CMA/CFM

Preparatory Program

New CMA Part 1

Mock Exam

HOCK
international
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 HOCK international – CMA/CFM Distance Learning Program
New CMA Part 1 – Mock Exam

Question 1: In the long run, a firm may experience increasing returns due to

a) The principle of substitution.

b) Opportunity costs.

c) Comparative advantage.

d) Economies of scale.

Question 2: If the price of computers increases and total revenue of the firm increases, then the
demand for computers is

a) Inelastic and the elasticity of demand is greater than one.

b) Inelastic and the elasticity of demand is less than one.

c) Elastic and the elasticity of demand is greater than one

d) Elastic and the elasticity of demand is less than one.

Question 3: Which one of the following most accurately describes the market conditions normally
associated with monopolistic competition?

a) High barriers to entry; homogenous products; many independent firms.

b) Few independent firms; high barriers to entry; differentiated products.

c) Low barriers to entry; homogenous products; many independent firms.

d) Differentiated products; many independent firms; low barriers to entry.

Question 4: The trough of a business cycle is generally characterized by which one of the following?

a) Shortages of essential raw materials.

b) Increasing capital investments.

c) Increasing price level.

d) Unused productive capacity.

Question 5: Information related to the financial transactions for a country is given below with values
stated in billions of US$.

Gross domestic product (GDP) $4,000 Personal taxes 250

Transfer payments 500 Undistributed corporate profits 25
Corporate income taxes 50 Depreciation 500
Social Security contributions 200 Net income earned abroad 0
Indirect business taxes 210

What is Net Domestic Product?

a) $3,500.

b) $3,450.

c) $3,475.

d) $4,500.

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Question 6: Which one of the following statements in regard to tariffs is correct?

a) A tariff reduces foreign demand but increases domestic demand.

b) A tariff reduces both domestic demand and supply.

c) A tariff increases the price of domestic and imported products

d) A tariff reduces the price of domestic products and increases domestic supply.

Question 7: If a small percentage increase in the price of a good greatly reduces the quantity
demanded for that good, the demand for that good is

a) Price inelastic.

b) Price elastic.

c) Unit price elastic.

d) Income elastic.

Question 8: The US current account includes

a) Imports and exports of machinery.

b) Imports and exports of government bonds.

c) Foreign direct investment.

d) All of the above.

Question 9: Foreign trade

a) Allows a country to avoid tradeoffs.

b) Makes a country more equitable.

c) Allows a country to have a greater variety of products at a lower cost than if it tried to produce
everything at home.

d) None of the above.

Question 10: The Phillips curve suggests that

a) An increase in inflation temporarily increases unemployment.

b) A decrease in inflation temporarily increases unemployment.

c) Inflation and unemployment are unrelated in the short-run.

d) None of the above.

Question 11: Which of the following is part of the opportunity cost of going on vacation?

a) The money that you would have made by staying home and going to work.

b) The money that you spent for the rental car on vacation.

c) The money that you spent on food during the vacation.

d) The money you spent at the amusement park on vacation.

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New CMA Part 1 – Mock Exam

The following information should be used for Questions 12-15:

Bacon 60
A F
● B ●
50 ●

40

E C
30 ● ●

20

10
D
●
10 20 30 40 50 60

Eggs

Question 12: If the economy is operating at Point C, the opportunity cost of producing an additional 15
units of bacon is

a) 10 units of eggs.

b) 20 units of eggs.

c) 30 units of eggs.

d) 40 units of eggs.

Question 13: If the economy is operating at Point E

a) The opportunity cost of 20 additional units of eggs if 10 units of bacon.

b) The opportunity cost of 20 additional units of eggs if 20 units of bacon.

c) The opportunity cost of 20 additional units of eggs if 30 units of bacon.

d) 20 additional units of eggs can produced with no impact on bacon production.

Question 14: Point F represents

a) A combination of production that can be reached if we reduce the production of eggs by 20 units.

b) A combination of production that is inefficient because there are unemployed resources.

c) A combination of production that can be reached if there is a sufficient advance in technology.

d) None of the above.

