CMA CPA 2006 Mock Exams

Copyright © 2005 by The Society of Management Accountants of Canada. All rights reserved. This material, in whole or in part, may not be reproduced or transmitted without authorization.

The Societies of Management Accountants of Alberta, Manitoba, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Ontario,

Prince Edward Island, Saskatchewan, and the Yukon, Certified Management Accountants Society of British Columbia, Ordre des comptables en management accrédités du Québec

2006 Entrance Examination

Part 1 Sample # 1

(Time Allowed: 4 hours)

Notes:

i) All answers must be indicated on the scannable multiple-choice answer sheet. Work done on the question paper and examination foolscap will NOT be marked.

ii) Included in the examination envelope is a supplement consisting of formulae and tables. It is a standard supplement that may be useful for answering questions on this paper.

iii) Examination materials must NOT BE REMOVED from the examination writing centre. All examination materials (i.e. answer sheet, used and unused foolscap sheets, envelope, supplement and question paper) must be submitted to the presiding officer before you leave the examination room.

2006 Entrance Examination Part 1 – Sample #1

CMA New Brunswick

TABLE OF CONTENTS

Instructions.................................................................................................. 1

Management Accounting ............................................................................ 2

Corporate Finance .................................................................................... 16

Operations Management .......................................................................... 19

Information Technology ............................................................................ 21

Strategic Management .............................................................................. 24

International Business............................................................................... 25

Human Resources .................................................................................... 27

Marketing .................................................................................................. 29

Financial Accounting................................................................................. 31

Taxation .................................................................................................... 42

Internal Control ......................................................................................... 45

Supplement of Formulae and Tables* .................................................... 47

* This supplement is provided to all candidates with each part of the examination.

2006 Entrance Examination Part 1 – Sample # 1 – Solutions

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INSTRUCTIONS: Use the multiple-choice answer sheet provided to record your answers to the questions. Be sure to enter your four-digit PART 1 envelope number on the multiple-choice answer sheet. Select the BEST answer for each of the following 151 questions and record your answer on the multiple-choice answer sheet by blackening the appropriate answer space (i.e. oval) with a soft lead (HB) pencil. Answer all questions. Mark ONLY ONE ANSWER for each question.

Sample Question:

189. (-) Market research and public relations costs are

a) engineered variable costs. b) discretionary variable costs. c) committed fixed costs. d) discretionary fixed costs. e) engineered fixed costs.

Assuming you select choice d) for your answer, you should blacken the “d” space on line 189 in the “ANSWERS” area of the multiple-choice answer sheet as shown below: 189 a b c d e Question Weighting:

Your performance on Part 1 will be based on the total weighted value of the questions answered correctly. Note that all questions are assigned the same weight, except for those specified with a plus (+) sign (i.e. has a higher weight) or minus (-) sign (i.e. has a lower weight). In the above example, there is a minus sign at the beginning of the question, signifying that the question has a lower weighted value than the average question.

Singular Versus Plural Phrasing:

For simplicity of wording, all questions are phrased as though there is a single correct answer, even when there are multiple correct answers. For example, the correct answer to a question that is worded, “Which of the following is...,” may be the choice that refers to two or more of the other choices, e.g. “Both a) and b) above.”


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Management Accounting

1. (-) Staff management, as opposed to line management, a) is directly responsible for the achievement of the organization’s basic objectives. b) makes capital expenditure decisions for the production line in a manufacturing

organization. c) provides information and analysis to support decisions pertaining to the

organization’s basic objectives. d) both a) and b) above. e) both b) and c) above.

2. (-) A factory manager’s salary is

a) an indirect labour cost. b) an administrative expense. c) a variable overhead cost. d) a direct labour cost. e) a period cost.

3. Bluebird Company uses a standard cost system under which overhead is applied on the

basis of direct labour hours (DLH). The following information is summarized from its preliminary budget on manufacturing costs: Production activity 45,000 DLH 50,000 DLH Factory overhead: Indirect materials $135,000 $150,000 Indirect labour 96,000 100,000 Utilities 10,000 11,000 Rent 80,000 80,000 Amortization 25,000 25,000 Miscellaneous 24,500 26,500 Total factory overhead $370,500 $392,500 The flexible budget for total factory overhead can be expressed as a) $17,250 + $7.85 per DLH. b) $105,000 + $5.90 per DLH. c) $105,000 + $5.75 per DLH. d) $105,000 + $4.40 per DLH. e) $172,500 + $4.40 per DLH.


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4. The use of a plant-wide overhead rate will a) result in appropriate inventory costs in a diverse job-order manufacturing situation if

inventory is significant. b) result in appropriate inventory costs in a diverse job-order manufacturing situation

regardless of inventory levels. c) provide cost data useful for pricing decisions, regardless of inventory levels, in a

process manufacturing situation where there is only one main product. d) provide cost data useful for pricing decisions in a joint-cost manufacturing situation if

inventories are insignificant. e) provide cost data useful for evaluating the performance of individual manufacturing

operations regardless of inventory levels. The following information pertains to questions 5 and 6. Green Wood Ltd. produces two lumber products from a joint milling process. A standard production run incurs joint costs of $300,000 and results in 60,000 units of product A and 90,000 units of product B. Product A sells for $2 per unit and product B sells for $4 per unit. 5. Assuming no further processing work is done after the split-off point, the amount of joint

cost allocated to product A using the relative sales value method would be a) $75,000. b) $180,000. c) $100,000. d) $225,000. e) $120,000.

6. (+) Assume that product B must be further processed at a cost of $200,000 per

production run. During the process, 10,000 units are lost. These spoiled units have no discernible value. The remaining units of product B are saleable at $10 per unit. Assume also that product A must be further processed at a cost of $100,000 per production run and then sold for $5 per unit. No units of product A are lost in this process. Using the net realizable value method, the completed cost assigned to each unit of product B would be a) $2.92. b) $5.63. c) $5.00. d) $5.31. e) $4.75.


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7. (+) The managers of ACME Manufacturing are discussing ways to allocate the cost of service departments, such as Quality Control and Maintenance, to the production departments. To aid them in this discussion, the controller has provided the following information:

Quality Control Maintenance Machining Assembly Total

Budgeted overhead costs before allocation $350,000 $200,000 $400,000 $300,000 $1,250,000

Budgeted machine hours — — 50,000 — 50,000 Budgeted direct labour hours

— — — 25,000 25,000

Budgeted hours of service: Quality control Maintenance

— 10,000

7,000 —

21,000 18,000

7,000 12,000

35,000 40,000

Using the direct allocation method, the total amount of overhead allocated to each machine hour would be a) $9.35. b) $5.25. c) $2.40. d) $8.00. e) $15.65.

8. SME Ltd. manufactures electronic components through two processes: fabrication and

assembly. It has been determined that the appropriate cost driver to use for allocating overhead costs is direct machine hours for the fabrication process and direct labour hours for the assembly process. Budgeted overhead costs and activity for the upcoming year are as follows:

Fabrication Assembly Total overhead costs $300,000 $180,000 Direct machine hours 10,000 3,000 Direct labour hours 8,000 9,000

The actual production data for Job 111, which was completed during the year, were as follows:

Fabrication Assembly Direct machine hours 10 50 Direct labour hours 40 25

What amount of overhead costs would have been applied to Job 111? a) $3,300 b) $2,000 c) $4,500 d) $2,200 e) $800


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9. Zoom Corporation uses standard absorption costing based on machine hours to account for overhead costs. The company bases its standards on estimated annual sales of $5,000,000, annual overhead costs of $1,300,000 and annual machine hour usage of 500,000 hours. During Year 4, however, Zoom Corporation experienced $5,800,000 in sales and used 600,000 machine hours, and actual overhead costs amounted to $1,400,000. For Year 4, overhead is a) $108,000 overapplied. b) $100,000 underapplied. c) $160,000 overapplied. d) $260,000 overapplied. e) $208,000 overapplied.


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The following information pertains to questions 10 and 11. The Wye Co. Ltd. expects to produce 11,000 units of product RGW during its first year of operations. The following standard manufacturing costs per unit were established based on this expected production volume:

Direct materials $13Direct labour 12Variable overhead 11Fixed overhead 6Unit standard cost $42

No variable selling and administrative costs were incurred during the year. At the end of the first year of operations, the accountant prepared income statements utilizing actual absorption costing, normal variable (direct) costing, normal absorption costing, standard variable (direct) costing, and standard absorption costing. These five income statements, labelled A through E, are produced below (in random order):

A B C D E Sales $540,000 $540,000 $540,000 $540,000 $540,000Cost of sales 346,500 324,000 400,500 378,000 423,000Variances: Direct materials - 5,000 - 5,000 - Direct labour - 20,000 - 20,000 - Variable overhead 15,000 15,000 15,000 15,000 - Fixed overhead - - 10,000 10,000 -Other costs 150,000 150,000 80,000 80,000 80,000 511,500 514,000 505,500 508,000 503,000Operating income $ 28,500 $ 26,000 $ 34,500 $ 32,000 $ 37,000

10. Which income statement was prepared using standard variable costing?

a) A b) B c) C d) D e) E

11. How many units of product RGW were actually produced during the year?

a) 10,000 b) 8,333 c) 10,667 d) 9,000 e) 11,667


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12. AI Inc. manufactures two products: A and B. The budget for Year 2 includes production on 600 units of A, 3,600 units of B, and total overhead costs of $840,000. Overhead consists of three activities, broken down for Year 2 as follows: Cost Driver Volumes Activity Cost Driver Product A Product B Total Cost Materials handling Number of requisitions 4,800 7,200 $300,000 Machine setups Number of setups 1,800 3,600 324,000 Quality inspections Number of inspections 1,800 5,400 216,000 $840,000

Using activity-based costing, what amount of overhead should be budgeted per unit of Product A (rounded to the nearest dollar)? a) $478 b) $115 c) $200 d) $723 e) $470

13. Pelletier Ltd. is a manufacturer that uses a just-in-time production system. For job-

costing purposes, the company uses a system that delays recording changes in the status of a product being produced until the good finished units are completed, i.e. it does not record work in process. This type of costing system is called a) kaizen costing. b) hybrid costing. c) product life cycle costing. d) backflush costing. e) normal costing.


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14. (+) DEH Inc. manufactures all the components it requires to produce product XYZ. The company is currently operating at 100% capacity and manufacturing overhead is charged to production at a rate of 120% of direct labour cost (1/3 of which are fixed). Thedirect materials and direct labour cost per unit to make component Z (one of the components required for product XYZ) are $5 and $6, respectively. Normal annual production of product XYZ requires 60,000 units of component Z. Company Q has offered to supply DEH Inc. with all the component Z it requires at a price of $18 per unit. If the offer is accepted, DEH Inc. will be able to eliminate $100,000 of fixed costs per year, or can instead utilize the freed up capacity to produce 10,000 units of product G2, which sells for $150 per unit. Direct materials and direct labour would amount to $54 and $45 per unit of G2, respectively. What action would maximize DEH Inc. income next year? a) Continue producing component Z internally. b) Purchase component Z from Company Q and do not produce product G2, to realize

incremental profit of $12,000. c) Purchase component Z from Company Q and do not produce product G2, to realize

incremental profit of $112,000. d) Purchase component Z from Company Q and produce G2 to realize incremental

profit of $18,000. e) Purchase component Z from Company Q and produce G2 to realize incremental

profit of $50,000. 15. (+) Newfoundland Company sells products X and Y; 40 percent of the company’s total

revenue is from X. The contribution margin ratios are 30 percent for X and 60 percent for Y. Fixed costs are $200,000. What would be the total sales required for Newfoundland to earn a target profit of $40,000 before tax? a) $300,000. b) $416,667. c) $200,000. d) $444,444. e) $500,000.


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16. (+) MM Co. uses a weighted average process costing system. Division A performs the first process in the production cycle and Division B performs the second process. Consider the following activity and costs for B in the month of February:

Physical Units Feb. 1 work in process (30% complete) 2,600 units Transferred in from Division A during Feb. 12,000 units Feb. 28 work in process (10% complete) 3,000 units

Feb. 1 Work In Process

Costs Added in February Total

Transferred in $25,740 $120,000 $145,740 Direct materials 8,190 48,000 56,190 Direct labour 20,904 300,240 321,144 Overhead 6,864 100,080 106,944 $61,698 $568,320 $630,018

In Division B, direct materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process. What is the total cost of the units completed and transferred out of Division B in February (to the nearest hundred dollars)? a) $577,700 b) $577,200 c) $473,500 d) $500,600 e) $555,400

17. Relay Ltd. manufactures batons. It has capacity to produce 300,000 batons per year at a

total variable cost of $600,000 and fixed costs of $450,000. Fixed costs will remain the same between 200,000 and 300,000 batons. Based on Relay’s predictions, 250,000 batons will be sold at the regular price of $5 each. In addition, a one-time-only order was received for 60,000 batons to be sold at a 40% discount off the regular price. By what amount would operating income be increased or decreased as a result of accepting the special order? a) $180,000 increase b) $30,000 increase c) $40,000 decrease d) $60,000 increase e) $40,000 increase


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18. The budgeted income for RST Ltd. for next year is as follows: Sales – 100,000 units @ $20 $2,000,000Variable manufacturing costs $800,000Fixed manufacturing costs 300,000Sales commissions - $1.50 per unit 150,000Fixed selling and administration expenses 350,000 1,600,000Operating income $ 400,000 Assume that a regular customer has requested RST Ltd. to provide a quote for a special order of 8,000 units. RST Ltd. has sufficient capacity to fill the order and would be required to pay only $6,000 in sales commissions for the order. If RST Ltd. would like the special order to make a contribution to operating income of $28,000, the sales price per unit that should be quoted to the customer for the special order is a) $12.25. b) $20.00. c) $15.75. d) $15.25. e) $19.25.

The following information pertains to questions 19 to 21. Yipann Corporation is reviewing an investment proposal. The initial cost as well as other related data for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its net book value and there will be no salvage value at the end of the investment’s life. Data regarding the investment proposal are as follows:

Year Initial Cost Net After-Tax Cash Flows Net Income 0 $105,000 1 $50,000 $15,000 2 45,000 17,000 3 40,000 19,000 4 35,000 21,000 5 30,000 23,000

Yipann’s effective tax rate is 40% and it uses a 24% after-tax target rate of return for new investment proposals. 19. The traditional payback period for the investment proposal is

a) 0.88 years. b) 1.94 years. c) 2.25 years. d) 1.60 years. e) more than 5 years.


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20. The net present value for the investment proposal (rounded to the nearest hundred dollars) is a) $49,800. b) $10,500. c) $(55,200). d) $115,500. e) $105,000.

