Gleim Publications. in error. There will be no effect on cost of goods sold or net profit for the period. Hence. 100 of debt. Answer (D) is correct. and neither the asset nor the obligation for future payments is recorded on the balance sheet.129 -. prior-period statements and opening balances are not adjusted. then A. C.Source: CIA 595 IV-26 An entity has 100 of current assets. B. Operating leases are treated as rental agreements. Inc. D. 100 of fixed assets. and 100 of equity. The effects of the errors on cost of goods sold are offsetting. the debt-to-assets ratio of the entity will be <List B> List A A.Source: CIA 1195 IV-1 If certain goods owned by an entity were not recorded as a purchase and were not counted in ending inventory. Neither cost of goods sold nor profit is affected. Printed for Pol Mirafuentes Page 285 . and ending inventory. Answer (B) is incorrect because the errors offset each other. B. so profit is also unaffected. are understated by the same amount. The balance of debt remains at 100. the debt-to-assets ratio would be 64% (175 ÷ 275). Answer (A) is incorrect because the errors offset each other. and equity of 100. [597] Gleim #: 4. which decreases cost of goods sold.

000 200. The amount is determined after subtracting any contribution already made. Asset Asset Liability Liability List B Greater than Equal to Greater than Equal to Answer (A) is correct. if the contribution made exceeds the amount due. Under a defined contribution plan. It amortizes start-up costs using the straight-line method over a 5-year period. not prior.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [598] Gleim #: 4. Printed for Pol Mirafuentes Page 286 . Answer (C) is incorrect because the employer reports a liability only if the contribution is less than the required amount. Answer (C) is incorrect because changes in accounting estimates arise from changes in current. as more experience is obtained. they should be reported [List B]. Answer (D) is incorrect because the employer reports a liability only if the contribution is less than the required amount. A change should be reported in the period in which it occurs.Source: CIA 1195 IV-25 Because changes in accounting estimates relate to changes in circumstances in the [List A] period.132 -.130 -.Source: CIA 1195 IV-26 Under a defined contribution postemployment benefit plan. the employer recognizes an expense and a liability for the contribution payable in exchange for an employee’s services performed during the period. List A A. C. Current Current Prior Prior List B Not at all Prospectively Retroactively Not at all Answer (A) is incorrect because changes in accounting estimates should be reported. C. Answer (B) is correct. Answer (B) is incorrect because an asset is reported only if the contribution is in excess of the amount required. as well as prospectively if future periods are affected. the entity became profitable. B. B.131 -. D. D. Answer (D) is incorrect because changes in accounting estimates arise from changes in current. Changes in accounting estimates arise as new events occur. However. List A A. Retroactive reporting is impracticable because it would result in continual adjustments of prior years’ financial statements.Source: CIA 589 IV-32 An entity incurred the following costs during its first year of operation. a(n) [List A] is reported on the balance sheet only if the amount the employer has contributed to the pension trust fund is [List B] the amount required. circumstances. or as additional evidence is acquired. What is the correct amount of amortization expense for start-up costs during the second year of the life of the entity? Copyright 2006 Gleim Publications. Inc. [600] Gleim #: 4. circumstances. the excess is treated as a prepaid expense. Legal fees in connection with establishing the legal entity Pre-opening costs of the new business Operating losses 100.000 During its second and later years.000 400. [599] Gleim #: 4. not prior.

000 40. recognizes income from long-term construction contracts under the percentage-of-completion method in its financial statements and under the completed-contract method for tax reporting. to correct this error.000 60. 20. Moreover. [601] Gleim #: 4.000 700.000 Percentageof-Completion 300. Answer (C) is incorrect because current-year start-up costs are expensed as incurred.000 Year 20X1 20X2 20X3 There are no other temporary differences. Examples include expenditures for start-up costs (start-up activities). Printed for Pol Mirafuentes Page 287 . but no intangible asset results that is recognized. B. or pre-operating costs of commencing new operations or marketing new products.000 162.500 (25% applicable tax rate × 650. Answer (D) is correct.000 600. Accordingly.500 37. No amortization expense should be recognized in the second year. expenditures may be made to provide future economic benefits.000 + 850.500 ignores the differences for 20X1 and 20X2. If the applicable tax rate is 25%. Mill should report in its balance sheet at December 31.134 -.Source: Publisher Mill. 20X3 a deferred income tax liability of A. which began operations on January 1. In its financial statements issued through December 31.500 ignores the difference for 20X1. The result is a taxable temporary difference. unless any resulting adjustment relating to prior periods is not practicable. Answer (B) is incorrect because 125. 87.000 ignores the difference for 20X3.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. C. D.133 -. Mill has reported 1.000) of income from long-term contracts. it has reported 1.500 Answer (A) is incorrect because 87. Mill expects to have future taxable amounts of 650. Inc.000 (300.500 125. an adjustment should be made to the opening balance of current year retained earnings and other relevant balances. In its tax returns for the same period. Thus.100. Thus.000 (400.000 + 700. [602] Gleim #: 4. B.000 850.Source: Publisher A deferred tax asset is recognized for Copyright 2006 Gleim Publications. In some circumstances.000). D. such expenditures should be expensed as incurred.000) of income from the same sources. Answer (B) is incorrect because current-year start-up costs are expensed as incurred.000 0 Answer (A) is incorrect because current-year start-up costs are expensed as incurred. such as legal and secretarial costs of establishing a legal entity. the entity should have expensed the full amount of the start-up costs in the first year.750.000 and should recognize a deferred tax liability of 162. 20X1. Income under each method follows: CompletedContract -400. C. Answer (C) is correct. 20X3.000 + 600. Answer (D) is incorrect because 37. pre-opening costs of a new facility or business.

no DTL is recognized when it arises from goodwill if the amortization of the goodwill is not deductible for tax purposes. [603] Gleim #: 4.000 (800. Yes Yes No No Deferred Tax Liability Yes No No Yes Answer (A) is incorrect because a taxable temporary difference usually results in a deferred tax liability in the current period. an excess over cost equals the excess of the acquirer’s interest in the net fair value of the identifiable assets.000) temporary difference.Source: Publisher At the beginning of year 1. it is a taxable temporary difference for which a deferred tax liability is recognized. Answer (B) is incorrect because a taxable temporary difference usually results in a deferred tax liability in the current period. At the end of year 2. D. Printed for Pol Mirafuentes Page 288 . Answer (D) is incorrect because no DTA is recognized when it arises from an excess over cost (negative goodwill) treated as deferred income.000 temporary difference will result in future taxable amounts.135 -. A deferred tax asset is recognized for most deductible TDs and for the carryforward of unused tax losses and credits. Cody reported a 500. the cumulative effect of the difference in accounting for financial reporting and tax purposes is a 300. Goodwill if its amortization is nondeductible for tax purposes. B. A deferred tax liability is recognized for the deferred tax consequences attributable to most taxable temporary differences. and contingent liabilities recognized over the acquisition cost. Because this 300. However. In a business combination that is an acquisition.000 – 500. but only to the extent it is probable that taxable profit will be available to permit the use of those amounts. Answer (C) is incorrect because a taxable temporary difference usually results in a deferred tax liability in the current period. Negative goodwill treated as deferred income. liabilities. liabilitiies. Cody reported 800. Answer (D) is correct. but only to the extent it is probable that taxable profit will be available to permit the use of those amounts. The reason is that the recognition of a DTL would increase goodwill. During year 1. A deferred tax asset is recognized for the deferred tax consequences attributable to most deductible temporary differences.000 loss from this contract. Cody’s year 2 balance sheet should include a Deferred Tax Asset A. Inc. D. Copyright 2006 Gleim Publications. B. goodwill equals the excess of the acquisition cost over the acquirer’s interest in the net fair value of the identifiable net assets. Answer (C) is correct. This contract is accounted for by the percentage-of-completion method for financial accounting purposes and the completed-contract method for tax purposes. Answer (A) is incorrect because a deferred tax liability (DTL) is recognized for most taxable TDs. The reason is that the recognition of a DTA would increase an excess over cost. C. and contingent liabilities recognized. because of cost overruns incurred in year 2.000 of income from this contract. Cody Construction began work on a 3-year construction contract. Answer (B) is incorrect because neither a deferred tax liability nor a deferred tax asset is recognized in these circumstances. However. C. In a business combination that is an acquisition.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The initial recognition of an asset that is not part of a business combination and does not affect accounting profit or taxable profit at the date of the transaction. A deductible temporary difference if the future availability of taxable profit is probable.

Copyright 2006 Gleim Publications.137 -.000.992.000 of interest income and 80. 20X2 Profit before income taxes Interest income included above that was not subject to income taxes 5.528. [604] Gleim #: 4. Printed for Pol Mirafuentes Page 289 . taxable profit is 3.000 100. Lally was subject to an effective income tax rate of 40% in 20X1 and 20X2. the current tax expense is 1.528. Deferred tax expense equals the deferred tax liability (40% × 80.000 of rental income are not subject to tax in 20X1.000 2.000. Answer (B) is correct. However. B.000 2. and deferred tax expense equals the change in the entity’s deferred tax assets and liabilities.600.960. tax expense is 1.600. Thus.000) at year-end. and current tax expense is 1.528.000 1.000 1.820.136 -.000 includes the tax-exempt interest.960. Answer (B) is incorrect because 1.032. C.000.000 includes tax on the tax-exempt interest but does not include tax on the rent income.000 that was not subject to income tax until its receipt in 20X2. assuming no deferred tax asset or liability balances existed at the beginning of the year.980.568.000 1. Because 100.560.000 does not include tax on the rent income. [605] Gleim #: 4. Tax expense (tax income) equals the sum of current tax expense (current tax income) and deferred tax expense (deferred tax income).000 (1.000 Answer (A) is incorrect because 1. 1.992.000 100. the rental income accrued in the previous year is taxable in 20X2. 20X1 is A.000 includes the tax-exempt interest but does not include the deferred tax liability from the rent.000 of interest income not subject to tax. Inc. Current tax expense equals taxes paid or payable. Answer (D) is incorrect because 2.032.568.000 + 32. 1.000 Profit before income taxes in 20X1 included rent income of 80.560. Hence.000 includes tax on the tax-exempt interest. Answer (C) is incorrect because 2.000. The 5.000 = 32. Answer (D) is incorrect because 1.000 does not include the deferred tax liability from the rent. B.000.000 1.528. C.000.000).000.Source: CMA 686 3-9 (Refers to Fact Pattern #37) Lally’s current tax expense for 20X2 was A. D. D.000.000 20X1 4. the profit subject to tax is 4.Source: CMA 686 3-7 (Refers to Fact Pattern #37) The tax expense that would have been reported on Lally’s income statement for the year ended December 31.000 Answer (A) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #37] The following relates to Lally Plc for 20X1 and 20X2. Answer (C) is incorrect because 1.000. Given a 40% rate.000 of pre-tax profit is reduced by the 100.

required contribution. Answer (C) is incorrect because the non-taxable interest income does not have deferred tax consequences.139 -. Therefore. The rental income created a deferred tax liability in 20X1 that reversed in 20X2. Given that the difference reversed in 20X2. 20X2 is A. List A A. An asset An asset A liability A liability List B Greater than Equal to Greater than Equal to Answer (A) is correct. not greater than the required amount. no deferred tax amount existed at the end of 20X2. D.000 32. Copyright 2006 Gleim Publications. Therefore. the company reports an asset on the balance sheet only if the contribution to the pension trust is greater than the defined. Answer (B) is incorrect because the non-taxable interest income does not have deferred tax consequences. Therefore. Answer (D) is incorrect because the company would not report a liability on the balance sheet if it contributed the required amount to the pension trust. Deferred tax liabilities arise from taxable temporary differences.138 -. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [606] Gleim #: 4. D. Printed for Pol Mirafuentes Page 290 . A deferred tax liability would have been created at the end of 20X1.Source: IIA.000 0 Answer (A) is incorrect because the non-taxable interest income does not have deferred tax consequences. [608] Gleim #: 4. The interest income not subject to tax resulted in neither future taxable nor future deductible amounts and therefore no deferred tax item was recognized for it. C. no asset is reported.000 8. no deferred amount existed at the end of 20X2. Inc. Answer (D) is correct. Answer (B) is incorrect because an asset is reported only if the contribution is in excess of the required contribution. no deferred tax amount existed at the end of 20X2. Answer (C) is incorrect because the company would report a liability on the balance sheet only if the contribution was less than the required amount. The rental income created a deferred tax liability in 20X1 that reversed in 20X2. The correct answer is 0.140 -.Source: IIA. adapted If a lease agreement transfers substantially all of the benefits and risks of ownership of the asset to the lessee. The rental income created a deferred tax liability in 20X1 that reversed in 20X2. C. B. no deferred tax amount existed at the end of 20X2. If the actual contribution is equal to that required. 40. [607] Gleim #: 4. Under a defined contribution plan. adapted Under a defined contribution pension plan. the asset value is recognized on the lessee’s books a <List A> asset and the lease is <List B> lease. Deferred tax assets arise from deductible temporary differences and the carryforward of unused tax losses and credits. The only item resulting in a temporary difference was the rental income. <List A> is reported on the balance sheet only if the amount the organization has contributed to the pension trust is <List B> the amount required.Source: CMA 686 3-10 (Refers to Fact Pattern #37) The deferred tax asset or liability reported on Lally’s balance sheet on December 31.

in comparison with the European company’s return. Answer (D) is incorrect because the return to the U. [610] Gleim #: 4. D.S. Copyright 2006 Gleim Publications.142 -. Because the return to the U.S. Answer (C) is incorrect because. Leased assets are recognized as tangible assets. not an operating lease. Inc. B. Indeterminate from the information provided.Source: CIA 591 IV-34 When the equity method is used to account for the investment in an associate. Answer (D) is incorrect because leased assets are not recognized as intangibles. If the value of the euro weakened against the U. adapted A U. if substantially all of the risks and benefits of ownership of the asset are transferred to the lessee. Printed for Pol Mirafuentes Page 291 . while the return to the European company is not. not an operating lease. company’s return will be A. Higher. company is adversely affected by the exchange rate movement.S.S. company is adversely affected and the return to the European company is unaffected.Source: IIA. then the lease is referred to as a capital lease. for the lessee.S. company will definitely be lower than the return to the European company. A tangible An intangible A tangible An intangible List B A capital A capital An operating An operating Answer (A) is correct. The same.141 -. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) List A A. An increase in a special equity account. Answer (A) is correct. dollar during the period.S. company will definitely be lower than the return to the European company. the recording of the receipt of a cash distribution from the investee will result in A. When lease agreements transfer the risks and benefits of ownership of the asset to the lessee.S. The recognition of investment income. company is adversely affected and the return to the European company is unaffected. then the lease is referred to as a capital lease. company and a European company purchased the same stock on a European stock exchange and held the stock for one year.S. C. B. B. C. the U. the lessee is referred to as a capital lease since it is essentially a form of financing. Answer (B) is incorrect because the return to the U. Answer (B) is incorrect because leased assets are not recognized as intangibles. Answer (C) is incorrect because the return to the U. An increase in a liability account. company is directly affected by the exchange rate movement.S. If substantially all of the risks and benefits of ownership of the asset are transferred to the lessee. D. A reduction in the investment balance. [609] Gleim #: 4. Lower. C. or capital. the return to the U. the return to the U.

Not disclosed in the financial statements. The liability is contingent on the lessor’s not receiving the full residual value from a third party. when the equity method is used. Rent expense can be accrued as sales occur.143 -.. [611] Gleim #: 4. A company accrues income tax payable in its interim financial statements. Printed for Pol Mirafuentes Page 292 .1 -. The amount is not contingent on a future event. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. Answer (D) is correct. This is a guarantee. Answer (B) is correct. A retail store in a shopping mall pays the lessor a minimum monthly rent plus an agreed-upon percentage of sales. A lessee agrees to reimburse a lessor for a shortfall in the residual value of an asset under lease. The company can accrue the amount that it expected the invoice to show. adapted Which of the following is an example of a contingent liability? A. Retrospective application means adjusting the opening balances of equity (e. Answer (D) is incorrect because the investment account is credited. the investment is initially recorded at cost on the entity’s books. Answer (B) is incorrect because a service was received and the company owes an amount. Reported as an adjustment to beginning retained earnings for the first period presented. Dividends received from an associate reduce the carrying amount.144 -. [612] Gleim #: 4. Answer (C) is incorrect because the investment account is credited. Inc. A company is refusing to pay the invoice for the annual audit because it seems higher than the amount agreed upon with the public accounting firm’s partner . B. Answer (C) is incorrect because as of the date of the interim financial statements. retained earnings) for the first period presented and restating other comparative amounts. D. the income tax is payable because earnings have occurred. There is no uncertainty regarding the amount or the timing of the payment as of the date of the interim financial statements. investment income (loss) is recognized for the investee’s share of the profits or losses of the associate. D.Source: CIA 597 IV-48 Common shareholders with preemptive rights are entitled to Copyright 2006 Gleim Publications. B. Answer (C) is incorrect because restrospective application is indicated unless it is impracticable. The carrying amount is subsequently adjusted to recognize the profits or losses of the associate after the date of acquisition.Source: CIA 595 IV-21 An enterprise changes its method of accounting for depreciation during the current year because it believes that the result will be a more appropriate presentation in the financial statements. A change in accounting policy should be applied retrospectively unless it is impracticable to determine period-specific effects or the cumulative effect. Answer (D) is correct. [613] Gleim #: 5. Disclosed as a separate type of depreciation expense.g. When the equity method is used. Included in the determination of net profit or loss for the current period. C. how should the enterprise report the adjustment resulting from the change in accounting policy if all relevant amounts are practicably determinable? A.Source: IIA. Answer (B) is incorrect because restrospective application is indicated unless it is impracticable. In its income statement for the year. Answer (A) is incorrect because changes in accounting policies must be disclosed in the financial statements for the period. Answer (A) is incorrect because there is no uncertainty regarding the amount of rent. directly following depreciation expense for the current year. Dividends received from the investee are recorded as a reduction of the investment account.

