RESA MS Preweek Oct 2023

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 46  October 2023 CPALE  Pre-Week Summary Lecture
MANAGEMENT SERVICES Aljon Lee  Elirie Arañas  Kenneth Manuel
MS PREWEEK LECTURE
Breakdown of 70 items in MANAGEMENT SERVICES
 40 items - Management Accounting (Part 1)
 25 items - Financial Management (Part 2)
 5 items - Economics (Part 3)
Consider the trend in the 70 questions given in MS based on recent batches of CPA board exams:
CPALE THEORIES PROBLEMS
May 2023  28 items (40%) 42 items (60%)
October 2022  24 items (34%) 46 items (66%)
May 2022  39 items (56%) 31 items (44%)
Oct & Dec 2021  40 items (57%) 30 items (43%)
October 2019  33 items (47%) 37 items (53%)
May 2019  32 items (46%) 38 items (54%)
4-year Average  33 items (47%) 37 items (53%)
Above information are based on the best estimates (average) of previous board examinees. To get the closest
estimate of the actual number, comments and feedbacks among the surveyed examinees were obtained right
after taking the subject Management Services.
The following preweek questions, which are divided into two sections – THEORIES (section 1) & PROBLEMS
(section 2), are MCQs taken from past CPA board exams, CMA materials, foreign test banks, and other
authoritative sources.
Section 1 - THEORIES
Please take time to revisit the following selected MCQs (theories):
✓ MS Quiz 1: 1, 7, 9, 11, 13, 15, 17
✓ MS Quiz 2: 6, 12, 20
✓ MS Quiz 3: 3, 4, 16
✓ MS Quiz 4: 3, 6, 7, 9, 12, 17
✓ MS First Pre-Board Exams: 6, 14, 20, 33, 35, 45
✓ MS Final Pre-Board Exams: 9, 15, 26, 28, 45
✓ MS-L Self-Test Exercises on “Risks” and other related topics: 102-105, 108-109, 125-133
Management Accounting (Part 1)

1. Management accounting:
D a. Provides information about the company as a whole
b. Reports information that has occurred in the past that is verifiable and reliable
c. Provides information that is generally available only on a quarterly or annual basis
d. Focuses on estimating future revenues, costs, and other measures to forecast activities and their results
2. The person most likely to use ONLY financial accounting information is a:
A a. Current shareholder c. Factory shift supervisor
b. Department manager d. Vice president for operations
3. The person (s) directly responsible for attaining of organizational objectives is/are the:
C a. Controller c. Line management
b. Chief financial officer d. Staff management
4. Management accounting is an integral part of the ______ function in an organization.
B a. Treasurer’s c. President’s
b. Controller’s d. Internal audit
5. Management accounting plays three key roles in a business organization: (1) Scorekeeping, (2) Attention-Directing
(3) Problem-Solving. Problem-solving is best illustrated in which of the following situations?
C* a. A daily sales report {scorekeeping}
b. Tracking the type of product returned {attention-directing}
c. Making a recommendation regarding the lease or purchase of a fleet of vehicles
 d. None of the choices illustrates problem-solving or any important role in management accounting
NOTE: Scorekeeping entails accumulating data and reporting results describing how the organization is doing. Attention-directing
involves reporting and interpreting information that helps managers focus on operational inefficiencies and opportunities. Problem-
solving involves identifying available alternatives and often recommends the best course of action.
6. For control decisions, emphasis is placed on the ___ role(s) of management accounting.
D a. Scorekeeping c. Problem-Solving
 b. Attention-Directing d. Both Scorekeeping and Attention-Directing
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
BATCH 46 – October 2023 CPA Licensure Examination
MS Preweek
7. For strategic decisions, emphasis is placed on the ___ role(s) of management accounting.
C a. Scorekeeping c. Problem-Solving
 b. Attention-Directing d. Both Scorekeeping and Attention-Directing
8. The latest version of IMA Standards of Ethical Professional Practice for management accountants comprises of (A)
competence, (B) confidentiality, (C) integrity and (D) credibility. “Integrity” requires management accountant to:
C** a. Maintain an appropriate level of professional expertise by continually developing knowledge and skills
and perform duties in accordance with relevant laws, regulations, and technical standards
b. Keep information confidential unless disclosure is authorized or legally required
c. Mitigate actual conflicts of interest and refrain from engaging in any conduct that would prejudice
carrying out duties ethically
 d. Communicate information fairly and objectively and disclose all relevant information expected to
influence an intended user’s understanding of the reports, analysis and recommendations
9. Which of the following actions should a management accountant take first in confronting a potential ethical conflict
concerning your direct supervisor?
D* a. Confront the supervisor directly.
b. Discuss the situation with your supervisor’s direct supervisor.
c. Inform the Board of Directors of the existence of a potential conflict.
 d. Review your organization’s procedures concerning resolution of such a conflict.
10. Based on Institute of Management Accountants (IMA) guidelines, the final step in resolving an ethical dilemma is to
A* a. Resign from the organization
b. Contact the IMA’s ethics hotline
c. Consult with the company board of directors
 d. Discuss the situation with the immediate supervisor
11. In the standard regression equation y = a + bx, the letter b is best described as a(n)
D* a. Independent variable {x} c. Constant coefficient {a}
b. Dependent variable {y} d. Variable coefficient
12. The slope of the line of regression is
C a. The level of total fixed costs c. The rate at which the dependent variable varies
b. The level of total variable costs d. The rate at which the independent variable varies
13. Weakness of the high-low method include all of the following, except
D a. Only two observations are used to develop the cost function
b. The high and low activity levels may not be representative
c. The method does not detect if the cost behavior is nonlinear
d. The mathematical calculations are relatively complex
14. The cost function derived by the simple least-squares method is
A a. Linear c. Parabolic
b. Curvilinear d. Derived from the maximum and minimum points
15. In regression analysis, R-squared (r2) of 0.99 between two variables indicates a (an)
B* a. Weak goodness-of-fit c. Reasonable goodness-of-fit
b. Excellent goodness-of-fit d. Spurious relationship between the two variables
16. As projected profit increases, the
D a. Breakeven point goes down c. Contribution margin goes up
b. Margin of safety stays constant d. Degree of operating leverage declines
17. What costs are treated as product costs under variable (direct) costing
C a. Only direct costs c. Only variable production costs
b. All variable costs d. All variable and fixed manufacturing costs
18. In determining the lowest price that can be quoted for a special order that will use idle capacity within a production
area, the best allocation method to use is
B a. Process costing c. Job order costing
b. Variable costing d. Absorption costing
19. A budget can serve as:
C* a. A control tool c. A planning and control tool
b. A planning tool  usual mistake ☺ d. A basis for preparing financial statements
20. The master budget embraces the impact of
A a. Operating and financing decisions c. Financing and managerial decisions
b. Operating and managerial decisions d. Operating, managerial, and financing decisions
21. The steps to follow when preparing the operating budget are
A a. Revenue budget, production budget, and direct materials purchases budget.
b. Costs of goods sold budget, production budget, and cash budget.
c. Revenue budget, overhead budget, and production budget.
d. Revenue budget, cash inflows, and production expenditures.
22. In the budgeting and planning process for a firm, which one of the following should be completed first?
D a. Sales budget  usual mistake ☺ c. Cost management plan
b. Financial budget d. Strategic plan
23. Strategy specifies:
D* a. The demand created for products and services
b. Standard procedures to ensure quality products
c. Incremental changes for improved performance
 d. How an organization matches its own capabilities with the opportunities in the marketplace
24. Pro forma financial statements are part of budgeting process. Normally, the last pro forma statement prepared is:
C a. Income statement c. Statement of cash flows
b. Statement of cost of goods sold d. Statement of manufacturing costs