21. (+) Now assume that the initial investment is for machinery that is expected to have a

salvage value of $10,000 at the end of five years. The machinery would be in the same CCA class as other assets owned by the company (CCA rate of 30%) and would be amortized on a straight-line basis. By what amount would this increase the net present value for the investment proposal (rounded to the nearest hundred dollars)? a) $26,000 b) $22,500 c) $23,700 d) $20,300 e) $24,300



The following information pertains to questions 22 to 24. Generico Ltd. uses an injection device to regulate the flow of raw materials into moulds in its production process. When the injector device is "out of control," the entire production line must be shut down. The production data for the past month indicated an unfavourable raw material cost variance as follows: Budgeted production volume 40,000 unitsActual production volume 39,000 units Budgeted raw materials (40,000 x 2 grams @ $10 per gram) $ 800,000Actual raw materials (39,000 x 2.2 grams @ $12 per gram) 1,029,600Variance (unfavourable) $ 229,600 The variance was either caused by the injector device being out of control or by random factors that would disappear on their own. The production manager must decide whether to shut down production to investigate the cause of the variance or wait another month. Data regarding investigation of the cause of the variance are as follows:

Cost to inspect injector device (10 hours @ $300) $3,000 Cost to repair injector device (20 hours @ $300) $6,000 Lost contribution margin during downtime $1,000 per hour

Based on past experience, there is a 10% chance that the injector device is out of control. If it is out of control and not corrected right away, the net cost to the company until the next regularly scheduled maintenance adjustment will be $90,000. 22. Which of the following represents the materials price variance?

a) $136,000 unfavourable b) $182,800 unfavourable c) $156,000 unfavourable d) $171,600 unfavourable e) $160,000 unfavourable

23. Which of the following represents the materials efficiency variance?

a) $93,600 unfavourable b) $69,600 unfavourable c) $78,000 unfavourable d) $58,000 unfavourable e) $156,000 unfavourable



24. The expected cost of investigating the variance is a) $39,000. b) $3,900. c) $13,000. d) $15,600. e) $5,600.

------------------------------- The following information pertains to questions 25 and 26. The budget and actual results for Acme Co. Inc. for the first quarter of the year are as follows: Static Budget Actual Results Unit sales: Regular 40,000 15,000 Deluxe 60,000 65,000 Total 100,000 80,000 Unit selling price: Regular $12 $13 Deluxe $6 $6 Unit variable costs: Regular $7 $9 Deluxe $4 $3 Market size (total units of both products) 500,000 480,000 25. The total sales (contribution margin) volume variance for the first quarter is

a) $70,000 unfavourable. b) $115,000 unfavourable. c) $135,000 unfavourable. d) $85,000 unfavourable. e) $65,000 unfavourable.

26. The total sales (contribution margin) quantity variance for the first quarter is

a) $63,750 unfavourable. b) $50,250 unfavourable. c) $64,000 unfavourable. d) $68,000 unfavourable. e) $51,250 unfavourable.



The following information pertains to questions 27 and 28. Milligan Company manufactures two models, small and large. Each model is processed as follows: Machining Department Polishing Department Small (x) 2 hours @ $25/hr 1 hour @ $20/hr Large (y) 4 hours @ $25/hr 3 hours @ $20/hr

The available time for processing the two models is 100 hours per week in the Machining department (MD) and 90 hours per week in the Polishing department (PD). The contribution margin expected is $50 for the small model and $70 for the large model. The company wishes to determine the mix of product to produce to maximize profits. 27. How would the objective function be expressed?

a) Maximize 50x + 70y b) 50x + 70y > 4,300 c) 5x(3) +7y(7) < 190 d) Minimize 70x + 160y e) Maximize 50x + 70y - 25MD - 20PD

28. How would the restriction (constraint) for the Machining department be expressed?

a) 50x + 100y < 2,500 b) Minimize 50x + 100y c) 2x + 4y < 100 d) Both a) and c) above are acceptable expressions. e) All of a), b) and c) above are acceptable expressions.

------------------------------- 29. BH Wholesalers has a sales budget for December of $800,000. Cost of merchandise

sold is expected to be 30% of sales. Sixty percent (60%) of all merchandise is paid for in the month of purchase and the remaining 40% is paid in the following month. The merchandise inventory balance on November 30 is $24,000 and the December 31 merchandise inventory balance is budgeted to be $30,000. The merchandise accounts payable balance on November 30 is $102,000. The budgeted accounts payable balance for December 31 is a) $138,000. b) $98,400. c) $93,600. d) $147,600. e) $96,000.



30. Which of the following attributes tends to create centralized decision making in an organization? a) High risk. b) Large size of organization. c) Complex business. d) Diverse product lines. e) All of the above.

31. ZIL Inc. operates two divisions, which are treated as investment centres. Data for each

division for Year 4 are as follows (in ’000s):

Division A Division B Net income $50,000 $95,000 Total assets $300,000 $650,000

The company’s required rate of return is 12%. The president wishes to evaluate the performance of these divisions and is not sure whether to use return on investment (ROI) or residual income (RI) as the performance measure. Which division performed better based on the ROI and RI performance measures? a) Division A, because its ROI and RI are higher than those of Division B. b) Division A, because its RI is higher than that of Division B. c) Division B, because its ROI is higher than that of Division A. d) Division B, because its ROI and RI are higher than those of Division A. e) None of the above.

32. Company E is a large manufacturer that treats its divisions as profit centres. Division X

produces an electronic component at the following costs:

Variable production cost $80/unitVariable selling cost $10/unitFixed cost (based on 10,000 units) $10/unit

Division Y currently purchases a similar component from an outside supplier for $105/unit. It has determined that the component produced by Division X could be used instead with no adverse effects on the quality of the final product. Currently, Division X, which is operating at full capacity, sells all of its output to outside customers at $112/unit per component. What is the lowest price at which Division X would agree to transfer the component to Division Y? a) $112. b) $90. c) $100. d) $102. e) $80.



33. Responsibility centres in not-for-profit organizations can be classified as mission centres or service centres. A mission centre a) provides support to other responsibility centres. b) can be an expense centre, but not a revenue centre. c) contributes directly to the objectives of the organization. d) can be a revenue centre, but not a profit centre. e) both c) and d) above.

Corporate Finance 34. (-) According to finance theory, which of the following best states what should be the

primary goal of a large public company’s vice-president of finance? a) Minimize the risks taken by the company. b) Maximize the current value per share of the company’s existing stock. c) Maximize the asset value of the entire company. d) Maximize the company’s current accounting profit. e) Maximize the company’s current earnings per share.

35. The security most often held as a substitute for cash is

a) treasury bills. b) common shares. c) gold. d) corporate bonds. e) municipal bonds.

36. (+) An individual has the following portfolio of investments:

Amount Rate of Return Investment 1 $20,000 8% Investment 2 $40,000 6% Investment 3 $70,000 3% Investment 4 $10,000 10%

What is the expected rate of return for the entire portfolio? a) 3.00% b) 5.07% c) 6.75% d) 7.00% e) 27.00%



37. Preferred shares with a par value of $50 have a dividend rate of 7% payable at the end of each year. The risk-free rate on long-term debt is 11% at the beginning of the year and 13% at the end of the year. If investors expect a return on these and similar shares of 12%, the expected market price of these preferred shares is a) $26.92. b) $29.17. c) $31.82. d) $50.00. e) $54.55.

38. (+) Given the following information, what is the after-tax weighted average cost of capital

(WACC) of the firm?

Market Value Balance Sheet (’000s) Cash Other

$ 100900

Long-term debt Preferred equity Common equity

$ 400100500

$1,000 $1,000 Cost of debt (kd) 8%Cost of preferred equity (kp) 9%Corporate tax rate (tc) 40%Beta (B) 1.2Expected annual return for the market 14%Market premium over the risk-free rate 6%

a) 10.42%. b) 10.44%. c) 15.20%. d) 11.70%. e) 15.60%.

39. Methods of accelerating cash collections include all of the following except

a) decentralized collections. b) electronic funds transfer. c) centralized banking. d) compensating balances. e) lock-box systems.

40. Which of the following is a spontaneous source of financing?

a) Notes payable. b) Long-term debt. c) Prepaid interest. d) Trade credit. e) A collateralized, short-term loan.



41. Marston Supply Company has credit sales of $2 million/year. Collections average $8,000/day with 250 working days per year. Marston is going to reduce its internal collection processing time by 1 day. What would be its annual savings assuming a 14% cost of funds? a) $1,120 b) $1,000 c) $1,550 d) $8,000 e) $767

42. Serial bonds are attractive to investors because

a) all bonds in the issue mature on the same date. b) the yield to maturity is the same for all bonds in the issue. c) investors can choose the maturity that suits their financial needs. d) the coupon rate on these bonds is adjusted to the maturity date. e) the bonds are retired on a lottery basis by their serial numbers.

43. Financial leverage results from the use of a source of funds for which the firm

a) pays a fixed percentage of revenue. b) pays a fixed percentage of income. c) earns a higher rate of return from its use than its cost. d) pays a variable return on each dollar amount raised. e) assumes no additional risk.

44. (-) Normally, the issuance of a stock dividend of one share of stock for every ten shares

currently held will a) increase shareholders’ equity. b) decrease future earnings per share. c) cause the market price of the shares to fall. d) cause the market price of the shares to increase. e) do both b) and c) above.



Operations Management 45. (-) Which of the following statements describes the difference between manufacturing

and service operations that is most likely to be true? a) It is more difficult to control service quality than manufactured goods quality. b) Services cannot be inventoried while goods can be inventoried. c) Forecasting demand for services is easier than forecasting demand for goods. d) Service-based employees require more skills than manufacturing-based employees.e) Equipment for manufacturing products is more complex than equipment used to

deliver services. 46. Statistical process control (SPC) represents a subset of Total Quality Management.

Which of the following represents the prime tool used in SPC? a) Fishbone or Ishikawa diagrams. b) Control charts. c) Acceptance sampling plans. d) Both b) and c) above. e) All of a), b) and c) above.

47. An example of an external failure cost is the cost of

a) equipment. b) dealing with customer complaints. c) rework. d) both b) and c) above. e) all of a), b) and c) above.

48. Which of the following statements regarding service design is FALSE?

a) Service systems with a high degree of customer contact are more difficult to control

than those with a low degree of customer contact. b) Service systems with a low degree of customer contact are more difficult to control

than systems with a high degree of customer contact. c) Customer contact is a key factor in the controllability of service systems. d) In high-contact service systems, the customer can affect the exact nature of the

service as well as the quality of the service. e) The extent of customer contact can distinguish one service system from another.

49. An organization that competes on cost is more likely to use a

a) make-to-order strategy and an assembly-line process. b) make-to-order strategy and a job-shop process. c) make-to-stock strategy and a continuous-flow process. d) make-to-stock strategy and a batch process. e) make-to-stock strategy and a job-shop process.



50. Which of the following is a characteristic of a process layout? a) Similar equipment and functions are grouped together. b) Equipment is moved to the product or service as needed. c) Process layout can be used with products but not services. d) Both a) and c) above. e) All of a), b) and c) above.

51. In manufacturing, which of the following is the LEAST LIKELY benefit of group

technology? a) Reduced setup time, work in process and production time. b) Economies of scale from larger volume purchases. c) Improved routing and machine loading. d) Simplification of production process layout and ease of cell design. e) Reduced labour costs.

52. Which of the following detracts from the applicability of PERT (program evaluation and

review technique) and CPM (critical path method)? a) Projects change in content over time. b) Sequence relationships can usually be specified beforehand. c) The cost of applying them is prohibitive. d) Both b) and c) above. e) All a), b) and c) above.

53. Which of the following sequences best captures the Theory of Constraints?

a) Set out key problem; undertake corrective action; find key constraint; relax constraint

with additional capacity; re-examine system looking for resolution to bottleneck. b) Identify system constraint; decide how to exploit system constraint; subordinate

everything to that decision; acquire necessary resources; repeat steps. c) Engage in problem finding; establish cross-functional team; define constraint

systems; locate underlying root causes of constraint; brainstorm possible solutions; consider preventive action to prevent constraint reoccurrence.

d) Define the effect or constraint in question; brainstorm all possible causes; make changes in most likely cause of constraint; examine resultant effects owing to change.

e) None of the above. 54. The elements of production scheduling include

a) loading. b) preventive maintenance. c) sequencing. d) both a) and c) above. e) all of a), b) and c) above.



55. Which of the following principles does NOT apply to business process reengineering? a) Organize around tasks, not outcomes. b) Link parallel activities instead of integrating their results. c) Capture information only once – at the source. d) Merge information-processing work into the real work that produces the information. e) Have those who use the output of the process perform the process.

Information Technology 56. For a database management system, which of the following statements is NOT correct?

a) The network data structure tends to be less difficult for programmers to work with

and maintain than the relational data structure. b) The network data structure allows many-to-many relationships among records. c) The hierarchical data structure is easy to understand and explain. d) An object-oriented database management system can store graphic, audio and video

along with procedures. e) The relational data structure allows end users to easily receive information in

response to ad hoc requests. 57. With regard to Internet, intranet and extranet applications, which of the following

statements is correct? a) Conducting electronic discussion groups between employees and external

consultants in a collaboration on a business project is an extranet application. b) An electronic calendar where company employees can check a co-worker’s calendar

to find an appropriate time to schedule a meeting is an extranet application. c) Enabling a company’s major customer to access its inventory databases and directly

place orders is an intranet application. d) Advertising on a company Web site and allowing customers to place orders and pay

for their products electronically is both an Internet and intranet application. e) None of the above.

58. Which of the following is NOT an advantage of application software packages?

a) Customized for organization’s applications. b) Cost savings. c) Shorter implementation time. d) Better documentation. e) Frees up scarce development resources.



59. Important types of control systems and procedures for accounting information systems are feedback, feedforward, and preventive. Which of the following represents one of each type of control, in the following order: feedback, feedforward, and preventive? a) Cost accounting variances, separation of duties, and cash planning. b) Cost accounting variances, cash budgeting, and organizational independence. c) Cash budgeting, cost accounting variances, and separation of duties. d) Inventory control, capital budgeting, and cash budgeting. e) Cash budgeting, capital budgeting, and hiring qualified employees.

60. In processing a batch of accounts receivable receipts, a customer payment was entered

in the amount of $25.01 instead of $2,501.00. The best control procedure to detect this error would be a) a completeness check. b) a limit check. c) a valid field test. d) a check digit. e) control totals.

61. (-) Typically, decision support systems (DSS)

a) are designed exclusively to support unstructured decision making. b) combine data analysis and modeling tools to support decision making. c) require programming knowledge and experience to operate. d) are used mainly by clerical workers. e) are none of the above.

62. Management of large systems projects require the involvement of a project

organizational structure, including a corporate strategic management group, an information systems steering committee, a project manager and project teams. Which of the following activities would normally be the responsibility of the information systems steering committee? a) Setting the strategic direction for the use of information technology in the

organization. b) Approving the allocation of resources within the information systems organization. c) Structuring and assigning the tasks of information technology project teams. d) Both b) and c) above. e) None of the above.

63. Which of the following is included in the systems implementation process?

a) Training. b) Systems design. c) Testing. d) Both a) and c) above. e) All of a), b) and c) above.