D. Hence. Inc. not a participation feature. Answer (D) is incorrect because a proxy fight is an attempt to gain control of a company by persuading shareholders to grant their voting rights to others. and common shareholders receive an equal dividend. Thus. Vote first at annual meetings. They participate in earnings distributions under set terms and conditions. [614] Gleim #: 5. Gain control of the firm in a proxy fight. Preferred shares have <List A> like common shares and <List B> like bonds. C. B. the preemptive right. [615] Gleim #: 5. grants common shareholders the power to acquire on a pro rata basis any additional common shares sold by the firm. A secondary purpose is to maintain the shareholders control of the company. Answer (C) is correct. Purchase any additional shares sold by the firm. proportional ownership interests from dilution in value. List A A. Answer (A) is incorrect because there is no prescribed order of shareholder voting.3 -. Convert their shares into common shares. Purchase any additional bonds sold by the firm. Monitor any sinking funds for the purchase and retirement of debt. Answer (C) is incorrect because a conversion feature. B.Source: CIA 597 IV-49 Participating preferred shareholders are entitled to A.2 -. Answer (D) is correct. C. Preemptive rights protect common shareholders. whether granted by statute or by the corporate charter. Printed for Pol Mirafuentes Page 293 .Source: CIA 596 IV-46 Preferred shares are securities with characteristics of both common shares and bonds. allows conversion to common stock. Answer (B) is incorrect because preferred shareholders do not have voting rights except in circumstances in which the firm has not paid the preferred share dividends for a specified period. Answer (A) is incorrect because the participation privilege is unrelated to monitoring privileges.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. A maturity date No maturity date A maturity date No maturity date List B A fixed periodic payment No fixed periodic payment No fixed periodic payment A fixed periodic payment Copyright 2006 Gleim Publications. B. D. Vote at all annual meetings. D. Share in the firm’s earnings beyond the stated dividend level. they do not apply to nonconvertible debt. Answer (B) is incorrect because preemptive rights concern only equity ownership. Accordingly. after the stated preferred dividend is paid. Participating preferred shareholders are entitled to share in the earnings of the firm. any remaining dividends are allocated to all shareholders in proportion to the par values of their shares. Preemptive rights also apply to debt convertible into common shares. C.

Preferred shareholders are usually given the right to vote for directors only if the company has not paid the preferred dividend for a specified period of time. preferred shares have no maturity date. Has voting rights. C. C.Source: CIA 596 IV-57 If a company has outstanding bonds with a sinking fund provision and if interest rates have <List A> since the bonds were issued. B. Answer (C) is correct. preferred shares have a fixed periodic payment. Answer (D) is incorrect because cumulative preferred shares have the right to receive any dividends not paid in prior periods before common share dividends are paid.4 -. preferred dividends. the claims of preferred shareholders must be satisfied in full before the common shareholders receive anything. Such a provision is an incentive for management to pay preferred dividends. B. However. In the event of liquidation. Increased Remained constant Increased Decreased List B Buying back bonds in the open market Calling in a portion of the bonds at face value Calling in a portion of the bonds at face value Buying back bonds in the open market Copyright 2006 Gleim Publications. Inc. D. List A A. Answer (A) is incorrect because preferred shares have priority over common shares with regard to earnings. Like common shares (but unlike bonds). [616] Gleim #: 5. Like bonds (but unlike common shares).g. Preferred shares do not usually have voting rights.. 5 to 10 years). although certain preferred shares (transient preferred shares) must be redeemed within a short time (e. Has the right to receive dividends in arrears before common share dividends can be paid. Has priority over common shares with regard to earnings.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because preferred shares do not have a maturity date. Has priority over common shares with regard to assets. Answer (B) is incorrect because preferred shares have fixed periodic dividend payments. unlike interest. Answer (C) is incorrect because preferred shares do not have a maturity date but do have fixed periodic dividend payments. because of bankruptcy. The fixed payment is in the form of a stated dividend in the case of the preferred shares and interest payments in the case of bonds.5 -.Source: CIA 1195 IV-47 Which of the following is usually not a feature of cumulative preferred shares? A. such as 10 quarters. so dividends must be paid on preferred shares before they can be paid on common shares. the company would realize a savings in meeting its sinking fund obligations by <List B>. Answer (B) is incorrect because preferred shares have priority over common shares with regard to assets. Printed for Pol Mirafuentes Page 294 . Answer (D) is correct. for example. do not become an obligation unless declared. D. [617] Gleim #: 5.

Source: CIA 1195 IV-46 Convertible bonds and bonds issued with warrants differ in that A. while convertible bonds do not. The bonds remain outstanding if the warrants are exercised.g. Retiring a portion of the bonds by purchasing them on the open market will be more costly than calling a portion of the bonds at face value. Answer (D) is incorrect because junk bonds are high-interest-rate. D. Zero-coupon bonds sell at a deep discount and increase in value each year until maturity. or ounces of rare metal (e. unsecured bonds that have been used extensively to finance leveraged buyouts. high-risk. while bonds issued with warrants have lower coupon rates than straight bonds. They are options to purchase equity securities and should be separately accounted for. These bonds do not pay interest. tons of coal. the prices of outstanding bonds must decrease so that their yields will reach the market rate. while bonds issued with warrants have higher coupon rates than straight bonds. D. C. Copyright 2006 Gleim Publications. Answer (A) is incorrect because deep discount bonds pay interest significantly below the market rate. Increase in value each year as they approach maturity. B. B.7 -. while bonds that are issued with warrants do not. Inc. buying bonds in the open market will be the cheaper strategy. the bonds will be selling at a discount (below face value) in the open market. If interest rates have increased.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. if interest rates have remained constant. Hence. the bonds will be selling at a premium in the open market. A capital gain results if the share price rises above the option price. Are high-interest-rate. The equity feature of convertible bonds is not separately accounted for. whereas zerocoupon bonds do not pay interest. Answer (B) is incorrect because. Convertible bonds have higher coupon rates than straight bonds. Answer (D) is correct. high-risk. Warrants are usually detachable. providing the owner with the total payoff at maturity. Are redeemable in measures of a commodity such as barrels of oil. the bonds will still be selling at face value in the open market. Answer (A) is incorrect because bonds issued with warrants and convertible bonds have lower coupon rates than conventional bonds. Bonds that are issued with warrants remain outstanding after the bondholder exercises the right to become a common shareholder. Answer (B) is incorrect because bonds issued with warrants and convertible bonds have lower coupon rates than conventional bonds. Answer (C) is incorrect because commodity-backed bonds are redeemable in measures of a commodity. Answer (D) is incorrect because. The cost of buying bonds on the open market will be the same as the cost of calling a portion of the bonds at face value. Convertible bonds must be surrendered when the conversion privilege is exercised. if interest rates have increased. Convertible bonds have lower coupon rates than straight bonds. Answer (C) is incorrect because. unsecured bonds. Retiring a portion of the outstanding bonds by buying them in the open market at the discounted price will be cheaper than calling a portion of the bonds at face value. silver). if interest rates have decreased. Convertible bonds remain outstanding after the bondholder exercises the right to become a common shareholder. Answer (C) is incorrect because convertible bonds do not remain outstanding. Printed for Pol Mirafuentes Page 295 . Sell for a small fraction of their face value because their yield is much lower than the market rate. [619] Gleim #: 5. C.Source: CIA 1196 IV-20 Zero-coupon bonds A. [618] Gleim #: 5.6 -. Answer (B) is correct..

which of the following securities provides the least risk? A.Source: CIA 1191 IV-50 From the viewpoint of the investor. Thus.S. D. Hence. Mortgage bond. In a bankruptcy proceeding. Printed for Pol Mirafuentes Page 296 . Corporate income bonds. subordinated debentures. corporate mortgage bonds. The interest payments on indexed or purchasing power bonds are based on an inflation index. The interest paid is not inflation adjusted. B. [622] Gleim #: 5. C. Such bonds are also more risky than secured debt. corporate debentures. Answer (B) is incorrect because convertible bonds can be redeemed for the common shares of the issuer at the option of the holder. Debentures of either kind are therefore more risky than mortgage bonds. interest paid to bondholders rises automatically when the inflation rate rises. mortgage bonds are less risky than the others listed.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [620] Gleim #: 5. Subordinated debentures have a claim on the debtor’s assets that may be satisfied only after senior debt has been paid in full. creditors will be able to receive payments from liquidation of the property in case of default. but the interest payments are not inflation adjusted. corporate first mortgage bonds. Income bonds.8 -.10 -. Thus. corporate mortgage bonds. Answer (A) is incorrect because income bonds pay interest to the holder only if the interest is earned. Answer (C) is incorrect because an income bond pays interest only if the debtor earns it. Preferred shares. corporate income bonds. Answer (A) is correct. Treasury bonds. common shares. Indexed bonds. including those preferences. corporate second mortgage bonds. C. under the rights enumerated in the bond indenture. Copyright 2006 Gleim Publications. D. preferred shares. B. Thus. usually real property. convertible preferred shares. D. Answer (C) is incorrect because mortgage bonds are secured by fixed assets of the issuer. [621] Gleim #: 5. they provide greater security to bondholders. Answer (D) is incorrect because unsecured debt is riskier than a mortgage bond. corporate income bonds. Mortgage bonds. these amounts are paid before any transfers are made to other creditors. Income bond. Answer (D) is correct. B. Convertible bonds. corporate first mortgage bonds. Interest payments are not inflation adjusted.9 -. Debentures. A mortgage bond is secured with specific fixed assets. C. Answer (B) is incorrect because a debenture is long-term debt that is not secured (collateralized) by specific property. Common shares. Subordinated debenture. U.Source: CIA 589 IV-49 Which of the following classes of securities are listed in order from lowest risk/opportunity for return to highest risk/opportunity for return? A.Source: CIA 595 IV-39 Bondholders are assured of protection against inflation if they hold A. Inc. such as the consumer price index.

Printed for Pol Mirafuentes Page 297 . albeit junior. Debentures are unsecured debt instruments. U. Preferred shareholders receive dividends only if they are declared.S. Treasury securities are backed by the full faith and credit of the U. The first term of the formula represents the periodic cost of the trade discount. income bonds.Source: CIA 1195 IV-53 The correct equation for calculating the approximate percentage cost. income bonds. holders of income bonds have less risk than shareholders because meeting the condition makes payment of interest mandatory. subordinated debentures.S. Answer (B) is incorrect because the proper listing is mortgage bonds. However. B. Copyright 2006 Gleim Publications. The second mortgage bonds are secured. For example. and common shares. Answer (C) is incorrect because the proper listing is first mortgage bonds. Inc. In the event of default. second mortgage bonds. Answer (A) is correct. Answer (D) is incorrect because the proper listing is mortgage bonds. Holders of common shares cannot receive dividends unless the holders of preferred shares receive the stipulated periodic percentage return. such as holders of second mortgages. shareholders have claims junior to those of debtholders if the enterprise is liquidated. their return is correspondingly lower. The multiple of these terms is the approximate annual percentage cost of not taking the trade discount. and preferred shares. calculated as the cost per unit of trade credit (discount %) divided by the funds made available by not taking the discount (100 – discount %). preferred shares. Holders of first mortgages have rights paramount to those of any other parties. Answer (B) is incorrect because the denominator of the first term should represent the funds made available by not taking the discount (100 – discount %). debentures. The second term represents the number of times per year this cost is incurred. Income bonds pay interest only in the event the corporation earns income. Answer (C) is incorrect because the first term is the reciprocal of the correct term. in addition to any arrearages if the preferred shares are cumulative. C. Corporate first mortgage bonds are less risky than income bonds or shares because they are secured by specific property. Their holders have enforceable claims against the issuer even if no income is earned or dividends declared. Thus. The general principle is that risk and return are directly correlated. claims. Answer (D) is incorrect because the second term is the reciprocal of the correct term. A precise formula would incorporate the effects of compounding when calculating the annual cost. D. and the directors usually have complete discretion in this matter. of not taking trade discounts is A. Also. government and are therefore the least risky form of investment listed. and common shares.11 -. [623] Gleim #: 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. the bondholders can have the property sold to satisfy their claims. on an annual basis.

500 less.000 less is based on a 30-day borrowing period. a difference of $75.900.500 [$4. B.000. C. net 30 days (2/15 net 30).Source: CIA 1192 IV-54 A company has accounts payable of $5 million with terms of 2% discount within 15 days.000. when A. Answer (B) is incorrect because percentage financing cost is unaffected by the purchase price of the items. D. D. B. or it can wait until the 30th day when it will receive revenues to cover the payment. The items purchased have a lower price. Copyright 2006 Gleim Publications. $75.000 × 12% × (15 ÷ 360)]. D. The interest cost of borrowing $4.000 less does not consider the interest paid. C. Assuming other factors are constant.924.000 less.13 -.500.Source: CIA 1196 IV-52 A short-term bank loan will have a higher effective financing cost if it has which combination of characteristics? A. Answer (B) is correct. The items purchased have a higher price. The discount percentage is lower. A 20% compensating balance and regular interest.14 -.000.500. B.000) to take advantage of the discount is $24. $100. and the total cost will be $4. C.Source: CIA 597 IV-51 A company obtaining short-term financing with trade credit will pay a higher percentage financing cost.500 more.500 more reflects interest paid but ignores the discounted price.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [624] Gleim #: 5. that is.000 less. the days of extra credit obtained by forgoing the discount are fewer. If it borrows funds on the last day of the discount period in order to obtain the discount. its total cost will be A. Answer (D) is correct. A 20% compensating balance and discount interest. the cost of not taking the discount. $51. Inc. A 10% compensating balance and regular interest. Answer (A) is incorrect because $51. the result is that the cost of trade credit. It can borrow funds from a bank at an annual rate of 12%. is greater. [626] Gleim #: 5. $24.900. The total cost if the discount is not taken will be $5. [625] Gleim #: 5. everything else being equal.12 -. Answer (C) is incorrect because $100.000 (98% × $5. Answer (A) is incorrect because the lower the discount percentage. Answer (D) is incorrect because $24. Printed for Pol Mirafuentes Page 298 . The supplier offers a longer discount period. Answer (C) is incorrect because percentage financing cost is unaffected by the purchase price of the items. the lower the opportunity cost of forgoing the discount and using the trade credit financing. If the discount period is longer. A 10% compensating balance and discount interest.

D. Answer (B) is incorrect because an open account is a credit arrangement involving only the signing of an invoice by the buyer. D.Source: CIA 1191 IV-56 An example of secured short-term financing is A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because lower compensating balances and regular interest are less costly. Also. retains title to the goods until the buyer has completed payment. and the acceptance of the draft by. B. is similar to a promissory note because it is payable at a specific time in the future rather than upon acceptance by the buyer. [627] Gleim #: 5. it calls for the buyer to pay a specified amount. The higher the compensating balance. Answer (A) is incorrect because a sight draft calls for immediate payment upon delivery of the shipping documents to. Answer (B) is incorrect because lower compensating balances and regular interest are less costly.16 -. Answer (D) is correct. The draft and the shipping documents related to the goods are then sent to the buyer’s bank. Answer (C) is correct. The buyer accepts the draft by signing it. the higher the portion of the loan funds that must be left on deposit with the lender. C. Answer (C) is incorrect because lower compensating balances and regular interest are less costly.15 -. after which both the banker and the seller record the transaction on their respective books. the interest paid is charged on a smaller amount of funds available to be used by the borrower. Commercial paper. however. A time draft. A warehouse receipt. Trade credit. that is. for a fee. Printed for Pol Mirafuentes Page 299 . The most costly combination of characteristics is a higher compensating balance and discount interest. C. the seller’s bank may. resulting in a further increase in the effective financing cost. Copyright 2006 Gleim Publications. [628] Gleim #: 5. A revolving credit agreement. Calls for immediate payment upon delivery of the shipping documents to the bank’s customer and acceptance of goods by the bank. Is a method of sales financing in which the bank retains title to the goods until the buyer has completed payment. Hence. Is a time draft payable on a specified date and guaranteed by the bank. A time draft (trade acceptance) is a form of commercial draft because it is drawn by a seller on the buyer. discount interest is deducted from the loan funds in advance. B. Inc. Answer (D) is incorrect because the description is of a conditional sales contract except that the seller. the buyer. which transmits the draft to the buyer. not the bank. If a seller is reluctant to ship goods because of concern about the buyer’s ability to pay a time draft. which is characteristic of a sight draft. Involves an invoice being signed by the banker upon receipt of goods.Source: CIA 596 IV-41 The credit instrument known as a banker’s acceptance A. and the effective cost is higher. This banker’s acceptance is an assumption of the obligation to pay at the due date. guarantee payment.

Source: CMA 1286 1-35 The following forms of short-term borrowing are available to a firm: Floating lien Factoring Revolving credit Chattel mortgages Bankers’ acceptances Lines of credit Commercial paper The forms of short-term borrowing that are unsecured credit are A. bankers’ acceptances. Factoring has been traditional in the textile industry for years. and recently companies in many industries have found it an efficient means of operation. Selling of accounts receivable by one company to another. [629] Gleim #: 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because commercial paper is a type of unsecured. The two major types of documents of title are bills of lading (issued by carriers) and warehouse receipts. These reductions in costs can more than offset the fee charged by the factor. It represents ownership of the goods and is ordinarily needed to obtain the goods from the bailee. Printed for Pol Mirafuentes Page 300 . Copyright 2006 Gleim Publications.. etc.18 -. Revolving credit. bankers’ acceptances. revolving credit.17 -. A document of title is usually issued by a bailee covering goods in the bailee’s possession or care (UCC 1-201). chattel mortgage. or trade credit. B.Source: CIA 590 IV-50 Factoring is the A. accounts receivable staff. The seller receives money immediately to reinvest in new inventories. usually with a bank. is the most common source of unsecured short-term financing. bankers’ acceptances. Factoring. D. Adjustment of inventories on financial statements for supplies that have become obsolete. short-term promissory note issued by large firms to other firms. chattel mortgage. and bad debts. plus a fee for collection. a public warehouse). Answer (D) is incorrect because accounts payable. insurance companies. chattel mortgage. Answer (C) is incorrect because factoring is a source of short-term funds through sale of receivables. Security for short-term inventory financing can be arranged if the debtor places its inventory under the control of the lender or its agent (e. Answer (A) is correct. Answer (B) is incorrect because factoring is a source of short-term funds through sale of receivables. that large firms often use. and commercial paper. Answer (C) is incorrect because a revolving credit agreement is a formal line of credit. Floating lien. and line of credit. [630] Gleim #: 5. D. and the lender holds the warehouse receipts. C. Answer (D) is incorrect because factoring is a source of short-term funds through sale of receivables. and line of credit. C. A company that uses a factor can eliminate its credit department. B. mutual funds. Floating lien. A warehouse receipt is issued by a person engaged in the business of storing goods for hire.g. Answer (B) is correct. line of credit. Selling of inventory by one company to another. Conversion of accounts receivable to bad debt on financial statements for accounts that are long overdue. and commercial paper. which can often operate more efficiently than its clients because of the specialized nature of its service. The financing cost is usually high: about 2 points or more above prime. A factor purchases a company’s accounts receivable and assumes the risk of collection. Inc.