MS Preweek
25. Unlike zero-based budgeting, incremental budgeting
C a. Starts from a base of zero {Zero-based budgeting}
b. Requires a manager to justify the entire budget for each year {Zero-based budgeting}
c. Simply adjusts the current year’s budget to allow for changes planned for the coming year
d. Eliminates the need to review all functions periodically to obtain optimum use of resources
26. ‘Kaizen’ budgeting refers to the budgeting process where
C* a. The budget is based on only one level of activity {Static budget}
b. The budget is based on many levels of activity so that the budget may be adjusted based on actual
activity {Flexible budget}
c. The budget is based not on the existing system, but on changes or improvements that are to be made
d. A product’s revenues and expenses are estimated over its entire life cycle (i.e., from R&D phase to
customer support phase) {Life-cycle budget}
27. A life-cycle budget is a budgeting tool or process
D* a. Which emphasizes the cost of activities {Activity-based budget}
b. Which summarizes all of a company’s budgets and plans {Master budget}
c. Which requires each manager to justify the unit’s entire budget each period {Zero-based budget}
d. In which estimates of revenues and expenses are prepared for each product beginning with the product’s
research and development phase and traced through its customer support phase
28. When actual performance varies from the budgeted performance, managers will be more likely to revise future
budgets if the variances were
D a. Small c. Controllable rather than uncontrollable
b. Favorable rather than unfavorable d. Uncontrollable rather than controllable
29. A firm most often uses a standard costing system in conjunction with:
A a. Flexible budgets c. Target (hurdle) rate of return
b. Management by objectives d. Participative management programs
30. A difference between standard costs used for cost control and the budgeted costs of the same effort exists because
A a. Standard costs represent what costs should be, whereas budgeted costs are expected actual costs
b. Budgeted costs are historical costs, whereas standard costs are based on engineering studies
c. Budgeted costs include some slack, whereas standard costs do not
d. Standard costs include some slack, whereas budgeted costs do not
31. Variance analysis should be used
A* a. To understand why variances arise
b. To encourage employees to focus on meeting standards
c. As the only source of information for performance evaluation
d. To administer appropriate disciplinary action to employees that do not meet standards
32. The production department should generally be responsible for material price variances that resulted from
B a. Purchases made in uneconomical lot-sizes. c. Purchase of the wrong grade of materials.
b. Rush orders arising from poor scheduling. d. Changes in the market prices of raw materials.
33. Materials mix variance + materials yield variance = ______
A a. Materials usage variance c. Materials purchase price variance
b. Materials price usage variance d. Total materials variance
34. A primary consideration in tracing a cost in responsibility accounting is
C a. Whether it is fixed or variable
b. Whether it is production or administrative
c. Who or what caused the cost to be incurred
d. Where in the organizational structure the cost occurred
35. Which of these items will LEAST likely appear in the internal performance report prepared by a profit center manager?
D** a. Intersegment and external sales c. Direct variable cost
b. Discretionary fixed cost d. Committed fixed cost
36. Managerial performance can be measured in many different ways, including return on investment (ROI) and residual
income. A good reason for using residual income instead of ROI is that
B* a. Residual income can be computed without regard to identifying an investment base
b. Goal congruence is more likely to be promoted by using residual income
c. Residual income is well understood and often used in the financial press
d. ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage
37. Managers are most likely to accept allocations of common costs based on
A* a. Cause and effect c. Fairness
b. Ability to bear d. Benefits received
38. The balanced scorecard has been adopted by many corporations. Which best describes the balanced scorecard?
D a. A strategy that meets management’s objectives.
b. A diagram illustrating cause and effect relationships
c. A table of key actions to achieve strategic objectives
d. A strategic performance measurement and management framework
39. Using the balanced scorecard approach, an organization evaluates managerial performance based on
B a. A single ultimate measure of operating results, such as residual income
b. Multiple financial and nonfinancial measures
c. Multiple nonfinancial measures only
d. Multiple financial measures only
40. A balanced scorecard is primarily concerned with
B* a. Staff c. Systems
b. Strategy d. Structure

MS Preweek
41. Strategy should focus PRIMARILY on the organization’s
B a. Products c. Employees
b. Customers d. Shareholders
42. To be successful, a company needs to be:
B a. Employee driven c. Management driven
b. Customer driven d. “Driven” by the board of directors
43. Which of the following is NOT a way for a company to improve customer response time?
C a. Use faster delivery procedures c. Purchase material in larger quantities
b. Produce the product more quickly d. Increase capacity of bottleneck operations
44. Which balanced scorecard performance measure is part of those used for internal business processes perspective?
A* a. Cycle time c. Customer retention
b. Employee satisfaction d. Return on investment
45. Which of the following is NOT an appropriate measure of internal business process performance?
D a. Quality costs c. Manufacturing cycle efficiency
b. Delivery cycle time d. Number of customer complaints
46. Productivity is measured by the
C a. Total quantity of input used to generate total quantity of output for a time period
b. Total quantity of output generated from a limited amount of input during a period
c. Quantity of good output generated from a specific amount of input during a period
d. Quantity of good output generated from the quantity of good input used during a period
47. The process of managing various activities in the value chain, along with the associated costs, is known as
B a. Activity-based costing c. Total quality management
 b. Strategic cost management d. Computer-integrated costing
48. The three major types of competitive strategic cost management include
C a. Differentiation, focus and productivity c. Cost leadership, focus and differentiation
 b. Cost leadership, focus and productivity d. Cost leadership, differentiation and productivity
49. JIT is based on notion that ‘work is initiated only in response to customer orders.’ This practice is described as
A* a. Demand-pull c. Supply-pull
 b. Demand-push d. Supply-push
50. Total Quality Management (TQM) should be viewed as
C* a. Goal centered and standard driven c. Customer centered and employee driven
 b. Policy centered and procedure driven d. Management centered and technology driven
51. Business Process Reengineering (BPR) is a more radical approach to improvement than TQM since BPR
B* a. Requires a change in the company’s products
b. Involves completely redesigning business processes by outside consultants
c. Involves redesigning business processes and eliminating value-added activities
 d. Empowers front-line workers to solve problems and it focuses on attention on solving problems rather
than on finger-pointing
52. Which of the following quality tools is another term for gradual yet continuous improvement?
B* a. Theory of constraints c. Business process reengineering
 b. Kaizen d. Kanban system
53. A company that wants to be known as a world-class manufacturer of quality products shall spend more heavily on
this type of quality costs.
B* a. Appraisal costs c. Internal failure costs
 b. Prevention costs d. External failure costs
54. Which of the four quality costs would be the MOST damaging to a company’s ability to build a reputation as a world-
class manufacturer of quality products?
D a. Appraisal costs c. Internal failure costs
 b. Prevention costs d. External failure costs
55. Which of the following statements is false regarding learning curve?
C a. Learning curves differ from company to company
b. Changes in personnel can change the learning curve
c. Learning curves can always be used for indirect labor
d. The learning curve may spike for a short time even if it is going to drop in the long run
Financial Management (Part 2)

1. The goal of working capital management is to:
C a. Pay off short-term debts
b. Balance current assets against current liabilities
c. Achieve a balance between risk and return in order to maximize the firm’s value
d. Achieve a balance between short-term and long-term assets to achieve the firm’s overall goals
2. A consultant recommends that a company hold funds for the following two reasons:
Reason #1: Cash needs can fluctuate substantially throughout the year
Reason #2: Opportunities for buying at a discount may appear during the year
The cash balances used to address the reasons given above are correctly classified as
Reason # 1 Reason # 2
C* a. Speculative balances Speculative balances
b. Speculative balances Precautionary balances
c. Precautionary balances Speculative balances
d. Precautionary balances Precautionary balances

MS Preweek
3. Which of the following is true about a firm’s float?
D* a. A firm strives to minimize the float for both cash receipts and cash disbursements
b. A firm strives to maximize the float for both cash receipts and cash disbursements
c. A firm strives to maximize the float for cash receipts and minimize the float for cash disbursements.
d. A firm strives to maximize the float for cash disbursements and minimize the float for cash receipts.
4. The Baumol Cash Model is used to determine the optimal split between cash and marketable securities. This model
assumes all of the following, EXCEPT that:
A a. Cash requirements are erratic or random
b. Interest rates are constant over the short run
c. The cost of a transaction is independent of the peso amount of the transaction
d. There is an opportunity cost associated with holding cash, beginning with the first peso
5. Which security is most often held as a substitute for cash?
A a. Treasury bills c. Gold
b. Common stock d. AAA corporate bonds
6. EOQ is the order quantity that results in
C* a. No inventory shortages c. The minimum total annual inventory costs
b. Maximum inventory costs d. The maximum total annual inventory costs
7. A decrease in inventory order costs will tend to
B a. Increase the reorder point c. Decrease the holding cost percentage
b. Decrease the economic order quantity d. Have no effect on the economic order quantity
8. Which statement best summarizes the factor that affects the level of safety stock that a firm will carry?
D a. The level of production the firm’s bank is willing to finance
b. The rapidity with which the inventory position will turn over
c. The amount of idle cash that management believes it has to invest in safety stock
d. The level of uncertainty with respect to a stock-out condition that management is willing to accept
9. An Enterprise Resource Planning (ERP) System can be best described as:
D a. A collection of programs that use a variety of unconnected databases
b. A sophisticated means of linking two or more companies to facilitate their planning processes
c. A database that is primarily used by a purchasing department to determine the correct amount of a
particular supply item to purchase
d. A single database that collects data and feeds it into applications that support each of the company’s
business activities, such as purchases, production, distribution, and sales
10. An increase in sales resulting from an increased cash discount for prompt payment would be expected to cause:
A* a. A decrease in cash conversion cycle c. An increase in operating cycle
b. A decrease in purchase discounts taken d. An increase in average collection period
11. An entity obtaining short-term financing with trade credit will pay a higher percentage financing cost when the
D a. Discount percentage is lower c. Items purchased have a lower price
b. Items purchased have a higher price d. Supplier offers a longer discount period
12. A short-term bank loan will have a higher effective financing cost if it has which combination of characteristics?
D* a. A 10% compensating balance and regular interest
b. A 10% compensating balance and discount interest
c. A 20% compensating balance and regular interest
d. A 20% compensating balance and discount interest
13. Generally, the most expensive source of financing for a firm is:
D a. Debt c. Retained earnings
b. Preferred stock d. New common stock
14. Which of the following is NOT a component used in calculating the cost of capital?
B a. Cost of long-term debt c. Cost of common stock
b. Cost of short-term debt d. Cost of retained earnings
15. The value of the stock increases as the
D a. Value of the debt decreases c. Required rate of return increases
b. Dividend growth rate decreases d. Required rate of return decreases
16. The Gordon model (Dividend Growth model) assumes that the return on share of common stock is comprised of a:
A* a. Dividend yield and dividends growth rate c. Capital gains yield and dividend growth rate
b. Dividend yield and expected price next year d. Capital gains growth rate and dividend growth rate
17. Under CAPM, “beta” can best be described as the
D* a. Weighted-average return of an investment portfolio
b. Variability of standard deviation of the investment returns
c. Investment return’s sensitivity to changes in interest rates
d. Investment return’s sensitivity to changes in the market’s returns
18. The additional return one must expect to receive for assuming risk?
B a. Risk discount c. Risk-free rate of return
b. Risk premium d. Expected rate of return
19. The type of risk that is not diversifiable and affects the value of a portfolio is
B a. Default risk c. Nonmarket risk
b. Market risk d. Liquidity risk
20. When purchasing temporary investments, which one of the following best describes the risk associated with the
ability to sell the investment in a short period of time without significant price concessions?
D a. Interest-rate risk c. Financial risk
b. Purchasing-power risk d. Liquidity risk