64. One of the advantages of using prototyping in designing accounting information systems is the fact that this technique a) increases user involvement. b) helps designers obtain acceptance of their designs from users. c) improves resource planning. d) both a) and b) above. e) all of a), b), and c) above.

65. Each business process can be divided into three different event categories, which are

a) operating events, information events and decision/management events. b) business events, information events and requesting events. c) operating events, information events and requesting events. d) decision/management events, maintaining events and business events. e) recording events, maintaining events and reconciliation events.

66. In the acquisition/payment business process, which of the following is NOT an operating

event? a) Requesting goods or services. b) Receiving and inspecting goods or services. c) Storing and/or maintaining goods. d) Recording data about the delivery of goods. e) Paying for goods or services.

67. When you implement a distributed processing architecture, which of the following

statements is NOT true? a) Performance will be improved. b) System availability will be improved. c) An adjustment to a changing workload will be required. d) A complete system breakdown will be rare. e) The information system will be integrated.

68. In converting from a manual system to an automated system, the basis for developing a

production work-in-process database would be a) the open production order master file and the work-in-process cost file. b) developed from standard cost figures and actual production results combined with

sales forecasts. c) a combination of stock status reports and production schedules. d) raw materials file and the open purchase order file. e) none of the above.



Strategic Management 69. Which of the following represents an operational control issue?

a) Inventory reorder points. b) Entry into a new market. c) Integration with a supplier’s capabilities. d) Long-range tax planning. e) None of the above.

70. A market penetration strategy

a) consists of introducing the organization’s existing products and services to

customers other than the ones that it currently serves. b) creates a new product or service for existing customers. c) attempts to gain greater control in a market in which it already has a product or

service. d) offers a new product or service to new customers. e) is affected by an organization’s ability to understand the needs and purchasing

patterns of new customers. 71. Which of the following is an example of vertical integration?

a) Relying on many different suppliers. b) Purchasing competitors. c) Adopting activities related to market segmentation. d) Employing an organizational structure based on functional specialties. e) Purchasing customer companies.

72. The effect of technological innovations on strategic plans is seen as

a) threats. b) diversification. c) opportunities. d) both a) and c) above. e) all of a), b) and c) above.

73. If economies of scale are an industry’s primary entry barrier, a new entrant’s major risk is

its inability to a) get buyers to switch to its products. b) access superior sources of raw materials for its products. c) match the pace of innovation of its established rivals. d) produce in sufficient volume to match the cost advantages of established industry

competitors. e) ensure quality of its finished products.



74. Which of the following internal resources of a competitor is the most difficult to imitate? a) Technological know-how. b) State-of-the-art manufacturing facilities. c) Marketing know-how. d) Brand name. e) Capital.

75. Of the following criteria, which is the most important to consider in evaluating strategic

alternatives? a) Does the strategy take advantage of environmental opportunities and corporate

strengths, and lead away from environmental threats and corporate weaknesses? b) Does the strategy meet the needs and desires of top managers and executives? c) Does the strategy conflict with other corporate strategies? d) Is the resulting market share likely to be sufficient to assure a required return on

investment? e) Is the strategy compatible with the corporate culture?

76. (-) The process of measuring products, services and practices against the industry

leaders and striving to match their performance is called a) continuous improvement. b) best practices strategy. c) the focus strategy, one of Porter’s competitive strategies. d) benchmarking. e) total quality management.

International Business 77. Which of the following activities is usually not considered part of the scope of

international business? a) Importing goods from abroad. b) Establishing a joint venture with a foreign partner. c) Operating as a subsidiary of a foreign owned company. d) Acquiring a competitor in your domestic market. e) Setting up a manufacturing facility in a foreign market.

78. The theory of comparative advantage suggests that a country will gain from trade

a) even though it can produce all products more efficiently than other countries. b) if it exports more than it imports. c) by exporting its excess production and importing scarce products. d) by exporting capital-intensive products and importing labour-intensive products. e) if it imports all goods that it cannot produce more efficiently than other countries.



79. GAAT and the World Trade Organization were set up to a) monitor capital flows among countries. b) encourage the freer and more orderly flow of goods and services among countries. c) assess the political risk associated with countries. d) encourage and enforce world peace. e) both a) and b) above.

80. The International Fisher Effect suggests that

a) if the real interest rate is the same worldwide, any differences in interest rates

between countries reflects differing expectations about inflation rates. b) for any two countries, the spot exchange rate should change in an equal amount but

in the opposite direction to the difference in nominal interest rates between the two countries.

c) if the real interest rate is different worldwide, any differences in interest rates between countries reflects differing expectations about inflation rates.

d) for any two countries, the spot exchange rate should change in an equal amount in the same direction to the difference in nominal interest rates between the two countries.

e) in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

81. Which of the following statements regarding international licensing is true?

a) It requires a significant up-front capital investment by the licensor. b) It requires that the licensor send employees to other countries to oversee foreign

operations. c) It is the main mechanism by which firms sell their technological know-how. d) It gives the licensor tight control over manufacturing and marketing abroad. e) Both b) and d) above.

82. Which of the following statements regarding global manufacturing is FALSE?

a) The difficulties in implementing a just-in-time inventory system for a global

organization are much greater than for a domestic organization, to the extent that it is usually not feasible.

b) Global manufacturing organizations use global sourcing to ensure an ongoing source of supply by strengthening the reliability of the supply network.

c) Information technology plays a major role in materials management by facilitating the tracking of inputs and allowing the global company to optimize its production schedule.

d) The choice of an optimal manufacturing location for a global corporation should consider country factors, technological factors and product factors.

e) International logistics is an important strategic consideration because the associated costs represent a significant portion of the total cost of an international order.



83. Trades of assets and liabilities in different currencies or interest rate structures (i.e. swaps) are used to a) protect against transaction risks. b) protect against translation risks. c) raise or transfer capital in foreign markets. d) both a) and b) above. e) all of a), b) and c) above.

84. The major argument for standardizing products as much as possible on a worldwide

basis is that a) production costs are usually minimized. b) import duties can be simplified. c) it will help harmonize product standards. d) it will increase the quality of products for all customers. e) none of the above.

Human Resources 85. Sam is transferred to a new department with a new supervisor. The new supervisor

looks at Sam’s file and notes the three times that Sam was late in one week last month. The new supervisor concludes that Sam is lazy and must be watched more closely than other staff. Sam, a single parent, experienced problems with day care arrangements the week that he was late three times. In this example, the new supervisor has interpreted Sam’s episodes of lateness as caused by a) external attributions. b) stereotyping. c) selective perception. d) events out of Sam’s control. e) internal attributions.

86. A manager operating from a Theory Y perspective would

a) ensure that employees are working to strict guidelines and well-defined deadlines to

ensure compliance. b) assume that subordinates require constant attention. c) provide general guidelines and permit subordinates some task discretion. d) do both a) and b) above. e) do both b) and c) above.



87. According to goal-setting theory, which of the following is NOT a condition necessary to maximize task effort and performance? a) Employees participate in setting the goals or the goals are assigned by someone

who is respected. b) The goals are moderately challenging. c) Employees are provided with feedback. d) Targets are specific and measurable. e) Employees support the goals.

88. Cohesive work groups are those where members are attracted to the group, are

motivated to remain in the group and mutually influence one another. A prime factor influencing group cohesion is a) the size of the group. b) whether the organization develops a climate fostering intragroup competition. c) the degree to which individuals’ personal leisure activities are compatible. d) the degree of structure associated with individuals’ work. e) both c) and d) above.

89. Which of the following is a disadvantage of a strong organizational culture?

a) A strong culture can result in employee dissatisfaction, high turnover and

absenteeism. b) A strong culture can cause decision makers to overreact to subtle misalignments

between the organization’s activities and the changing environment. c) A strong culture tends to prevent an organization from nurturing new cultural values

that may better fit environmental changes in the long term. d) Both b) and c) above. e) All of a), b) and c) above.

90. House’s path-goal model of leadership suggests that

a) in order to be effective, a leader should try to improve job satisfaction and

performance of subordinates by clarifying the nature of the task and reducing impediments to successful task completion.

b) the effectiveness of a group depends on diagnosing the situation in which the group operates and then assigning a leader for the group who has a leadership style that matches the situation.

c) team management is the most effective leadership approach. d) the best leaders possess certain abilities, skills and personality characteristics. e) leaders can choose a leadership style along a continuum from highly autocratic to

highly participative depending on a problem’s attributes.



91. Which of the following is true for a mechanistic organizational structure? a) It is informal, personal, and highly decentralized. b) It is centralized and tasks are rigidly defined. c) It has a high degree of formalization and is highly decentralized. d) Employees are grouped around outputs, clients and/or geographic areas. e) Employees who belong to a permanent functional unit are usually temporarily

assigned to a specific project team. 92. An organization that has successfully adopted the philosophy of continuous

improvement would normally use which of the following change management strategies to manage this philosophy? a) Sensitivity training. b) Quantum change. c) Unfreezing by strengthening the driving force for change. d) Incremental change. e) Refreezing to maintain the desired changes.

Marketing 93. The correct sequence for the marketing process is

a) developing the mix, market targeting, market positioning, market segmentation. b) market positioning, market targeting, market segmentation, developing the mix. c) market segmentation, market positioning, market targeting, developing the mix. d) market targeting, developing the mix, market positioning, market segmentation. e) market segmentation, market targeting, market positioning, developing the mix.

94. A local Honda dealer is concerned that sales of its motorcycle might be adversely

affected, in the case of some people, by the image of the violence and crime associated with certain motorcycle groups. Which of the following reference groups best relates to this situation? a) Unsocial group. b) Disassociative group. c) Membership group. d) Target group. e) Aspirational group.

95. (-) Market segmentation links

a) various buyer needs with an organization’s promotional strategy. b) various seller needs with an organization’s distribution channels. c) various buyer needs with an organization’s marketing mix. d) various seller needs with an organization’s pricing policy. e) none of the above.



96. The rate of market acceptance for a new product will be affected by a) how observable the product benefits are. b) its compatibility with existing customer buying and usage behaviour. c) the ease with which customers can try the product. d) the infrastructure required for customers to use the product. e) all of the above.

97. (-) Which of the following classes of products requires little effort on the part of the

customer in searching out the product, requires little need to compare alternatives in terms of price, quality or style, and involves low psychological and financial risk? a) Unsought. b) Tangible. c) Convenience. d) Specialty. e) Shopping.

98. Which of the following is NOT an example of promotional pricing?

a) Loss leader. b) Price points. c) Special-event pricing. d) Cash rebates. e) Two for the price of one.

99. In which marketing situation is intensive distribution most appropriate?

a) Designer line of clothing. b) Branded toothpaste. c) Power tools. d) Financial services. e) None of the above.

100. Purchase decisions made by consumers that are shaped through store visits would

imply which of the following promotional strategies? a) A pull strategy, using personal selling. b) A pull strategy, using publicity and philanthropy to generate public goodwill. c) A push strategy, using mass advertising. d) A pull strategy, using brand awareness. e) A push strategy, using trade and sales promotions and merchandising.



101. The term “marketing mix” refers to a) the total assortment of products a given firm has on the market. b) the blending of the four strategy elements of marketing decision making to satisfy

chosen consumer segments. c) the total assortment of advertisements used for any given product. d) the group of people at whom a promotional campaign is aimed. e) none of the above.

102. When using the licensing mode of entry into a foreign country, the marketer (the

licensor) typically provides a) knowledge of the foreign market. b) access to the foreign market. c) know-how. d) host-country employees. e) contacts with the host government.

Financial Accounting 103. (-) Which of the following is NOT considered a characteristic of accounting information

according to the conceptual framework of financial accounting? a) Accuracy. b) Representational faithfulness. c) Verifiability. d) Neutrality. e) Timeliness.

104. To comply with the matching principle, the cost of labour services of an employee who

participates in the manufacturing of a product normally should be charged to the income statement in the period in which the a) work is performed. b) employee is paid. c) product is sold. d) product is completed. e) product is started.



105. The Farell Co. Ltd. had a net loss of $160,000 last year. The following facts for last year are available: Dividends paid $40,000 Amortization expense $30,000 Increase in accounts payable $15,000 Issuance of shares $100,000 Retirement of debt $50,000

What was the amount of cash provided (or used) from operations last year? a) $(205,000). b) $(130,000). c) $(115,000). d) $65,000. e) $75,000.

The following information pertains to questions 106 and 107 . MOE Inc. had 200 Product M on hand at May 1 costing $18 each. Purchases and sales of the product during May were as follows:

Purchases Sales Date Quantity Unit Cost Quantity Unit Price

May 12 150 $100 May 14 100 $20 May 29 100 $22 May 30 100 $90

A physical inventory taken after the close of business on May 31 indicated that there were 150 units of Product M on hand. 106. The cost of goods sold for Product M for May under the weighted average periodic

method is a) $2,925. b) $4,740. c) $4,875. d) $4,900. e) $5,100.



107. The gross profit for Product M for May under the FIFO periodic method is a) $18,900. b) $19,100. c) $19,125. d) $19,400. e) $20,800.

------------------------------- 108. The following information is available from Company U’s December 31 trial balance:

Cost Retail Net sales $262,500 Beginning inventory $ 6,000 10,500 Net purchases 210,000 367,500 Markups 31,500 Markup cancellations 10,500 Markdowns 25,500 Markdown cancellations 20,250

Using the conventional retail inventory method, what is the value of the ending inventory as at December 31 (to the nearest dollar)? a) $71,053 b) $72,000 c) $75,904 d) $59,602 e) $57,176

The following information pertains to questions 109 and 110. The following pertains to G Co.’s temporary investment portfolio as at December 31:

Temporary Investments Face Value Number of

Shares Cost Market Value

Unrealized Gain (Loss)

Canadian Air shares 1,000 $31,500 $39,375 $7,875 Superior shares 10,500 $246,750 $243,625 ($3,125) Volatile bonds $100,000 $92,750 $92,000 ($750)

109. What amount of net temporary investments should be reported on G Co.’s December 31

balance sheet? a) $378,875 b) $371,000 c) $375,000 d) $378,250 e) $367,125



110. The balance in the “Allowance to Adjust Temporary Investments to Fair Value” account as at January 1, Year 4, is a credit of $23,500. What adjustment is necessary on December 31, Year 4, to achieve the correct balance at year end? a) $23,500 debit b) $19,500 credit c) $19,500 debit d) $27,500 credit e) $27,500 debit

------------------------------- 111. A subsidiary's financial statements are to be consolidated with a parent's financial

statements when the parent controls the subsidiary. The primary indicator of control is a) the ownership of more than 50% of the voting shares of the subsidiary. b) the ability to manage the day-to-day affairs of the subsidiary. c) the right to elect the majority of the members of the subsidiary's Board of Directors. d) the right to hold membership on the Board of Directors in the capacity of Chairman. e) the ownership of voting shares and proxies totalling 100% of the voting rights of the

subsidiary. 112. On January 1, Year 5, Co. Q issues bonds due in 5 years for $52,079. The bonds yield

an effective interest rate of 7% compounded semi-annually. The face value of the bonds is $50,000 and the annual coupon rate is 8%. Cash interest is paid semi-annually. What is the amount of premium or discount to be amortized in the first year using the effective interest method (rounded to the nearest dollar)? a) $354 b) $521 c) $416 d) $500 e) $361

113. When Pyne Co. decided to go into the business of delivering pizzas at lunch time to a

nearby office complex, the company acquired a delivery truck at a cost of $20,000. The truck had an estimated useful life of five years and a $2,000 salvage value. The company also acquired a used car for deliveries at a cost of $4,800, with an estimated useful life of three years and a $600 salvage value. The amortization on Pyne’s used delivery car for year three using the sum-of-the-years’- digits method would be a) $200. b) $700. c) $800. d) $1,400. e) $1,600.