Factoring is a form of financing in which receivables serve as security. or weighted average. bankers’ acceptances. Also. of all financing sources in their usual proportions. The benchmark cost of capital for these projects should be A. the composition of which may be constantly changing. A weighted average of the costs of all financing sources should be used. Also. When a firm achieves its optimal capital structure. The standard deviation of returns on the equity of the company rises. the weightedaverage cost of capital is minimized. C. Answer (B) is incorrect because the cost of capital is a composite. and commercial paper are all unsecured means of borrowing. Printed for Pol Mirafuentes Page 301 . the composition of which may be constantly changing. with the weights determined by the usual financing proportions. B. The terms of any financing raised at the time of initiating a particular project do not represent the cost of capital for the firm. a floating lien is secured by property.Source: CIA 597 IV-50 When a company increases its degree of financial leverage (DFL). B. The systematic risk of the company falls. The cost of equity financing. The equity beta of the company falls. a floating lien is secured by property. such as inventory. The after-tax cost of new-debt financing. A floating lien is also secured by property. A chattel mortgage is a loan secured by personal property (movable property such as equipment or livestock). of all financing sources in their usual proportions. D. a floating lien is secured by property. Copyright 2006 Gleim Publications. lines of credit. Factoring is a form of financing in which receivables serve as security. Factoring is a form of financing in which receivables serve as security. or weighted average. Factoring is a form of financing in which receivables serve as security. [631] Gleim #: 5. The cost of capital should also be calculated on an after-tax basis. An unsecured loan is a loan made by a bank based on credit information about the borrower and the ability of the borrower to repay the obligation. such as inventory. D. the composition of which may be constantly changing. [632] Gleim #: 5. but is made on the signature of the borrower. such as inventory. Unsecured credit is not backed by collateral. Answer (C) is incorrect because a chattel mortgage is a loan secured by personal property (movable property such as equipment or livestock). The cost of capital should also be calculated on an after-tax basis. The cost of capital should also be calculated on an after-tax basis. The weighted-average cost of capital. The systematic risk of the company rises.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a chattel mortgage is a loan secured by personal property (movable property such as equipment or livestock). Answer (B) is incorrect because a chattel mortgage is a loan secured by personal property (movable property such as equipment or livestock). such as inventory. or weighted average. Answer (D) is correct. The cost of capital is a composite. A. Answer (A) is incorrect because the cost of capital is a composite. of all financing sources in their usual proportions. of all financing sources in their usual proportions.20 -. Inc. The loan is not secured by collateral. The before-tax cost of new-debt financing.Source: CIA 597 IV-42 A company has made the decision to finance next year’s capital projects through debt rather than additional equity. Answer (D) is correct. Revolving credit. Answer (C) is incorrect because the cost of capital is a composite. or weighted average. the composition of which may be constantly changing. Also.19 -. The cost of capital should also be calculated on an after-tax basis. C.

Answer (D) is incorrect because 6. also known as market risk.0 Answer (A) is incorrect because 1. a firm had $50. the sooner retained earnings are exhausted and the company must seek external financing. Answer (B) is incorrect because the marginal cost of capital is higher. beta rises. [634] Gleim #: 5. Beta is a measure of the volatility of a firm’s share price relative to the average share.0 6. 1. A higher investment opportunity schedule. Answer (B) is correct. C. A higher marginal cost of capital. In other words. Answer (D) is correct. Answer (A) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because an increase in the DFL increases the riskiness of the firm’s shares.000 units × ($10 unit price – $4 unit variable cost)]. C. Answer (C) is incorrect because 2. then.0 uses the first-year sales level.22 -. Inc. The contribution margin is $150. Systematic risk is not specific to a company.21 -. is unrelated to the DFL. the variability of returns will increase.Source: CIA 597 IV-52 In its first year of operations. As a result. the result is a higher marginal cost of capital because lower-cost capital sources will be used up earlier.25 ignores variable costs.25 1. Answer (C) is incorrect because the existence of investment opportunities is unrelated to the dividend payout.50 [$150. also known as market risk. A lower investment opportunity schedule. It is the risk associated with a company’s shares that cannot be diversified because it arises from factors that affect all shares. Thus.000 FC)].000 of fixed operating costs. D. [633] Gleim #: 5.000 – $50. It sold 10. what will the degree of operating leverage (the extent to which fixed costs are used in the firm’s operations) be in the second year? A. Answer (B) is incorrect because systematic risk. The DOL may be calculated as the contribution margin (sales – variable cost) divided by the excess of the contribution margin over fixed costs. Printed for Pol Mirafuentes Page 302 . Answer (D) is incorrect because the existence of investment opportunities is unrelated to the dividend payout. Systematic risk is not specific to a company. B. it will have A. The higher the dividend-payout ratio. fixed interest charges and the riskiness of the firm rise. Assuming the same investments are undertaken. Hence. the DOL in the second year is 1.000 units at a $10 unit price and incurred variable costs of $4 per unit.Source: CIA 597 IV-53 If a company has a higher dividend-payout ratio. B.000 units. if all else is equal. is unrelated to the DFL. Answer (C) is incorrect because systematic risk.0 uses the first-year sales level and ignores variable costs. D.000 [25.000 CM ÷ ($150. When the DFL rises. A lower marginal cost of capital. If all prices and costs will be the same in the second year and sales are projected to rise to 25. The DFL equals the percentage change in EPS (earnings available to common shareholders) divided by the percentage change in net operating profit. the standard deviation of returns of the company rises. Copyright 2006 Gleim Publications. It is the risk associated with a company’s shares that cannot be diversified because it arises from factors that affect all shares.50 2.

if investors expect lower dividend growth. Investors have a lower required return on equity. Inc.24 -. it has greater fixed financing charges than company Y. [636] Gleim #: 5. Answer (B) is incorrect because the level of fixed financing charges does not affect operating income variability. B. the denominator is smaller. Company X has less operating earnings variability than company Y.25 -. Printed for Pol Mirafuentes Page 303 . Interest payments are fixed financing charges. Investors expect lower dividend growth. everything else equal. B.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [635] Gleim #: 5. D is the next dividend. Answer (D) is incorrect because the expected holding periods of investors are not related to the market value of the common shares. As a result of the increase in nominal interest rates. C. company X will be more risky and therefore will have a more volatile net income stream than company Y. D. financial leverage than company Y. Answer (A) is correct. P is the share’s price. if A. Thus. Investors have longer expected holding periods. but common share dividends are not. not less. The dividend growth model is used to calculate the cost of equity. Answer (B) is incorrect because. when investors have a lower required return on equity.23 -.Source: CIA 1196 IV-25 The market value of a firm’s outstanding common shares will be higher. As a result. the market value of common shares will decrease. company X and company Y. The equation is also used to determine the share price.Source: CIA 1196 IV-49 If two companies. Given that company X is more highly leveraged. Company X has more operating earnings variability than company Y. Company X has less financial leverage than company Y. Greater use of debt financing means that a company has greater financial leverage. Answer (D) is incorrect because company X has greater. which translates into a higher market value. The simplified formula is R is the required rate of return. and G is the growth rate in earnings per share. Company X has more net earnings variability than company Y. Answer (A) is correct. Answer (C) is incorrect because the level of fixed financing charges does not affect operating income variability. Investors have shorter expected holding periods. if other factors are constant. are alike in all respects except that company X employs more debt financing and less equity financing than company Y does. C. [637] Gleim #: 5. Answer (C) is incorrect because the expected holding periods of investors are not related to the market value of the common shares.Source: CIA 593 IV-49 Assume that nominal interest rates just increased substantially but that the expected future dividends for a company over the long run were not affected. D. which of the following statements is true? A. the company’s share price should Copyright 2006 Gleim Publications.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. The dividend growth model is used to calculate the price of a share. Dividends are expected to grow at a constant rate of 10%.26 -. which results in a lower share price. which results in a lower share price. Answer (A) is incorrect because a higher interest rate raises the required return of investors. If: P0 D1 RS G = = = = current price next dividend required rate of return EPS growth rate Assuming that D1 and G remain constant. Change. Printed for Pol Mirafuentes Page 304 . A higher interest rate raises the required return of investors. Stay constant. Answer (D) is incorrect because a higher interest rate raises the required return of investors.000 outstanding shares with a market value of $25 each. Answer (C) is incorrect because a higher interest rate raises the required return of investors. the cost of new equity financing is calculated by the following formula: Copyright 2006 Gleim Publications. [638] Gleim #: 5. which results in a lower share price. Inc. It just paid a $1 per share dividend. Answer (B) is correct. an increase in R S resulting from an increase in the nominal interest rate will cause P 0 to decrease. Decrease. Increase. which results in a lower share price.Source: CIA 594 IV-80 A company has 10. C. D. but in no obvious direction. B. If flotation costs are 5% of the selling price.

B. based on the net proceeds of the new issue. C. The calculation of the cost of new equity is as follows: Copyright 2006 Gleim Publications. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Answer (D) is correct. not market price. Answer (B) is incorrect because the end-of-period expected dividend should be included in calculating the dividend yield. Printed for Pol Mirafuentes Page 305 . to the expected dividend growth rate. and advertising. The expected dividend at the end of the period equals the dividend at time zero times one plus the expected dividend growth rate. should be included in calculating the dividend yield. printing. Net proceeds received by the firm when issuing one common share equals the market price of a share times one minus the flotation cost percentage. Flotation costs include items such as underwriting fees. Answer (A) is incorrect because the end-of-period expected dividend and the net proceeds of the issue should be included in calculating the dividend yield. Answer (C) is incorrect because the net proceeds. Inc. The cost of new equity is calculated by adding the expected dividend yield.

27 -. Answer (D) is incorrect because the marginal cost of debt financing is the interest rate on new debt minus the firm’s marginal tax rate multiplied by the interest rate.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [639] Gleim #: 5. or Kd(1 – T). Moreover. Moreover. Answer (B) is incorrect because the marginal cost of debt financing is the interest rate on new debt minus the firm’s marginal tax rate multiplied by the interest rate. Answer (C) is correct. not on the cost of outstanding debt. New Outstanding New Outstanding List B Firm’s marginal tax rate Firm’s marginal tax rate Interest rate times the firm’s marginal tax rate Interest rate times the firm’s marginal tax rate Answer (A) is incorrect because the marginal cost of debt financing is the interest rate on new debt minus the firm’s marginal tax rate multiplied by the interest rate. Moreover. B. Copyright 2006 Gleim Publications. the marginal or incremental cost of debt to the firm is based on the cost of newly issued debt. Moreover. the marginal or incremental cost of debt to the firm is based on the cost of newly issued debt. Inc. marginal cost equals the cost of new debt times one minus the marginal tax rate. The marginal cost of debt financing is the interest rate on new debt minus the firm’s marginal tax rate multiplied by the interest rate. The marginal cost of debt must equal the cost of new debt minus the tax savings. the marginal or incremental cost of debt to the firm is based on the cost of newly issued debt. This expression equals Kd – KdT.Source: CIA 594 IV-48 The marginal cost of debt for a firm is defined as the interest rate on <List A> debt minus the <List B>. C. not on the cost of outstanding debt. Hence. not on the cost of outstanding debt. the marginal or incremental cost of debt to the firm is based on the cost of newly issued debt. D. not on the cost of outstanding debt. Printed for Pol Mirafuentes Page 306 . List A A.

Projects are mutually exclusive if acceptance of one requires rejection of the other. Have the same net present value. The marginal cost of financing increases with the amount of new funds raised. Independence should be distinguished from mutual exclusivity. Such schedules can be drawn only for a set of projects that A. Answer (D) is correct. The steps of the schedule can be of varying lengths. An IOS schedule is drawn for a set of independent projects. B. The decision to be made is whether to accept or reject each project without regard to other investment opportunities. Have the same investment cost. Answer (C) is incorrect because IOS schedules do not require that all projects have the same NPV. C. how much money the company would invest at different rates of return. Each dollar of investment funds will be raised in these proportions (40 cents of debt and 60 cents of equity). Printed for Pol Mirafuentes Page 307 . Answer (B) is incorrect because IOS schedules cannot be drawn for mutually exclusive projects.Source: CIA 596 IV-48 (Refers to Fact Pattern #38) The investment opportunity schedule (IOS) shows. in rank order.) MCC = Marginal cost of capital IOS = Investment opportunity schedule 8% The company has a 40% debt and 60% equity capital structure. as follows: Interval 1 2 3 Amount Raised First $ 75 million Next $100 million Over $175 million Weighted-Average Cost of Capital 6% 10% 12% [640] Gleim #: 5. The NPV of each project depends on the investment cost and on the present value of the expected cash flows.28 -. the cash flows of one independent project are not influenced by those of another. Thus.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #38] A company has the following three investment projects available: Project A B C Cost $ 50 million $ 75 million $125 million Internal Rate of Return 14% 12% These investment opportunities and financing costs are shown in the graph below: (Refer to Figure CIA3_6_46. Both costs and cash flows can vary for projects on an IOS. Inc. Are independent. D. Answer (A) is incorrect because IOS schedules do not require that all projects have the same investment cost. Copyright 2006 Gleim Publications. Are mutually exclusive.

29 -. This intersection is at an MCC of 10% and an optimal capital budget of $125 million. [643] Gleim #: 5. [642] Gleim #: 5.30 -. The MCC is only 6% over this range of financing. The intersection of the IOS and MCC schedules determines the cost of capital and the optimal capital budget. B only A and B only A and C only C only List B 75 125 175 125 Answer (A) is incorrect because both A and B should be undertaken. bringing the optimal capital budget to $125 million. with a $75 million cost and a 12% IRR. The marginal cost of financing in this part of the schedule is 10%. Printed for Pol Mirafuentes Page 308 . B.31 -. the marginal cost of the next dollar of capital is 10%. Answer (B) is correct. Answer (B) is incorrect because 8% is the IRR of Project C. so Project B is also acceptable.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [641] Gleim #: 5. Answer (C) is incorrect because A is acceptable. However. 6% cannot be the discount rate. The highest ranked project is A. The marginal cost of capital and the appropriate discount rate to use in evaluating investment proposals for this company would be A. the MCC is 10%. When $125 million has been invested. The MCC is 10% for the first $50 million invested in this project and 12% for the remaining $75 million. It offers an IRR less than the marginal cost of financing the project. assume that the optimal capital budget for the company is $150 million. Answer (D) is incorrect because C is not acceptable. Answer (D) is incorrect because at an investment level of $150 million.Source: CIA 596 IV-49 (Refers to Fact Pattern #38) The company should invest in Project(s) <List A> and has an optimal capital budget of <List B> million dollars. Given that the optimal capital budget exceeds $75 million. if the optimal capital budget is assumed to be $150 million. but C is not. The next highest ranked project is B. the company is still in the second interval of the MCC schedule. C. D. Inc. B.Source: CIA 596 IV-50 (Refers to Fact Pattern #38) Without prejudice to your answer to any other question. List A A.Source: CMA 691 1-9 The most direct way to prepare a cash budget for a manufacturing firm is to include Copyright 2006 Gleim Publications. 6% 8% 10% 12% Answer (A) is incorrect because 6% applies only to the first $75 million of new financing. The company should begin with the project having the highest return and continue accepting projects as long as the IRR exceeds the MCC. C. with a $50 million cost and a 14% IRR. Answer (C) is correct. D. The appropriate discount rate (the cost of capital used in capital budgeting) theoretically is determined at the intersection of the IOS and MCC schedules. Project C is not acceptable because it has an 8% return.

what would be the net benefit to the company? Use 365 days per year. each averaging $20. goodwill amortization and depreciation.g.000 ($20. and goodwill amortization.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Projected net income. With the lockbox system. and net income. An average of 6 days is required for mailed checks to be received. $1. Projected sales and purchases. Printed for Pol Mirafuentes Page 309 . If DLF adopts the lockbox system. percentages of collections. Answer (B) is correct. C. [644] Gleim #: 5. has agreed to provide a lockbox system to CMC at a fixed fee of $50.125 $60.Source: Publisher DLF is a retail mail order firm that currently uses a central collection system that requires all checks to be sent to its Boston headquarters. its average cash balance will increase by A. a gain of $60. D.200. depreciation.000. Projected purchases. $59. A proposed lockbox system would reduce the mailing and processing time to 2 days and the check clearing time to 1 day.33 -. D. If CMC makes use of the lockbox system.000 $750. C. [645] Gleim #: 5..06) at a cost of $59.000 $600. estimated purchases and payment terms. In other words. DLF has an average daily collection of $150. collection percentages. D. e. Keystone National Bank.125 is the annual lockbox cost. If payments are collected 2 days earlier.Source: CMA Sample Q1-6 Cleveland Masks and Costumes.000 per year and a variable fee of $0.000 Copyright 2006 Gleim Publications. Answer (D) is correct. Inc.000. goodwill amortization and depreciation. percentages of purchases paid.g. and other cash receipts and disbursements. A. credit terms.000 is the annual savings without regard to costs. Answer (C) is incorrect because collection percentages must be considered. and net income includes noncash elements. a major west coast bank. Projected sales. The most direct way of preparing a cash budget requires incorporation of sales projections and credit terms..000 $450. and terms of payments.000 is the annual fixed fee. 3 days for DLF to process them. the company can earn $120. CMC receives 50 payments per day. B.000 $120.000 × 50 payments per day × 2 days × .875.50)].875 $50. e. (CMC) has a majority of its customers located in the states of California and Nevada. the company’s collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. Answer (A) is incorrect because net income includes noncash elements.32 -. C. B. and 2 days for the checks to clear through its bank. Inc. On average.125 [$50. preparation of the cash budget requires consideration of both inflows and outflows. B. and net income.50 for each payment processed by the bank. Answer (D) is incorrect because $120.000 + (50 payments × 365 days × $. Answer (B) is incorrect because net income includes noncash elements. Answer (C) is incorrect because $50.000 Answer (A) is incorrect because $59.