MS Preweek
21. When establishing optimal capital structure, firms should strive to
D a. Maximize the marginal cost of capital c. Minimize the amount of debt financing used
b. Maximize the amount of equity financing d. Minimize the weighted average cost of capital
22. If a company is profitable and is effectively using its leverage, which financial ratio is likely to be the largest?
C a. Return on total assets c. Return on common equity
b. Return on operating assets d. Return on total equity
23. Additional funds needed (AFN) are best described as:
D a. The amount of assets required per peso of sales
b. Funds that are obtained automatically from routine business transactions
c. A forecasting approach in which the forecasted percentage of sales for each item is held constant
d. Funds that a firm must raise externally through borrowing or by selling new common/preferred stock
24. External capital requirements (i.e., AFN) are LOWER for entities with which one of the following characteristics?
D* a. Lower profit margins c. Higher sales growth rates
b. Lower retention ratios d. Lower capital intensity ratios
25. A company has an acid-test ratio of 1.5 to 1.0. Which will cause this ratio to deteriorate for the company?
C* a. Sale of equipment at a loss c. Borrowing short-term loan from a bank
b. Sale of inventory on account d. Payment of cash dividends previously declared
26. Accounts receivable turnover will normally decrease as a result of:
B* a. An increase in cash sales in proportional to credit sales
b. A change in credit policy to lengthen the period for cash discounts
c. A significant sales volume decreases near the end of the accounting period
d. The write-off of an uncollectible account (assume the use of allowance for doubtful accounts method)
27. The Du Pont model measures
A* a. Return on investment c. Throughput
b. Residual income d. Profit
28. What effect will the issuance of common stock for cash at year-end have on the following ratios?
Return on Total Assets Debt-Equity Ratio
D a. Increase Increase
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease
29. Identify the set of ratios that is most useful in evaluating solvency.
D* a. Debt ratio, current ratio, and TIE c. Debt ratio, quick ratio, and TIE
b. Debt ratio, TIE, and RoA d. Debt ratio, TIE, and cash flow to debt
30. In deciding whether to replace a machine, which of the following is NOT a sunk cost?
D a. Book value of the existing machine c. Depreciated cost of the existing machine
b. Original cost of the existing machine d. Expected resale price of the existing machine
31. In capital budgeting, which of the following is NOT considered in the net investment for decision making purposes?
D* a. Additional working capital requirements
b. Tax shield on loss of disposal of old machine
c. Salvage value of the old machine to be replaced
d. Salvage value of the new machine for replacement
32. In computing the initial investment for decision-making, taxes would be relevant for all of the following, EXCEPT:
C* a. Avoidable repairs of old asset
b. Profit on sale of old asset replaced by a new one
c. Increase in working capital required to support new capital investment
d. Loss on write-off of other assets disposed because of new capital investment
33. For a certain capital project, the return that investors demand for investing in a firm is known as:
D* a. DCF rate of return c. Payback
b. Net present value d. Cost of capital
34. In an investment in plant asset, the return that keeps the market price of the firm stock unchanged is
B a. Net present value c. Adjusted rate of return
b. Cost of capital d. Unadjusted rate of return
35. As a capital budgeting technique, the payback period considers depreciation expense (DE) and time value of money
(TMV) as follows:
B* a. DE, relevant and TVM, relevant c. DE, irrelevant and TVM, relevant
b. DE, irrelevant and TVM, irrelevant d. DE, relevant and TVM, irrelevant
36. The payback method assumes that all cash inflows are reinvested to yield a return equal to
D* a. The discount rate c. The internal rate of return
b. The hurdle rate d. Zero
37. A change in the discount rate used to evaluate a specific project will affect the project’s
D a. Life c. Payback period
b. Total cash flows d. Net present value
38. Everything else being equal, the internal rate of return (IRR) of an investment project will be lower if:
D* a. Cash inflows are larger c. The project has a shorter payback period
b. The investment cost is lower d. Cash inflows are received later in project life
39. All other factors equal, which will affect a project’s internal rate of return, net present value and payback period?
C* a. An increase in discount rate c. An increase in the initial cost of the project
b. A decrease in the life of the project d. All of the choices
40. Investments available in Philippine capital markets generally consists
A* a. Debt and equity securities c. Real estate and multi-level networking
b. Pag-ibig funds, mutual funds and UITFs d. Franchising and lending arrangements

MS Preweek
Economics (Part 3)
1. ___ economics is analysis that generates objective descriptions or predictions about the world that can be verified
with data.
A a. Positive c. Normative
 b. Negative d. Marginal
2. Which of the following is an example of a positive economic statement?
B* a. Economics is the most useful social science
b. An increase in income causes an increase in savings
c. The government should ideally work as a welfare state
 d. Eliminating poverty is more important than reducing inflation
3. ___ economics prescribes what an individual or society ought to do.
C a. Positive c. Normative
 b. Negative d. Behavioral
4. Which of the following is an example of a normative economic statement?
D* a. An increase in income is accompanied by an increase in savings
b. An increase in income is accompanied by an increase in consumption
c. An increase in the money supply will lead to an increase in inflation rate
 d. An increase in government expenditure will lead to an increase in well-being
5. Which of the following statements correctly differentiates between positive and normative economics?
A a. Positive economics is descriptive, whereas normative economics is advisory.
b. Positive economics is based on judgments, whereas normative economics is not.
c. Positive economics describes what people ought to do, whereas normative economics describes what
people actually do.
 d. Positive economics is applied to microeconomics, whereas normative economics is applied to
macroeconomics.
6. The 3 basic principles in modern economics are optimization, equilibrium and empiricism. EMPERICISM refers to:
C* a. The process of choosing the best option from a set of alternatives, given the available information
b. A special situation where everyone is simultaneously optimizing, so that nobody will benefit personally
by changing his or her behavior
c. The analysis that is evidenced-based as it uses data to test theories and to determine what is causing
things to happen in the world
 d. The study of how economic agents choose to allocate scarce resources and how the choices affect society
7. The term “free riders” refers to people who:
A a. Don’t contribute but still benefit from others’ actions
b. Make economic decisions randomly and are not rational
c. Selflessly pay for others’ consumption of goods and services
 d. Haggle over the prices of the goods and services that they buy
8. Which of the following is an example of free riding?
A* a. An individual who sneaks inside a music concert
b. A consumer who buys his groceries from a nearby store
c. A tax payer who exercises in the public park near his house
 d. A club member who makes voluntary contributions to the club
9. Assume that a house is rented by 4 students. When it comes to keeping the house clean, each of the four roommates
has an incentive to leave cleaning to the others. As a result, the house is never clean. What is the best solution to
this problem of free riding?
B a. Ask every roommate to clean the house if they dirty it
b. Require every roommate to contribute to a cleaning service
c. Require each room mate to pay more toward the house rent and groceries
 d. Assign one roommate the responsibility to keep a watch over the other students
10. A business cycle is a sequence of economic activity in a nation’s economy that is typically characterized by four
phases – recession, recovery, growth and decline. DECLINE refers to
D* a. Most unwelcome stage of business cycle where levels of buying, selling, production and employment
typically diminish. {recession}
b. An ‘upturn’ stage in the business cycle where the economy troughs out and start working its way up to
better financial footing. {recovery}
c. The stage in the business cycle where the economy goes through sustained expansion, increased
consumer confidence, and high levels of business activity. {growth}
d. A ‘downturn’ or contraction stage in the business cycle that marks the end of the period of growth and
where the economy experiences decreased level of production by businesses and consumer purchases.
11. Gross domestic product (GDP) is the
C a. Total purchases by consumers, business, government, and foreign entities {Aggregate demand}
b. Total amount of expenditures for consumer goods and investment for a period {Aggregate demand}
c. Value of all goods and services produced by the country by both domestic and foreign-owned companies
d. Value of all goods and services produced by the country by domestic firms, excluding those produced
by foreign-owned companies.
12. Which of the following may provide a leading indicator of a future increase in gross domestic product?
D a. A reduction in the money supply
b. A decrease in the issuance of building permits
c. An increase in the timeliness of delivery by vendors
d. An increase in the average hours worked per week of production workers