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Question 15: As we move from Point A to Point D

a) The opportunity cost of eggs in terms of bacon is constant.

b) The opportunity cost of eggs in terms of bacon falls.

c) The opportunity cost of eggs in terms of bacon rises.

d) The economy becomes more efficient.

Question 16: Which of the following statements about trade is true?

a) Unrestricted international trade benefits every person in a country equally.

b) People that are skilled at all activities cannot benefit from trade.

c) Trade can benefit everyone in society because it allows people to specialize in activities in which
they have an absolute advantage.

d) Trade can benefit everyone in society because it allows people to specialize in activities in which
they have a comparative advantage.

The following information should be used for Questions 17-20: The following table shows the
units of output a worker can produce per month in Australia and Korea.

Food Electronics

Australia 20 5

Korea 8 4

Question 17: Which of the following statements about absolute advantage is true?

a) Australia has an absolute advantage in the production of food while Korea has an absolute
advantage in the production of electronics.

b) Korea has an absolute advantage in the production of food while Australia has an absolute
advantage in the production of electronics.

c) Australia has an absolute advantage in the production of both food and electronics.

d) Korea has an absolute advantage in the production of both food and electronics.

Question 18: The opportunity cost of 1 unit of electronics in Australia is

a) 5 units of food.

b) 1/5 of a unit of food.

c) 4 units of food.

d) 1/4 of a unit of food.

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Question 19: Korea should

a) Specialize in food production, export food and import electronics.

b) Specialize in electronics production, export electronics and import food.

c) Produce both goods because neither country has a comparative advantage.

d) Produce neither because it has an absolute disadvantage in the production of both goods.

Question 20: Prices of electronics can be stated in terms of units of food. What is the range of prices
of electronics for which both countries could gain from trade?

a) The price must be greater than 1/5 of a unit of food, but less than 1/4 of a unit of food.

b) The price must be greater than 4 units of food, but less than 5 units of food.

c) The price must be greater than 1/4 of a unit of food, but less than 1/2 of a unit of food.

d) The price must be greater than 2 units of food, but less than 4 units of food.

Question 21: A perfectly competitive market has

a) Only one seller.

b) At least a few sellers.

c) Many buyers and sellers.

d) Firms that set their own prices.

Question 22: If an increase in the price of blue jeans leads to an increase in the demand for tennis
shoes, then blue jeans and tennis shoes are

a) Substitutes.

b) Complements.

c) Normal goods.

d) Inferior goods.

Question 23: Suppose there is an increase in both the supply and the demand for personal computers.
In the market for personal computers, we would expect

a) The equilibrium quantity to rise and the equilibrium price to rise.

b) The equilibrium quantity to rise and the equilibrium price to fall.

c) The equilibrium quantity to rise and the equilibrium price to remain unchanged.

d) The equilibrium quantity to rise and the change in the equilibrium price to be unknown.

Question 24: Which of the following is true about the impact of an increase in the price of lettuce?

a) The supply for lettuce will decrease.

b) The equilibrium price and quantity of salad dressing will rise.

c) The equilibrium price and quantity of salad dressing will fall.

d) None of the above.

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Question 25: Suppose a frost destroys much of the Florida orange crop. At the same time, suppose
consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium price and
quantity in the market for orange juice?

a) Price will increase, the change in quantity will be unknown.

b) Price will increase, quantity will increase.

c) Price will increase, quantity will decrease.

d) Price will decrease, the change in quantity will be unknown.

Question 26: Which of the following will not shift a country’s production possibilities frontier outward?

a) An increase in the fixed assets of the country.

b) An advance in technology.

c) A reduction in unemployment.

d) An increase in the labor force.

The following information is for Questions 27 and 28: Suppose that at a price of $30 per month,
there are 30,000 subscribers to cable television in Big Town. If Big Town Cablevision raises the price to
$40 per month, subscribers will fall to 20,000.

Question 27: What is the price elasticity of demand for cable TV in Big Town, using the midpoint
method?

a) 0.66

b) 0.75

c) 1.0

d) 1.4

Question 28: At which of the following prices does Big Town Cablevision earn the greatest total
revenue?

a) Either $30 or $40 because the price elasticity of demand is 1.0.

b) $30 per month.

c) $40 per month.

d) $0 per month.