Printed for Pol Mirafuentes Page 310 .000 represents only a 4-day savings.000 per day). Answer (B) is incorrect because the company enjoys one day’s net float because its checks clear more slowly than its deposits. C. the $250. or $500. If that period were reduced to 3 days. The company’s checking account earns interest at an annual rate of 2%.000) $50.000 of expense results in net interest expense of $14. B. Answer (C) is incorrect because the net float is positive.000 $0 $(10. The float period is the time between when a check is written and when it clears the payor’s checking account. Answer (D) is incorrect because the lockbox system will result in an additional 8 days of savings. the company is required to maintain a compensating balance of $50.000 Answer (A) is correct.000 per year. Check float results in an interest-free loan to the payor because of the delay between payment by check and its deduction from the bank account. the company maintains a balance of $25.34 -.00% 5. Subtracting the $500 interest earned from the $15.000 in funds. D.8% fails to consider the compensating balance requirement.000 of the loan usable. not 5.000 at an annual interest rate of 6%.500 by $225. What is the effective interest rate of the loan? A.000 in its checking account.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct.000 incremental balance. The company can write checks (up to $10.35 -. Ordinarily. and only 4 days for the deposits to clear. At 6% interest. Inc. B. leaving $225. the net float equals one day’s receipts. Copyright 2006 Gleim Publications. and 2 for clearing).44%. Answer (B) is incorrect because 7. Answer (C) is incorrect because 5. The company will have free use of the money for one day.80% 6.44% 7.000 balance for transaction purposes. In this case. DLF’s cash balance would increase by $1. The $50.000 (8 days × $150.000.66% fails to consider the interest earned on the incremental balance being carried. [646] Gleim #: 5. 3 for processing. This is partially offset by the 2% interest earned on the $25. only $25.500 for the use of $225.Source: CMA 694 1-24 Assume that each day a company writes and receives checks totaling $10.66% Answer (A) is correct. 6.Source: CMA 696 1-11 A company obtained a short-term bank loan of $250. [647] Gleim #: 5.000) even when it has no money because the checks do not clear until a day after deposits clear. Thus. Answer (D) is incorrect because 6.000 loan would require an interest payment of $15.000 produces an effective interest rate of 6. the amount is $10. Checks are currently tied up for 11 days (6 for mailing. As a condition of the loan. Answer (D) is incorrect because the net float represents the difference between when deposits clear and when disbursements clear. what is the float? A. D. not 3. C.200. Answer (C) is incorrect because $600. If it takes 5 days for the checks to clear and be deducted from the company’s account. Dividing $14. Answer (B) is incorrect because the decrease is 8 days.00% fails to consider that the $25.000 in its checking account for transaction purposes.000.000 of the loan will not be available for current use. If checks written require one more day to clear than checks received. $10.000 compensating balance requirement is partially satisfied by the company’s practice of maintaining a $25.000 currently being maintained counts toward the compensating balance requirement.

000 – $24. Have a secondary market for investors. Because collections will be accelerated by 3 days at a rate of $300.000 per year. a corporate treasurer is primarily concerned with A.000 to invest.36 -.000 per month) for its services. Answer (B) is incorrect because negotiable CDs are regulated.000 ignores the $24. A negotiable CD can be traded.Source: Publisher A firm has daily cash receipts of $300. A bank has offered to provide a lockbox service that will reduce the collection time by 3 days.000 $30. Are usually sold in denominations of a minimum of $100.. [650] Gleim #: 5. B. Thus. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [648] Gleim #: 5.000. Are regulated by the Federal Reserve System. A certificate of deposit (CD) is a form of savings deposit that cannot be withdrawn before maturity without incurring a high penalty. C.000 Answer (A) is incorrect because $(24. Answer (D) is incorrect because $54. Have yields considerably greater than bankers’ acceptances and commercial paper. Answer (C) is incorrect because negotiable CDs are typically issued in a denomination of $100.000) ignores the additional interest revenue from investing the increased funds.000 $54.e.000 for providing this service. D.000). The bank requires a monthly fee of $2. At a rate of 6%. C. the interest earned will be $54. Answer (C) is correct.000. the firm will increase its income by $30. If money market rates are expected to average 6% during the year. B. However.000.000 (12 months × $2. B.000) $12. Answer (B) is incorrect because $12. their yield is less than that of commercial paper and bankers’ acceptances because they are less risky.000 ($54. Printed for Pol Mirafuentes Page 311 . Copyright 2006 Gleim Publications. the company will have an additional $900.38 -. Inc. Minimizing taxes. the bank will charge $24. [649] Gleim #: 5. However. Investing in Treasury bonds since they have no default risk. $(24. D. CDs usually have a fairly high rate of return compared with other savings instruments because they are for fixed. Liquidity and safety. C. they are negotiable). Maximizing rate of return.Source: CMA 691 1-12 Which one of the following is not a characteristic of a negotiable certificate of deposit? Negotiable certificates of deposit A. Answer (D) is correct.37 -.000 bank service charge. Answer (A) is incorrect because negotiable CDs do have a secondary market (i.Source: CMA 1295 1-12 When managing cash and short-term investments.000 per day. the additional annual income (loss) of using the lockbox service is A. usually long-term periods.000 is based on 2 days of accelerated inflows rather than 3.

Answer (B) is incorrect because the holding of cash and cash-like assets is not a major factor in controlling taxes. and the interest rate charged for holding $980 an additional 20 days (30 – 10) is 2. These assets are not held for purposes of achieving investment returns. Therefore. B. respectively. Because the number of 20-day periods in a year is 18 (360/20). An analysis to compare these two proposals for the change in credit policy would include all of the following factors except the A.000 15% Currently. a retail store.. Cash and short-term investments are crucial to a firm’s continuing success. if the credit policy at Ryan’s were changed. Bank loan covenants on days’ sales outstanding. what is the annual cost of credit if the cash discount is not taken and Garo pays net 30? A. liquid assets are subject to significant control risk.7% (18 × 2. Printed for Pol Mirafuentes Page 312 . Thus. not 30 days. Copyright 2006 Gleim Publications. [651] Gleim #: 5. C. C.Source: CMA 697 1-8 Garo Company. Answer (C) is incorrect because investments in Treasury bonds do not have sufficient liquidity to serve as short-term assets.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because most companies are not in business to earn high returns on liquid assets (i. not 30 days.000 20% 5% $75. an immediate payment of $980 would save the company $20. the company could save $20 by paying within the discount period. B.40 -. net 30.Source: CMA 697 1-14 The sales manager at Ryan Company feels confident that.000 20% 5% $90.000 15% Proposal B $600. they are held to facilitate operations). Answer (D) is correct. The proposed payment terms for Proposal A and Proposal B are net 45 and net 90. D.0% calculates the interest rate based on the full invoice price. The two credit proposals being considered are as follows: Proposal A Increase in sales Contribution margin Bad debt percentage Increase in operating profits Desired return on sales $500. the annual rate is 36.39 -. Cash and short-term investments are held because of their ability to facilitate routine operations of the company. the company would utilize excess capacity.5% 36.0% 24. is considering foregoing sales discounts in order to delay using its cash. liquidity and safety are the primary concerns of the treasurer when dealing with highly liquid assets. Cost of funds for Ryan.e.04%). 24.7% Answer (A) is incorrect because the length of the extra credit period is 20 days. Sufficient liquidity must be available to meet payments as they come due. Current bad debt experience. Supplier credit terms are 2/10. On a $1. Impact on the current customer base of extending terms to only certain customers. sales would increase and.04% ($20/$980). Assuming a 360-day year. Answer (D) is correct.0% 36. [652] Gleim #: 5. At the same time. D. payment terms are net 30.000 invoice. Inc. Answer (B) is incorrect because the length of the extra credit period is 20 days. consequently. Answer (C) is incorrect because 36.

Answer (B) is correct. Answer (A) is incorrect because $36. a firm that allows terms of 2/15.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the cost of funds is an obvious element in the analysis of any investment. the average amount of daily sales must be $75.000.Source: CMA 1295 1-4 The average collection period for a firm measures the number of days A. including the periods both before and after the end of the normal credit period. net 30. D.000 ÷ 360 days). Ryan’s ability to increase receivables and possible bad debt losses may be limited.000. [654] Gleim #: 5. Answer (C) is incorrect because the impact on the current customer base of extending terms to only certain customers is relevant.42 -. Ryan must estimate the expected bad debt losses under each new policy. Answer (A) is correct. $180. For example.Source: CMA 1292 1-20 Best Computers believes that its collection costs could be reduced through modification of collection procedures. Inc.000.000. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days. Answer (D) is incorrect because it describes the normal credit period.000 of capital invested in receivables. The average collection period measures the number of days between the date of sale and the date of collection. Answer (C) is incorrect because $36. $30.000 per year to justify the change in procedures. the company must save at least $36. Answer (B) is incorrect because $36. Given sales of $27.000. Before a typical account becomes delinquent.000. Printed for Pol Mirafuentes Page 313 . B. After a typical credit sale is made until the firm receives the payment. should have an average collection period of somewhere between 15 and 30 days. Answer (D) is incorrect because existing loan agreements may require Ryan to maintain certain ratios at stated levels. are not relevant. Beyond the end of the credit period before a typical customer payment is received.000 ($27.41 -. With an additional $450.000 per year (8% × $450.000 is the minimum savings required. The company’s budgeted credit sales for the coming year are $27. It should be related to a firm’s credit terms. $36. Answer (D) is correct. Thus. Answer (C) is incorrect because the average collection period includes the total time before a payment is received. For a typical check to “clear” through the banking system. [653] Gleim #: 5. The increased accounts receivable balance is therefore $450. there will be no change in uncollectible accounts. $360.000). such as the current bad debt experience.000. Thus. Answer (B) is incorrect because it describes the concept of float.000). B.000 is the minimum savings required.000. C. however. The current customers may demand the same terms.000.000 (6 days × $75. Copyright 2006 Gleim Publications. and short-term interest rates are expected to average 8%. D. All factors should be considered that differ between the two policies.000 is the minimum savings required. the minimum savings in collection costs (using a 360-day year) for the coming year would have to be A. To make the changes in collection procedures cost beneficial. C. the company’s interest cost will increase by $36. Factors that do not differ.

B. on an average. 30 days of sales are outstanding. However. This calculation requires a new estimate of beta to be used in the Capital Asset Pricing Model. $4.Source: Publisher A common mistake in valuing the firm to be acquired in a business combination is A.000 in sales per day and is paid. The rate therefore should not be the cost of capital of the acquiring firm but rather the cost of equity of the combined firm after the combination. Printed for Pol Mirafuentes Page 314 .000 $54. the discount rate used should be the cost of equity capital. and customers pay in 30 days. [657] Gleim #: 5. Purchasing a put option on that stock. C. or $120. Answer (D) is incorrect because $54. collection requires 30 days. B. [656] Gleim #: 5. D. Whether customers pay by credit card or cash. If the net incremental cash flows to the acquiring firm’s shareholders are to be valued. Answer (A) is incorrect because market values is an essential element of the valuation.Source: CIA 590 IV-57 A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. If sales are $4. this rate should reflect the risk associated with the use of funds rather than their source. within 30 days of the sale. Selling a put option on that stock. After they receive their invoice.000 $120. Moreover.000 is based on the 45% of collections via credit card.43 -. 55% of the customers pay by check. Including incremental cash flows in the valuation. Obtaining a warrant option on that stock. Approximately how much would the company show in accounts receivable on its balance sheet on any given date? A.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [655] Gleim #: 5. Answer (B) is correct.000 Answer (A) is incorrect because $4.000 $48. Using the acquiring firm’s discount rate when valuing the incremental cash flows. Purchasing a call option on that stock.000 is only one day’s sales. it is somewhat concerned that the market price of this stock could decrease over the short run.000 per day. Including all related transaction costs associated with an acquisition. Answer (C) is incorrect because invoices are outstanding for 30 days. D. C.Source: CMA 1294 1-22 A firm averages $4. Answer (C) is correct. B.45 -.44 -. not 12 days. Copyright 2006 Gleim Publications. Inc. while the remaining 45% pay by credit card. D. C. Answer (D) is incorrect because transaction costs is an essential element of the valuation.000. The company could hedge against the possible decline in the stock’s market price by A. Answer (B) is incorrect because incremental cash flow is an essential element of the valuation. Using market values in the valuation.

B. Answer (A) is incorrect because an out-of-the-money option may not have expired. valuable given less time to maturity.” Answer (C) is incorrect because the option does exist. If the market price falls. D. C. [659] Gleim #: 5. Time to maturity on the option. The option has become a put option. Answer (B) is correct. The option no longer exists. Printed for Pol Mirafuentes Page 315 . When the option has less time to maturity. The exercise price is the price at which the call holder has the right to purchase the underlying share.Source: Publisher If a call option is “out-of-the-money. minus the cost of the option. Answer (D) is incorrect because a call option is less. the chance that the share price will rise is smaller. Answer (C) is incorrect because a call option is less. the put option may allow the sale of stock at a price above market. valuable. not more. When the value of the asset underlying a call option is less than the exercise price of the option. The value of the underlying asset is less than the exercise price. [658] Gleim #: 5.Source: Publisher The type of option that does not have the backing of stock is called a(n) Copyright 2006 Gleim Publications. not more. the call option is less. the more valuable the call option. commissions. and the profit of the option holder will be the difference between the price stated in the put option and the market price. B.Source: CIA 1196 IV-58 A call option on a common share is more valuable when there is a lower A. the option is “out-of-money. and taxes.46 -. If the underlying share has a lower market value. C. Answer (B) is correct. Answer (D) is incorrect because a warrant gives the holder a right to purchase stock from the issuer at a given price (it is usually distributed along with debt). Answer (B) is correct. The option has expired. Less variability means a lower probability of a price increase. not more. Variability of market price on the underlying share. Answer (A) is incorrect because a call option is the right to purchase a common share at a set price for a set time period.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because a call option is the right to purchase shares at a given price within a specified period. The company that issues the stock has nothing to do with put (and call) options.” A. valuable if the price of the underlying share is less variable.47 -. Exercise price on the option. [660] Gleim #: 5. Answer (D) is incorrect because call options do not change into put options. The lower the exercise price. D. Inc. Market value of the underlying share.48 -. Answer (C) is incorrect because selling a put option could force the company to purchase additional stock if the option is exercised. A put option is the right to sell stock at a given price within a certain period. it is just not worth exercising.

[661] Gleim #: 5. Unsecured option. Speculation involves the assumption of risk in the hope of gaining from price movements. Foreign option. Answer (A) is incorrect because a covered option is one that is written against stock held in the option writer’s portfolio. Increased risk regardless of motive.Source: Publisher A contractual arrangement that gives the owner the right to buy or sell an asset at a fixed price at any moment in time before or on a specified date is a(n) A. Answer (D) is incorrect because speculating increases risk while hedging offsets risk. Answer (A) is incorrect because hedging decreases risk by using offsetting commitments that avoid the impact of adverse price movements. Naked option. A futures contract is entered into as either a speculation or a hedge. D. B. Answer (B) is incorrect because a foreign option is a nonsense term. C. D. B. Unlike stocks and bonds. Inc. Future option. C. C. Answer (C) is correct. American option. Answer (A) is incorrect because a European option is exercisable only at the expiration date. B. An American option is a contractual arrangement that gives the owner the right to buy or sell an asset at a fixed price at any moment in time before or on a specified date. Answer (D) is incorrect because a put option is an option that gives the owner the right to sell the underlying asset for a fixed price. D. Offset risk when speculating and increased risk when hedging. Covered option. including options and futures. European option. Offset risk when hedging and increased risk when speculating. Put option. the option writer will have to purchase the underlying stock if the call option is exercised. they are not claims on business assets. [662] Gleim #: 5. Answer (B) is incorrect because speculation involves the assumption of risk in the hope of gaining from price movements. Printed for Pol Mirafuentes Page 316 .50 -. Copyright 2006 Gleim Publications. Thus. Decreased risk regardless of motive. Answer (D) is correct.49 -. A naked or uncovered option is a call option that does not have the backing of stock. Derivatives. are contracts between the parties who contract.Source: Publisher The use of derivatives to either hedge or speculate results in A. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements. Answer (C) is correct. Answer (C) is incorrect because although an option can be exercised in the future.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. it is not called a future option. Answer (B) is incorrect because an unsecured option is a nonsense term.

S. Interest rate futures contracts involve risk-free bonds. Answer (A) is incorrect because the value of the forward contract will increase when interest rates decrease. Answer (C) is incorrect because the value of the forward contract will not remain constant if interest rates decline. not sell futures. A short hedge.S.000 bushels of wheat in 3 months. Accordingly. The automobile company wants to protect itself against price increases. the value of the bonds and the forward contract increase. Based on its forecasted need to purchase 300.52 -. Agreed to cosign the note of its 100%-owned subsidiary to protect the lender from the possibility that the subsidiary might default on the loan. Answer (B) is correct. C. Treasury bonds in 6 months and.53 -. Remained constant. A change in prices can be minimized or avoided by hedging. Purchased a term life insurance policy on the company’s chief executive officer to protect the company from the effects of an untimely demise of this officer. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements. [664] Gleim #: 5. Answer (C) is incorrect because the automobile company needs to purchase futures in order to protect itself from loss. Selling futures to protect the company from loss. such as U. during those 6 months. Increased.000 shares of common stock of a public corporation based on the assumption that the stock will increase in value. which is used for avoiding price declines. D. Answer (A) is incorrect because a short hedge is a futures contract that is sold to protect against price declines. Copyright 2006 Gleim Publications.Source: Publisher An automobile company that uses the futures market to set the price of steel to protect a profit against price increases is an example of A. The automobile company wishes to protect itself against price increases. depending on the extent of the decline in interest rates. Any of the answers may be correct. Selling futures to protect against price declines. B. Answer (D) is incorrect because any decline in interest rates increases the value of the bonds. Answer (B) is correct.Source: Publisher Herbert Corporation was a party to the following transactions during November and December 2002. Inc.000 bushels of wheat to protect itself from changes in wheat prices during the period. which is a futures contract that is purchased to protect against price increases. C. The automobile company desires to stabilize the price of steel so that its cost to the company will not rise and cut into profits. Decreased. D. Treasury bonds.Source: Publisher If a corporation holds a forward contract for the delivery of U. [665] Gleim #: 5. Which of these transactions is most likely to be defined as a derivative? A. the automobile company uses the futures market to create a long hedge. A long hedge. Printed for Pol Mirafuentes Page 317 . Selling futures protects against price declines. entered into a 3-month forward contract to purchase 300. D.51 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [663] Gleim #: 5. Purchased 1. When interest rates decrease over the period of a forward contract. C. interest rates decline. B. Answer (D) is incorrect because it is the definition of a short hedge. at the end of the 6 months the value of the forward contract will have A. B.