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13. Which is a positive effect of inflation?
C* a. Uncertainty about future inflation may discourage investment and saving
b. Loss in stability in the real value of money and other monetary items over time
c. Mitigation of economic recessions and debt relief by reducing the real level of debt
d. Shortages of goods if consumers begin hoarding in anticipation of price increase in the future
14. In macroeconomics, a deflationary spiral is a situation where
B* a. Decreases in production lead to decreases in prices, which in turn lead to lower wages and demand
b. Decreases in prices lead to lower production, which in turn leads to lower wages and demand, which
leads to further decreases in prices
c. Decreases in prices lead to higher production, which in turn leads to higher wages and demand, which
results into increase in prices
d. Increases in prices lead to a vicious cycle, and a problem exacerbates its own cause
15. Stagflation is defined as the “double trouble” of high level of inflation combined with the increase in
A* a. Unemployment c. The money supply
b. The price level d. Corporate profits
16. Under US labor standards, individuals are considered as unemployed when they have
C* a. No job
b. No job and are not looking for a job
c. No job but looked for a job at least once for the past 4 weeks
d. No job but looked for a job at least once for the past 6 months
17. Workers who are unemployed because they lack the skills needed by employers are called
D a. Cyclically unemployed c. Frictionally unemployed
b. Seasonally unemployed d. Structurally unemployed
18. Which type of unemployment is likely to increase the most in a severe recession?
A a. Cyclical unemployment c. Frictional unemployment
b. Seasonal unemployment d. Structural unemployment
19. The most effective FISCAL policy program for reducing demand-pull inflation is to:
A* a. Decrease government spending and increase taxes
b. Increase government spending and decrease taxes
c. Increase both government spending and taxes
d. Decrease the money supply
20. Which of the following is NOT an instrument of MONETARY policy by which money supply is controlled?
D* a. Open-market operations c. Changing the discount rate
b. Changing the reserve ratio d. Manipulation of government spending
21. When the interest rate is extremely high,
B a. Opportunity cost of holding money is low c. Supply of money will be relatively small
b. Opportunity cost of holding money is high d. No cost to holding money (purchasing power is constant)
22. If Bangko Sentral raises interest rates sharply, the country’s currency will most likely
A a. Increase in relative value
b. Decrease in relative value
c. Remain unchanged in value
d. Decrease sharply in value at first and then return to its initial value
23. Balance of payments is an accounting statement that records monetary transactions between:
C a. Two residents of the same nation c. Residents of a nation and the rest of the world
b. Residents and non-residents of a nation d. Non-residents of a nation and the rest of the world
24. Trade deficit occurs when
A a. Export of goods < imports of goods c. Export of services > imports of services
b. Export of goods > imports of goods d. Export of services < imports of services
25. When a country imports more than it exports, the country
B a. Has negative net imports c. Is suffering from inflation
b. Has negative net exports d. Is experiencing an income boom
26. Which of the following is an economic rationale for government intervention in trade?
A a. Protecting infant industries c. Dealing with friendly countries
b. Preserving national identity d. Maintaining spheres of influence
27. If the value of US dollar in foreign currency markets changes from US $1 = € 0.95 to US $1 = € 0.90,
C* a. US exports to Europe shall decrease
b. The Euro has depreciated against the dollar
c. Products imported from Europe to the U.S. will become more expensive
d. US tourists in Europe will find their dollars capable of buying more European products
28. A Philippine importer of English clothing has contracted to pay an amount fixed in British pounds three months from
now. If the importer worries that the Philippine peso may depreciate sharply against the British pound in the interim,
it would be well advised to
B a. Sell pounds in the forward exchange market c. Sell pesos in the futures market
b. Buy pounds in the forward exchange market d. Buy pesos in the futures market
29. A company has recently purchased some stock of a competitor. However, it is somewhat concerned that the market
price of this stock could decrease over the short run. The company could hedge against the possible decline in the
stock’s market price by:
B a. Selling a put option on that stock c. Purchasing a call option on that stock
b. Purchasing a put option on that stock d. Obtaining a warrant option on that stock
30. If people expect the price of coffee to rise next month, the demand for coffee will
B a. Decrease now c. Stay the same now and increase next month
b. Increase now d. Stay the same now and next month

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31. If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded
of the good, demand is said to be
C a. Unit-elastic c. Relatively inelastic
b. Relatively elastic d. Perfectly inelastic
32. If a small percentage increase in the price of a good results in a rather large percentage reduction in the demanded
of the good, demand is said to be
B a. Unit-elastic c. Relatively inelastic
b. Relatively elastic d. Perfectly inelastic
33. When the demand for a product is elastic, a decrease in the price of a product will
B* a. Increase competition c. Decrease total revenue
b. Increase total revenue d. Not affect total revenue
34. According to the law of supply,
A a. Producers are willing to supply larger amounts of a good as its price increases
b. A direct relationship exists between the price of a good and the amount buyers choose to buy
c. An inverse relationship exists between the price of a good and the amount buyers wish to buy
d. An inverse relationship exists between the price of a good and the amount producers supply
35. A shift in the supply curve may result from the following, EXCEPT
C* a. Changes in production technology
b. Changes in the number of sellers in the market
c. Changes in the number of buyers in the market
d. Changes or expected changes about future prices of resources
36. The competitive model of supply and demand predicts that a surplus can arise only if there is a
D* a. Maximum price above the equilibrium price
b. Minimum price below the equilibrium price
c. Maximum price below the equilibrium price
d. Minimum price above the equilibrium price
37. If there is a decrease in both the supply and demand for a good, which of the following will definitely occur?
D a. The price of the good will increase c. The equilibrium quantity will increase
b. The price of the good will decrease d. The equilibrium quantity will decrease
38. Compared with firms in a perfectly competitive market, a monopolist tends to
A a. Produce substantially less but charge a higher price
b. Produce substantially more and charge a higher price
c. Produce the same output and charge a higher price
d. Produce substantially less and charge a lower price
39. Monopolistic competition is characterized by
A* a. A relatively large group of sellers who produce differentiated products
b. A relatively small group of sellers who produce differentiated products
c. A monopolistic market where the consumer is persuaded that there is perfect competition
d. A relatively large group of sellers who produce a homogenous product
40. A profit-maximizing monopolist will produce at an output level where:
C a. Marginal revenue equals average total cost
b. Marginal cost equals average total cost
c. Marginal revenue equals marginal cost
d. Demand equals average total cost
Section 2 - PROBLEMS
1. A banking system with a reserve ratio of 20% and a change in reserves of P 1,000,000 can increase its total
demand deposits by
A a. P 5,000,000 b. P 1,000,000 c. P 800,000 d. P 200,000
Solution: Reserves = deposits x reserve ratio 1,000,000 = deposits x 20%
2. If the price elasticity of demand is 1.5 and a change in price of the product increases the quantity demanded
by 4%, then what is the percentage change in price?
D a. 0.375% increase b. 0.375% decrease c. 2.667% increase d. 2.667% decrease
Solution: ∆% Price x Elasticity = ∆% Quantity Demanded ∆% Price x 1.5 = 4%
3. A consumer has P 50 to spend. He must decide between buying two goods: magazines (mags) priced at P 5
each and DVDs priced at P 10 each. Which of the following combinations of the two goods will exactly satisfy
his budget constraint?
B a. 3 mags, 4 DVDs b. 2 mags, 4 DVDs c. 6 mags, 1 DVDs d. 2 mags, 2 DVDs
Solution: (2 mags x 5) + (4 DVDs x 10) = 50
4. Scenario: Ken must choose between driving and taking a train to destination A. Travelling by train will cost her
P 400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasoline costs
P 250. Her opportunity cost of time is P 15 per hour. What must Ken do?
A a. Drive, to save P 120 c. Travel by train, since it is quicker
b. Drive, to save P 150 d. Travel by train, to P 30 in travel time
Solution: Train: 400 + 4 (15) = 460 Drive: 250 + 6 (15) = 340