114. LL Inc. purchased land with an old building for the purpose of constructing a new facility. The following expenditures were incurred in relation to the new facility:

Architect fees $3,600Cash paid for land and old building (80% attributed to land) $200,000City assessment for drainage project $2,600Cost of survey before construction $500Excavation for basement before construction $18,500Legal fees for title search $1,500New building construction $1,500,000Removal of old building $25,000Salvage received from sale and removal of old building materials $5,500Trees and landscaping after completion of building $7,300

What is the value of the building account at completion of construction? a) $1,518,500 b) $1,581,600 c) $1,522,100 d) $1,522,600 e) $1,529,400

115. A company is about to be sued for producing and selling an unsafe product. Attorneys

for the company cannot predict the outcome of the litigation, but they state that the lawsuit may be filed in the $80 million to $120 million range. In its financial statements, the company should a) make the following journal entry and disclose the existence of the lawsuit in a

footnote: Estimated loss from litigation ... $100,000,000 dr. Estimated liability from litigation loss .... $100,000,000 cr. b) disclose the existence of the lawsuit in a footnote without making a journal entry. c) neither make a journal entry nor disclose the lawsuits in a footnote because bad

publicity will hurt the company. d) make the following journal entry and disclose the existence of the lawsuit in a

footnote: Cost of goods sold ......... $120,000,000 dr. Estimated liability from litigation loss .... $120,000,000 cr. e) tell the external auditor to decide on how to address this issue for the company.



The following information pertains to questions 116 to 118. On January 1, Aspen Inc. had 120,000 common shares outstanding, recorded at $1,440,000, and retained earning of $2,500,000. On September 30, Aspen Inc. issues $4,750,000 of 5% convertible bonds at par, which mature in 5 years. The bonds are convertible on the basis of 10 common shares for each $1,000 bond. On October 1, 20,000 additional common shares were issued for $240,000. Aspen Inc.’s net income for the year was $1,000,000. On December 31, Aspen Inc. declared and paid $150,000 cash dividends on preferred shares and $175,000 cash dividends on common shares. Aspen Inc.’s income tax rate was 40%. 116. (+) What is Aspen Inc.’s basic earnings per share for the year?

a) $5.40 b) $6.80 c) $7.28 d) $8.00 e) $8.33

117. (+) What is Aspen Inc.’s fully-diluted earnings per share for the year?

a) $6.64 b) $5.75 c) $6.30 d) $6.47 e) $5.19

118. (+) Using the ending shareholders’ equity (instead of average equity), what was Aspen

Inc.’s rate of return on common shareholders’ equity for the year? a) 13.9% b) 17.0% c) 19.3% d) 20.3% e) 17.5%

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119. (-) In which of the following situations would the percentage-of-completion method of accounting be used rather than the completed contract method? a) Contracts are long term in nature. b) Costs are difficult to estimate until the contract is complete and the extent of

progress towards completion cannot reasonably be estimated. c) There are numerous acts required to complete the contract. d) The contract value is based on the improvement of the customer’s production and

the amount of improvement can be reasonably predicted at the start of the contract. e) Some customers do not pay but the amount of bad debts can be reasonably

estimated. 120. A lease is normally accounted for as a capital lease by the lessee if which of the

following conditions is met? a) At the end of the lease term, the lessee has the option to renew the lease. b) The term of the lease is at least 75% of the economic life of the leased property. c) The present value of the minimum lease payments is at least 75% of the fair value of

the leased property at the inception of the lease. d) The lessee pays all costs incident to ownership of the leased property such as

repairs and insurance. e) None of the above is an appropriate condition.

121. (+) The following information relates to STV Ltd.’s defined benefit pension plan:

Service costs for Year 10 $62,500Estimated accrued benefits (projected benefit obligation) on Jan. 1, Year 10 $522,800Pension benefits paid to retirees in Year 10 $38,250Assumed discount rate 9%

STV Ltd.’s projected benefit obligation on December 31, Year 10, assuming no change in actuarial estimates, is a) $594,602. b) $623,550. c) $585,300. d) $547,050. e) $594,102.

122. For a defined benefit pension plan, the pension expense for the period does NOT

include the a) current service cost. b) amortization of past service cost. c) amortization of adjustments arising from significant changes in assumptions. d) interest on the accrued pension obligation. e) amount contributed by the employer to the pension plan during the period.



123. Which of the following will create a timing difference between accounting and taxable incomes for which future income tax debits or credits must be recorded? a) Dividends received on Canadian investments. b) Political contributions. c) Membership dues to a country club at which clients are entertained. d) Provision for warranty repairs. e) None of the above.

124. Assume you are employed as the chief accountant for DrawPro Inc., a computer

software company. The company was developing a new software program called Graphics Tool. At the end of the year, the director of research estimated that $1 million was spent during the year for the Graphics Tool program. He asked you to reduce his expenses by capitalizing $1 million as research and development costs. Prior to capitalizing the research and development costs, which of the following questions would NOT be considered in ensuring that your statements would be in accordance with generally accepted accounting principles? a) Has the future market for Graphics Tool been clearly defined? b) Is the Graphics Tool program technology feasible? c) Are the costs related to research activities or development activities? d) Does management intend to launch the Graphics Tool program upon completion? e) How soon will the Graphics Tool program be ready to begin marketing?

125. Which of the following transactions or events would generally qualify as an extraordinary

item? a) Losses with respect to inventories due to an unforeseen technological breakthrough.b) Losses from a fluctuation in foreign exchange rates due to a major stock market

collapse. c) Expropriation of a corporation’s land and building for highway expansion. d) Income tax reductions on utilization of previously unrecognized prior period losses. e) Losses suffered due to inadequate fire insurance coverage.

126. In preparing its year-end adjusting entries, the Jesson Co. Ltd. neglected to adjust the

prepaid insurance account for the amount of insurance expired during the year. As a result of this error, a) net income is understated, the retained earnings balance is understated and the

assets are understated. b) net income is overstated, the retained earnings balance is overstated and the assets

are correctly stated. c) net income is understated, the retained earnings balance is overstated and the

assets are overstated. d) net income is overstated, the retained earnings balance is overstated and the assets

are overstated. e) none of the above are correct.



127. For which of the following may direct adjustments to the retained earnings account be made? a) Extraordinary items. b) Gain or loss from unusual items. c) Changes in accounting policies. d) Issue of shares. e) None of the above.

128. An unexpected decrease in which of the following ratios could indicate that fictitious

inventory has been recorded? a) Price-earnings. b) Total asset turnover. c) Current. d) Average collection period. e) Acid test (quick ratio).

129. (-) Which of the following is considered an activity ratio?

a) Times interest earned. b) Receivables turnover. c) Payout ratio. d) Acid test (quick ratio). e) Operating profit margin.

130. Which group of ratios would be useful in evaluating the effectiveness of working capital

management? a) Profit margin, acid-test ratio, and return on assets. b) Acid-test ratio, inventory turnover ratio, and average collection period ratio. c) Inventory turnover ratio, times interest earned, and debt-to-equity ratio. d) Acid-test ratio, current ratio, and return on equity. e) Profit margin, return on equity, and return on assets.

131. (-) Which of the following items is NOT a required disclosure for a publicly traded entity

with significant operating segments? a) Cash flow from operations for each segment. b) Factors used to identify the reportable segments. c) Amortization of capital assets for each segment. d) A reconciliation of the reporting segment’s revenue to the enterprise’s total revenue. e) The method of accounting for any transactions between segments.

The following information pertains to questions 132 and 133. Another World Inc. (AWI) is a foreign subsidiary of a Canadian company in its second year of operation. The following December 31 year-end balances, denominated in the host country’s foreign currency (FC), appeared in the records of AWI:



Year 1 Year 2 Cash 30,000 FC 150,000 FC Accounts receivable 45,000 FC 90,000 FC Inventory (FIFO basis) 40,000 FC 75,000 FC Capital assets 190,000 FC 180,000 FC Accounts payable 55,000 FC 25,000 FC Capital stock 10,000 FC 10,000 FC Retained earnings, January 1 0 FC 240,000 FC Sales 550,000 FC 600,000 FC Cost of sales 200,000 FC 250,000 FC Amortization expense 10,000 FC 10,000 FC Other operating expenses 100,000 FC 120,000 FC

Other Information: 1) The inventory was purchased evenly over the fourth quarter of each respective year. 2) Capital assets were purchased on January 1, Year 1. 3) Capital stock was issued on January 1, Year 1. 4) Sales, purchases and expenses occurred evenly throughout each year. 5) Exchange rates were as follows:

1 FC = CDN$ Year 1 Year 2 January 1 0.36 0.30 December 31 0.30 0.34 Average for the year 0.33 0.32 Average for the fourth quarter 0.31 0.35

132. (+) If AWI is financially and operationally independent of its Canadian parent, the

amounts that should appear on the Year 2 translated year-end financial statements of AWI (in Canadian dollars) are a) inventory $24,000, sales $192,000, amortization expense $3,200. b) inventory $25,500, sales $204,000, amortization expense $3,400. c) inventory $25,500, sales $192,000, amortization expense $3,200. d) inventory $26,250, sales $204,000, amortization expense $3,400. e) inventory $26,250, sales $192,000, amortization expense $3,200.

133. (+) If AWI uses the current rate method, what amount of cumulative translation gain/loss

should appear on AWI’s December 31, Year 2, balance sheet? a) $9,800 gain b) $6,600 gain c) $4,400 gain d) $6,800 gain e) $0

-------------------------------



134. Durali Festival Corp. (DFC) is a not-for-profit organization with annual revenues of $350,000. Which of the following policies VIOLATES generally accepted accounting principles? a) DFC expenses capital assets when acquired. This policy is fully disclosed in DFC’s

notes. b) DFC uses the restricted fund method for contributions to its restricted funds and it

accounts for restricted contributions to the general fund in accordance with the deferral method.

c) Membership revenues are recognized on an accrual basis. d) DFC recognizes both a revenue and expense equal to the fair value of services

donated by a local singer who performs at the festival. The singer would be hired for a fee if he did not donate his time.

e) All transfers between funds are reported in the statement of operations as revenue of the receiving fund and as an expense of the fund being transferred from.

135. (-) In fund accounting for a church, which of the following would NOT be included in the

balance sheet? a) Short-term (temporary) investments. b) Unrestricted funds. c) Receivables. d) Estimated commitments. e) Retained earnings.

Taxation 136. For income tax purposes, which of the following statements with respect to a deemed

resident is FALSE? a) A person who either enters or leaves Canada part way through the year on a

permanent basis is a deemed full-time resident. b) A deemed resident is taxed on his/her worldwide income in Canada regardless of

where he/she lives. c) A person who has sojourned in Canada for a period greater than 183 days is a

deemed resident. d) A deemed resident can be a corporation under certain conditions. e) A deemed resident is taxed as a full-time resident.



137. In which of the following situations would the income attribution rules apply? a) Transferring ownership of a capital property to a subsidiary in return for more shares

in the subsidiary at an elected transfer price equal to the adjusted cost base of the capital property.

b) Transferring ownership of an income-generating property as a gift to a spouse. c) Hiring a spouse as an employee of the family business at a salary appropriate for the

services performed by the spouse. d) Both a) and b) above. e) All of a), b) and c) above.

138. The term “rollover” implies that the taxation of the accrued gains is deferred to a future

time when it will be taxed a) in the hands of the person to whom the property is transferred when that person

disposes of the property. b) when the “new” property that is substituted for the “old” property is sold. c) when the property is sold to a person who does not qualify for a similar subsequent

rollover. d) both a) and b) above. e) all of a), b) and c) above.



139. (+) The following receipts, benefits and expenditures for Year 11 pertain to an individual who is an employee of a large corporation: Gross salary $30,000 Commissions 19,500 Bonus 3,000 Income taxes withheld $16,800 CPP contributions (maximum amount) 1,496 EI contributions (maximum amount) 878 Canada Savings Bond payments made through payroll deductions 3,000 Charitable donations made through payroll deductions 125 (22,299) Net remuneration received $30,201 The individual is required by contract with his employer to travel away from the company’s place of business on a regular basis and to pay these expenses directly. During Year 11, the individual paid actual travel expenses of $2,500 for transportation, $1,000 for accommodation and $500 for meals, all of which were reasonable in the circumstances. The employer pays the individual a travel allowance of $200 per month and also pays an annual premium of $700 to a private medical health plan on behalf of the individual. For purposes of calculating federal income taxes, the individual’s net income from office or employment for Year 11 is a) $47,001. b) $51,150. c) $50,450. d) $52,500. e) $48,776.

140. Which one of the following statements is true with respect to the reporting by an

individual of dividends received from a taxable corporation resident in Canada? a) The amount received is grossed up and added to income for property, and then the

individual may claim a tax credit. b) An individual who receives dividends need not report them for personal tax purposes

because the corporation has already paid tax. c) The individual includes the amount received in the computation of income from a

business because the amount was expensed by the corporation in calculating its business profits.

d) The amount received is grossed up and, added to income from property, resulting in the double taxation of some of the corporation’s profits.

e) The amount received is grossed up and included as income from property in the computation of net income for tax purposes, but then the entire grossed-up amount is taken as a deduction in the computation of taxable income.



141. A profitable company buys a depreciable class 8 asset (i.e. 20% CCA rate) for $500,000 at the beginning of Year 1. The company uses straight-line amortization for capital assets. This asset has an expected useful life of 8 years and has an estimated residual value of $50,000 at the end of 8 years. At the beginning of Year 3, the company sold this asset, which was the last asset in this class held by the company, for $350,000. What is the effect of this sale on the company’s Year 3 taxable income? a) $10,000 terminal loss b) $30,000 recapture c) $37,500 terminal loss d) $26,000 recapture e) $100,000 terminal loss

142. Control of SWM Ltd., a Canadian-controlled private corporation, has been acquired by a

non-related person who will operate the company in the same business as before. On the date that control was acquired, SWM Ltd. had net capital losses and non-capital losses for tax purposes available to carry forward. The non-capital losses included losses from carrying on a business, property losses, and allowable business investment losses. Which of the following will SWM Ltd. be allowed to carry forward to apply to future business income or future capital gains? a) The net capital losses. b) All of the non-capital losses. c) Only the non-capital losses from carrying on a business and the allowable business

investment losses. d) Only the non-capital losses from carrying on a business. e) Both a) and b) above.