Question 29: Which of the following is not employed as an argument in support of trade restrictions?

a) Free trade destroys domestic jobs.

b) Free trade harms the national security if vital products are imported.

c) Free trade is harmful to importing countries if foreign countries subsidize their exporting
industries.

d) Free trade harms both domestic producers and domestic consumers and therefore reduces total
surplus.

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Question 30: The higher the exchange rate for a foreign currency, the:

a) Lower the cost of imported goods and the lower the demand for foreign exchange.

b) Lower the cost of imported goods and the higher the demand for foreign exchange.

c) Higher the cost of imported goods and the higher the demand for foreign exchange.

d) Higher the cost of imported goods and the lower the demand for foreign exchange.

Question 31: Suppose the world consists of two countries – the US and Mexico. Further, suppose there
are only two goods – food and clothing. Which of the following statements is true?

a) If the US has an absolute advantage in the production of food, then Mexico must have an
absolute advantage in the production of clothing.

b) If the US has a comparative advantage in the production of food, then Mexico must have a
comparative advantage in the production of clothing.

c) If the US has a comparative advantage in the production of food, then it must also have a
comparative advantage in the production of clothing.

d) If the US has a comparative advantage in the production of food, then Mexico must might also
have a comparative advantage in the production of food.

Question 32: Under a system of floating exchange rates, the exchange rate is

a) Determined by governments.

b) Market determined.

c) Both a) and b).

d) Neither a) nor b).

Question 33: A country which pegs its exchange rate and runs a persistent balance of payments
deficits also runs the risk of

a) High unemployment.

b) Running out of foreign exchange.

c) Accumulating too much foreign exchange.

d) Its exchange rate rising.

Question 34: The three major tools which the Federal Reserve uses to control the reserves of banks
are:

a) Open market operations, the federal funds rate and the government deficit.

b) Open market operations, the federal funds rate and the discount rate.

c) Open market operations, legal reserve requirements and the federal funds rate.

d) Open market operations, legal reserve requirements and the discount rate.

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Question 35: If Federal Aviation Administration regulation of airline passenger service decreases the
variable costs of the airlines by requiring fewer expenditures on quality checks and maintenance, then

a) Fixed costs will fall.

b) Prices will fall in the short and long run.

c) In the long run, the industry will tend to have more firms producing lower levels of output.

d) Prices will rise in the short-term as a result of the new requirements, but fall in the long run.

Question 36: The sale of government securities in the open market will

a) Increase bank reserves.

b) Decrease bank reserves.

c) Raise the money supply.

d) Reduce the discount rate.

Question 37: If the Federal Reserve were to simultaneously buy government bonds in the open market
and raise the legal reserve requirement on deposits

a) The money supply will increase.

b) The money supply will decline.

c) The money supply will remain the same.

d) The two actions work in opposite directions and the effect on the money supply is uncertain.

Question 38: The main difference between personal income and personal disposable income is

a) Sales tax.

b) Payroll and income taxes (including transfer payments).

c) Excise taxes.

d) Government spending.

Question 39: Which of the following is true concerning economics of ethical decision making?

i) The higher the probability of detection, the more likely one is to cheat.

ii) The higher the sanctions imposed if one is detected, the less likely one is to cheat.

iii) The unexpected costs of unethical behavior are lower if information about cheating is rapidly
and widely distributed.

a) i and iii only.

b) i, ii and iii.

c) i only.

d) ii only.

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Question 40: If the Federal Reserve purchases $50 million of government securities in the open market,
with a 0.10 required reserve ratio, the maximum increase in deposits would be

a) $5 million.

b) $50 million.

c) $500 million.

d) $200 million.

Question 41: The direct contribution of the foreign sector to GDP is represented by:

a) Government foreign aid.

b) Net imports.

c) Gross exports less capital inflows.

d) Personal consumption.