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5. A growing company is assessing current working capital requirements. An average of 58 days is required to
convert raw materials into finished goods and to sell them. An average of 32 days is required to collect on
receivables. If the average time the company takes to pay for its raw materials were 15 days after they are
received, then what would be the total cash conversion cycle for this company?
C a. 11 days b. 41 days c. 75 days d. 90 days
Solution: Cash conversion cycle = (Age, inventory) + (Age, AR) – (Age, AP) = 58 + 32 – 15
6. Albay Company has P 5,000,000 of average inventory and sales of P 30,000,000. Using a 365-day year,
calculate the firm’s inventory conversion period.
C a. 30.25 days b. 45.00 days c. 60.83 days d. 72.44 days
Solution: Inventory turnover: 30 M ÷ 5 M = 6 times Age of inventory: 365 ÷ 6
7. A firm has daily cash receipts of P 100,000. A bank has offered to reduce the collection time on the firm’s
deposits by two days for a monthly fee of P 500. If money market rates are expected to average 6% during
the year, what is the net annual benefit (loss) from having this service?
B a. P 12,000 b. P 6,000 c. P 3,000 d. P 0
Solution: Benefit: 100,000 (2) 6% = 12,000 Cost: 500 (12) = 6,000
8. Abra Company’s budgeted sales for the coming year are P 40,500,000 of which, 80% are expected to be credit
sales at terms of n/30. Abra estimates that a proposed relaxation of credit standards would increase credit
sales by 20% and increase in the average collection period from 30 days to 40 days. Cost of money is 15%.
Based on a 360-day year, how much opportunity cost is involved with the proposed relaxation of credit
standards?
A a. P 243,000 b. P 540,000 c. P 900,000 d. P 1,620,000
Solution: Old AR balance: 32.4 M x (30 ÷ 360) = 2.7 M Opportunity Cost: 15% (4.32 M – 2.7 M)
New AR balance: 32.4 M x 1.2 x (40 ÷ 360) = 4.32 M
9. Apayao Company uses 4,500 units of Part AYC-18 each year. The cost of placing one order for the part is
estimated to be about P 20. Other costs associated with carrying Part AYC-18 in inventory are:
Annual cost per part
Insurance P 0.20
Property taxes 0.09
Interest on funds invested 0.15
Others 0.06
Total costs P 0.50
Assume that the company has been able to reduce the cost of placing an order to only P 1.00 and that when
the waste and inefficiency caused by inventories is considered, the cost to carry an inventory jumps to P 1.60
per unit. What would be the Economic Order Quantity (EOQ) under these conditions?
A a. 75 b. 80 c. 95 d. 100
Solution: EOQ = Square root of [2 D O ÷ C] = Square root of [ 2 (4,500) 1 ÷ 1.60]
10. Benguet Corporation’s economic order quantity (EOQ) for Material MR-69 is 5,000 pounds. If the company
maintains a safety stock of MR-69 at 500 pounds, and its order point is 1,500 pounds, what would be the total
annual carrying costs assuming the carrying cost per unit is P 0.20?
B a. P 100 b. P 600 c. P 1,000 d. P 1,100
Solution: Average inventory: (EOQ/2) + safety stock = (5,000/2) + 500 = 3,000 units
11. If a firm purchases raw material from its supplier on a 2/10, net 60 cash discount basis, what is the equivalent
annual interest rate (using a 360 day-year) of foregoing the cash discount and making payment on the 60th
day?
B a. 73.5% b. 14.7% c. 12.2% d. 2.0%
Solution: [Discount % ÷ (100% - Discount %)] x [360 ÷ (Credit term – Discount term)] = (2 ÷ 98) x (360 ÷ 50)
12. Bukidnon Traders borrowed P 20,000 at an APR of 10%. The loan called for a compensating balance of 10%.
What is the effective interest rate (EAR) on the loan? (Round final answer to two decimal places).
B a. 12.2% b. 11.1% c. 10% d. 9.1%
Solution: EAR = 10%* ÷ (100% - 10%**) *interest or APR **compensating balance
Alternatively: EAR = 10% (20,000) ÷ 20,000 (90%) = 2,000 ÷ 18,000
13. A company obtained a short-term bank loan of P 250,000 at an APR of 6%. As a condition of the loan, the
company is required to maintain a balance of P 25,000 in its checking account, which earns 2%. What is the
effective interest rate of the loan?
B a. 6.66% b. 6.44% c. 6.00% d. 5.80%
Solution: EAR = 6% (250,000) – 2% (25,000) ÷ (250,0000 – 25,000) = 14,500 ÷ 225,000
14. Cebu Company has a P 2,000,000 line of credit. The line has an interest rate of 6% and a commitment fee of
2%. If Cebu is using P 400,000 of the line of credit, what is the effective rate on the line of credit?
C a. 6% b. 8% c. 14% d. 16%
Solution: EAR = [6% (400,000) + 2% (2,000,000 – 400,000)] ÷ 400,000

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15. Based on the data presented below, what is Cam Sur Corporation’s cost of sales for the year?
Current ratio 3.5
Acid test ratio 3.0
Year-end current liabilities P 600,000
Beginning inventory P 500,000
Inventory turnover 8.0
C a. P 1,600,000 b. P 2,400,000 c. P 3,200,000 d. P 6,400,000
Solution: Ending inventory = (current ratio – quick ratio) current liabilities = (3.5 – 3) 600,000 = P 300,000
Average inventory = (500,000 + 300,000) ÷ 2 = 400,000
Inventory turnover = CGS ÷ average inventory CGS = 8 times x 400,000
16. A firm has a debt-equity ratio of 50 percent. Currently, it has interest expense of P 500,000 on P 5,000,000
of total debt outstanding. Its tax rate is 40 percent. If the firm’s RoA is 6 percent, by how many percentage
points is the firm’s RoE greater than its RoA?
B a. 0.0% b. 3.0% c. 5.2% d. 7.4%
Solution: Du Pont technique: RoA ÷ equity ratio = RoE 6% ÷ (100 ÷ 150) = 9%
17. Camiguin Company’s net income for 2023 was P 60,250. Its average stockholders’ equity for 2023 was
P500,000, inclusive of P 50,000 par value of preferred stock with a dividend rate of 8%. What is the company’s
return on common stockholders’ equity?
C a. 11.25% b. 12.05% c. 12.50% d. 13.39%
Solution: Return on common SHE = Income available to common shareholders ÷ average common SHE
Return on common SHE = [60,250 – 8% (50,000)] ÷ (500,000 – 50,000)
Items 18 and 20 are based on the following information
Davao Company has earnings per share (EPS) of P 6.20, pays dividend of P 3.72 per share, and has a market
price of P 49.60 per share.
18. What is the dividend yield?
A a. 7.5% b. 8% c. 13.3% d. 60%
Solution: Dividend yield = dividends ÷ price = 3.72 ÷ 49.60
19. What is the payout ratio?
D a. 7.5% b. 8% c. 13.3% d. 60%
Solution: Dividend payout = dividends ÷ EPS = 3.72 ÷ 6.20 = dividend yield x PE ratio = 7.5% x 8
Incidentally, retention or plowback ratio = 100% - dividend payout = 40%
20. Ecija Company’s cost of equity is 18%, its before-tax cost of debt is 8%, and its corporate tax rate is 40%.
Given the following balance sheet, calculate the after-tax weighted average cost of capital.
ASSETS LIABILITIES & EQUITY
Cash P 100 Accounts payable P 200
Accounts receivable 400 Accrued taxes due 200
Inventories 2,000 Long-term debt 400
Plant and equipment 1,300 Equity 1,200
P 2,000 P 2,000
B a. 16.8% b. 14.7% c. 10.3% d. 9.7%
Solution: Debt: 8% (1-0.4) x (400 ÷ 1,600) Equity: 18% x (1,200 ÷ 1,600)
21. A company believes that it can sell long-term bonds with a 6% coupon, but a price that gives a yield-to-
maturity of 9%. If such bonds are part of next year’s financing plans, which of the following should be used
for bonds in the after-tax (40%) cost-of-capital calculation?
B a. 3.6% b. 5.4% c. 4.2% d. 6.0%
Solution: Cost of debt: yield rate (100% – tax rate) = 9% (100% – 40%)
22. Kalinga Company sold 12%, non-convertible preferred stock with a par value of P 50. The stock sold for P 55,
and flotation costs were 6% of the market price. Tax rate is 30%. What is the cost of preferred stock?
A a. 11.61% b. 10.91% c. 8.12% d. 7.64%
Solution: Cost of preferred stock: dividend yield = expected dividend ÷ net price = [50 (12%)] ÷ [55 (94%)]
23. A firm is expected to pay a dividend of P 5.00 per share this year. Dividend is expected to grow at a rate of
6%. If the current market price of the stock is P 60 per share, what is the estimated cost of equity?
D a. 6% b. 8.3% c. 12% d. 14.3%
Solution: Cost of equity (Gordon model): dividend yield + growth rate = (5 ÷ 60) + 6%
24. La Union Corporation carries no debt in its capital structure. Its beta is 0.8. The risk-free rate is 9 percent
and the expected return on the market is 15 percent. The company has an opportunity to invest in a project
that earns 12%. What is the required rate of return (i.e., cost of capital)?
D a. 4.8% b. 9% c. 12% d. 13.8%
Solution: Cost of capital (CAPM): risk-free rate + beta-adjusted risk premium = 9% + 0.8 (15% - 9%)
25. Laguna Company considers replacing old equipment that has a net book value of P 100,000, remaining useful
life of 4 years with P 25,000 depreciation each year. The old equipment can be sold for P 80,000. The new
equipment costs P 160,000 and has a 4-year useful life. Cash savings on operating expenses before 40%
taxes amount to P 50,000 per year. What is the amount of initial net cash outflow in the new equipment?