143. Kelso Ltd. provides management advisory services to Downton Ltd. It is not involved in

any other business. Don Kelso is the sole shareholder and the only employee of Kelso Ltd. He and his son each own 50% of the issued shares of Downton Ltd. Which of the following statements, if any, is true? a) Kelso Ltd. is carrying on an “active business.” b) Kelso Ltd. is carrying on a “personal services business,” unless it employs in the

business more than five full-time employees throughout the year, which it does not. c) Kelso Ltd. is carrying on a “specified investment business.” d) If Mr. Kelso would reasonably be regarded as an employee of Downton Ltd., then

Kelso Ltd. is carrying on a “personal services business.” e) None of the above statements is true.

144. Examples of purchases on which input tax credits could be claimed because GST would

have been paid include a) zero-rated purchases. b) exempt purchases. c) salaries, wages and other remuneration. d) taxes and levies, fines and penalties imposed by a government. e) none of the above.



145. Which of the following statements about the small business deduction is FALSE? a) A corporation must be a Canadian-controlled private corporation throughout the year

to qualify for the small business deduction. b) The small business deduction is a deduction used in determining income for tax

purposes. c) Foreign income not taxed in Canada is removed from the base on which the small

business deduction is calculated. d) The benefits of the small business deduction are also available for large Canadian-

controlled private corporations. e) The business limit must be allocated among associated companies for the purpose

of determining the small business deduction for each company. Internal Control 146. Internal control comprises the plan of organization, the procedures and records that are

concerned with the safeguarding of assets, and the a) decision processes of management. b) reliability of financial records. c) authorization of transactions. d) achievement of administrative objectives. e) none of the above.

147. When considering the effectiveness of a system of internal control, it should be

recognized that inherent limitations do exist. Which of the following is an example of an inherent limitation in a system of internal control? a) The effectiveness of procedures depends on the segregation of employee duties. b) Procedures are designed to assure the execution and recording of transactions in

accordance with management’s authorization. c) In the performance of most control procedures, there are possibilities of errors

arising from mistakes in judgement. d) Procedures for handling large numbers of transactions are processed by electronic

data processing equipment. e) None of the above.

148. (-) The process of establishing controls consists of several steps. Which of the following

is NOT one of these steps? a) Measure results. b) Compare actual results to objectives. c) Appoint an internal auditor. d) Develop objectives. e) Determine appropriate actions.



149. A manufacturing plant has a quality control division. Its responsibility is to ensure that all products manufactured are within the company’s quality guidelines. This division is an example of a a) preventive control. b) corrective control. c) steering control. d) post-action control. e) detective control.

150. For good internal control in a large organization, the person who should sign cheques is

the a) person who prepares cheques. b) purchasing agent. c) accounts-payable clerk. d) treasurer. e) both a) and d) above.

151. Which of the following is an effective internal control measure that encourages receiving

department personnel to count and inspect all merchandise received? a) Quantities ordered are excluded from the receiving department copy of the purchase

order. b) Vouchers are prepared by accounts payable department personnel only after they

match item counts on the receiving report with the purchase order. c) Receiving department personnel are expected to match and reconcile the receiving

report with the purchase order. d) Internal auditors periodically examine, on a surprise basis, the receiving

department’s copies of receiving reports. e) None of the above.

END OF PART 1 OF EXAMINATION



Supplement of Formulae and Tables

Formulae

1. CAPITAL STRUCTURE

a) After-Tax Marginal Cost of Debt:

( )k k T or

T IFb = −−

11( )

where k = interest rate

T = corporate tax rate I = annual interest payment on debt F = face value of debt

b) Cost of Preferred Shares:

kDNPp

p

p=

where Dp = stated annual dividend payment on shares NPp = net proceeds on preferred share issue c) Cost of Common Equity: i) Cost of Common Shares (Capitalization of Dividends with Constant Growth

Rate): k

DNP

gee

= +1

where D1 = dividend expected for period 1 NPe = net proceeds on common share issue g = annual long-term dividend growth rate

ii) Cost of Retained Earnings: k r

DP

gre ee

= = +1

where Pe = market price of a share re = expected return on common equity



iii) Capital Asset Pricing Model: ( )R R R Rj f j m f= + −β where Rj = expected rate of return on security j Rf = risk-free rate Rm = expected return for the market portfolio β j = beta coefficient for security j (measure of systematic risk) d) Weighted Average Cost of Capital:

k BV

k PV

k EV

kb p e= ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

where B = amount of debt outstanding P = amount of preferred shares outstanding E = amount of common equity outstanding V = B + P + E = total value of firm 2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset

Present Value = CdTd k

kk

CdTd+ k

kk+

++

⎛⎝⎜

⎞⎠⎟=

++

⎛⎝⎜

⎞⎠⎟

221

1 051( )

.

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly Acquired

Present Value = UCC dTd+k

⎛⎝⎜

⎞⎠⎟

c) Present Value of Total Tax Shield Lost From Salvage

( ) ( )Present Value =

S

+k

dTd+k

or S

+k

dTd+k

n nn1 1 1n

⎛⎝⎜

⎞⎠⎟

⎛⎝⎜

⎞⎠⎟−, depending on cashflow assumptions

Notation for above formulae: C = net initial investment UCC = undepreciated capital cost of asset Sn = salvage value of asset realized at end of year n T = corporate tax rate k = discount rate or time value of money d = maximum rate of capital cost allowance n = total life of investment



Table 1

Present Value of One Dollar Due at the End of n Years

( )P

i n=+

1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 01 02 03 04 05

0.990 .980 .971 .961 .951

0.980 .961 .942 .924 .906

0.971 .943 .915 .888 .863

0.962.925 .889 .855 .822

0.952.907 .864 .823 .784

0.943.890 .840 .792 .747

0.935.873 .816 .763 .713

0.926 .857 .794 .735 .681

0.917.842 .772 .708 .650

0.909.826 .751 .683 .621

06 07 08 09 10

.942

.933

.923

.914

.905

.888

.871

.853

.837

.820

.837

.813

.789

.766

.744

.790

.760

.731

.703

.676

.746

.711

.677

.645

.614

.705

.665

.627

.592

.558

.666

.623

.582

.544

.508

.630

.583

.540

.500

.463

.596

.547

.502

.460

.422

.564

.513

.467

.424

.386 11 12 13 14 15

.896

.887

.879

.870

.861

.804

.788

.773

.758

.743

.722

.701

.681

.661

.642

.650

.625

.601

.577

.555

.585

.557

.530

.505

.481

.527

.497

.469

.442

.417

.475

.444

.415

.388

.362

.429

.397

.368

.340

.315

.388

.356

.326

.299

.275

.350

.319

.290

.263

.239 16 17 18 19 20

.853

.844

.836

.828

.820

.728

.714

.700

.686

.673

.623

.605

.587

.570

.554

.534

.513

.494

.475

.456

.458

.436

.416

.396

.377

.394

.371

.350

.331

.312

.339

.317

.296

.277

.258

.292

.270

.250

.232

.215

.252

.231

.212

.194

.178

.218

.198

.180

.164

.149 21 22 23 24 25

.811

.803

.795

.788

.780

.660

.647

.634

.622

.610

.538

.522

.507

.492

.478

.439

.422

.406

.390

.375

.359

.342

.326

.310

.295

.294

.278

.262

.247

.233

.242

.226

.211

.197

.184

.199

.184

.170

.158

.146

.164

.150

.138

.126

.116

.135

.123

.112

.102

.092



Table 1 (cont’d)


( )P

i n=+

1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 01 02 03 04 05

0.901 .812 .731 .659 .593

0.893 .797 .712 .636 .567

0.885 .783 .693 .613 .543

0.877.769 .675 .592 .519

0.870.756 .658 .572 .497

0.862.743 .641 .552 .476

0.855.731 .624 .534 .456

0.847 .718 .609 .516 .437

0.840 .706 .593 .499 .419

0.833.694 .579 .482 .402

06 07 08 09 10

.535

.482

.434

.391

.352

.507

.452

.404

.361

.322

.480

.425

.376

.333

.295

.456

.400

.351

.308

.270

.432

.376

.327

.284

.247

.410

.354

.305

.263

.227

.390

.333

.285

.243

.208

.370

.314

.266

.225

.191

.352

.296

.249

.209

.176

.335

.279

.233

.194

.162 11 12 13 14 15

.317

.286

.258

.232

.209

.287

.257

.229

.205

.183

.261

.231

.204

.181

.160

.237

.208

.182

.160

.140

.215

.187

.163

.141

.123

.195

.168

.145

.125

.108

.178

.152

.130

.111

.095

.162

.137

.116

.099

.084

.148

.124

.104

.088

.074

.135

.112

.093

.078

.065 16 17 18 19 20

.188

.170

.153

.138

.124

.163

.146

.130

.116

.104

.142

.125

.111

.098

.087

.123

.108

.095

.083

.073

.107

.093

.081

.070

.061

.093

.080

.069

.060

.051

.081

.069

.059

.051

.043

.071

.060

.051

.043

.037

.062

.052

.044

.037

.031

.054

.045

.038

.031

.026 21 22 23 24 25

.112

.101

.091

.082

.074

.093

.083

.074

.066

.059

.077

.068

.060

.053

.047

.064

.056

.049

.043

.038

.053

.046

.040

.035

.030

.044

.038

.033

.028

.024

.037

.032

.027

.023

.020

.031

.026

.022

.019

.016

.026

.022

.018

.015

.013

.022

.018

.015

.013

.010



Table 1 (cont’d)


( )P

i n=+

1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 01 02 03 04 05

0.826 .683 .564 .467 .386

0.820 .672 .551 .451 .370

0.813 .661 .537 .437 .355

0.806.650 .524 .423 .341

0.800.640 .512 .410 .328

0.794.630 .500 .397 .315

0.787.620 .488 .384 .303

0.781 .610 .477 .373 .291

0.775 .601 .466 .361 .280

0.769.592 .455 .350 .269

06 07 08 09 10

.319

.263

.218

.180

.149

.303

.249

.204

.167

.137

.289

.235

.191

.155

.126

.275

.222

.179

.144

.116

.262

.210

.168

.134

.107

.250

.198

.157

.125

.099

.238

.188

.148

.116

.092

.227

.178

.139

.108

.085

.217

.168

.130

.101

.078

.207

.159

.123

.094

.073 11 12 13 14 15

.123

.102

.084

.069

.057

.112

.092

.075

.062

.051

.103

.083

.068

.055

.045

.094

.076

.061

.049

.040

.086

.069

.055

.044

.035

.079

.062

.050

.039

.031

.072

.057

.045

.035

.028

.066

.052

.040

.032

.025

.061

.047

.037

.028

.022

.056

.043

.033

.025

.020 16 17 18 19 20

.047

.039

.032

.027

.022

.042

.034

.028

.023

.019

.036

.030

.024

.020

.016

.032

.026

.021

.017

.014

.028

.023

.018

.014

.012

.025

.020

.016

.012

.010

.022

.017

.014

.011

.008

.019

.015

.012

.009

.007

.017

.013

.010

.008

.006

.015

.012

.009

.007

.005 21 22 23 24 25

.018

.015

.012

.010

.009

.015

.013

.010

.008

.007

.013

.011

.009

.007

.006

.011

.009

.007

.006

.005

.009

.007

.006

.005

.004

.008

.006

.005

.004

.003

.007

.005

.004

.003

.003

.006

.004

.003

.003

.002

.005

.004

.003

.002

.002

.004

.003

.002

.002

.001



Table 1 (cont’d)


( )P

i n=+

1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 01 02 03 04 05

0.763 .583 .445 .340 .259

0.758 .574 .435 .329 .250

0.752 .565 .425 .320 .240

0.746.557 .416 .310 .231

0.741.549 .406 .301 .223

0.735.541 .398 .292 .215

0.730.533 .389 .284 .207

0.725 .525 .381 .276 .200

0.719 .518 .372 .268 .193

0.714.510 .364 .260 .186

06 07 08 09 10

.198

.151

.115

.088

.067

.189

.143

.108

.082

.062

.181

.136

.102

.077

.058

.173

.129

.096

.072

.054

.165

.122

.091

.067

.050

.158

.116

.085

.063

.046

.151

.110

.081

.059

.043

.145

.105

.076

.055

.040

.139

.100

.072

.052

.037

.133

.095

.068

.048

.035 11 12 13 14 15

.051

.039

.030

.023

.017

.047

.036

.027

.021

.016

.043

.033

.025

.018

.014

.040

.030

.022

.017

.012

.037

.027

.020

.015

.011

.034

.025

.018

.014

.010

.031

.023

.017

.012

.009

.029

.021

.015

.011

.008

.027

.019

.014

.010

.007

.025

.018

.013

.009

.006 16 17 18 19 20

.013

.010

.008

.006

.005

.012

.009

.007

.005

.004

.010

.008

.006

.004

.003

.009

.007

.005

.004

.003

.008

.006

.005

.003

.002

.007

.005

.004

.003

.002

.006

.005

.003

.003

.002

.006

.004

.003

.002

.002

.005

.004

.003

.002

.001

.005

.003

.002

.002

.001 21 22 23 24 25

.003

.003

.002

.002

.001

.003

.002

.002

.001

.001

.003

.002

.001

.001

.001

.002

.002

.001

.001

.001

.002

.001

.001

.001

.001

.002

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001



Table 2

Present Value of One Dollar Per Year — n Years at i%

( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 01 02 03 04 05

0.990 1.970 2.941 3.902 4.854

0.980 1.942 2.884 3.808 4.713

0.971 1.914 2.829 3.717 4.580

0.9621.8862.7753.6304.452

0.9521.8592.7233.5474.330

0.9431.8332.6733.4654.212

0.9351.8082.6243.3874.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.9091.7362.4873.1703.791