Question 42: Which of the following would cause a demand curve for a good to be price inelastic?

a) A greater number of substitutes for the good.

b) The good is inferior.

c) The good is a luxury.

d) The good is a necessity.

Question 43: An increase in the price of beef provides information which

a) Tells consumers to buy more beef.

b) Tells consumers to buy less pork.

c) Tells producers to produce more beef.

d) Provides no information because prices are not related to demand or supply of products.

Question 44: If a nation has an absolute advantage in the production of a good,

a) It can produce that good at a lower opportunity cost than its trading partner.

b) It can produce the good using fewer resources than its trading partner.

c) It can benefit by restricting imports of that good.

d) It will specialize in the production of that good and export it.

Question 45: Swedish technological progress allows them to be more competitive and offer numerous
new products at lower prices next year. Assuming a freely floating exchange rate, this should cause a
US

a) Balance of payments deficit.

b) Balance of payments surplus.

c) Dollar depreciation.

d) Dollar appreciation.

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Questions 46 to 50 are based on the following information: ABC Company manufactures two
garden benches, small and large. Each model is processed as follows:

Matching Polishing

Small (X) 2 hours 3 hours

Large (Y) 4 hours 3 hours

The available time for processing the two models is 100 hours a week in the Matching Department and
90 hours a week in the Polishing Department. The contribution margin expected is $5 for X and $7 for Y.

Question 46: The objective function for the linear program ABC Company would use to determine the
optimal weekly production of each model would be

a) Z=7X+5Y

b) 2X+4Y≥90

c) Z=5X+7Y

d) 3X+3Y≤100

Question 47: The Polishing constraint for ABC Company’s linear program would be

a) 3X+3Y≤100

b) 4X+3Y≤90

c) 2X+3Y≤100

d) 3X+3Y≤90

Question 48: The optimal mix of products to manufacture is

a) X=10 and Y=20

b) X=20 and Y=10

c) X=0 and Y=30

d) X=40 and Y=0

Question 49: The maximum possible profit is

a) 120

b) 190

c) 240

d) 380

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Question 50: What is the maximum price that ABC Company would be willing to pay for 20 extra hours
of working time in the Matching Department?

a) $90

b) $20

c) $130

d) $200

Question 51: The table below shows the estimated probabilities of the percent of defective units
resulting from a production run.
Percent Defective Probability
2% 30%
3% 50%
4% 20%
The expected percent defective for a production run would be

a) 1.50%.

b) 2.30%.

c) 2.90%.

d) 3.00%.

Question 52: When simulating with the Monte Carlo technique, the average simulated demand over the
long run should approximate the

a) actual demand.

b) real demand.

c) sampled demand.

d) expected demand.

Question 53: Hanson Company manufactures two different types of receivers, a regular Model R and a
special features Model S. The company has limited resources. On an annual basis it has a total of 480
direct labor-hours and a total of 300 lbs. of material available for use in the manufacture of these
receivers. The company uses linear programming to determine a production schedule that will maximize
the company’s profit.
Based on the company’s current data on selling prices and production costs, it is estimated that the sale
of Model R will contribute $7 profit per unit and the sale of Model S will contribute $10 profit per unit.
Resources used in the production of the two receivers are as follows. (Let Model S = S and Model R = R.)
Model S Model R
Raw materials used per unit 5 lbs. 3 lbs.
Labor used per unit 6 hours 4 hours

The constraint function for labor hours can be expressed as

a) 5S + 3R ≤ 300.

b) 6S – 4R ≤ 480.

c) 6S + 4R ≤ 480.

d) 11S + 7R ≤ 480.

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Question 54: Reeves Inc. has developed a new production process to manufacture its product. The
new process is complex and requires a high degree of technical skill. However, management believes
there is a good opportunity for the employees to improve as they become more familiar with the
production process. The production of the first unit requires 100 direct labor hours. If a 70% learning
curve is used, the cumulative direct labor hours required to produce a total of eight units would be

a) 196 hours.

b) 274 hours.

c) 392 hours.

d) 560 hours.

Question 55: An accounting system identification code that utilizes a sum-of-digits check digit will
detect all of the following errors except

a) completeness errors.

b) transcription errors.

c) transposition errors.

d) validity errors.