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C a. P 160,000 b. P 80,000 c. P 72,000 d. P 68,000
Solution: Net investment: costs – savings = present cash OUT – present cash IN = 160,000 – (80,000 + 8,000*)
* Tax savings from loss on sale of old equipment: 40% (80,000 – 100,000)
26. Leyte Industries invested in a new machine that cost P 80,000. The machine being depreciated over 5 years
using straight-line depreciation with no salvage value. The machine is expected to produce incremental cash
revenues of P 100,000 per year and incremental cash expenses of P 30,000 per year. The tax rate is 25%.
Calculate Leyte Industries’ incremental operating after-tax cash flows.
B a. P 70,000 b. P 56,500 c. P 52,500 d. P 40,500
Solution: After-tax cash flow: (100,000 – 30,000) 75% = 52,500
Tax shield of depreciation: (80,000 ÷ 5 years) 25% = 4,000
27. Masbate is considering an investment in a new machine to replace its existing one. Information on the existing
machine and the replacement machine follow:
Cost of the new machine P 40,000
Net annual savings in operating costs 9,000
Salvage value now of the old machine 6,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000
What is the expected payback period for the new machine?
C a. 8.50 years b. 4.44 years c. 3.78 years d. 2.67 years
Solution: Payback period = (40,000 – 6,000) ÷ 9,000
28. A piece of labor-saving equipment that Manila Company could use to reduce costs in one of its plants has just
come into the market. Relevant data follow:
Life of the equipment 12 years
Purchase cost of the equipment P 432,000
Annual cash savings from use of equipment P 90,000
What is the ARR based on original investment to be provided by the equipment?
B a. 8.3% b. 12.5% c. 20.8% d. 29.2%
Solution: ARR (original investment): (90,000 – 36,000*) ÷ 432,000 *Depreciation: 432,000 ÷ 12 years
Mindoro Foundation is a tax-exempt charitable organization. Mindoro invested P 400,000 in a five-year project
at the beginning of year 1. Mindoro estimates that the annual cash savings from this project will amount to
P130,000. The P 400,000 of assets will be depreciated over their five-year life on the straight-line basis. On
investments of this type, Mindoro’s required rate of return is 12%.
12% 14% 16%
PV of P 1 for 5 periods 0.57 0.52 0.48
PV of an annuity of P 1 for 5 periods 3.60 3.40 3.30
30. What is the net present value of the project?
C a. P 36,000 b. P 57,000 c. P 68,000 d. P 250,000
Solution: Net present value = 130,000 (3.6) – 400,000
Incidentally, Profitability index = 468,000 ÷ 400,000 = 1.17 times
31. What is the internal rate of return on the project?
D a. Less than 12% c. Less than 16%, but more than 14%
b. Less than 14%, but more than 12% d. More than 16%
Solution: IRR: PV, Cash IN = PV, Cash OUT 130,000 (PV factor) = 400,000 Target PV Factor = 3.076
32. Consider the following two mutually exclusive projects: Project X costs P 500 and has cash flows of P 400 in
each of the next 2 years. Project Y also costs P 500, and generates cash flows of P 600 and P 100 for the next
2 years, respectively. Which investment should the firm choose if the cost of capital is 25%?
A a. Project X c. Both
b. Project Y d. Neither
Solution: Project X: NPV = 400 (1.44) – 500 = 76 Project Y: NPV = 600 (0.8) + 100 (0.64) – 500 = 44
33. The following information pertains to a simple least squares regression for Pampanga Corporation:
Mean value of the dependent variable 30
Mean value of the independent variable 8
Coefficient of the independent variable 3
Number of observations 12
What is the "a" value for the least-squares regression model?
C a. 60 b. 20 c. 6 d. 0
Solution: cost function → Y = a + bX 30 = a + 3 (8)
Pangasinan Company incurred the following factory overhead costs for the second quarter of the year:
Machine Hours Factory Overhead
April 150 P 4,200
May 120 P 3,600
June 180 P 4,800

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34. Using high-low method, how much is the fixed factory overhead cost for the second quarter?
C a. P 1,200 b. P 2,400 c. P 3,600 d. P 4,800
Solution: Variable cost per hour = ∆ Y ÷ ∆ X = (4,800 – 3,600) ÷ (180 – 120) = 20 per hour
Monthly fixed cost = 3,600 – 20 (120) = 1,200
35. Which of the following equations shall be used under least-squares method?
D a. 12,600 = 3 a + 69,300 b c. 1,890,000 = 450 a + 69,300 b
b. 1,926,000 = 3 a + 69,300 b d. 1,926,000 = 450 a + 69,300 b
Solution: Sum of the hours: 450 Sum of the squared hours: 69,300
Sum of the costs: 12,600 Equation 1: 12,600 = 3 a + 450 b
Sum of the hours x costs: 1,926,000 Equation 2: 1,926,000 = 450 a + 69,300 b
36. Listed below are costs of quality that a manufacturing company has incurred throughout its operations. The
company plans to prepare a report that classifies these costs into the following four categories: preventive
costs, appraisal costs, internal-failure costs, and external-failure costs.
Cost items Amount
A) Design reviews P 275,000
B) Finished goods returned due to failure 55,000
C) Freight on replacement finished goods 27,000
D) Labor inspection during manufacturing 75,000
E) Labor inspection of raw materials 32,000
F) Manufacturing product-testing labor 63,000
G) Manufacturing rework labor and overhead 150,000
H) Materials used in warranty repairs 68,000
I) Process engineering 180,000
J) Product-liability claims 145,000
K) Product-testing equipment 35,000
L) Repairs to equipment maintenance 22,000
M) Scheduled equipment maintenance 90,000
N) Scrap material 125,000
O) Training of manufacturing workers 156,000
What would be the amount of quality costs classified as PREVENTIVE costs for the manufacturing firm?
B a. P 643,000 b. P 701,000 c. P 736,000 d. P 768,000
Solution: Preventive costs: A, I, M & O Internal-failure costs: G, L & N
Appraisal costs: D, E, F & K External-failure costs: B, C, H, & J
37. Palawan Manufacturing Corporation has the following information:
Moving time 8 days Processing time 10 days
Inspection time 2 days Storage time 30 days
What is the manufacturing cycle efficiency (MCE)?
A a. 20% b. 25% c. 60% d. 80%
Solution: MCE: value-added time ÷ throughput time (manufacturing cycle) = 10 ÷ 50
38. Romblon will make P 500,000 if the fishing season weather is good, P 200,000 if the weather is fair, and would
actually lose P 50,000 if the weather is poor during the season. If the weather service gives a 40% probability
of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what is the
expected monetary value for Rizal?
B a. P 200,000 b. P 232,500 c. P 267,500 d. P 500,000
Solution: Expected value (100%) = 40% (500,000) + 25% (200,000) + 35% (-50,000)
39. Rizal Corporation manufactures specialty components for the electronics industry in a highly labor-intensive
environment. Arc Electronics has asked Rizal to bid on a component that Rizal made for Arc last month. The
previous order was for 80 units and required 120 hours of direct labor to manufacture. Arc would now like 240
additional components. Rizal experiences an 80% learning curve on all of its jobs. The number of direct labor
hours needed for Rizal to complete the 240 additional components is:
A a. 187.2 b. 256.0 c. 307.2 d. 360.0
Solution: Average hours per unit (based on 80 units): 120 hours ÷ 80 units = 1.5
Average hours per unit (based on 320 units): 1.5 x 80% x 80% = 0.96
Total hours (based on 320 units): 320 units x 0.96 = 307.2
Total hours for 240 additional units (320 units less 80 units): 307.2 hours – 120 hours
40. Samar Company incurred direct costs of P 500,000 based on a particular course of action during 2023. If a
different course of action had been taken, direct costs would have been P 400,000. In addition, Samar’s 2023
fixed costs were P 90,000. What was the incremental cost?
C a. P 10,000 b. P 90,000 c. P 100,000 d. 190,000
Solution: 500,000 – 400,000 NOTE: Fixed costs are considered irrelevant, unless avoidable.
41. Surigao plans to shut down a division with a P 20,000 contribution margin. Overhead allocated is P 50,000,
P5,000 of which cannot be eliminated. What is the increase in income by discontinuing the division?
C a. P 5,000 b. P 20,000 c. P 25,000 d. P 30,000
Solution: Segment margin = CM – avoidable fixed cost = 20,000 – (50,000 – 5,000) = (P 25,000)