06 07 08 09 10

5.796 6.728 7.652 8.566 9.471

5.601 6.472 7.325 8.162 8.983

5.417 6.230 7.020 7.786 8.530

5.2426.0026.7337.4358.111

5.0765.7866.4637.1087.722

4.9175.5826.2106.8027.360

4.7675.3895.9716.5157.024

4.623 5.206 5.747 6.247 6.710

4.486 5.033 5.535 5.995 6.418

4.3554.8685.3355.7596.145

11 12 13 14 15

10.368 11.255 12.134 13.004 13.865

9.787 10.575 11.348 12.106 12.849

9.253 9.954 10.635 11.296 11.938

8.7609.3859.98610.56311.118

8.3068.8639.3949.89910.380

7.8878.3848.8539.2959.712

7.4997.9438.3588.7459.108

7.139 7.536 7.904 8.224 8.560

6.805 7.161 7.487 7.786 8.061

6.4956.8147.1037.3677.606

16 17 18 19 20

14.718 15.562 16.398 17.226 18.046

13.578 14.292 14.992 15.678 16.351

12.561 13.166 13.753 14.324 14.877

11.65212.16612.65913.13413.590

10.83811.27411.69012.08512.462

10.10610.47710.82811.15811.470

9.4479.76310.05910.33610.594

8.851 9.122 9.372 9.604 9.818

8.313 8.544 8.756 8.950 9.129

7.8248.0228.2018.3658.514

21 22 23 24 25

18.857 19.661 20.456 21.244 22.023

17.011 17.658 18.292 18.914 19.523

15.415 15.937 16.444 16.936 17.413

14.02914.45114.85715.24715.622

12.82113.16313.48913.79914.094

11.76412.04212.30312.55012.783

10.83611.06111.27211.46911.654

10.017 10.201 10.371 10.529 10.675

9.292 9.442 9.580 9.707 9.823

8.6498.7728.8838.9859.077



Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 01 02 03 04 05

0.901 1.713 2.444 3.102 3.696

0.8931.6902.4023.0373.605

0.885 1.668 2.361 2.975 3.517

0.8771.6472.3222.9143.433

0.8701.6262.2832.8553.352

0.8621.6052.2462.7983.274

0.8551.5852.2102.7433.199

0.848 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.107 2.589 2.991

06 07 08 09 10

4.231 4.712 5.146 5.537 5.889

4.1114.5644.9685.3285.650

3.998 4.423 4.799 5.132 5.426

3.8894.2884.6394.9465.216

3.7854.1604.4874.7725.019

3.6854.0394.3444.6074.833

3.5893.9224.2074.4514.659

3.498 3.812 4.078 4.303 4.494

3.410 3.706 3.954 4.163 4.339

3.326 3.605 3.837 4.031 4.193

11 12 13 14 15

6.207 6.492 6.750 6.982 7.191

5.9386.1946.4246.6286.811

5.687 5.918 6.122 6.303 6.462

5.4535.6605.8426.0026.142

5.2345.4215.5835.7255.847

5.0295.1975.3425.4685.576

4.8364.9885.1185.2295.324

4.656 4.793 4.910 5.008 5.092

4.487 4.611 4.715 4.802 4.876

4.327 4.439 4.533 4.611 4.676

16 17 18 19 20

7.379 7.549 7.702 7.839 7.963

6.9747.1207.2507.3667.469

6.604 6.729 6.840 6.938 7.025

6.2656.3736.4676.5506.623

5.9546.0476.1286.1986.259

5.6695.7495.8185.8785.929

5.4055.4755.5345.5855.628

5.162 5.222 5.273 5.316 5.353

4.938 4.990 5.033 5.070 5.101

4.730 4.775 4.812 4.844 4.870

21 22 23 24 25

8.075 8.176 8.266 8.348 8.422

7.5627.6457.7187.7847.843

7.102 7.170 7.230 7.283 7.330

6.6876.7436.7926.8356.873

6.3136.3596.3996.4346.464

5.9736.0116.0446.0736.097

5.6655.6965.7235.7475.766

5.384 5.410 5.432 5.451 5.467

5.127 5.149 5.167 5.182 5.195

4.891 4.909 4.925 4.937 4.948



Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 01 02 03 04 05

0.826 1.510 2.074 2.540 2.926

0.8201.4922.0422.4942.864

0.813 1.474 2.011 2.448 2.804

0.8071.4571.9812.4042.745

0.8001.4401.9522.3622.689

0.7941.4241.9232.3202.635

0.7871.4071.8962.2802.583

0.781 1.392 1.868 2.241 2.532

0.775 1.376 1.842 2.203 2.483

0.769 1.361 1.816 2.166 2.436

06 07 08 09 10

3.245 3.508 3.726 3.905 4.054

3.1673.4163.6193.7863.923

3.092 3.327 3.518 3.673 3.799

3.0213.2423.4213.5663.682

2.9513.1613.3293.4633.571

2.8853.0833.2413.3663.465

2.8213.0093.1563.2733.364

2.759 2.937 3.076 3.184 3.269

2.700 2.868 2.999 3.100 3.178

2.643 2.802 2.925 3.019 3.092

11 12 13 14 15

4.177 4.279 4.362 4.432 4.489

4.0354.1274.2034.2654.315

3.902 3.985 4.053 4.108 4.153

3.7763.8513.9123.9624.001

3.6563.7253.7803.8243.859

3.5433.6063.6563.6953.726

3.4373.4933.5383.5733.601

3.335 3.387 3.427 3.459 3.483

3.239 3.286 3.322 3.351 3.373

3.147 3.190 3.223 3.249 3.268

16 17 18 19 20

4.536 4.576 4.608 4.635 4.657

4.3574.3914.4194.4424.460

4.189 4.219 4.243 4.263 4.279

4.0334.0594.0804.0974.110

3.8873.9103.9283.9423.954

3.7513.7713.7863.7993.808

3.6233.6403.6543.6643.673

3.503 3.518 3.529 3.539 3.546

3.390 3.403 3.413 3.421 3.427

3.283 3.295 3.304 3.311 3.316

21 22 23 24 25

4.675 4.690 4.703 4.713 4.721

4.4764.4884.4994.5074.514

4.292 4.302 4.311 4.318 4.323

4.1214.1304.1374.1434.147

3.9633.9713.9763.9813.985

3.8163.8223.8273.8313.834

3.6793.6843.6893.6923.694

3.551 3.556 3.559 3.562 3.564

3.432 3.436 3.438 3.441 3.442

3.320 3.323 3.325 3.327 3.329



Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 01 02 03 04 05

0.763 1.346 1.791 2.131 2.390

0.758 1.332 1.766 2.096 2.345

0.752 1.317 1.742 2.062 2.302

0.7461.3031.7192.0292.260

0.7411.2891.6961.9972.220

0.7351.2761.6741.9662.181

0.7301.2631.6521.9362.143

0.725 1.250 1.630 1.906 2.106

0.719 1.237 1.609 1.877 2.070

0.7141.2251.5891.8492.035

06 07 08 09 10

2.588 2.739 2.854 2.942 3.009

2.534 2.678 2.786 2.868 2.930

2.483 2.619 2.721 2.798 2.855

2.4332.5622.6582.7302.784

2.3852.5082.5982.6652.715

2.3392.4552.5402.6032.650

2.2942.4042.4852.5442.587

2.251 2.356 2.432 2.487 2.527

2.209 2.308 2.380 2.432 2.469

2.1682.2632.3312.3792.414

11 12 13 14 15

3.060 3.100 3.129 3.152 3.170

2.978 3.013 3.040 3.061 3.076

2.899 2.931 2.956 2.974 2.988

2.8242.8532.8762.8922.905

2.7522.7792.7992.8142.826

2.6832.7082.7272.7402.750

2.6182.6412.6582.6702.679

2.556 2.576 2.592 2.603 2.611

2.496 2.515 2.529 2.539 2.546

2.4382.4562.4692.4782.484

16 17 18 19 20

3.183 3.193 3.201 3.207 3.211

3.088 3.097 3.104 3.109 3.113

2.999 3.007 3.012 3.017 3.020

2.9142.9212.9262.9302.933

2.8342.8402.8442.8482.850

2.7582.7632.7672.7702.772

2.6852.6902.6932.6962.698

2.616 2.621 2.624 2.626 2.627

2.551 2.555 2.557 2.559 2.561

2.4892.4922.4942.4962.497

21 22 23 24 25

3.215 3.217 3.219 3.221 3.222

3.116 3.118 3.120 3.121 3.122

3.023 3.025 3.026 3.027 3.028

2.9352.9372.9382.9392.939

2.8522.8532.8542.8552.856

2.7732.7752.7752.7762.777

2.6992.7002.7012.7012.702

2.629 2.629 2.630 2.630 2.631

2.562 2.562 2.563 2.563 2.563

2.4982.4992.4992.4992.499



Solutions to 2006 CMA Entrance Examination

Part 1 – Sample #1

Answer Summary:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

c a e c a d e e c b a e d d e a b a c b c d c d b c

27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52.

a d b a e d c b a b b a d d a c c e b e d b c a d a

53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.

b d a a a a b e b b d d a d e a a c e d d d a d d a

79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

b b c a e a e c b a c a b d e b c e c b b e b c a c

105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

c c d a c e a e b c b b d e c b a e d e c d c b b b

131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151.

a c b e e a b e b a a d a e b b c c e d a

2006 Entrance Examination Part 1 – Sample # 1

CMA New Brunswick 1


2 CMA New Brunswick

Management Accounting 1. Answer: c.

Line managers are directly responsible for the achievement of the objectives of the organization. For example, a plant manager who is responsible for making investments in new equipment is considered to be a line manager. Staff management, however, exists to provide advice and assistance to line managers. Therefore, choice c) pertains to staff management and choices a) and b) pertain to line management.

2. Answer: a.

The factory manager’s salary is an indirect cost because it is associated with the manufacturing process but does not constitute a direct labour cost. It is a fixed manufacturing cost, not a variable, period, or administrative cost.

3. Answer: e.

Variable overhead = ($392,500 - $370,500) ÷ (50,000 - 45,000) = $22,000 ÷ 5,000 DLH = $4.40 per DLH Fixed overhead = $392,500 - ($4.40 x 50,000) = $392,500 - $220,000 = $172,500 or Fixed overhead = $370,500 - ($4.40 x 45,000) = $172,500

4. Answer: c.

When there is only one main product, all overhead will relate to the single product; therefore, a single plant-wide overhead rate would be appropriate for determining production costs related to the product for pricing purposes.

5. Answer: a.

Using the relative sales value method, joint costs would be allocated to product A as follows: [($2 × 60,000)/($2 × 60,000) + ($4 × 90,000)] × $300,000 = $120,000/$480,000 × $300,000 = $75,000

6. Answer: d.

The net realizable value method allocates joint costs on the basis of relative estimated net realizable value. The cost of each unit of product B would be calculated as follows: Total cost = $200,000 + {$300,000 × [80,000 × $10 - $200,000]/[(60,000 × $5 - $100,000) + (80,000 × $10 - $200,000)]} = $200,000 + {$300,000 × $600,000/($200,000 + $600,000)} = $425,000 Cost per unit = $425,000/80,000 = $5.31


CMA New Brunswick 3

7. Answer: e. Using the direct allocation method, overhead allocated to each machine hour is as follows: [$400,000 + (21,000/28,000 × $350,000) + (18,000/30,000 × $200,000)]/50,000 = ($400,000 + $262,500 + $120,000)/50,000 = $15.65 per machine hour.

8. Answer: e.

Overhead rates: Fabrication = $300,000 ÷ 10,000 hours = $30 per direct machine hour. Assembly = $180,000 ÷ 9,000 hours = $20 per direct labour hour. Overhead applied to Job 111 = ($30 x 10 hours) + ($20 x 25 hours) = $800.

9. Answer: c.

($1,300,000 ÷ 500,000 x 600,000) - $1,400,000 = $160,000 overapplied. 10. Answer: b.

Under standard variable costing, cost of good sold is calculated as the standard variable cost x the standard inputs allowed for actual outputs. Therefore, there may be variable cost variances but no fixed cost variances.

11. Answer: a.

Statements C and D must represent absorption costing because each shows a fixed overhead variance and statements A and B, which do not show a fixed overhead variance, must represent variable costing. Therefore, the $150,000 other costs shown in statements A and B must represent the actual fixed overhead and fixed selling and administration expenses. The $80,000 other costs under statement E (actual absorption) represent the actual fixed selling and administration expenses. The $70,000 difference less the $10,000 fixed overhead variance represents the total fixed overhead applied for actual inputs. Therefore, $60,000 ÷ $6 per unit = 10,000 units produced. An alternative method of calculating units produced is as follows:

Operating income statement B (i.e. standard variable costing) $514,000Operating income statement D (i.e. standard absorption costing) 508,000Fixed overhead in ending inventory 6,000Divide by $6 standard cost per unit ÷ 6Number of units in ending inventory 1,000Number of units sold 9,000Number of units produced 10,000


4 CMA New Brunswick

12. Answer: e. Materials handling: 4,800/(4,800 + 7,200) x $300,000 = $120,000Machine setups: 1,800/(1,800 + 3,600) x $324,000 = 108,000Quality inspections: 1,800/(1,800 + 5,400) x $216,000 = 54,000Total overhead cost $282,000

Overhead cost per unit = $282,000/600 = $470.

13. Answer: d.

Backflush costing is a costing system that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods. Traditional systems track costs sequentially as products pass from direct materials, to work in process, to finished goods, and finally to sales. With backflush costing, work in process is not recorded, and in some cases, direct materials inventory and/or finished goods inventory are not recorded. Backflush costing is appropriate for a just-in-time production system because inventories are minimized in such a system and the need to track costs at the various stages of production is not required. Kaizen costing is an approach that incorporates continuous improvement. Hybrid costing blends characteristics from both job-costing and process-costing systems. Product life cycle costing tracks and accumulates the actual costs attributable to each product from start to finish, including initial R&D to final customer servicing & support in the marketplace. Normal costing using the traditional system of tracking costs sequentially through each stage of the production process (materials purchases, conversion into work in process, conversion into finished goods, sale of finished goods).

14. Answer: d.

Variable costs to produce component Z = $5 + $6 + ($6 x 120% x 2/3) = $15.80 Cost to purchase component Z = $18.00 Incremental variable cost = ($18.00 - $15.80) x 60,000 = $132,000 increase Incremental fixed cost = $100,000 decrease Contribution margin per unit from product G2 = $150 – [$54 + $45 + ($45 x 120% x 2/3)] = $15 Total contribution margin from product G2 = $15 x 10,000 = $150,000 The incremental contribution margin from product G2 is greater than the incremental variable cost of purchasing component Z and is greater than the incremental fixed cost savings. Therefore, the company should purchase component Z from Company Q and produce product G2 to realize an incremental profit of $150,000 - $132,000 = $18,000.

15. Answer: e.

($200,000 + $40,000) ÷ [(.3 x .4) + (.6 x .6)] = $240,000 ÷ .48 = $500,000


CMA New Brunswick 5

16. Answer: a

Accounted For

Transferred-In

Direct Materials

Conversion(DL + OH)

Completed & transferred out: (2,600 + 12,000 - 3,000) 11,600 11,600 11,600 11,600 Ending WIP 3,000 3,000 3,000 300 Equivalent units 14,600 14,600 14,600 11,900 Total costs during February $145,740 $56,190 $428,088 Cost per equivalent unit $49.80 $ 9.98 $ 3.85 $ 35.97 Costs of units completed and transferred out = 11,600 x $49.80 = $577,680 = $577,700 (rounded)

17. Answer: b.

Variable costs = $600,000/300,000 = $2 per unit; revenue from special order = 60% x $5 = $3 per unit

Increased revenue 60,000 x $3 $180,000 Opportunity cost 10,000 x $5 (50,000)Increased variable costs 50,000 x $2 (100,000)Increase in income $ 30,000

Alternative calculations: [(60,000 x $1) + (240,000 x $3)] - (250,000 x $3) = $780,000 - $750,000 = $30,000 increase (60,000 x $1) - (10,000 x $3) = $30,000 increase

18. Answer: a.

RST Ltd. has sufficient capacity to fill the order; therefore, there are no opportunity costs.Desired contribution margin = $28,000 ÷ 8,000 units = $3.50/unit. Variable costs = $8.00 + $0.75 = $8.75. Therefore, the sales price should be $8.75 + $3.50 = $12.25 per unit.