Answer (B) is correct. The gains attributable to the increase in the fair value of the derivative that should be recognized in 2004 and 2005 earnings. It is reclassified into earnings when the forecasted transaction affects earnings. The notional amount of the derivative contract is 300.000 bushels. Answer (B) is incorrect because insuring the CEO’s life is a transaction based on identifiable events. foreign exchange rate.000 $0 2005 $25. a calendar-year-end firm. and the settlement date of the derivative is February 1. Copyright 2006 Gleim Publications. not underlyings. the $55. The fair value of the derivative contract had increased by an additional $25. A derivative is a financial instrument or other contract that (1) has (a) one or more underlyings and (b) one or more notional amounts or payment provisions. the $30. and (3) requires or permits net settlement.000 reclassified from other comprehensive income and the $25. Thus. Settlement of a derivative is based on the interaction of the notional amount and the underlying.000 on February 1. The accounting treatment of gains and losses arising from changes in fair value of a derivative designated as a cash flow hedge varies for the effective and ineffective portions. A cash flow hedge is a hedge of an exposure to variability in the cash flows of a recognized asset or liability or a forecasted transaction. 2004 increased by $30. An underlying may be a specified interest rate. also an amount equal to the decrease in the fair value of the wheat. Printed for Pol Mirafuentes Page 318 . Lombardi Company. $30.000 gain attributable to the increase in fair value in 2005. 2004. the wheat was sold and the derivative contract was settled. entered into a derivative contract designed to hedge the risk of cash flows associated with the forecast future sale of 300.000 $0 $55. The effective portion initially is reported as other comprehensive income.54 -. the $55.000 gain in 2004 is recognized as other comprehensive income in 2004. or both. shares. an amount equal to the decrease in the fair value of the wheat. It is reclassified and included in earnings in 2005. [666] Gleim #: 5. bushels. Given that the hedge was fully effective. B. 2005. Answer (C) is incorrect because given that the hedge was fully effective. pounds. The purchase of the forward contract as a hedge of a forecasted need to purchase wheat meets the criteria above. (2) requires either no initial net investment or an immaterial net investment.Source: Publisher On December 1. C. A notional amount is a number of currency units. the underlying is the price of the same variety and grade of wheat that Lombardi expects to sell. security price. index of prices or rates. the $55. respectively.000 gain should be recognized in the period in which the forecasted transaction affects earnings. Given that the sale occurred in 2005. The fair value of the derivative contract on December 31.000 bushels of wheat. 2005 earnings include the $30. commodity price. This hedge has no ineffective portion. 2005. or other variable. Inc.000 gain should be recognized in the period in which the forecasted transaction affects earnings.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because it involves a net investment equal to the fair value of the stock.000 $55.000 gain should be recognized in the period in which the forecasted transaction affects earnings.000. D. Answer (C) is incorrect because cosigning a subsidiary’s note is a transaction based on identifiable events. The ineffective portion is immediately included in earnings.000 gain should be recognized in the period in which the forecasted transaction affects earnings. Answer (D) is incorrect because given that the hedge was fully effective. or other units specified.000 $0 $0 Answer (A) is incorrect because given that the hedge was fully effective. not underlyings. Answer (D) is correct. 2005. The anticipated sales date is February 1. 2005. On February 1. the $55. are 2004 A.

000) (51. Forecast Corporation enters into a qualifying cash flow hedge of a transaction it expects to occur at the beginning of period 4. The effective portion of a cash flow hedge of a forecasted transaction is included in OCI until periods in which the forecasted transaction affects earnings. The increase in fair value of the derivative exceeds the decrease in PV of the cash flows by $2.000 in earnings for period 2. at the end of period 2.000 Period 1 2 3 Change in Fair Value of the Derivative $50. The entity has favorable profitability. Answer (B) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [667] Gleim #: 5. C.000 + $47.000). D.000) 80. B.000 credit in period 1).55 -. debit earnings for $2. the net change in the hedging derivative’s fair value is $16. and earnings is credited for $2. What conclusion can a financial analyst draw from this? A. [668] Gleim #: 5.000.000. Report a balance in other comprehensive income (OCI) of $16.000 ($50. the hedge is effective at the end of period 3 to the extent it offsets $16.000 ($50. Thus. Copyright 2006 Gleim Publications. Recognize a loss of $2. and the change in the PV of the expected cash flows on the forecasted transaction is $-19.000 – $81. The following information about the periodic changes hedging relationship is available: Change in PV of Expected Cash Flows from the Forecasted Transactions $(48. OCI is credited for $48.000 at the end of period 3. Printed for Pol Mirafuentes Page 319 .000 – $48.000 + $47. C. The entity may be undercapitalized.000 of the net $19.000). Record other comprehensive income of $97.000 decrease in the cash flows of the forecasted transaction that are expected to occur in period 4.Source: Publisher At the beginning of period 1.Source: CIA 597 IV-24 An entity has a high fixed-assets turnover ratio.000.000 – $48. OCI should have a credit balance of $97.000 47.000. Answer (A) is incorrect because Forecast should recognize earnings for period 1 of $2. Answer (C) is incorrect because the entry for period 2 is to debit the derivative for $47. Inc.000 for period 2. Forecast assesses hedge effectiveness by comparing the change in present value (PV) of the expected cash flows associated with the forecasted transaction with all of the hedging derivative’s gain or loss (change in fair value). The derivative is adjusted to fair value by a $50.56 -.000 ($80.000. Answer (D) is incorrect because. The change in those cash flows that occurs for any reason has been designated as the hedged risk.000 (the extent of the hedge’s effectiveness). Recognize a gain of $47. B. D. At the end of period 3. and credit OCI for $49. The entity may be overcapitalized.000 – $51.000) Given that the hedge is effective to the extent it offsets the change in the present value of the expected cash flows on the forecasted transaction. Forecast should A. The entity may have a problem with employees converting inventory to personal use.000.000 debit.000 (81.000 in earnings for period 1.

[670] Gleim #: 5. The day’s sales outstanding. Answer (B) is incorrect because fluctuations in inventory do not affect fixed-assets turnover. B. the current ratio. The cash conversion cycle. It measures the efficiency of asset management. It measures the extent to which operating profit can decline before the entity is unable to meet its annual interest cost.59 -. This process typically occurs before the receivables collection period. it is also called the receivables collection period. or that it uses fixed assets efficiently. Answer (A) is correct.. Answer (D) is incorrect because the fixed-assets turnover ratio is not a profitability indicator. The inventory conversion period.Source: CIA 597 IV-31 The times-interest-earned ratio is primarily an indication of A. Asset management. Answer (C) is correct. Answer (A) is incorrect because the inventory conversion period (days of inventory) is the average time required to convert materials into finished goods and then to sell them. Answer (D) is incorrect because the inventory divided by the sales per day is the inventory conversion period (days of inventory). minus the payables deferral period (average time between resource purchases and payment of cash for them). e. The inventory divided by average daily sales. Answer (D) is incorrect because profitability ratios measure operating results. Printed for Pol Mirafuentes Page 320 . and the amount of time in one period does not necessarily bear any relationship to the other. that is. Inc. Answer (B) is incorrect because liquidity ratios. B.58 -. A high ratio indicates either that the entity is undercapitalized.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the ratio may indicate undercapitalization. Thus.57 -. [669] Gleim #: 5. D. The day’s sales outstanding (days of receivables) may be stated as the accounts receivable balance divided by average credit sales per day or as days in the year divided by the receivables turnover. The times-interest-earned ratio equals net profit before taxes and interest divided by interest. plus the receivables collection period. indicate the relationship of current assets to current liabilities. Answer (C) is correct.Source: CIA 597 IV-35 Which of the following is true about the impact of price inflation on financial ratio analysis? Copyright 2006 Gleim Publications. Thus. It is the average time required to convert the entity’s receivables into cash. [671] Gleim #: 5. D.Source: CIA 597 IV-27 An entity’s receivables collection period is equal to A. Profitability. The fixed-assets turnover ratio equals net sales divided by net fixed assets. C. It estimates the time between when the entity makes payments and when it receives cash inflows. Liquidity.g. it is a measure of debt-paying capacity (solvency). Answer (C) is incorrect because asset management ratios indicate how effectively the entity is using its assets. Answer (B) is incorrect because the cash conversion cycle equals the inventory conversion period. C. it cannot afford to buy enough fixed assets. Solvency.

the total assets turnover equals sales divided by total assets. Answer (B) is incorrect because inflation affects any financial ratio analysis involving comparisons of prior-period with current-period monetary amounts. historical cost amounts for different periods are measured in units representing different levels of purchasing power. Inflation therefore impairs the comparability of financial statement items. total assets turnover. Inflation affects financial ratio analysis for one entity over time. the return on assets is multiplied by the leverage factor. C. and net profit margin. Answer (A) is incorrect because the market-to-carrying-amount ratio and the total-debt-to-total-assets ratio do not provide any information about net profit available to shareholders. Inflation has no impact on financial ratio analysis. as well as comparative analysis of entities of different ages. D.61 -. and profits. Price-to-earnings ratio. This result is obtained because the total assets and sales factors cancel in the multiplication of the three ratios. [673] Gleim #: 5. inventory costs. whether for the same entity over time or for entities of differing ages. B. D. Printed for Pol Mirafuentes Page 321 . Net profit is also distorted because of inflation’s impact on depreciation expense and inventory costs.9% What conclusion could a financial analyst validly draw from these ratios? Copyright 2006 Gleim Publications. The extended Du Pont equation gives the return on common equity. Answer (C) is correct. and the product of these two ratios is the return on assets. In the extended Du Pont equation. earnings per share. Answer (D) is incorrect because inflation affects any financial ratio analysis involving comparisons of prior-period with current-period monetary amounts. depreciation charges. Answer (C) is incorrect because the price-to-earnings ratio and the return-on-assets ratio do not provide information about the carrying amount of common equity. Inflation is the diminution over time of the purchasing power of money. B. also called the equity multiplier (total assets ÷ common equity at carrying amount).2% Industry Average 9. Inflation affects comparative analysis of entities of different ages but not financial ratio analysis for one entity over time. Answer (B) is incorrect because the price-to-earnings ratio.2% 12.60 -. and equity multiplier. This result is the basic Du Pont equation. Net profit margin. Inflation affects financial ratio analysis for one entity over time but not comparative analysis of entities of different ages. Because balance sheet amounts are expressed in terms of money. The net profit margin equals the net profit available to common shareholders divided by sales.Source: CIA 597 IV-37 An investor has been given several financial ratios for an entity but none of the financial reports. Price-to-earnings ratio and return-on-assets ratio.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Answer (D) is correct. and the net profit margin do not provide information about the carrying amount of common equity. [672] Gleim #: 5. Which combination of ratios can be used to derive return on equity? A. Inc. C. Answer (A) is incorrect because inflation badly distorts balance sheets. EPS.Source: CIA 597 IV-38 The following ratios relate to an entity’s financial situation compared with that of its industry: The Company Return on Assets (ROA) Return on Equity (ROE) 7. Market-to-book-value ratio and total-debt-to-total-assets ratio.9% 15.

D. The entity’s profits are increasing over time. C.9% ROA). Answer (D) is incorrect because share valuation is a response to many factors. Copyright 2006 Gleim Publications. Inc.92 (15. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. and the industry average is 1. The entity uses more debt than does the average entity in the industry. greater use of debt increases the equity multiplier and the return on equity. Answer (C) is incorrect because the debt-to-assets ratio will be higher and the current ratio will be lower. Answer (B) is correct. the equity multiplier is 1. and the current ratio will be lower because cash is lower. The use of financial leverage has a multiplier effect on the return on assets.62 -.2% ROE ÷ 7. It will have less cash and less total assets than a comparable entity with a lower payout ratio. Printed for Pol Mirafuentes Page 322 .Source: CIA 1196 IV-53 All else being equal. Answer (B) is correct.40 (12. also called the equity multiplier (total assets ÷ common equity). leading to higher profitability.9% ROE ÷ 9. Higher Higher Lower Lower List B Higher Lower Higher Lower Answer (A) is incorrect because the current ratio will be lower. In this example. An entity with a higher dividend-payout ratio is distributing more of its earnings as dividends to common shareholders. The extended Du Pont formula illustrates this point by showing that the return on equity equals the return on assets times the leverage factor. [674] Gleim #: 5. D. The higher-than-average return on equity does not mean that the entity has a more favorable market-to-carrying-amount ratio. Thus. not over time. The higher equity multiplier indicates that the entity uses more debt than the industry average. The debt-to-assets ratio will be higher because total assets are lower. B. The entity’s product has a high market share.2% ROA). Answer (A) is incorrect because the question gave no information about market share. B. The entity’s shares have a higher market value to carrying amount than does the rest of the industry. List A A. Answer (C) is incorrect because this comparison is with an industry average. an entity with a higher dividend-payout ratio will have a <List A> debt-to-assets ratio and a <List B> current ratio. Answer (D) is incorrect because the debt-to-assets ratio will be higher.

08 includes prepaid expenses in the quick assets and excludes income taxes payable in the current liabilities. Answer (B) is incorrect because 1. Quick assets total 206.42 excludes the income taxes payable from the current liabilities.500 50.building Accumulated depreciation -.000 net accounts receivable).500 150.000 298.000 403. Inc.97 0.000 income taxes payable + 22.42 1.82 Answer (A) is incorrect because 1. Printed for Pol Mirafuentes Page 323 .000 752.63 -. Copyright 2006 Gleim Publications.08 0. Answer (C) is correct.500 The quick ratio for this year is A.000 115. Accounts payable Accounts receivable (net) Accumulated depreciation -.000 70.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [675] Gleim #: 5.82 includes deferred income taxes payable in the current liabilities.500 ÷ 213.500).000 37.500 other current liabilities). the quick ratio is 0.500 cash + 64.500 (67. Given current liabilities of 213.000 64. financial assets held for trading.967 (206.000 accounts payable + 54.000 54.Source: CIA 1193 IV-46 The following account balances represent the December 31 balance sheet of an entity. C.500 27. 1.500 136.500 (27.equipment Cash Common shares (10 par value) Deferred income taxes payable (expected to reverse more than one year from now) Equipment Income taxes payable Inventory Land and building Long-term notes payable Financial assets held for trading Notes payable within 1 year Other current liabilities Share premium Prepaid expenses Retained earnings 67. Answer (D) is incorrect because 0. D.000 22.000 123. The acid test (quick) ratio equals quick assets (cash. and accounts receivable) divided by current liabilities.000 current notes payable + 70.000 financial assets held for trading + 115.000 27.000 257.500 100. B.

C.65 -. Answer (B) is incorrect because 28. 31 retained earnings 3. 21. 19. 1 retained earnings Minus dividends Dec. D.6% is the ratio of dividends paid to the sum of beginning retained earnings and net profit.Source: CIA 596 IV-36 (Refers to Fact Pattern #39) The entity has a dividend-payout ratio of A.6% 40.0% is the ratio of dividends paid to the December 31 retained earnings. The dividend-payout ratio is the ratio of dividends paid to net profit for the period. Printed for Pol Mirafuentes Page 324 .1% 45. C. B. D.000 1.0% Answer (A) is incorrect because 19.6% is the ratio of dividends paid to the December 31 carrying amount of common equity.600 1.64 -. Inc.0% (100 dividends ÷ 200 net profit).0% 50.Source: CIA 596 IV-38 (Refers to Fact Pattern #39) The entity has return on assets of A. Answer (C) is incorrect because 40. B. it equals 50. [677] Gleim #: 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [Fact Pattern #39] An entity’s financial statements for the current year are presented below: Balance Sheet Cash Accounts receivable Inventory Net fixed assets Total Accounts payable Long-term debt Share capital Retained earnings Total 100 200 50 600 950 140 300 260 250 950 Statement of Income and Retained Earnings Sales Cost of goods sold Gross profit Operations expenses Operating profit Interest expense Profit before tax Income tax Net profit Plus Jan. Hence.3% Copyright 2006 Gleim Publications. Answer (D) is correct.6% 28.2% 42.400 970 430 30 400 200 200 150 100 250 [676] Gleim #: 5.1% 39.

Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Answer (B) is correct.33% is the ratio of profit before interest and taxes to sales. EPS must have been 5 (2 ÷ . Answer (B) is incorrect because 13. B. It equals 21. Dividends of 2 per share were paid in the current year.67% 13. C. [679] Gleim #: 5. The profit margin is the ratio of net profit to sales.67% (200 net profit ÷ 3.1% is the ratio of profit before tax to total assets. B. Answer (C) is incorrect because 42.Source: CIA 596 IV-40 (Refers to Fact Pattern #39) The entity has a profit margin of A.33% 14. Copyright 2006 Gleim Publications. Accordingly. the P-E ratio is 4 (20 share price ÷ 5 EPS). The return on assets is the ratio of net profit to total assets.Source: CIA 1195 IV-32 An entity has 100. The P-E ratio equals the share price divided by EPS.33% 46.000 outstanding common shares with a market value of 20 per share.3% is the ratio of profit before interest and tax to total assets. 6. Printed for Pol Mirafuentes Page 325 .4). [678] Gleim #: 5. The price-to-earnings ratio of the entity is A.66 -. Answer (C) is incorrect because 14. Answer (D) is incorrect because 46. Answer (B) is incorrect because 39.5 equals EPS divided by dividends per share.67% Answer (A) is correct. If the dividends per share equaled 2 and the dividend-payout ratio was 40%. Answer (D) is incorrect because 45.000 sales).2% is the ratio of net profit to common equity. Inc. C. and the entity has a dividend-payout ratio of 40%. D.67% is the ratio of gross profit to sales.33% is the ratio of profit before tax to sales. D. It equals 6. Answer (D) is incorrect because 50 equals price per share divided by the dividend-payout percentage.5 4 10 50 Answer (A) is incorrect because 2.1% (200 net profit ÷ 950 total assets). Answer (C) is incorrect because 10 equals share price divided by dividends per share. 2.67 -.

accounts receivable. accrued wages). Increased by 2 million. Answer (B) is incorrect because the difference between all assets and all liabilities stayed the same. C. [681] Gleim #: 5. Answer (D) is incorrect because an increase of 2.000 results from omitting accrued wages.000. Printed for Pol Mirafuentes Page 326 . From January 1 to June 30.000.000 {[(4 + 4 + 10) – (3 + 3 + 2)] – [(3 + 5 + 8) – (2 + 4 + 1)]}. the net working capital A. Answer (C) is correct. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [680] Gleim #: 5. Increased by 1 million. Answer (A) is incorrect because a decrease of 1. Copyright 2006 Gleim Publications. D.69 -. Inc.Source: CMA 1296 3-27 Which denominator used in the return on investment (ROI) formula is criticized because it combines the effects of operating decisions made at one organizational level with financing decisions made at another organizational level? A. Equity. inventories for this entity) minus current liabilities (accounts payable.000 results from omitting inventories. D. Total assets available. B. notes payable. Total assets employed. Working capital plus other assets. Stayed the same. 1 3 5 8 10 26 2 4 1 9 10 26 June 30 4 4 10 11 29 3 3 2 11 10 29 From January 1 to June 30.68 -. Net working capital equals current assets (cash. Decreased by 1 million.Source: CIA 1192 IV-52 The following are the January 1 and June 30 balance sheets of an entity: Assets (in millions) Cash Accounts receivable Inventories Fixed assets Total assets Accounts payable Notes payable Accrued wages Long-term debt Equity Total liabilities and equity Jan. B.000. the net working capital increased by 1.