Question 56: To avoid potential errors and irregularities, a well designed system of internal accounting
control in the accounts payable area should include segregation of which of the following functions from
each other?

a) Cash disbursements and vendor invoice verification

b) Vendor invoice verification and merchandise ordering

c) Physical handling of merchandise received and preparation of receiving reports

d) Check signing and cancelation of payment documentation

Question 57: Which of the following departments should have the responsibility for authorizing payroll
rate changes?

a) Personnel

b) Payroll

c) Treasurer

d) Timekeeping

Question 58: Which of the following control procedures may prevent the failure to bill customers for
some shipments?

a) Each sales order should be approved by authorized personnel.

b) Sales journal entries should be reconciled to daily sales summaries.

c) Each shipment should be supported by a prenumbered sales invoice that is accounted for.

d) Each sales invoice should be supported by a shipping document.

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Question 59: In general, material irregularities perpetrated by which of the following are most difficult
to detect?

a) Cashier

b) Internal auditor

c) Key-punch operator

d) Controller

Question 60: To provide the greatest degree of independence in performing internal auditing functions,
an internal auditor should probably report to the

a) Financial vice-president.

b) Board of directors.

c) Corporate controller.

d) Corporate stockholders.

Question 61: Auditing to determine whether an entity is managing and using its resources
economically and efficiently would most appropriately be classified as:

a) Compliance auditing.

b) Financial auditing.

c) Operational auditing.

d) Program results auditing.

Question 62: The best description of the purpose of internal auditing is that it:

a) Reviews the reliability and integrity of financial and operating information.

b) Reviews the means of safeguarding assets and, as appropriate, verifies the existence of such
assets.

c) Furnishes members of the organization with information needed to effectively discharge their
responsibilities.

d) Appraises the economy and efficiency with which resources are employed.

Question 63: A firm uses a centralized computer system that allows its traveling sales personnel to
directly enter new orders and to query the database on old orders. To maintain data integrity in this
application, it would be important to have:

a) Backup.

b) Password protection.

c) Uninteruptable power supplies.

d) Encryption.

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Question 64: Independence permits internal auditors to render impartial and unbiased judgments. The
best way to achieve independence is through:

a) Individual knowledge and skills.

b) Organizational status and objectivity.

c) Supervision within the organization.

d) Organizational knowledge and skills.

Question 65: The charter of the internal audit department should:

a) Provide recommended formats to report significant audit findings and recommendations.

b) Describe audit programs to be carried out.

c) Define the audit department’s work schedule, starting plan, and financial budget.

d) Authorize access to records, personnel, and physical properties relevant to the performance of
audits.

Question 66: A subsidiary president terminated a controller and hired a replacement without the
required corporate approvals. Sales, cash flow, and profit statistics were then manipulated by the new
controller and president via accelerated depreciation and sale of capital assets to obtain larger
performance bonuses for the controller and the subsidiary president. An approach that might detect this
fraudulent activity would be:

a) Analysis of overall management control for segregation of duties.

b) Required exit interviews for all terminated employees.

c) Periodic changes of outside public accountants.

d) Regular analytical review of operating divisions.

Question 67: The organizational status of the internal audit department

a) Is best when the reporting relationship is direct to the board of directors.

b) Requires the board’s annual approval of the audit schedules, plans and budgets.

c) Should be sufficient to permit the accomplishment of its audit responsibilities.

d) Is guaranteed when the charter specifically defines its independence.

Question 68: Which of the following is not a common cause of accidental damage to a computer-
based information system or the data it holds?

a) Interruptions to the power supply

b) Inaccurate data entry

c) Attempts to carry out tasks beyond the ability of the employee

d) Failure to comply with procedures for the use of organizational information systems

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Question 69: The use of the Internet for internal use within companies is:

a) An intranet

b) An extranet

c) A legacy system

d) None of the above

Question 70: Birch Corporation had net income for the year of $101,504 and a simple capital structure
consisting of the following common shares outstanding:

Months Outstanding Number of Shares

January - February 24,000

March - June 29,400

July - November 36,000

December 35,040

Total 124,440

Birch Corporation's basic earnings per share (rounded to the nearest cent) were

a) $3.20

b) $3.45

c) $3.26

d) $2.90

Question 71: Which of the following ratios should be used in evaluating the effectiveness with which
the company uses its assets?