19. Answer: c.

$105,000 = $50,000 (yr 1) + $45,000 (yr 2) + .25 × $40,000 (yr 3) Therefore, the payback period is 2.25 years.

20. Answer: b.

NPV = ($50,000 × .806) + ($45,000 × .650) + ($40,000 × .524) + ($35,000 × .423) + ($30,000 × .341) - $105,000= $10,545 = $10,500 (rounded)


6 CMA New Brunswick

21. Answer: c. Present value of CCA tax shield = ($105,000 x .3 x .4)/(.3 + .24) x [(2 + .24)/2(1 + .24)] = $21,075 Present value of tax shield from salvage: [$10,000/(1 + 0.24)5] x [(.3 x .4)/(.3 + .24)] = $758 Present value of salvage = $10,000 x .341 = $42,410 Net present value would increase by $21,075 - $758 + $3,410 = $23,727 = $23,700 (rounded)

22. Answer: d.

Materials price variance: = (Standard price - Actual price) x Actual quantity = ($10 - $12) x 85,800 grams = $171,600 unfavourable.

23. Answer: c.

Materials efficiency variance: = (Standard input quantity allowed - Actual input quantity) x Standard price = [(39,000 x 2) - (39,000 x 2.2) x $10 = (78,000 - 85,800) x $10 = $78,000 unfavorable.

24. Answer: d.

Cost to investigate = $3,000 + ($1,000 x 10 hours) = $13,000. Cost of repairs = $6,000 + ($1,000 x 20 hours) = $26,000. Expected cost of investigating variance = $13,000 + (10% x $26,000) = $15,600.

25. Answer: b.

One way to calculate the sales volume variance is as follows: (Actual sales volume - Budgeted sales volume) × Budgeted contribution margin/unit Regular (15,000 - 40,000) × $5 $125,000 unfavourable Deluxe (65,000 - 60,000) × $2 10,000 favourable Total $115,000 unfavourable

26. Answer: c.

One method for calculating the sales quantity variance is as follows: (Total actual units - Total budgeted units) × Budgeted sales mix % × Bud. CM/unit Regular (80,000 - 100,000) × .4 × $5 $40,000 unfavourable Deluxe (80,000 - 100,000) × .6 × $2 24,000 unfavourable Total $64,000 unfavourable

27. Answer: a.

The objective function is to maximize contribution margin, which is expressed as: Maximize 50x + 70y.


CMA New Brunswick 7

28. Answer: d. While the Machining department constraint would usually be expressed as shown in (c), it could also be expressed as shown in (a). Another acceptable expression not shown would be x + 2y < 50.

29. Answer: b.

Budgeted cost of merchandise sold in December = $800,000 x 30% = $240,000. Budgeted merchandise purchases in December = $240,000 + $30,000 ending inventory - $24,000 beginning inventory = $246,000. Budgeted merchandise accounts payable balance = $246,000 x 40% = $98,400.

30. Answer: a.

Decentralized decision making is appropriate for very large, multiproduct, diverse and complex businesses. In organizations where there is high risk associated with decision making, centralized decision making tends to lower the risk. For example, in a vertically integrated company, if the decisions of one division highly affect the operations of another division and the success of the organization depends on all the divisions cooperating with each other, the higher the risk associated with the decision, the more often the decision is made centrally.

31. Answer: e.

ROI Division A = $50,000/$300,000 = 16.7% ROI Division B = $95,000/$650,000 = 14.6% RI Division A = $50,000 - ($300,000 x .12) = $14,000 RI Division B = $95,000 - ($650,000 x .12) = $17,000 Division A has a higher ROI, while Division B has a higher RI. None of choices a), b), c) or d) reflects this; therefore, choice e) is the correct answer.

32. Answer: d.

Although Division X could receive $112 from outside customers, they save $10 in selling expenses. Consequently, transferring inside at $112 - $10 = $102 leaves them in the same position as selling to outsiders at $112.

33. Answer: c.

The output of a mission centre contributes directly to the objectives of the organization (choice c), whereas the output of a service centre contributes to the work of other responsibility centres (choice a). Mission centres can be profit centres, revenue centres or expense centres; therefore, choices b), d) and e) are not correct and choice c) is the correct answer.


8 CMA New Brunswick

Corporate Finance 34. Answer: b.

The shareholders of large public companies are usually not directly involved with the day-to-day operations of a company and, instead, employ managers to represent the owners’ interests and make decisions on their behalf. Therefore, the vice-president of finance is mainly concerned with maximizing the current market value of the company’s existing shares. The market value of the company’s shares is a reflection of the present value of future cash flows. Other Choices: a) Minimizing the risks taken by the company could result in profitable projects being

overlooked by management. This could result in sacrificing growth potential, which could have a negative effect on share price.

c) Maximizing the size (i.e. asset value) of the company could lead to decisions that could have a negative effect on share price and shareholder wealth. For example, a company could pay an excessive amount for another firm in an effort to increase the acquiring company’s size, but because the amount paid was excessive, the value of its shares could go down instead of up.

d) Maximizing accounting profit is not the same as maximizing cash flow. It is cash flow that will ultimately determine the value of the company’s shares. As well, accounting profit for the current year does not consider the future profits of the company.

e) Maximizing current earnings per share is similar to choice d) current earnings per share reflect the current accounting profit of the company, and do not consider the future profits of the company or its cash flows.

35. Answer: a. 36. Answer: b.

($20,000/$140,000 x 8%) + ($40,000/$140,000 x 6%) + ($70,000/$140,000 x 3%) + ($10,000/$140,000 x 10%) = 5.07%

37. Answer: b.

Using the cost of preferred shares formula, K= (D/NP) where k is the cost of preferred shares, D is the dividend and NP is the net proceeds (i.e. market price): 0.12 = (50 x .07)/NP NP = $29.17

38. Answer: a.

Cost of equity (Rj) = Rf + B(Rm - Rf), where Rf = .14 - .06 = .08 = .08 + 1.2(.14 - .08) = .152 WACC = (Wd)(kd)(1-tc) + (Wp)(kp) + (We)(ke), where ke = Rj WACC = (.4)(.08)(1-.4) + (.1)(.09) + (.5)(.152) = .1042 = 10.42%.

39. Answer: d. 40. Answer: d.


CMA New Brunswick 9

41. Answer: a. $8,000 x 14% = $1,120

42. Answer: c. 43. Answer: c. 44. Answer: e.

A stock dividend is simply the distribution of additional shares to shareholders. It represents a recapitalization of the company – a shareholder’s proportional ownership remains unchanged. All other things being equal, the market price of the shares will drop so that the total market value of a shareholder’s holdings stays the same and the company’s total shareholders’ equity remains unchanged (i.e. new price equals old price divided by 1.1). Because there are additional shares over which to distribute earnings, the future earnings per share will drop.

Operations Management 45. Answer: b.

A service operation typically produces an intangible product that cannot be stored or inventoried, whereas manufactured goods are tangible products that can be stored or inventoried. Controlling quality and forecasting demand are equally difficult for both manufacturing and service operations, and both require a wide range of employee skills and complexity of equipment. Therefore, choices a), c), d) and e) are not as likely as choice b).

46. Answer: e. 47. Answer: d. 48. Answer: b. 49. Answer: c.

A make-to-order system produces products only in response to firm orders from buyers. A make-to-stock process produces products in response to forecasted demand, and builds inventory until the products are sold. A make-to-stock process will provide faster service at lower cost than a make-to-order process. As well, a continuous flow process will produce products with a lower per-unit cost than a job shop or batch process, because the former processes are high volume processes that exploit economies of scale, specialization of labour, and dedication of resources (e.g. equipment) to a single product or production line. Thus, an organization wishing to emphasize low cost production (over, say, flexibility of production) will be more likely to use a make-to-stock strategy and a high volume process, such as a continuous flow process.



50. Answer: a. 51. Answer: d.

Group technology is the principle underlying the cellular manufacturing process layout. While the spatial configuration of the cellular process layout is no more difficult than that of job shops, the design of the work cells themselves can be very difficult. It requires decisions regarding which operations and machines to have in each cell and how the operations in the cells should be arranged. As well, there are often a large number of design alternatives from which to choose. Other Choices: a) One the most predominant benefits of group technology and cellular manufacturing

is that it reduces setup time and throughput time. Jobs processed at the same cell often have similar characteristics that require less changeover from job to job. As well, the wait between production stages, the wait for transport, and the transport time are reduced.

b) The use of group technologies in product design results in greater use of fewer parts, which improves efficiency, reduces materials handling and can result in economies of scale from purchasing more of fewer parts/components/inputs (as opposed to fewer of more parts/components/inputs).

c) Routing and machine loading would be improved with cellular processing, which is based on group technology.

e) Improved setup and throughput time results in the reduction of labour. 52. Answer: a.

Both PERT and CPM deal with the cost, time and resource availability factors of a project. For these techniques to be effective, the project must have well-defined tasks that are interdependent and ordered (i.e. they must follow each other in a given sequence). A change in content over time would detract from the applicability of these project scheduling techniques (i.e. they would be highly inaccurate later on). The cost of PERT and CPM rarely exceeds 2 percent of total project cost, and the added cost is generally outweighed by the savings from improved scheduling and reduced project time.

53. Answer: b.

The Theory of Constraints (TOC) is best described by choice b), although choices a), c), d) and e) appear to be plausible given that they represent competing problem solving models.

54. Answer: d. 55. Answer: a.

One of the principles of business process reengineering is to organize around outcomes, not tasks. Choices b) to e) are other principles of reengineering.



Information Technology 56. Answer: a.

Network systems are programming-intensive, time-consuming, difficult to install, and difficult to remedy if design errors occur; whereas, simplicity of design and maintenance is an advantage of a relational system. The network data structure tends to be more, not less, difficult for programmers to work with and maintain than the relational data structure. Therefore, statement a) is not correct. All of the other statements are correct.

57. Answer: a.

An extranet is a network that links selected resources of a company with its customers, suppliers and other business partners, using the Internet or private networks to link the organizations’ intranets. Choice a) is an example of an extranet application. Other Choices: b) This is an example of an intranet, not extranet, application. An intranet is an internal

company network. c) This is an example of an extranet application, not an intranet application. d) This is an example of an Internet application, but not an intranet application.

58. Answer: a. 59. Answer: b. 60. Answer: e.

A batch control total for the total dollar amounts of the cheques can be calculated beforehand for the batch of payments. The total of the cheque amounts generated by the computer for the batch should be reconciled with the previously calculated batch total to check for inputting errors. Option a) (a completeness check) determines that a critical field has not been left blank. Option b) (a limit check) determines that a field does not contain an excessive amount. Option c) (a valid field test) determines whether appropriate data has been entered into a field, e.g. that only numeric characters are entered in a numeric field such as a cheque amount field. Choice d) (a check digit) is an extra reference number added to an identification code and is used to ensure a particular code was entered correctly.

61. Answer: b.

Decision support systems (DSS) combine the use of sophisticated data analysis and modeling tools to support decision making; therefore, choice b) is correct. They are typically used at the management level of the organization; therefore choice d) is not correct. They help managers make decisions that are unstructured, semi-structured, unique, or rapidly changing, and not easily specified in advance; therefore choice a) is not correct. DSS support easy modification of models, which increases the organization’s responsiveness to changing internal and external environments. Programming knowledge and experience are not usually required by users to operate a DSS; therefore choice c) is not correct.



62. Answer: b. The corporate strategic management group is responsible for developing the strategic organization plan, including the direction for the use of information technology in the organization (choice a). The information systems steering committee is the senior management group with direct responsibility for systems development and operation. This includes reviewing and approving the plans for systems and the allocation of resources within the information systems organization (choice b). The project manager is concerned with the management of the specific project and would be responsible for structuring and assigning the tasks of the information technology project teams. (choice c). Therefore, only choice b) is correct.


Prototyping is an effective systems design technique because it involves the user intimately in the process of establishing information requirements. A basic prototype system is demonstrated to the users, who experiment with using the system and suggest modifications. The proposed modifications are incorporated into the prototype and the experimentation process is repeated with the users until they are satisfied that the system effectively meets their requirements. This technique greatly reduces the risk of the system not being used once it is implemented and greatly increases the probability of designers to obtain acceptance of their designs from users.

65. Answer: a.

Each business process can be divided into three different event categories: operating events, information events and decision/management events.

66. Answer: d.

The acquisition/payment business process includes requesting a good or service (choice a), selecting a supplier, ordering the good or service, receiving and inspecting the good or service (choice b), storing/maintaining the good (choice c), and paying for the good or service (choice e).

67. Answer: e.

A distributed system makes integration of data more difficult. The information is scattered throughout the different computers.

68. Answer: a. Strategic Management 69. Answer: a.

Operational control is the development and adaptation of standards used for directing and controlling day-to-day operations. Inventory reorder points represent standards used for controlling operations and, therefore, represent an operational control issue. Choices b), c) and d) relate to long-range strategic planning.

70. Answer: c.



71. Answer: e. Growth through concentration in the firm’s current industry can be achieved through vertical integration. Taking over a function previously performed by a distributor, or buying the customer company, is forward integration, which is a form of vertical integration.


Economies of scale, the “primary” entry barrier in the question, do not deter an entrant from accomplishing choices a), b), c) and e). If significant cost advantages result from economies of scale, it becomes difficult, if not impossible, for a new entrant to produce on a scale comparable to that of its established rivals and achieve such cost advantages. On the other hand, although a large-scale production is possible, it involves a greater risk of mammoth initial capital costs, which may easily turn into sunk costs.

74. Answer: d.

Choices b) and e) represent tangible resources which are fairly easy to imitate. Choices a) and c) represent intangible resources, but they can be imitated too, although with some difficulty because of their company-specific nature. An intangible resource, such as a brand name, is the most difficult to imitate because it symbolizes a “company’s reputation.” Also, law prohibits competitors from imitating brand names.

75. Answer: a.

One of the most important criteria in selecting one strategy over another is the ability of the proposed strategy to deal with the specific strategic factors developed in the SWOT analysis. If the strategy does not take advantage of opportunities and strengths, and lead away from threats and weaknesses, it will probably fail. The best strategy may not be chosen if it runs contrary to the needs and desires of top managers and executives (choice b), but the chosen strategy may still succeed if it appropriately deals with the factors developed in the SWOT analysis. Whether a strategy fits with the other corporate strategies (choice c) and whether it results in an acceptable return on investment (choice d) are important factors to consider, but are not the most important factors (e.g. there may be problems with the current strategies or there may be alternatives that generate a greater return on investment). If a strategy is incompatible with the corporate culture (choice e), there is a high likelihood that it will fail; therefore, this is an important factor to consider. However, it may be possible to manage around the culture or try to change the culture to fit the strategy.