2. total assets available. An average of 58 days is required to convert raw materials into finished goods and to sell them. [682] Gleim #: 5. B. ratio of 1. Answer (C) is incorrect because working capital plus other assets reflects the assumption that the manager controls short-term credit. If the average time the entity takes to pay for its raw materials is 15 days after they are received.4.. Then an average of 32 days is required to collect on receivables. assets employed. The cash conversion cycle is the length of time between paying for purchases and receiving cash from the sale of finished goods. Answer (D) is incorrect because it reflects an assumption that the subunit manager does not influence the resource base (denominator of the ROI calculation). although it has the advantage of emphasizing return to owners. Answer (C) is correct. minus the payables deferral period. 90 days.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because it reflects an assumption that the subunit manager does not influence the resource base (denominator of the ROI calculation). and the following partial summary balance sheet: Cash Accounts receivable Inventory Fixed assets Total assets 10 ___ ___ ___ 100 Current liabilities Long-term liabilities Equity Total liabilities and equity ___ 40 30 ___ [683] Gleim #: 5.Source: CIA 1196 IV-34 (Refers to Fact Pattern #40) The entity has an accounts receivable balance of Copyright 2006 Gleim Publications. However. Answer (B) is incorrect because 41 days results from subtracting the receivables collection period and adding the payables deferral period. and equity.Source: CIA 596 IV-53 A growing entity is assessing current working capital requirements. Answer (B) is correct. 11 days. no corporate-level decision to allocate long-term liabilities to subunits is necessary. It equals the inventory conversion period. a quick. D. or acid test. Answer (A) is incorrect because 11 days results from subtracting the receivables collection period. the total cash conversion cycle is A. The denominator may be defined in various ways. or 75 days (58 days + 32 days – 15 days). If equity (total assets – total liabilities) is chosen. plus the receivables collection period. Inc. C. One problem with this definition of the resource base is that. a portion of long-term liabilities must be allocated to the investment center to determine the manager’s resource base. it reflects decisions at different levels of the entity: short-term liabilities incurred by the responsibility center (operating decisions) and long-term liabilities controlled at the corporate level (long-term financing decisions). 75 days. e. Answer (D) is incorrect because 90 days omits the payables deferral period. ROI equals income divided by invested capital. Printed for Pol Mirafuentes Page 327 . 41 days.71 -. working capital plus other assets.g.70 -. [Fact Pattern #40] An entity has a current ratio of 1.

72 -. Inventory can be determined because it is included in current. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. Total assets equal total liabilities and equity. and the current and quick ratios are known. equals 6 (42 – 36). and the accounts receivable balance is 26 (36 – 10 cash). Because the quick ratio equals the quick assets (cash + accounts receivable) divided by current liabilities. Answer (C) is incorrect because 36 equals the quick assets. Fixed assets must then equal 58 (100 total assets – 10 cash – 26 accounts receivable – 6 inventory). accounts receivable. B.2 quick ratio). Inc. which is the only difference in this question between current and quick assets. B. if total assets equal 100.73 -. total liabilities and equity must equal 100. 12 26 36 66 Answer (A) is incorrect because 12 equals current assets minus current liabilities. C. Hence. and inventory is less than 100. B. D. Answer (B) is correct. and fixed assets. C. accounts receivable (26). [685] Gleim #: 5. [684] Gleim #: 5. Answer (D) is incorrect because 64 assumes that inventory is 0. 0 16 58 64 Answer (A) is incorrect because the sum of cash. inventory.4 current ratio × 30 current liabilities). the quick assets must equal 36 (30 × 1.Source: CIA 1196 IV-35 (Refers to Fact Pattern #40) The entity has a fixed assets balance of A. Total assets (given as 100) equals the sum of cash (given as 10).Source: Publisher Earnings-per-share data must be reported on the face of the income statement for Profit or Loss from Continuing Operations A. Current assets equal 42 (1. Yes Yes No No Discontinued Operation Yes No No Yes Copyright 2006 Gleim Publications. but not quick. C. and the quick assets equal 36 (1. Thus. Answer (D) is incorrect because 66 equals the sum of the quick assets and current liabilities. D. Answer (B) is incorrect because 16 is the result of neglecting to subtract the equity balance when calculating the current liability balance. assets. Answer (C) is correct. inventory. and current liabilities must equal 30 (100 – 40 – 30).2 quick ratio × 30 current liabilities). Printed for Pol Mirafuentes Page 328 .

000 shares of nonconvertible preference shares.75 -. Answer (D) is incorrect because preference dividends are an adjustment when they accumulate. that is. C. 2005. 2004. Added to the loss for the year. whether earned or not.000 on the preference shares. the dividend. Snell issued 200. Deducted from income in the year paid.10 0. Answer (A) is incorrect because the effect is to reduce loss per share. No shares were issued during 2005.Source: Publisher In computing the loss per share of ordinary shares.000 of cash dividends on the ordinary shares and 60. Answer (B) is correct.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because EPS data must be reported on the face of the income statement for income from continuing operations and net income but not for the effect of an accounting change. in computing earnings or loss. 2005 was 330. cumulative preference dividends not earned should be A.74 -. is deducted from profit or loss from continuing operations and profit or loss. B.000.85 0. 1. During 2004. EPS data for a discontinued operation may be disclosed on the face of the income statement or in a note.65 Copyright 2006 Gleim Publications. C. D. the preference dividends accumulate only to the extent of profit or loss. What is Snell’s 2003 basic earnings per share? A. Inc. [686] Gleim #: 5. no adjustment is necessary except to the extent of available income. Snell declared and paid 75. B. Answer (B) is correct. [687] Gleim #: 5. When preference shares are noncumulative. or added to any loss for the year. If the dividend is cumulative only if earned.000 shares of ordinary shares issued and outstanding at December 31. Deducted from the loss for the year. When preference shares are cumulative. Answer (C) is incorrect because EPS data must be reported on the face of the income statement for income from continuing operations and net income but not for the effect of an accounting change.90 0. Answer (D) is incorrect because EPS data must be reported on the face of the income statement for income from continuing operations and net income but not for the effect of an accounting change.Source: CPA 1190 I-52 Snell Co. EPS data for profit or loss from continuing operations and profit or loss must be reported on the face of the income statement. On January 1. Profit for the year ended December 31. Added to income in the year paid. an adjustment is made for dividends declared. Answer (C) is incorrect because preference dividends are an adjustment when they accumulate. Printed for Pol Mirafuentes Page 329 . had 300. D.

26 3.040 × × × × (2 ÷ 12) (4 ÷ 12) (5 ÷ 12) (1 ÷ 12) = = = = 4.040 124. C.20 (101.720 Accordingly.504 and a simple capital structure consisting of the following ordinary shares outstanding: Months Outstanding January .65 assumes all dividends are subtracted from the numerator.26 is based on an unweighted average of the four levels of shares outstanding during the year.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because 1. To calculate the numerator.November December Total Number of Shares 24. BEPS is 3.000 = 0.20 3.Source: CMA 1294 2-15 Smith Corporation had profit for the year of 101.90 300. The latter is calculated as follows: 24.76 -. Earnings per share for 2005 thus amounted to 0. Answer (D) is incorrect because 3.45 is based on the shares outstanding March through June.000 29.440 Smith Corporation’s basic earnings per share (rounded to the nearest cent) were A. Answer (B) is correct.000 35. Answer (B) is correct. Inc.504 profit ÷ 31. BEPS equals profit or loss attributable to ordinary equity holders divided by the weightedaverage number of ordinary shares outstanding. BEPS is equal to the amount of profit or loss attributable to ordinary equity holders divided by the weighted-average number of ordinary shares outstanding during the year.800 15.June July .90. 330. B. Answer (C) is incorrect because 3.000 35. [688] Gleim #: 5.90 3.720 shares).February March .000 2. D. Answer (D) is incorrect because 0.85 assumes the ordinary but not the preference dividends were subtracted from the numerator.000 Answer (C) is incorrect because 0.400 36. Copyright 2006 Gleim Publications.000 – 60.000 9.920 31. Printed for Pol Mirafuentes Page 330 .90 is based on the shares outstanding at year-end. dividends on cumulative preference shares must be subtracted from profit or loss whether or not the dividends were declared.10 assumes no preference dividends were declared.400 36.000 29. 2.45 Answer (A) is incorrect because 2.

Source: CMA 693 2-18 When an entity reports amounts for basic and diluted earnings per share. share call options allow holders to purchase shares under specified conditions. B. nonconvertible preference shares are never potential ordinary shares.77 -. Answer (C) is incorrect because EPS also must be presented for profit or loss from continuing operations and any discontinued operations. C. [690] Gleim #: 5.Source: CPA 1186 T-32 In the computation of DEPS. DEPS may be disclosed either on the face of the income statement or in the notes. However. Answer (D) is incorrect because BEPS and DEPS are to be presented on the face of the income statement with equal prominence. B. B. Printed for Pol Mirafuentes Page 331 . convertible debt. Fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. Fairly present diluted earnings per share on a prospective basis. warrants.79 -. the computation would A. Preference Shares Yes Yes No No Share Options No Yes Yes No Answer (A) is incorrect because nonconvertible instruments do not entitle holders to obtain ordinary shares. They include options. In addition. outstanding options issued by the reporting entity are assumed to be exercised. The entity must present BEPS and DEPS with equal prominence. Unlike an option.Source: CPA 577 T-27 In a diluted earnings-per-share computation. convertible preference shares. If the exercise price of these options exceeds the average market price. C. D. share call options allow holders to purchase shares under specified conditions. and contingently issuable shares. A public entity or any entity that discloses EPS must report EPS information on the face of the income statement for both profit or loss from continuing operations and profit or loss. They should be presented with equal prominence on the face of the income statement. [691] Gleim #: 5. BEPS should be presented on the face of the income statement. Answer (B) is incorrect because certain EPS amounts must be presented on the face of the income statement.78 -. A. Answer (D) is incorrect because nonconvertible instruments do not entitle holders to obtain ordinary shares. Be antidilutive. which of the following are potential ordinary shares? Nonconvertible A. D. They need to be reported for profit or loss only. Answer (B) is incorrect because nonconvertible instruments do not entitle holders to obtain ordinary shares. Answer (C) is correct. Potential ordinary shares are contracts that may entitle holders to obtain ordinary shares.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [689] Gleim #: 5. Reflect the excess of the number of shares assumed issued at the average market price over the number of shares assumed issued at the exercise price. Inc. However. D. C. Answer (A) is correct. share call options allow holders to purchase shares under specified conditions. Copyright 2006 Gleim Publications. However. EPS data for any discontinued operation must be presented on the face of the income statement or in a note. They need not be shown on the face of the income statement but must be disclosed in the notes to the financial statements.

Answer (B) is incorrect because the natural rate of unemployment. C. Investors are unwilling to risk new investments in productive capacity. i. There are four phases of a business cycle: trough. The purchasing power of money is likely to decline rapidly.. they are dilutive because (1) exceeds (2). Answer (C) is incorrect because costs ordinarily do not rise during the trough. Answer (D) is correct. the purchasing power of money is unrelated to the concept of recession.81 -. Answer (B) is incorrect because investors are unwilling to risk new investments during the trough. the result is antidilutive. thus. if an option is not in the money. which results from the normal workings of the labor market. the result is antidilutive. The trough is marked by low levels of economic activity and underuse of resources. and the excess will be added to the BEPS denominator. when the exercise price exceeds the average market price. demand-pull inflation is unlikely during a recession. Answer (D) is correct. D. B. recovery. remains unchanged. B. Because of the underuse of resources. it is antidilutive. Increasing purchasing power and increasing capital investments. Shortages of essential raw materials and rising costs. Unused productive capacity and an unwillingness to risk new investments. C. The natural rate of unemployment will increase dramatically. prices are more apt to be stable or decline during the trough. if later.80 -. the amount caused by inadequate aggregate demand. technically. Answer (D) is incorrect because potential income will be greater than actual national income given the existence of idle capacity. purchasing power relates to inflation. There are four phases of a business cycle: trough. when the exercise price exceeds the average market price. peak. Inc. recovery. Rising costs and an unwillingness to risk new investments. and recession. when the exercise price exceeds the average market price. Potential national income will exceed actual national income. Options and warrants (instruments that give the holders the right to purchase ordinary shares of the entity) issued by the reporting entity are assumed to be exercised at the beginning of the period or at time of issuance. Answer (C) is incorrect because. Answer (B) is incorrect because. D. potential national income will exceed actual national income. Answer (A) is incorrect because.e. Printed for Pol Mirafuentes Page 332 . However.Source: CMA 693 1-2 During the recessionary phase of a business cycle. The proceeds are assumed to be from an issuance at the average market price for the period. economic activities and employment levels contract and society’s resources are underused. [692] Gleim #: 5. Actual national income will exceed potential national income. Copyright 2006 Gleim Publications. During the recessionary phase of a business cycle. If the options are in the money (exercise price is less than average market price). Any increase in unemployment will be cyclical. The difference between (1) the shares issued and (2) the shares that would have been issued at the average market price is an issue for no consideration. Answer (C) is correct.Source: CMA 693 1-3 The trough of a business cycle is generally characterized by A. and recession. [693] Gleim #: 5. Answer (A) is incorrect because the trough of a business cycle is characterized by excess resources and a lack of demand-pull inflation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because. peak. A. the result is antidilutive. However.

lag. An example of a lag variable is A. and the change in the CPI for services. consumer confidence. unemployment claims. [695] Gleim #: 5. The Conference Board’s lagging indicators include average duration of unemployment in weeks. and some lag it.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [694] Gleim #: 5. the ratio of consumer installment credit outstanding to personal income. stock prices. The best known are the composite indexes calculated by The Conference Board. Indicators may lead. Answer (B) is incorrect because a decline in the issuance of building permits signals lower expected building activity and a falling GDP. An increase in the average hours worked per week of production workers. Recovery. An increase in weekly hours worked by production workers is favorable for economic growth. consumer goods orders. Housing starts. B. and the spread between the yield on 10-year Treasury bonds and the federal funds rate. Answer (A) is incorrect because a falling money supply is associated with falling GDP. or coincide with economic activity. Inc. Orders for consumer and producer goods. building permits. A leading indicator changes prior to a change in the direction of the business cycle. C. C. a private research group with more than 2. Answer (C) is incorrect because housing starts are leading indicators. D.Source: CIA 595 IV-55 Which of the following may provide a leading indicator of a future increase in gross domestic product? A.Source: Publisher All of the following are stages of the business cycle except A. Trough. the average prime rate charged by banks. orders for fixed assets. Chronic unemployment.82 -. C. timeliness of deliveries. Answer (C) is incorrect because an increase in the timeliness of delivery by vendors indicates slacking business demand and potentially falling GDP. D. or peak. Economic indicators are variables that in the past have had a high correlation with aggregate economic activity. Consumer expectations. B. the ratio of manufacturing and trade inventories to sales. Boom. B.84 -.83 -. The leading indicators included in the Conference Board’s index are average weekly hours worked by manufacturing workers. A decrease in the issuance of building permits.Source: CIA 597 IV-58 Some economic indicators lead the economy into a recovery or recession. the change in the index of labor cost per unit of output. Answer (D) is incorrect because consumer expectations are leading indicators. Printed for Pol Mirafuentes Page 333 . Economists use a variety of economic indicators to forecast turns in the business cycle. An economic indicator is highly correlated with changes in aggregate economic activity. Acceleration.700 corporate and other members worldwide. An increase in the timeliness of delivery by vendors. Answer (B) is incorrect because orders for consumer and producer goods are leading indicators. [696] Gleim #: 5. D. the commercial and industrial loans outstanding. Answer (A) is correct. Answer (D) is correct. money supply. A reduction in the money supply. Copyright 2006 Gleim Publications.

new product models and features are introduced. Answer (C) is incorrect because competitors are most numerous and products become less differentiated during the maturity stage of the product life cycle. and recession. cost per customer decreases. Printed for Pol Mirafuentes Page 334 . and the mass market is targeted through advertising. Moreover. production costs may decrease in any stage of a product’s life cycle and not specifically in the decline stage. Answer (B) is correct. new plant technology or the increased availability of raw materials.Source: IIA. New product models and features are introduced. Firm’s inventory levels. Acceleration is not one of the stages. Answer (A) is incorrect because poor product quality is evident during the introduction stage of the product life cycle. customers are early adopters. adapted During the growth stage of a product’s life cycle: A. This decline may be slow or rapid. There is little difference between competing products. Product’s prices. Answer (B) is incorrect because these are stages in the business cycle.85 -. the first symptom of the decline stage is a decline in the A. The strategy is to advance by these means and by achieving economies of productive scale. C. sales and profits increase rapidly. In the growth stage. It is an action that may be taken in the maturity stage to compete in the market. B. narrowing of the product line.86 -. The sales of most product types and brands eventually decrease permanently. Product’s sales. distribution channels are extended. The quality of the products becomes more variable and products are less differentiated. C.Source: IIA. A business cycle has four stages: the trough. a decrease in the product’s prices is a response to a permanent decline in sales. Answer (D) is incorrect because the quality of the products becomes more variable and products are less differentiated during the decline stage of the product life cycle. and promotion spending declines or remains stable.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because these are stages in the business cycle. Product’s production cost. Answer (D) is incorrect because a change in prices is a marketing decision. Moreover. This first symptom of the decline stage of a product’s life cycle triggers such other effects as price cutting. adapted In a product’s life cycle. imitators have entered the market and competitors have learned which technologies and features are successful. The firm enters new market segments and distribution channels and attempts to build brand loyalty and achieve the maximum share of the market.g. Inc. Thus. D. is not the first symptom. recovery. Copyright 2006 Gleim Publications. [697] Gleim #: 5. D. Answer (D) is correct. new competitors enter an expanding market. Answer (A) is incorrect because a decline in the firm’s purchases. resulting in a decline in the firm’s inventory levels. [698] Gleim #: 5. prices are set to penetrate the market. and reduction in promotion budgets. peak. Answer (C) is incorrect because a decline in production costs may be due to many factors. B.. Answer (C) is incorrect because these are stages in the business cycle. Answer (B) is correct. The quality of products is poor. e. It will occur only when production declines as a result of a drop in sales. In this stage.