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42. Sultan K Company currently sells 10,000 units of product M for P 18.00 each. Variable costs are P 8.00 per
unit. A discount store has offered P 16.00 for 4,000 units of product M. The managers believe that if they
accept the special order, they will lose some sales at the regular price.
Determine the number of units Sultan could lose before the order became unprofitable.
C a. 2,000 units b. 2,667 units c. 3,200 units d. 5,000 units
Solution: Special order margin = Regular sales margin → 4,000 (16 – 8) = x (18 – 8)
43. South C Company is approached by a customer to fulfill a large one-time-only special order for a product
similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Direct materials P 455
Direct labor 300
Variable manufacturing support 45
Fixed manufacturing support 100
Total manufacturing costs P 900
Mark-up (60%) 540
Targeted selling price P 1,440
South C has excess capacity. If South C accepts the order, direct materials cost will increase by P 30 per unit.
What is the minimum acceptable price of this one-time-only special order?
A a. P 830 b. P 900 c. P 930 d. P 1,470
Solution: Minimum price (with excess capacity) = (455 + 30) + 300 + 45
44. Siquijor Company uses 8,000 units of a certain part in production each year. Presently, this part is purchased
from an outside supplier at P 12 per unit. For some time now, there has been idle capacity in the factory that
could be utilized to make this part. The following are the unit costs of making this part internally:
Direct materials P 3.25
Direct labor 2.75
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 5.00
The above fixed manufacturing overhead represents an allocation of existing costs to this part. However, there
would be an increase of P 12,000 in fixed manufacturing overhead costs for the salary of a new supervisor. If
Siquijor outsources the part from the outside supplier, what is the effect on a per-unit basis?
D a. P 2.50 savings b. P 3.50 savings c. P 1.00 loss d. P 2.50 loss
Solution: Relevant cost to make = 3.25 + 2.75 + 2 + (12,000 ÷ 8,000) = 9.5 vs. Relevant cost to buy = 12
45. Batangas produces two products, A and B. The company has 100 pounds of raw materials and 300 direct labor
hours available for production. The time requirement and contribution margins per unit are as follows:
A B
Raw materials per unit (pounds) 1 2
Direct labor hours per unit 4 2
Contribution margin per unit P4 P5
What is the objective function for maximizing profits and the equation for the constraint on raw materials?
Objective Function Constraint on raw materials
B a. Max Z = 1 A + 2 B 4 A + 2 B < 100
b. Max Z = 4 A + 5 B 1 A + 2 B < 100
c. Max Z = 4 A + 2 B 4 A + 5 B < 100
d. Min Z = 4 A + 5 B 4 A + 2 B < 300
Items 46 to 49 are based on the following information
The following is available for an investment center of Bulacan Corporation for 2023:
Sales P 100,000
Operating expenses 85,000
Average operating assets 40,000
Stockholder’s equity 25,000
Required rate of return 18%
46. Determine the operating profit margin.
A a. 15% b. 25% c. 37.5% d. 60%
Solution: Profit margin = operating income ÷ sales = (100,000 – 85,000) ÷ 100,000
47. What is the assets turnover?
B a. 1.5x b. 2.5x c. 3.5x d. 4x
Solution: Assets turnover = sales ÷ operating assets = 100,000 ÷ 40,000
48. What is the return on investment?
C a. 15% b. 25% c. 37.5% d. 60%
Solution: RoI = operating income ÷ operating assets = (100,000 – 85,000) ÷ 40,000
RoI (alternative solution) = profit margin x assets turnover = 15% x 2.5
49. What is the residual income?
B a. P 7,200 b. P 7,800 c. P 9,600 d. P 15,000
Solution: Residual income = operating income – required income = 15,000 – 18% (40,000)

MS Preweek
50. The following information is available for Cavite Enterprises for 2023:
Net operating profit after taxes P 36,000,000
Depreciation expense 15,000,000
Change in net working capital 10,000,000
Capital expenditures 12,000,000
Invested capital (total assets – current liabilities) 100,000,000
Weighted average cost of capital 10%
What is the amount of the economic value added (EVA)?
B a. P 36,000,000 b. P 26,000,000 c. P 20,000,000 d. P 15,000,000
Solution: EVA = profit after tax – required profit = 36 M – 10% (100 M)
Items 51 & 52 are based on the following information
The Motor Division of Iloilo Zodiac Corporation uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average
cost of P 100. The Carburetor Division of Iloilo Zodiac manufactures the exact type of carburetor that the Motor
Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and
sells all of its output to a foreign car manufacturer at P 106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs P 70
Variable selling costs 10
All fixed costs 10
The Carburetor Division would not incur any variable selling costs on units that are transferred internally.
51. What is the maximum of the transfer price range for a transfer between the two divisions?
B a. P 106 b. P 100 c. P 90 d. P 70
Solution: Maximum transfer price is based on the purchase price offered by the outside supplier.
52. What is the minimum of the transfer price range for a transfer between the two divisions?
C a. P 70 b. P 90 c. P 96 d. P 106
Solution: Minimum transfer price (full capacity): 106 – 10
Alternatively, minimum transfer price = Unit VC + Lost UCM = 70 + (106 – 80)
An organization sells a single product for P 40 per unit, which it purchases for P 20. The salespeople receive a
salary plus a commission of 5% of sales. Last year the organization’s net income (after taxes) was P 100,800.
The organization is subject to an income tax rate of 30%. The fixed costs of the organization are:
Advertising P 124,000
Rent 60,000
Salaries 180,000
Other fixed costs 32,000
Total P 396,000
53. What is the breakeven point in unit sales for the organization?
D a. 8,800 units b. 18,000 units c. 19,800 units d. 22,000 units
Solution: BEP: 396,000 ÷ (40 – 20 – 2)
54. The organization is considering changing the compensation plan for sales personnel. If the organization
increases the commission to 10% of sales and reduces salaries by P 80,000, what peso sales volume must the
organization have in order to earn the same net income as last year?
C a. P 1,042,000 b. P 1,100,000 c. P 1,150,000 d. P 1,630,000
Solution: Required peso sales: [(396,000 – 80,000) + (100,800 ÷ 0.7)] ÷ [40 – (20 + 4)] = 28,750 units
55. Product RST has sales of P 200,000, a contribution margin ratio of 20% and a margin of safety of P 80,000.
What is RST’s fixed cost?
B a. P 16,000 b. P 24,000 c. P 80,000 d. P 96,000
Solution: Margin of safety x CMR = profit = 16,000 CM = 200,000 x 20% = 40,000 FC = CM – profit
56. A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes
annually but forecasts that it will produce and sell only 500,000 boxes in the next year. The costs to produce
and distribute the candy are detailed below. The organization has invested capital of P 6.75 million.
Variable costs per pound
Manufacturing P 4.85
Packaging 0.35
Distribution 1.80
Total P 7.00
Annual fixed costs
Manufacturing overhead P 810,000
Marketing and distribution 270,000
What selling price per pound that the confectioner should charge for a one-pound box of candy to obtain a
20% rate of return on invested capital?
D a. P 9.70 b. P 11.05 c. P 11.50 d. P 11.86
Solution: FULL COST per box: 7 + [(810,000 + 270,000) ÷ 500,000] = P 9.16
PROFIT per box: 20% (6.75 M) ÷ 500,000 = P 2.70 Selling price = full cost + profit