Receivables Turnover Dividend Payout Ratio

a) No No

b) Yes Yes

c) Yes No

d) No Yes

Question 72: In analyzing a company's financial statements, which financial statement would a
potential investor primarily use to assess the company's liquidity and financial flexibility?

a) Statement of cash flows.

b) Income statement.

c) Balance sheet.

d) Statement of retained earnings.

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Question 73: During 2001, Rand Co. purchased $960,000 of inventory. The cost of goods sold for 2001
was $900,000, and the ending inventory at December 31, 2001 was $180,000. What was the inventory
turnover for 2001?

a) 6.4

b) 5.3

c) 5.0

d) 6.0

Question 74: Are the following ratios useful in assessing the liquidity position of a company?

Current Return on
Ratio Shareholders' Equity

a) No Yes

b) No No

c) Yes No

d) Yes Yes

Question 75: In a comparison of 2001 with 2000, Neir Co.'s inventory turnover ratio increased
substantially, although sales and inventory amounts were essentially unchanged. Which of the following
statements explains the increased inventory turnover ratio?

a) Accounts receivable turnover increased.

b) Gross profit percentage decreased.

c) Total asset turnover increased.

d) Cost of goods sold decreased.

Question 76: According to the FASB conceptual framework, which of the following relates to both
relevance and reliability?

a) Verifiability.

b) Comparability.

c) Timeliness.

d) Feedback value.

Question 77: A useful tool in financial statement analysis is the common-size financial statement. What
does this tool enable the financial analyst to do?

a) Determine which companies in the same industry are at approximately the same stage of
development.

b) Evaluate financial statements of companies within a given industry of approximately the same
value.

c) Ascertain the relative potential of companies of similar size in different industries.

d) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time
or between companies within a given industry without respect to relative size.

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Question 78: According to the FASB conceptual framework, which of the following situations violates
the concept of reliability?

a) Financial statements are issued 9 months late.

b) Financial statements include property with a carrying amount increased to management's

estimate of market value.

c) Management reports to shareholders regularly refer to new projects undertaken, but the financial
statements never report project results.

d) Data on segments having the same expected risks and growth rates are reported to analysts
estimating future profits.

Question 79: Select Co. had the following 2001 financial statement relationships:

Asset turnover 5

Profit margin on sales 0.02

What was Select's 2001 percentage return on assets?

a) 0.4%

b) 2.5%

c) 10.0%

d) 0.1%

Question 80: The following data pertain to Ruhl Corp.'s operations for the year ended December 31,
2001:

Operating income $800,000

Interest expense 100,000

Income before income tax 700,000

Income tax expense 210,000

Net income $490,000

The times-interest-earned ratio is

a) 7.0 to 1.

b) 8.0 to 1.

c) 5.9 to 1.

d) 4.9 to 1.

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Question 81: Birch Corporation had net income for the year of $101,504 and a simple capital structure
consisting of the following common shares outstanding:

Months Outstanding Number of Shares

January - February 24,000

March - June 29,400

July - November 36,000

December 35,040

Total 124,440

Assume Birch Corporation issued a 20% stock dividend on June 30 (which is not taken into account in
the above figures). In this case, BEPS (rounded to the nearest cent) were

a) $2.41

b) $2.88

c) $2.76

d) $2.70

Question 82: The following data pertain to Thorne Corp. for the calendar year 2001:

Net income available to common shareholders $240,000

Dividends paid on common stock 120,000

Common stock outstanding (unchanged during year) 300,000 shares

The market price per share of Thorne's common stock at December 31, 2001 was $12. The price-
earnings ratio at December 31, 2001 was

a) 9.6 to 1.

b) 30.0 to 1.

c) 15.0 to 1.

d) 10.0 to 1.