Hence.Source: IIA.89 -. competition is at its greatest and costs are at their lowest. Answer (C) is correct.Source: IIA.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [699] Gleim #: 5. [701] Gleim #: 5. the profit growth is normally slow due to A. and higherincome customers (innovators) are usually targeted. per-unit costs of production are high and little competition exists. Available alternatives. prices will be lower than during the introduction stage. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. A mass market. adapted While auditing a marketing department. per-unit costs are on the rise because volume is declining. However. Answer (D) is incorrect because. price-cutting predominates as firms struggle to maintain sales volume in the face of a permanent decrease in demand. resulting in higher prices. the per-customer cost is high. C. Competitors are few. During the maturity stage. Competitors tend not to enter the market until they have greater assurance of profits. Growth stage. during the growth stage. so prices can be raised.88 -. Answer (C) is incorrect because no mass market is available during the introduction stage. not many alternatives are available during the introduction stage of an innovative product. plan for financing to cope with losses. Answer (A) is incorrect because. prices are at their highest. but costs are not at their minimum and competitors are not at their maximum. Answer (D) is incorrect because. Printed for Pol Mirafuentes Page 335 . but not as low as during the maturity stage. They may initially be high to permit cost recovery when unit sales are low. Maturity stage. D. B. Answer (A) is correct. during the decline stage. Answer (B) is incorrect because. late in the decline stage. there are few competitors. Cost-plus prices are charged. B. adapted While auditing a marketing department. In addition. by definition. Introduction stage. Under such a philosophy. Decline stage. resulting in some of the lowest prices seen during a product’s life cycle. adapted At the introduction stage of an innovative product. the opportunity for cost reductions would be greatest in which stage of the life cycle? Copyright 2006 Gleim Publications. build supplier relations. the price charged on a consistent basis for a specific product would probably be lowest during which life cycle stage? A. little competition exists. Inc. The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and selective distribution to generate awareness of the product and encourage customers to try it. costs are dropping and competitors are being added.87 -. [700] Gleim #: 5. C. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Expensive sales promotion. Under such a philosophy. High competition. D. firms are engaged in competitive price-cutting measures.Source: IIA. Answer (B) is incorrect because. basic versions of the product are produced. Thus. increase production and marketing efforts. and plan for competition. during the introduction stage. during the introduction stage. In the growth stage. The strategy is to infiltrate the market. Moreover.

[703] Gleim #: 5. Decline stage. Answer (B) is incorrect because buyers are less concerned with price and quality during the growth stage than in the maturity stage. During the growth stage. should produce the turnaround. Set clear short-term objectives for each operating unit that.91 -. C. Reduce staff in the non-valueadding functions by 20%.Source: IIA.Source: CIA 597 III-20 Faced with 3 years of steadily decreasing profits despite increased sales and a growing economy. fixed costs are being spread over more units of production. and quality is sometimes poor. Answer (A) is incorrect because few competitors exist during the introduction stage. Copyright 2006 Gleim Publications. low volume reduces the opportunities for cost reductions. Decline stage. Introduction stage. C. the opportunity for cost reductions is at its maximum because production volume is increasing at a high rate. Reduce staff by 10% in every unit. Printed for Pol Mirafuentes Page 336 . The result is less opportunity for cost reductions. it is an ideal time for the firm to differentiate its product by advertising low prices and higher quality. D. Answer (D) is incorrect because few competitors exist during the decline stage. D. Thus. Growth stage. Set a turnaround goal of significantly increasing profits within 2 months. together. Because price and quality are both concerns of customers during the maturity stage. B. Growth stage. Answer (B) is correct. and the benefits of the learning curve are being realized. [702] Gleim #: 5.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A. which of the following is the healthiest course of action for a chief executive officer to take? A. Maturity stage. Answer (C) is incorrect because production volume changes little during the maturity stage. Moreover. Implement a plan to encourage innovation at all levels. a firm has reasons to set itself apart. Maturity stage. Due to the availability of many substitutes. Introduction stage. Inc.90 -. B. the internal auditor discovered that the product life cycle model was used to structure the marketing mix. Classify all job functions as either (a) adding value in the eyes of the customer (such as production and sales) or (b) not adding value in the eyes of the customer (such as accounting and human resources). Answer (A) is incorrect because production volume is low during the introduction stage. During which stage of the life cycle would it be appropriate to advertise that the company’s product is the lowest price and best quality of all competitors? A. adapted While auditing a marketing department. The manager has asked the auditor for advice about increasing advertising of various products. The maturity stage is the ideal time for advertising lower prices and superior quality because this is the period during a product’s life when competition is greatest. Answer (D) is incorrect because costs per unit typically rise during the decline stage as production volume declines. Answer (C) is correct. Although costs are also high during this period. B. prices may rise late in the decline stage for the remaining firms as per-unit costs increase. C. D. Use early retirement and reemployment programs to trim staff size.

Answer (C) is incorrect because reducing staff disproportionately in control functions could have disastrous consequences. and public equity financing ordinarily is not yet available. Maturity and industry decline. Additional debt financing often results in an unreasonable amount of financial leverage at this stage. By itself. nonprioritized downsizing. it will experience financing needs in excess of funds available either internally or from trade credit or bank credit. for example. reduced innovation.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because this response illustrates two of the characteristics of organizational decline: increased centralization of decision making and lack of long-term planning. Answer (A) is incorrect because. B. low morale. if a company is reasonably profitable. Formation. and conflict. Answer (C) is incorrect because.Source: CIA 1196 IV-45 A company is arranging debt financing for the purchase of a new piece of equipment that has a 5-year expected useful life. A 10-year term loan with interest compounded monthly. C. in the growth to maturity stage of development. Inc. resistance to change. Copyright 2006 Gleim Publications.Source: CIA 1196 IV-51 In which stage of a firm’s development is it most likely to seek and obtain external equity financing in the form of venture capital? A. A 5-year term loan with interest compounded annually.93 -.5%? A. personal savings. Answer (B) is incorrect because another characteristic of organizational decline is nonprioritized downsizing. scapegoating. during the formation stage. Answer (D) is correct. At the rapid growth stage. [705] Gleim #: 5. a firm is not likely to attract venture capital financing easily. a rapidly growing firm is most likely to seek and obtain venture capital financing. Rapid growth. A 10-year term loan with interest compounded semiannually. C. It has a record of success and a better balance between cash inflows and outflows than in the rapid growth stage. Formal capital markets provide financing at lower cost than venture capitalists. Reversing these characteristics is the key to reversing organizational decline. B. Which of the following alternative financing arrangements has the lowest effective annual percentage rate if each has a quoted nominal rate of 9. so venture capital is not likely to be sought at this stage of development. trade credit. The exclusive emphasis on short-term results is likely to be counterproductive. D. Hence. relative to available investment opportunities. Printed for Pol Mirafuentes Page 337 . [704] Gleim #: 5. high turnover of competent leaders. Growth to maturity. Answer (D) is incorrect because the decline phase is characterized by more than adequate cash flows. Prior to demonstrating initial success. by encouraging innovation in all aspects of the organization’s activities and by redeploying personnel. and government agencies are the main sources of financing. Organizational decline has been found to have the following characteristics: greater centralization. lack of long-term planning. A 5-year term loan with interest compounded quarterly.92 -. D. so venture capital is not likely to be sought at this stage. the firm is able to access formal markets for debt and equity. downsizing rarely turns a company around. Answer (B) is correct.

95 -. Bankers acceptances. Treasury bonds. quarterly. capital market securities. large denomination (often over $100. and consumer credit loans. For any given quoted nominal rate. U. Answer (B) is incorrect because preferred shares are long-term. C. The term of the loan is not relevant to the calculation of the effective annual percentage cost of financing. the more frequent the interest compounding. It allows the buyer to retain interest income although the seller-dealer can repurchase after a specified time. the more frequent the interest compounding. Answer (B) is incorrect because. Answer (C) is correct. and monthly compounding are all more frequent than annual compounding. creditworthy companies to other companies and institutional investors. Commercial paper.Source: CIA 1195 IV-65 Which of the following financial instruments can be traded in international money markets? A. The acceptance by the bank guarantees payment at maturity. They are normally used to finance a specific transaction.S. unsecured. Answer (A) is incorrect because an agency security is issued by a corporation or agency created by a government.Source: CMA 689 1-13 Short-term. Treasury bills.S. Printed for Pol Mirafuentes Page 338 . In many instances. D. Capital markets trade shares and long-term debt. Examples are government securities issued by the bodies that finance mortgages. commercial paper. or monthly. Answer (B) is incorrect because bankers’ acceptances are drafts drawn on deposits at a bank. unsecured promissory notes issued by large firms are known as A. C.S. Funds are borrowed or lent for short periods (less than one year) in money markets. Semiannual. Semiannual. and monthly compounding are all more frequent than annual compounding. Answer (D) is incorrect because U. Mortgages. Answer (C) is correct. D. quarterly. Repurchase agreements. Semiannual. capital market securities. money market mutual funds. the more frequent the interest compounding. Answer (C) is incorrect because. Annual compounding is less frequent than semiannual. Treasury bonds are long-term.000) promissory notes issued by large. Commercial paper is the term for the short-term (typically less than 9 months). the more costly the loan. B. Inc. [707] Gleim #: 5. Answer (D) is incorrect because. such as the Federal National Mortgage Association (Fannie Mae) in the U. the more costly the loan. Copyright 2006 Gleim Publications.S. Eurodollar market time deposits.S. B. negotiable certificates of deposit. Treasury bills. quarterly. Agency securities. bankers’ acceptances. the maturity date is only a few days after issuance. [706] Gleim #: 5. Preferred shares. Answer (A) is incorrect because mortgages are long-term. the more costly the loan. U. and monthly compounding are all more frequent than annual compounding. Answer (D) is incorrect because a repurchase agreement involves a secured loan to a government securities dealer. capital market securities. quarterly. the least frequent compounding is associated with the lowest effective annual percentage cost.94 -.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is correct. Examples of instruments traded in money markets are U.

EPS are usually higher if debt is used instead of equity to raise capital. Answer (A) is incorrect because EPS is not a function of investor confidence and is not maximized by concurrent proportional increases in both debt and equity.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [708] Gleim #: 5. [709] Gleim #: 5. If the cost of any source of financing increases.000 for interest expense. C. The MCC is a weighted average of the costs of the different financing sources. Included in this amount were depreciation of $5.Source: CIA 1191 IV-58 A firm must select from among several methods of financing arrangements when meeting its capital requirements.98 -. Answer (B) is incorrect because financing costs do not depend on rates of return on investment. Decreases in the returns on the additional investments undertaken. The MCC curve is upward sloping because the lowest cost financing sources are assumed to be used first. The estimated cash flow for the period is Copyright 2006 Gleim Publications. and $4. Increases in the returns on the additional investments undertaken. not a decrease. which preserves a stable capital structure and maintains investor confidence. To acquire additional growth capital while attempting to maximize earnings per share. first when the company has raised $75 million and again when $175 million of new funds has been raised. an increase in the cost of a source of financing. Increases in the cost of at least one of the financing sources.97 -. and the possibility of a proportionately lower EPS if sales volume fails to meet projections. The reason is that the cost of debt is lower than the cost of equity because interest is tax deductible. the MCC curve will rise. D. These increases in the MCC are caused by A. which avoids the cost and risk of increased debt and the dilution of EPS through increased equity. Answer (D) is correct. Management is expected to be willing to take acceptable risks to be competitive and attain an acceptable rate of growth. as cumulative debt increases.000 for the year. Earnings per share will ordinarily be higher if debt is used to raise capital instead of equity. the cost of debt also increases. D. Printed for Pol Mirafuentes Page 339 . C. creditors’ liens on the firm’s assets. Answer (A) is incorrect because financing costs do not depend on rates of return on investment.96 -. will result in an increase in the MCC. a firm should normally A. Select debt over equity initially. a charge of $6. the prospect of higher EPS is accompanied by greater risk to the firm resulting from required interest costs. [710] Gleim #: 5. at least initially. Select equity over debt initially. even though increased debt is accompanied by interest costs and a degree of risk. Answer (B) is correct. B.Source: CMA 692 1-26 RLF Corporation had income before taxes of $60. which minimizes risk and avoids interest costs. Answer (C) is incorrect because equity capital is initially more costly than debt.Source: CIA 596 IV-51 The marginal cost of capital (MCC) curve for this company rises twice. Decreases in the cost of at least one of the financing sources. provided that the firm is not over-leveraged. Discontinue dividends and use current cash flow. Answer (C) is incorrect because as additional funds are raised.000. Thus.000 for the amortization of bond discounts. However. B. Attempt to increase both debt and equity in equal proportions. Inc. Answer (D) is incorrect because using only current cash flow to raise capital is usually too conservative an approach for a growth-oriented firm.

000 of net income produces a cash flow of $71. plus 30% of February credit sales (30% × $120 = $36).000 Answer (A) is incorrect because $138. plus 20% of January credit sales (20% × $100 = $20). Adding the $5.000.100 -. $49. plus cash sales for March of $18. Answer (C) is incorrect because the $5.000 $108. Answer (D) is incorrect because $108.000. To determine cash flow for the period.000 of discount amortization to the $60. $138. $66.000. total collections equal $119. C. not the total cash collections for March. Cash inflows for March would consist of 50% of March credit sales (50% × $90 = $45).000 equals the sum of February credit sales and March cash sales. Answer (C) is correct. 30% of February credit sales.000 $122. If money market rates are expected to average 6% during the year.000 for amortization should be added back to. January Cash sales Sales on credit $ 15 100 February $ 24 120 March $18 90 April $14 70 On average.000 $0 $6. 20% of March credit sales. C.000 is the total sales for March.Source: CMA 696 1-12 A firm has daily cash receipts of $100. and the remainder is paid 2 months after the month of sale.000. D. $3.000 does not reflect the noncash expense for depreciation. $60.000 and collection time of 2 days. 50% of credit sales are paid for in the month of sale. D. Answer (B) is incorrect because $66. B.000.000 $12. B. Answer (A) is incorrect because the cash flow for the period is greater than net income given noncash expenses in the form of depreciation and bond discount amortization. [712] Gleim #: 5. C. Assuming there are no bad debts. not subtracted from. Answer (B) is incorrect because $122. Inc.000 $119.99 -. D.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.000 Copyright 2006 Gleim Publications. B.000 of depreciation and the $6. Printed for Pol Mirafuentes Page 340 . Answer (D) is correct. the expected cash inflow for Cooper in March is A. $71. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500. income. 30% in the month following the sale. for the first 4 months of the year (all amounts are in thousands of dollars).000 of depreciation and the $6. and 100% of March cash sales.000. the net annual benefit (loss) from having this service is A. [711] Gleim #: 5. Consequently.Source: CMA 1295 1-8 Shown below is a forecast of sales for Cooper Inc. all noncash expenses should be added back to net income.000 equals 50% of January credit sales.

Garth must use $2.000.000 of interest for April must also be paid.000.000. Thus. Answer (C) is incorrect because $0 results from figuring the interest earned for only one day.200 + $10. the amount of the line of credit used in June is $1. $200. the closest answer is $61.000 of the line of credit.000 (1% × $2.000.000 if the bank’s system is adopted. Answer (B) is correct.050.000.000 + $30. $61.000 + $1.000 $132.000 fails to deduct the annual service charge from the interest earned. Interest for May is therefore $30. If collection time is 2 days.000. Answer (D) is correct. Consequently.000 inflows – $10.020. and average daily receipts are $100.000). Inc. approximately how much will Garth pay in interest during the first half of the year? A. At the end of March.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because $3.000).000. Copyright 2006 Gleim Publications.000).000 – $6.000 will generate $12. [713] Gleim #: 5. so the amount of the line of credit used in May is $3. Assuming all cash flows occur at the end of the month.000. Answer (D) is incorrect because the company would repay the credit line at the end of months with a positive cash flow.502 (1% × $1. and total interest is $60.000 of an additional $1. Interest in June is $10. Zero.000 + $20.Source: CMA 697 1-15 The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any shortterm borrowings) as follows.200 to pay the interest for May. The net cash outflow for April (ignoring short-term borrowings) is $1.000 ($2. Given the net cash inflow for May of $2.000 miscalculates the annual service charge.101 -.000 of its line of credit ($2.000. the average cash balance will increase by $200. and June. Answer (C) is incorrect because the company would repay the credit line at the end of months with a positive cash flow.000 ($12.200.000). Answer (B) is incorrect because $12.000 beginning balance + $6. C.000.050. D. The sum of the beginning balance and inflows exceeds the outflows for the first 2 months. Thus.200).000. The $500 monthly charge by the bank will result in an annual expense of $6.000 outflows). the $20. however.200 (1% × $3. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Cash (millions) Inflows January February March April May June $2 2 2 2 4 5 Outflows $1 4 5 3 2 3 Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1% of the amount utilized.000 of interest revenue annually. At a 6% interest rate.000 $80. interest for April is $20.000.000 Answer (A) is incorrect because interest must be paid monthly when the credit line is used in April. May.020. Printed for Pol Mirafuentes Page 341 .702 ($20.000.000 (again ignoring short-term borrowings) and the borrowing of $30. B. not two.502). However. the net annual benefit is $6.