MS Preweek
57. Sorsogon’s income declined by 300% when sales declined from P 10 M to P 8 M. What was the operating
leverage?
C a. 2.7 times b. 12 times c. 15 times d. 30 times
Solution: DOL = CM ÷ profit before tax = ∆% pre-tax profit ÷ ∆ % sales = 300% ÷ 20%
58. Tarlac Company had the following costs when it produces 100,000 and sold 80,000 units of its only product:
Manufacturing costs Selling & Admin. Costs
Fixed P 180,000 Fixed P 90,000
Variable 160,000 Variable 40,000
How much lower would net income be if it used variable costing (VC) instead of absorption costing (AC)?
A a. P 36,000 b. P 54,000 c. P 68,000 d. P 94,000
Solution: ∆ income = ∆ Inventory x unit FFOH = (100,000 – 80,000) x (180,000 ÷ 100,000)
NOTE: If Production > Sales, then Ending Inventory > Beginning Inventory, AC profit > VC profit
59. Negros Company manufactures a single product. Unit variable production costs are P 20 and fixed production
costs are P 150,000. Athens uses a normal activity of 10,000 units to set its standard costs. Athens began
the year with no inventory, produced 11,000 units, and sold 10,500 units.
Ending inventory under absorption costing amounts to:
C a. P 10,000 b. P 15,000 c. P 17,500 d. P 20,000
Solution: Absorption (full) costing inventory: [20 + (150,000 ÷ 10,000)] x (11,000 – 10,500)
NOTE: Once normal capacity is given, the unit FFOH is based on NORMAL production. A capacity or volume
variance explains any difference between the normal capacity used and actual production attained.
Agusan Company has a budgeted normal monthly capacity of 5,000 labor hours with a standard production of
4,000 units at this capacity. Standard costs are:
Materials 2 kilos at P1.00
Labor P 8.00 per hour
Factory overhead at normal capacity:
Fixed expenses P 5,000.00
Variable expenses P 1.50 per labor hour
During November, actual factory overhead totaled P 11,250 and 4,500 labor hours cost P 33,750. Production
during the month was 3,500 units using 7,200 kilos of materials at a cost of P 1.20 per kilo.
60. What was the material price variance?
A a. P 1,440 U b. P 3,440 U c. P 204 F d. P 2,187.50 F
Solution: Material price variance (MPV): AQ (AP – SP) = 7,200 (1.20 – 1.00)
NOTE: If silent, MPV is preferably based on actual quantity of materials purchased (i.e., MPPV).
61. What was the labor efficiency variance?
B a. P 2,250 U b. P 1,000 U c. P 2,187.50 F d. P 62.50 F
Solution: Labor efficiency variance: (AH – SH) SR [4,500 – 3,500 (1.25*)] 8
* Standard hours per unit (based on normal capacity): 5,000 ÷ 4,000 = 1.25
A company uses a standard cost system and prepared the budget for May when 24,000 machine hours of
activity were expected: variable overhead, P 48,000; fixed overhead: P 240,000. Actual data for May were:
Standard machine hours allowed for output attained: 25,000 Variable overhead incurred: P 50,000
Actual machine hours worked: 24,000 Fixed overhead incurred: P 250,000
62. What was the standard variable overhead rate for May?
A a. P 2.00 b. P 2.08 c. P 5.00 d. P 5.21
Solution: Standard variable overhead rate: P 48,000 ÷ 24,000 machine hours
63. What were the variable-overhead (A) spending and (B) efficiency variances, respectively?
D a. P 0, P 0 b. P 0, P 2,000 U c. P 2,000 U, P 0 d. P 2,000 U, P 2,000 F
Solution: VFOH spending variance: AFOH (V) – BAAH (V) = 50,000 – 24,000 (2)
VFOH overhead efficiency variance: BAAH (V) – BASH (V) = (AH – SH) VR = (24,000 – 25,000) 2
64. What were the fixed-overhead (A) budget and (B) volume variances, respectively?
D a. P 0, P 10,000 F b. P 10,000 F, P 0 c. P 10,000 U, P 0 d. P 10,000 U, P 10,000 F
Solution: FFOH budget (spending) variance: AFOH (F) – BAAH (F) = 250,000 – 240,000
FFOH volume variance: BASH (F) – SHSR (F) = 240,000 – 25,000 (240,000 ÷ 24,000)
NOTE: In standard cost variance analysis, under-applied = unfavorable (over-applied = favorable)
65. Lanao Company began operations on January 1 of the current year with a P 12,000 cash balance. 40% of
sales are collected in the month of sale; 60% are collected in the month following sale. 20% of purchases are
paid in the month of purchase, and 80% are paid in the month following purchase.
January February
Sales P 35,000 P 55,000
Purchases 30,000 40,000
Operating expenses (P 2,500 monthly depreciation) 7,000 9,000

MS Preweek
If operating expenses are paid in the month incurred, what is the increase in cash balance for February?
B a. P 2,000 increase b. P 4,500 increase c. P 5,000 increase d. P 7,500 increase
Solution: 40% (55,000) + 60% (35,000) – 20% (40,000) – 80% (30,000) – (9,000 – 2,500)
Zamboanga Company has budgeted quarterly sales for the year 2024 as follows:
Quarter 1 2 3 4
Sales in unit 12,000 14,000 18,000 16,000
The ending inventory of finished goods for each quarter should equal 25% of the next quarter's budgeted
sales in units. Four pounds (lbs.) of raw materials are required for each unit produced. The raw materials
inventory at the end of each quarter should equal 10% of the next quarter's production needs in materials.
66. What is the budgeted or scheduled production for the third quarter (in units)?
B a. 16,500 b. 17,500 c. 18,000 d. 18,500
Solution: 3Q production = sales + closing units – opening units = 18,000 + (25% x 16,000) – (25% x 18,000)
67. Assuming that the budgeted production in second quarter is 15,000 units, what would be budgeted purchases
of raw materials in the second quarter (in pounds)?
A a. 61,000 b. 61,500 c. 62,000 d. 62,500
Solution: Q2 purchases = usage + closing lbs. – opening lbs. = (15,000 x 4) + 0.1 (17,500 x 4) – 0.1 (15,000 x 4)
Misamis Company presents the results of its budgeted manufacturing operations for 2024:
January 1, 2024 December 31, 2024
Direct materials P 36,000 P 30,000
Work-in-process 18,000 12,000
Finished goods 54,000 72,000
Additional budgeted information for the year 2024:
Direct materials purchases P 84,000
Direct manufacturing labor payroll 60,000
Direct manufacturing labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00
68. What was 2024’s budgeted prime cost?
D a. P 90,000 b. P 120,000 c. P 144,000 d. P 150,000
Solution: DM usage: (36,000 + 84,000 - 30,000) DL: 60,000
69. What was 2024’s budgeted conversion cost?
B a. P 90,000 b. P 140,000 c. P 144,000 d. P 170,000
Solution: DL: 60,000 FOH: (60,000 ÷ 7.50) 10
70. What was 2024’s budgeted cost of goods manufactured?
D a. P 218,000 b. P 224,000 c. P 230,000 d. P 236,000
Solution: TMC: 90,000 + 60,000 + 80,000 = 230,000 CGM: 230,000 + 18,000 – 12,000
 END 
Terminologies mentioned in the recent CPALEs --- May 2023, May/Oct 2022 & Oct/Dec 2021
FINANCIAL MANAGEMENT MANAGEMENT ACCOUNTING ECONOMICS
Net Present Value, Profitability Index Kaizen Budgeting Unemployment Rate
Du Pont Technique, Debt & Equity Ratio Balanced Scorecard Monopolistic Competition
Line of Credit Controller vs. Treasurer Fiscal Policy
Standard Deviation, Coefficient of Variation Fixed Overhead Spending Variance Monetary Policy
APR & EAR Variable Overhead Efficiency Variance Elasticity
Cash Conversion Cycle Strategy, Scorekeeping Oligopoly
Non-Diversifiable Risks Make vs. Buy, Sell vs. Process Trade Deficit
Solvency Ratio Segment & Controllable Margin Perfect Competition vs. Monopoly
Capital Asset Pricing Model (CAPM) Quantity and Mix Variance Recession, Inflation
Working Capital Policy Profit: Absorption vs. Variable Costing Market Price
Financial Leverage Probability Equilibrium, Supply vs. Demand
Risk Averse vs. Risk Taker Learning Curve Okun’s Law
EOQ & Reorder Point Organizational Chart Social Surplus
Additional Funds Needed Internal Business Processes Job Separation
Inventory Turnover vs. Age of Inventory Management Acct vs. Financial Acct Free Riding
Lockbox System Expected Value of Perfect Information
Beta Coefficient Flexible Budget
Current Ratio vs. Quick Ratio Slope Coefficient OTHERS
Expected Return Operating Leverage “Panunumpa ng Propesyonal”
Project Ranking vs. Screening Material & Labor Variances Price-Recovery Component
Payback Period, Accounting Rate of Return Goodness of Fit Growth Component
Return on Common Equity Coefficient of Correlation Activity Based Costing
Float Product Cost vs. Period Cost Operating Cash Flow (Indirect Method)
Effective Rate High-Low Method
AP Turnover vs. Age of Payable Minimum & Maximum Transfer Price

MS Preweek
 Strategic analysis to operating income in MS-G is generally broken down into three (3) major components:
1) GROWTH component is the change in the operating income due to the change in the units sold by
considering the effect on both the costs and the revenues.
2) PRICE-RECOVERY component is the change in the operating income due to the change in the selling
price of the units sold, change in the input prices and the per-unit price of capacity.
3) PRODUCTIVITY component measures the changes in the costs attributable to the changes in the quantity
of inputs to produce the same output.
 OKUN’s LAW in economics states that a country must grow its gross domestic product (GDP) by 2% in order
to achieve a 1% decrease in the unemployment rate. Conversely, economists can use Okun's law as an
indicator of how much GDP may be lost with rising unemployment rates, based on the following formula:
 PANUNUMPA NG PROPESYONAL (PRC Reg. Form No. 001 – Revised November 2007)
“The winner is not determined at the start of the race; it is usually the last-minute effort
that counts. You are almost at the finish line, so make yourself count.”
– CPL

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 46  October 2023 CPALE  Pre-Week Summary Lecture

MANAGEMENT SERVICES Aljon Lee  Elirie Arañas  Kenneth Manuel

Management Accounting (Part 1)

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Financial Management (Part 2)

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