Question 83: Which of the following accounting pronouncements is the most authoritative?

a) AICPA Accounting Principles Board Opinion.

b) AICPA Statement of Position.

c) FASB Technical Bulletin.

d) FASB Statement of Financial Accounting Concepts.

Question 84: Which of the following is considered a pervasive constraint by SFAC 2?

a) Verifiability.

b) Conservatism.

c) Timeliness.

d) Costs and benefits.

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Question 85: In the hierarchy of generally accepted accounting principles, APB Opinions have the same
authority as AICPA

a) Audit and Accounting Guides.

b) Issues Papers.

c) Accounting Research Bulletins.

d) Statements of Position.

Question 86: How is the average inventory used in the calculation of each of the following?

Acid-test Inventory
(Quick) Ratio Turnover Rate

a) Numerator Denominator

b) Not used Numerator

c) Numerator Numerator

d) Not used Denominator

Question 87: Heath Co.'s current ratio is 4:1. Which of the following transactions would normally
increase its current ratio?

a) Collecting an account receivable.

b) Selling inventory on account.

c) Purchasing inventory on account.

d) Purchasing machinery for cash.

Question 88: What are the Statements of Financial Accounting Concepts intended to establish?

a) Generally accepted accounting principles in financial reporting by business enterprises.

b) The meaning of "present fairly in accordance with generally accepted accounting principles."

c) The hierarchy of sources of generally accepted accounting principles.

d) The objectives and concepts for use in developing standards of financial accounting and reporting.

Question 89: Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the
following transactions would improve Gil's current ratio?

a) Paying $20,000 of short-term accounts payable.

b) Purchasing $50,000 of merchandise inventory with a short-term account payable.

c) Collecting $10,000 of short-term accounts receivable.

d) Refinancing a $30,000 long-term mortgage with a short-term note.

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Question 90: Which of the following ratios is(are) useful in assessing a company's ability to meet
currently maturing or short-term obligations?

Acid-Test Ratio Debt-to-Equity Ratio

a) No Yes

b) No No

c) Yes Yes

d) Yes No

Question 91: In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is the better company?

a) A high current ratio may indicate inefficient use of some assets.

b) A high current ratio may indicate inadequate inventory on hand.

c) The current ratio includes assets other than cash.

d) The two companies may define working capital in different terms.

Question 92: At December 30, 2001, Solomon Co. had a current ratio greater than 1:1 and a quick
ratio less than 1:1. On December 31, 2001, all cash was used to reduce accounts payable. How did these
cash payments affect the ratios?

Current Ratio Quick Ratio

a) Decreased Decreased

b) Increased Decreased

c) Increased Increased

d) Decreased Increased

Question 93: On December 31, 2001, Northpark Co. collected a receivable due from a major customer.
Which of the following ratios would be increased by this transaction?

a) Inventory turnover ratio.

b) Current ratio.

c) Quick ratio.

d) Receivable turnover ratio.

Question 94: Pronouncements considered generally accepted accounting principles include all of the
following except

a) APB Opinions.

b) Interpretations issued by the FASB.

c) AICPA Accounting Research Bulletins.

d) AICPA Issues Papers.

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Question 95: Which of the following would an internal auditor NOT include in a report to management
at the end of an engagement?

a) Areas in which there was not an appropriate segregation of duties.

b) Evidence showing that internal control policies are not functioning properly.

c) An opinion on whether or not the financial statements are fairly presented.

d) Evidence of fraud or illegal acts committed by employees.

Question 96: Independent auditors are responsible for which of the following items during the annual
audit?

a) Designing a plan of internal controls for the organization

b) Working with the client to ensure that the control environment set by management is one
conducive to the achievement of company goals.

c) Evaluating and assessing the functioning of internal controls.

d) Supervising the implementation and execution of new internal controls procedures.

Question 97: Which of the following is not a part of the control environment of a publicly traded
company?

a) The manner in which authority and responsibility are assigned.

b) The policies regarding the employment and retention of staff.

c) The structure of the organization and its reporting process.

d) The vacation policy and scheduling of vacations in the delivery department.