Kemple is planning to keep a $500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month. Accordingly.000.000 ($1. because the savings is $34 per year. Thus.000).10 per check charge for a standard business checking account with no minimum balance. and the owner is deciding what type of checking account to open. B. Kemple also has the option of a premium business checking account that requires a $2. Answer (D) is correct. [715] Gleim #: 5.103 -. Premium account. B. Answer (D) is correct.Source: Publisher A firm has daily cash receipts of $300. Bank 4’s lockbox service costs $1. If money market rates are expected to average 6% during the year.600. The standard account will cost $10 per month plus $8 in check charges ($. total annual cost is $126. the incremental $2.102 -. Given that the annual collections equal $453.000 checks per year.600. Multiplying 700 checks times 360 days results in a total of 252.03% of the amount collected.750. for a total of $18 per month or $216 per year. If Kemple’s cost of funds is 10%. and its cost of short-term funds is 7% per year.000).Source: CMA 697 1-13 Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. The best option is therefore to maintain a compensating balance of $1. Bank 3’s lockbox service costs $500 per month and will reduce collection time by 1 day. Answer (C) is incorrect because the savings on the premium account is $16.000 per month and will reduce collection time by 4 days. Premium account. C. C. Standard account. resulting in a total cost of $122.000 incremental deposit.50 × 252.000 per month and will reduce collection time by 2 days.10 x 80 checks).000 per month and will reduce collection time by 3 days. Printed for Pol Mirafuentes Page 342 . Answer (C) is incorrect because the annual cost is $136. The bank charges $10 per month plus a $0.50 fee per check.500 (. under (A).000 minimum deposit will cost $200 per year. but it will require the depositor to maintain a balance of $2. A $0. Answer (A) is incorrect because the annual cost is $126. the premium account should be selected because it is cheaper by $16 per year.03% × $453.800 each.104 -. D.000 and is interested in acquiring a lockbox service in order to reduce collection time.080. A fee of 0. which one of the following proposals is optimal for Newman? A. Answer (B) is incorrect because the annual cost is $125. because the savings is $16 per year.000 when the cost of funds is 7%.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [714] Gleim #: 5. Standard account.080 (. Bank 1’s lockbox service costs $3. A compensating balance of $1. Inc. Answer (B) is incorrect because the savings on the premium account is $16. and the firm wishes to maximize income. which bank should the firm choose? Copyright 2006 Gleim Publications. (C) is also less desirable because the annual fee would be $136. Answer (A) is incorrect because the relevant cost of the minimum premium account deposit is based on the $2. Assuming that all proposals will produce equivalent processing results and using a 360-day year. A flat fee of $125.000. which account should Kemple choose? A.500.000 ($. which is less desirable than the $125. Bank 2’s lockbox service costs $5. [716] Gleim #: 5. because the savings is $34 per year.000 flat fee in (B).000.500 minimum balance but has no monthly fees or per check charges.000 per year.750. Newman receives an average of 700 checks per day averaging $1. because the savings is $16 per year.07 × $1. D.000). The premium account has no check charges. not the full $2.750.800 × 700 × 360). At a 10% cost of capital.000 more than desired.Source: CMA 697 1-20 Kemple is a newly established janitorial firm.

the number of days in the cash flow cycle is A. Thus.000). D. 105 days. Consequently. Bank 1.000.000 per month) for its services. C. thus forfeiting all supplier discounts. including average monthly purchases and credit terms. Shown below are data on CyberAge’s two major vendors. net 30 5/10.Source: Publisher If the average age of inventory is 60 days. They are deducted.105 -. Bank 3. The customer pays a fee based on the amount of time spent signed on to the computer. Answer (A) is incorrect because the age of payables should be deducted from the sum of the other items.000 per year. and the average age of accounts receivable is 45 days. Answer (C) is incorrect because Bank 3 will increase the firm’s income by only $12. is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. Answer (A) is incorrect because Bank 1 will increase the firm’s income by only $18. Answer (D) is correct. net 90 Copyright 2006 Gleim Publications. C. Vendor Web Master Softidee Average Monthly Purchases $25. a relatively new store. 90 days.000 to invest. 135 days. Inventory is held for an average of 60 days prior to sale. the average time between outlay and sale is 30 days. Answer (B) is incorrect because the payables are not added to the inventory period. Printed for Pol Mirafuentes Page 343 . Because collections made using Bank 4’s lockbox service will be accelerated by 2 days at a rate of $300. B. Receivables are collected an average of 45 days after sale. tee-shirts. the average age of the accounts payable is 30 days. the firm will have an additional $600. CyberAge has been paying all of its bills on the last day of the payment period. the bank will charge $12. Answer (C) is correct. and computer accessories. D. At a rate of 6%. [717] Gleim #: 5.000 ($36.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) A.000 (12 months × $1. The cash flow cycle begins when the firm pays for merchandise it has purchased and ends when the firm receives cash from the sale of the merchandise. Bank 4. the firm will gain $24. the interest earned will be $36.000 – $12. Bank 2. but the average age of accounts payable is 30 days. 75 days. Answer (B) is incorrect because Bank 2 will increase the firm’s income by only $12.000 per day. Inc. [Fact Pattern #41] CyberAge Outlet. so the length of the cash flow cycle is 75 days (30 + 45).000.000 50.000 Credit Terms 2/10.000. The store also sells books. However. B. Answer (D) is incorrect because 105 days equals the sum of the inventory cycle and the receivables cycle.

and the average amount borrowed from Softidee is $126. This calculation.000 – $2.106 -.6842% [($2.000. If the company pays Web Master within 10 days.500 ($50.67)}. Yes.500.500) for 80 days (90 – 10). 27. if the cost of alternative long-term financing is greater. [719] Gleim #: 5.500 × (80 days ÷ 90 days)]. the company is effectively paying $500 to retain $24. Printed for Pol Mirafuentes Page 344 .67 [3 months × $47. paying Softidee $2.67)] ÷ ($16. if the firm’s weighted-average cost of capital is equal to its weighted-average cost of trade credit. however.500 ÷ $47. the company is. Similarly. Inc. D. it will save $500 (2% × $25. Answer (B) is correct. No. understates the true cost of not taking the discount because it does not consider the effects of compounding.2% Answer (A) is incorrect because 27. in effect.500 × (20 days ÷ 30 days)]. The average amount borrowed from Web Master is $16. B.2% {[36. C.500 (5% × $50. B.500 ($25. Answer (C) is incorrect because 28.33) + (23. Thus.0% is based on weights of $25.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [718] Gleim #: 5. if the cost of alternative short-term financing is greater. the company’s weightedaverage annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is A.6842% × $126. C.666. The annualized interest rate on this borrowing is 36.Source: CMA 1296 1-10 (Refers to Fact Pattern #41) Assuming a 360-day year and that CyberAge continues paying on the last day of the credit period. The annualized rate on this borrowing is 23.333.000 – $500) for 20 days (30 – 10).666.7346% × $16.0% 25. Copyright 2006 Gleim Publications.666.7346% [($500 ÷ $24.0% 30.107 -.2% is an unweighted average of the two interest rates.0% is based on weights of $24. the weighted average of these two rates based on average borrowings is 25.333.500 and $47.000).500) × (360 days/80 days)]. Yes.33 [1 month × $24.Source: CMA 1296 1-11 (Refers to Fact Pattern #41) Should CyberAge use trade credit and continue paying at the end of the credit period? A.000) to hold $47.2% 28. if the cost of alternative short-term financing is less. Yes.500) × (360 days ÷ 20 days)].333. Answer (D) is incorrect because 30.33 + $126. D. Thus.000 and $50.

500 for 2 days. Answer (C) is incorrect because the company should maintain its current practice if the cost of alternative long-term financing is higher. At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of the DTC? Assume a 360-day year.6842% [($2. The controller of the company is considering using a wire transfer instead.500 × (20 days ÷ 30 days)]. Thus. Answer (B) is incorrect because $125. C.02% interest rate)].2% (as determined below) to obtain trade credit and pay at the end of the credit period. D. the breakeven amount is $62.108 -.500 × (80 days ÷ 90 days)].333. Thus. the local bank issues a depository transfer check (DTC) to the central bank at headquarters. The individual store managers deposit daily collections at a local bank in a non-interest bearing checking account.000 – $2. Similarly. the company is. Any amount greater than $62. Answer (C) is incorrect because the interest on $173 for 2 days is less than $. The additional cost of each transfer would be $25.67)}.2% {[36.000 or above.33 [1 month × $24. the weighted average of these two rates based on average borrowings is 25. Electronic Data Interchange (EDI).500.67 [3 months × $47. The annual rate is determined as follows: If the company pays Web Master within 10 days. A draft. The annualized interest rate on this borrowing is 36.Source: CMA 1294 1-17 Troy Toys is a retailer operating in several cities.67)] ÷ ($16.500 (5% × $50.500 ($25.666.02% per day for 2 days. A. D. $125. Given a $25 fee and an interest rate of 0. B. or if other sources are available only at a higher rate.33) + (23.7346% [($500 ÷ $24.500) for 80 days (90 – 10). paying Softidee $2.000 is required if collections are accelerated by only one day. [720] Gleim #: 5.000 – $500) for 20 days (30 – 10). Furthermore.Source: CMA 1296 1-5 A working capital technique that increases the payable float and therefore delays the outflow of cash is A.02% per day).Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the company should continue the current practice unless alternative short-term financing is available at a lower rate. Inc.07.6842% × $126. Answer (A) is incorrect because the $25 transfer fee is covered by the interest on $62.500 ÷ $47.500) × (360 days ÷ 80 days)]. Concentration banking. Copyright 2006 Gleim Publications.7346% × $16. Any amount greater than $173. Printed for Pol Mirafuentes Page 345 . and the annual interest rate paid by the central bank is 7.500 ($50. The average amount borrowed from Web Master is $16. Thus. This policy should be continued if trade credit is the only source of financing. in effect. The annualized rate on this borrowing is 23. C.500) × (360 days ÷ 20 days)]. the interest earned on a transfer of any amount greater than $62.666. Answer (D) is correct. it will save $500 (2% × $25. An optimal mix of financing sources may require that trade credit be obtained at less than the weightedaverage cost of capital.33 + $126.000). It would never be economically feasible. Answer (D) is correct.500 [$25 transfer fee ÷ (2 × .333. trade credit is just one element in the firm’s financing structure. and the average amount borrowed from Softidee is $126.2% (0. The company is currently paying an annual rate of 25. Answer (B) is incorrect because the weighted-average cost of capital is usually a concern in capital budgeting and is not as important in the decision process as the marginal cost of capital.500 would exceed the $25 fee.109 -.000) to hold $47. B.666.333. Twice per week. the company is effectively paying $500 to retain $24. [721] Gleim #: 5. collections would be accelerated by 2 days. A lockbox system.

a lockbox system. than the face amount of the loan. [723] Gleim #: 5. B.000). not more. EDI expedites cash payments.000 (7% × $100. Answer (A) is correct. [722] Gleim #: 5. The payee receives the money almost instantaneously. Thus. a three-party instrument in which the drawer orders the drawee to pay money to the payee.00% 8. If the stated interest on the loan is 7%. C. is a means of slowing cash outflows.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because concentration banking.111 -. Answer (C) is incorrect because 8.000 [$100. Thus.000 for the use of $80. a lockbox system. the company is paying $7. Answer (C) is incorrect because safety stock is held for such purposes.000 in funds at an effective cost of 8. Is the amount of prepaid interest on a loan.Source: CMA 688 1-13 A compensating balance A.75% ($7.Source: CMA 697 1-19 Hagar Company’s bank requires a compensating balance of 20% on a $100. D. C. B. Banks sometimes require a borrower to keep a certain percentage of the face amount of a loan in a noninterest-bearing checking account. Compensates a financial institution for services rendered by providing it with deposits of funds. Answer (C) is incorrect because EDI is the communication of electronic documents directly from a computer in one entity to a computer in another entity. Funds kept as a compensating balance can often be withdrawn if a certain average balance is maintained.40% 8. Inc.000).75% Answer (A) is incorrect because the borrower has access to less. Answer (B) is correct. and the use of a local post office box are techniques used to accelerate cash receipts. a valuation allowance is used to reflect losses on marketable securities. Is used to compensate for possible losses on a marketable securities portfolio. A check is the most common type of draft.000 ÷ $80. Answer (D) is incorrect because concentration banking. what is the effective cost of the loan? A. Payment by draft. in financial accounting. D. This greater rate compensates a bank for services provided and results in greater profitability for the financial institution.000 – (20% × $100.83% 7. Interest on the loan is $7.000)] is available for use. Check float arises from the delay between an expenditure and the clearing of the check through the banking system. Answer (D) is incorrect because interest deducted in advance is discount interest. 5. Copyright 2006 Gleim Publications. Is a level of inventory held to compensate for variations in usage rate and lead time. Answer (B) is incorrect because.40% is 120% of the contract rate. Answer (D) is correct. and the use of a local post office box are techniques used to accelerate cash receipts. Answer (B) is incorrect because the effective rate is higher than the contract rate as a result of the compensating balance requirement. Printed for Pol Mirafuentes Page 346 .000 loan. This requirement raises the effective rate of interest paid by the borrower.110 -. Given that the borrower has to maintain a 20% compensating balance. only $80.

and carrying cost. inventory demand. the average cash balance is $3. [725] Gleim #: 5.112 -. Substituting in the formula yields an optimal cash balance of about $6. In the cash model.928. Answer (B) is incorrect because $2. B. the fixed cost per sale of securities is equivalent to the ordering cost.000 $2. C. Inc. C.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) [724] Gleim #: 5.113 -.000 over a one-month period. Printed for Pol Mirafuentes Page 347 .928 ÷ 2). and the interest rate is effectively the cost of carrying a dollar of cash for the period. Answer (C) is correct.928 Answer (A) is incorrect because $1. Miller-Orr cash management model.464 $6. D.000 results from using 24% in the denominator.000 $3.Source: CMA 696 1-10 A company uses the following formula in determining its optimal level of cash. Arbitrage pricing model. $1.464 ($6. Thus. If: 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. B. Baumol cash management model. D.000 results from using 6% in the denominator.928 is the optimal cash balance. Altman’s Z-Score model. Assume that the fixed cost of selling marketable securities is $10 per transaction and the interest rate on marketable securities is 6% per year. The EOQ for inventory is a function of ordering cost per order. the demand for cash is similar to the demand for inventory. The company estimates that it will make cash payments of $12.Source: Publisher Which of the following models is essentially an application to cash management of the inventory economic order quantity (EOQ) formula? A. Copyright 2006 Gleim Publications. What is the average cash balance (rounded to the nearest dollar)? A. Answer (D) is incorrect because $6.

D. Daily sales average 150 units at a price of $300 each. Selling of a security that is not owned by the seller. C. Treasury bills are short-term marketable securities.Gleim's CIA Test Prep: Part III: Business Analysis and Information Technology (1347 questions) Answer (A) is incorrect because the Miller-Orr cash management model is not deterministic.114 -. Answer (C) is incorrect because the investor does not own the shares sold in a short-sale. Betting that a stock will increase by a certain amount within a given period of time. [728] Gleim #: 5. A convertible bond is not a short-term investment because its maturity date is usually more than one year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee’s stock price. Answer (D) is incorrect because the short-seller is betting that the stock will decrease in price. B. Printed for Pol Mirafuentes Page 348 .S. Eurodollars. U. net 30. the amount of Jackson’s accounts receivable is Copyright 2006 Gleim Publications. Eurodollars. but simply provides a range in which marketable securities will not be transacted. Answer (A) is incorrect because U. bankers’ acceptances. Commercial paper. C. It is a deterministic model in the same way that the EOQ model is deterministic. Answer (B) is correct. Treasury bills. Marketable securities are near-cash items used primarily for short-term investment. Answer (C) is incorrect because commercial paper is a short-term marketable security. Inc. Answer (D) is incorrect because an arbitrage pricing model is a means of valuing an asset by means of using several risk factors.115 -.Source: CMA 1295 1-6 Jackson Distributors sells to retail stores on credit terms of 2/10.S. B. Selling of a security that was purchased by borrowing money from a broker. Answer (B) is correct. Answer (A) is incorrect because margin trading involves buying securities by borrowing from a broker. Convertible bonds. commercial paper. the loan is repaid by buying securities on the open market and returning them to the broker. Selling of all the shares you own in a company in anticipation that the price will decline dramatically. D. Assuming that all sales are on credit and 60% of customers take the discount and pay on day 10 while the rest of the customers pay on day 30. Answer (B) is incorrect because Eurodollars are short-term marketable securities. and negotiable CDs of U.Source: CMA 694 1-25 All of the following are alternative marketable securities suitable for investment except A. Answer (C) is incorrect because Altman’s Z-Score is a means of forecasting a firm’s future solvency by adding the weighted amounts of five financial ratios. [727] Gleim #: 5. money-market mutual funds with portfolios of short-term securities. Examples include U.S. At a later time. The Baumol cash management model is essentially the inventory EOQ model in that it minimizes the total of fixed trading costs and cash carrying costs. Answer (D) is correct. [726] Gleim #: 5.S.116 -.Source: CMA 1294 1-16 The term “short-selling” is the A. banks. Treasury bills. The seller speculates that the stock’s market price will decline. Short-selling is accomplished by borrowing securities from a broker and selling those securities. floating rate preferred stock.

B. However. The remaining 60%. sales total $1. the average receivable balance is $810.000. [729] Gleim #: 5.000. by the end of 30 days. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% to 60%. [730] Gleim #: 5. the company’s A. If projected sales for the coming year are $50 million.000. the average collection period must have declined. Answer (D) is incorrect because no information is given relative to working capital elements other than receivables.000 decrease.000 $810. Answer (C) is incorrect because $900. Answer (B) is incorrect because $990.000.500. The average collection period is a ratio calculated by dividing the number of days in a year (365) by the receivable turnover.Source: CMA 1294 1-24 A company plans to tighten its credit policy. Printed for Pol Mirafuentes Page 349 .118 -.000 for 30 days rather than $1. The firm has daily sales of $45. Percentage discount offered has decreased.000.000 Answer (A) is incorrect because 60% of the sales will be paid for within the 10-day discount period. Answer (D) is correct. Accordingly. so an acceleration of customer payments will have no effect on working capital.000 is based on a sales total of $1.334 decrease.000 on which no discount will be taken and $270. calculate the dollar impact on accounts receivable of this proposed change in credit policy.000 ($810. Accounts receivable turnover has decreased.000 for 30 days rather than $1.000 consisting of 150 units at $300 each. An increase in discounts taken accompanied by declines in receivables balances and doubtful accounts all indicate that collections on the increased sales have been accelerated. D. the higher the turnover. an increase in discounts taken.000. or $810.817. A.778 increase.500.000 is based on a sales total of $1. D. $6. Thus. $18. The turnover increases when eithe