Question 98: Which of the following is not an essential part of an accounting system?

a) Data preparation.

b) Data distribution.

c) Data entry.

d) Transaction processing.

Question 99: Within a capital asset system, which one of the following functions does not need to be
segregated from the others?

a) The authorization to execute sales of capital assets.

b) Investigating differences that arose during the capital asset reconciliation.

c) Recording capital asset transactions.

d) Performing the capital asset reconciliation.

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Question 100: Which of the following items would most likely not be considered a "reportable condition"
and would therefore not be included in a letter to management at the end of engagement?

a) The absence of a proper segregation of duties in one of the departments.

b) Evidence of the failure of control procedures in one of the departments.

c) The absence of appropriate review and approval of disposals in the capital asset department.

d) Evidence that a competitor firm is planning a large promotional campaign in which it will offer a
large discount on its products, which compete with the products of the internal auditor’s
company.

Question 101: Ray Corporation has long-term debt of $1,200,000 and equity of $1,000,000. The board
of directors has set a goal of 1:1 for the company’s debt-equity ratio. Which of the following could the
company employ to achieve this goal?

a) Issuing rights to purchase new common stock.

b) Paying a stock dividend to the existing shareholders.

c) Issuing new bonds.

d) Paying a dividend on its common stock.

Question 102: A wholesaler’s cost of goods sold as a percentage of sales increased from the year ended
December 31, 2002 to the year ended December 31, 2003. Which of the following is most likely to have
caused the increase?

a) An increase in sales volume, resulting in an increase in purchases.

b) Purchases received in December 2002 were recorded as purchases in January 2003.

c) The closing inventory as of December 31, 2003 is overstated.

d) The closing inventory as of December 31, 2002 is understated.

Question 103: CMA Petroleum has the following items in its financial statements as of 12/31/03 and
12/31/04 (in 000s):

12/31/03 12/31/04
Sales revenue 20,000 18,000
Inventory 1,900 1,700
Purchases 9,500

Assuming continuity in the rate of sales, how many days' worth of sales does the business have in
inventory at year-end 12/31/04 to the nearest day, using a 365-day year?

a) 35 days

b) 68 days

c) 64 days

d) 71 days

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Question 104: The inventory turnover ratio is 10 if

a) sales revenue is $600,000 and the average inventory level at selling price is $60,000.

b) purchases are $360,000 and the average inventory level at cost is $36,000.

c) cost of goods sold is $400,000 and the average inventory level at cost is $40,000.

d) purchases are $300,000 and closing inventory at cost is $30,000.

Question 105: The profit margin on sales achieved by an enterprise is 5% and the asset turnover ratio
is 2. What is the company’s return on assets?

a) 6%

b) 10%

c) 14%

d) 24%

Question 106: If an economy could produce more consumer goods without forgoing the production of
any other goods, which of the following statements would be true?

a) The economy is efficiently operating outside the production possibilities curve.

b) The economy is efficiently operating inside the production possibilities curve,

c) The economy is inefficiently operating inside the production possibilities curve.

d) The economy is efficiently operating on the production possibility curve.

Question 107: A firm increases the price of its product and finds that its total revenue increases. Which
of the following best describes why this has happened?

a) The firm's supply has increased.

b) The firm has an elastic demand.

c) The firm has a unit elastic demand.

d) The firm has an inelastic demand.

Question 108: The economy is doing extremely well and to accommodate the need for workers, a large
influx of immigrants is allowed into the country. None of the new immigrants will work in the milk
industry. What will be the effect on price and quantity in the milk market?

a) Market price will decrease and the market quantity will decrease.

b) Market price will increase and the market quantity will increase.

c) Market price will decrease and the market quantity will increase.

d) Market price and market quantity will be indeterminate.

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Question 109: If the nominal interest rate is 10 percent and the inflation rate is 5 percent, the real
interest rate is

a) 10 percent

b) 5 percent

c) 8 percent

d) 15 percent

Question 110: Given the following data, what is this country's gross domestic product?

Consumption $20

Investment $5

Government Purchases $10

Exports $4

Imports $9

a) $20

b) $25

c) $30

d) $48

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