76. Answer: d.

Benchmarking is based on the concept that reinventing something that someone else is already using successfully makes no sense. It involves finding the company that is the best performer for a certain key activity (i.e. the best-in-class company), determining the difference in performance between your company and the best-in-class company, and developing tactical programs to match or improve on the best-in-class company’s performance. The other choices are more general strategies, e.g. benchmarking might be a component of a continuous improvement or TQM strategy.



International Business 77. Answer: d. 78. Answer: a.

A country with absolute advantage will gain from trade when a less efficient country is not equally less efficient in producing all goods. If each country specializes in what it does best (comparative advantage) and trades with the other country, the total output of the countries will increase.

79. Answer: b. 80. Answer: b.

The Fisher effect describes the relationship between inflation and interest rates in two countries (choice a). It suggests that as inflation rises, so will the nominal interest rate because lenders will want to protect the real interest rate (i.e. the real interest rate is found by subtracting the inflation rate from the nominal rate). The International Fisher Effect suggests that the interest rate differential is an unbiased predictor of future changes in the spot exchange rate. For example, if nominal interest rates in Germany are higher than those in Canada, the value of the DM will fall (or the value of the Canadian dollar will rise) by the interest rate differential (choice b).

81. Answer: c.

In a licensing situation, the licensor often provides its technological know-how to the licensee for a fee. This has resulted in licensing becoming the main mechanism by which firms sell their technological know-how, and has created a risk that the licensee may use the knowledge gained from the licensor to compete against the original licensor once the term of the license is over. Licensing usually requires little up-front capital investment by the licensor (choice a). In a licensing situation, the licensee usually has control over manufacturing and marketing in the local market rather than the licensor (choice d), and the licensee generally employs local workers (choice b), although the licensor may be required to initially train these workers.

82. Answer: a.

Although just-in-time inventory systems are difficult to implement, they are often feasible. Many global manufacturing companies currently use JIT inventory systems. All of statements b), c), d) and e) are true.

83. Answer: e.

Although swaps are most likely to be used to raise or transfer capital, they may also be used to protect against both transaction and translation risks.

84. Answer: a. Human Resources



85. Answer: e. The supervisor appears to have concluded that the reason for Sam’s tardiness is that he is lazy, which is an internal attribute.

86. Answer: c.

Choice a) and b) describe a manager operating from a Theory X perspective and choice c) describes a manager operating from a Theory Y perspective.

87. Answer: b.

Generally, the more challenging the goal, the greater the effort level and persistence and the greater the potential self actualization. Moderately challenging goals (choice b) will result in moderate, not maximum, task effort and performance. Choices a), c), d) and e) all describe conditions necessary to maximize task effort and performance.

88. Answer: a.

Factors that contribute to group cohesion include the following: member similarity, member interaction, group size, group success, external competition/challenges and somewhat difficult entry into the group. Of the choices presented, only the size of the group (choice a) is a group cohesion factor.

89. Answer: c.

One of the disadvantages of a strong corporate culture is that it tends to suppress dissenting subcultural values that, in the long term, prevents organizations from nurturing new cultural values that may better fit environmental changes. Strong cultures result in higher commitment, effort and job satisfaction, while absenteeism and turnover are lower, not higher (i.e. therefore, choice a) is not a disadvantage). As well, strong cultures where employees and management blindly focus on the mental model shaped by that culture could cause decision makers to incorrectly define or overlook (not overreact to) subtle misalignments between the organization’s activities and the changing environment (i.e. therefore, choice b) is not a disadvantage).

90. Answer: a.

House’s path-goal model of leadership is based on the expectancy theory of motivation and states that a leader should try to enhance subordinates’ satisfaction with their jobs and increase their performance level. This can be done by clarifying the nature of the task, reducing impediments to successful task completion and increasing the opportunities for subordinates to obtain job satisfaction.

91. Answer: b.

A mechanistic organizational structure is highly centralized [not decentralized as in choices a) and c)] and has a high degree of formalization. It is characterized by many rules and procedures, limited decision making at lower levels, large hierarchies of peoplein specialized roles and vertical rather than horizontal communication flows. Tasks are rigidly defined and are altered only when sanctioned by higher authorities. Choice a) describes an organic structure, choice d) describes a divisional structure and choice e) describes a matrix structure.



92. Answer: d. Incremental change is an evolutionary strategy involving the fine-tuning of the existing organization and taking small steps towards the change effort’s objectives. Continuous improvement usually applies incremental change because it attempts to make small improvements to existing work processes. As well, incremental change produces less resistance and involves less risk than a quantum change strategy (choice b). Unfreezing and refreezing are components of the force field model of managing change which begins with unfreezing the current situation (choice c), producing a disequilibrium between the driving and restraining forces, and ends with refreezing (choice e), which reinforces and maintains the new role patterns. Choices a), c), and e) are change management techniques that would have limited effectiveness in a continuous improvement environment.

Marketing 93. Answer: e.

Applying the marketing concept, we define entire markets, segment those markets into homogeneous units, and then build a product to satisfy a need in that segment. Only choice e) is in the proper order.

94. Answer: b.

The Honda dealer has targeted customers who may like the freedom of driving a motorcycle but don’t want to be characterized as part of a notorious group. The notorious group for this target customer would be a disassociative group.

95. Answer: c.

Market segmentation is the process of dividing the total heterogeneous market for a product or service into several segments and then developing a separate marketing mix for each segment based on the needs of the customers.

96. Answer: e.

Each of choices a), b), c) and d) will affect the market’s acceptance of a new product. 97. Answer: c.

Convenience products are items that the consumer purchases frequently, conveniently and with a minimum of shopping effort (e.g. toothpaste). Since these products are relatively inexpensive, there is low psychological and financial risk. Other choices: a) Unsought goods are things that the consumer typically puts off because it does not

satisfy an immediate want or need, like insurance. They often involve some shopping effort as well as some psychological and/or financial risk.

b) Tangible goods include all classes of products. d) Specialty goods are products where a good deal of time and effort is usually put into

the buying process. e) Shopping goods are products typically bought in an environment where the

consumer can compare quality and price with competitors.



98. Answer: b. 99. Answer: b.

The maximum market coverage occurs through intensive distribution, in which the manufacturer attempts to persuade as many retailers as possible in an area to carry the product. Intensive distribution is usually required for brand-name convenience goods, such as branded toothpaste.

100. Answer: e.

A push strategy is when a manufacturer directs the promotional mix at channel members to gain their cooperation in ordering and stocking the product, and pushing their product to their customers. It mainly involves personal selling and sales promotions, such as discounts. Consumers whose purchase decision is shaped through the store will be influenced by how the retailers present the products and would imply a push strategy (choice e). A pull strategy is when a manufacturer directs their promotional efforts at the customer to encourage them to ask the retailer for their product. A pull strategy usually involves advertising directed at brand awareness and positioning. Consumers whose purchase decision is shaped largely outside of the store would dictate a pull strategy. Other choices: a) Although personal selling would be appropriate, a pull strategy would not be. b) This question situation requires a push strategy. c) A push strategy would be appropriate, but mass advertising is appropriate for a pull

strategy, not a push strategy. d) Brand awareness may be associated with a pull strategy, but the question situation

requires a push strategy. 101. Answer: b.

Marketing mix is a combination of four elements: product, price, distribution and promotion. These four elements together must satisfy the needs of the organization’s target market and achieve the company’s marketing objectives.

102. Answer: c.

Under a licensing agreement, the licensor provides know-how for a fee, usually called a royalty, based on the number of products produced. The marketer does not provide access to or knowledge of the foreign market under this arrangement. The marketer would also not provide host country employees or government contacts, as these are provided by the firm that is the receiver of the license.

Financial Accounting 103. Answer: a.

Accounting information must be free of material error, but need not be 100% accurate. However, verifiability, representational faithfulness, neutrality and timeliness are all characteristics of accounting information according to the conceptual framework of financial accounting.



104. Answer: c. Matching of costs and revenues is defined as “simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or events.” This direct relationship is exemplified by the sale of a product because it results in both revenue (sales revenue) for receipt of cash (or a receivable) and expense (cost of sales) for the sacrifice of the product to a customer. The direct labour cost of manufacturing the product is absorbed by the finished goods inventory and is not recognized until the product is sold.

105. Answer: c.

Net loss from operations $(160,000) Add back amortization 30,000 Add back increase in accounts payable 15,000 Cash provided (used) from operations $(115,000)

106. Answer: c.

Weighted average cost per unit = [(200 × $18) + (100 × $20) + (100 × $22)]/400 = $19.50 Cost of goods sold = 250 × $19.50 = $4,875

107. Answer: d.

Sales (150 × $100) + (100 × $90) $24,000 Cost of goods sold (200 × $18) + (50 × $20) 4,600 Gross profit $19,400



108. Answer: a.

The conventional retail inventory method disregards markdowns in calculating the average cost as a percentage of retail value:

Cost Retail Calculation Beginning inventory $ 6,000 $ 10,500 Net purchases 210,000 367,500 $378,000 Markups 31,500 Markup cancellations 10,500 21,000 399,000 Markdowns 25,500 Markdown cancellations 20,250 5,250 Goods available for sale $216,000 393,750 Less sales: 262,500 Inventory at retail $131,250

Inventory at cost = $216,000/$399,000 x $131,250 = $71,053 Choice b) – Includes markdowns: $216,000/$393,750 x $131,250 = $72,000 Choice c) – Includes markdowns and excludes markups: $216,000/$373,500 x $131,250 = $75,904 Choice d) – Deducts markups and adds markdowns: ($378,000 - $21,000 + $5,250) - $262,500 = $362,250 - $262,500 = $99,750; $216,000/$361,500 x $99,750 = $59,602 Choice e) – Deducts markups: ($378,000 - $21,000) - $262,500 = $357,000 - $262,500 = $94,500; $216,000/$357,000 x $94,500 = $57,176

109. Answer: c.

Temporary investments should be reported at fair value at each balance sheet date. The fair value of the temporary investments = $39,375 + $243,625 + $92,000 = $375,000. Choice a) – Uses highest value: $39,375 + $246,750 + $92,750 = $378,875 Choice b) – Uses cost: $31,500 + $246,750 + $92,750 = $371,000 Choice d) – Uses cost of shares and face value of bonds: $31,500 + $246,750 + $100,000 = $378,250 Choice e) – Uses lower of cost or market: $31,500 + $243,625 + $92,000 = $367,125

110. Answer: e.

The unrealized gain(loss) at December 31 = $7,875 - $3,125 - $750 = $4,000 gain. Therefore, the ending balance in the allowance account should be a debit of $4,000. The adjustment would be a debit of $23,500 + $4,000 = $27,500.

111. Answer: a.



112. Answer: e. Interest payment every 6 months = 8% x $50,000/2 = $2,000 Interest expense first 6 months = 7% x $52,079/2 = $1,822.77 Amortization of premium first 6 months = $2,000 - $1,822.77 = $177.23 Investment in bonds balance = $52,079 - $177 = $51,902 Interest expense 2nd 6 months = 7% x $51,902/2 = $1,816.57 Amortization of premium 2nd 6 months = $2,000 - $1,816.57 = $183.43 Amortization for the first year = $177.23 + $183.43 = $360.66 = $361 (rounded) Choice a) – Calculated annually rather than semi-annually: Interest payment = 8% x $50,000 = $4,000 Choice b) – (8% - 7%) x $52,079 = $520.79 Choice c) – Premium of $2,079 divided by 5 = $415.80 Choice d) – (8% - 7%) x $50,000 = $500.00

113. Answer: b.

Sum of the years’ digits = 3 + 2 + 1 = 6 Year 3 depreciation = 1/6 × ($4,800 – $600) = $700

114. Answer: c.

All costs incurred up to the excavation for the new building are considered land costs. Salvage proceeds reduce the cost of the land. Special assessments such as drainage are charged to land because of their permanent nature. This includes landscaping. Value of building account = $3,600 + $18,500 + $1,500,000 = $1,522,100 Choice a) – Excludes architect fees: $18,500 + $1,500,000 = $1,518,500 Choice b) – Includes original cost of old building and removal of old building and salvage in addition to correct costs: $1,522,100 + (20% x $200,000) + $25,000 - $5,500 = $1,581,600 Choice d) – Includes survey cost: $1,522,100 + $500 = $1,522,600 Choice e) – Includes trees and landscaping cost: $1,522,100 + $7,300 = $1,529,400

115. Answer: b.

A contingency is “an existing condition, situation or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” The accounting treatment of loss contingencies is to charge estimated losses to income (and record the liability or asset impairment) when information available prior to issuance of financial statements indicates that it is likely that an asset had been impaired or a liability had been incurred (as of year-end) AND the amount of loss can be reasonably estimated. If an accrual is not made, disclosure of the contingency should be made when the likelihood that a loss will occur cannot be determined (which is the case here), or when the occurrence of the loss is likely but the amount cannot be reasonably estimated.

116. Answer: b.

Basic earnings per share = (net income - preferred dividend) ÷ (weighted average number of shares outstanding)= ($1,000,000 - $150,000) ÷ [120,000 + (20,000 x ¼)] = $850,000 ÷ 125,000 = $6.80



117. Answer: d.

Net income available for common shareholders = (net income - preferred dividend) + (bond interest net of tax) = ($1,000,000 - $150,000) + (5% x $4,750,000 x 60% x ¼) = $850,000 + $35,625 = $885,625 Fully diluted weighted average number of shares = 120,000 + (20,000 x ¼) + ($4,750,000/$1,000 x 10 x 1/4) = 136,875 Fully diluted EPS = Net income available for common shareholder ÷ Fully diluted weighted average common shares = $885,625/136,875 = $6.47 Choice a) – Ignores tax effect on interest: $850,000 + (5% x $4,750,000 x ¼)/136,875 = $6.64 Choice b) – Assumes the bonds were issued at the beginning of the year: $850,000 + (5% x $4,750,000 x 60%)/[120,000 + (20,000 x ¼) + ($4,750,000/$1,000 x 10)] = $5.75 Choice c) – Assumes bonds were issued at the beginning of the year and ignores tax effect on interest: $850,000 + (5% x $4,750,000)/[120,000 + (20,000 x ¼) + ($4,750,000/$1,000 x 10)] = $6.30 Choice e) – Deducts common dividends from income available to common shareholders: [($1,000,000 - $150,000 - $175,000) +$35,625]/136,875 = $5.19.

118. Answer: e.

Average common shareholders’ equity = $1,440,000 + $2,500,000+ $240,000 + $1,000,000 - $175,000 - $150,000 = $4,855,000 Return on common shareholders’ equity = (net income - preferred dividends)/average common shareholders’ equity = ($1,000,000 - $150,000)/$4,855,000 = 17.5% Choice a) – Deducts common dividend from net income in numerator: ($1,000,000 - $150,000 - $175,000)/$4,855,000 = 13.9% Choice b) – Neglects preferred share dividends from numerator: ($1,000,000 - $175,000)/$4,855,000 = 17.0% Choice c) – Neglects dividends: $1,000,000/($1,440,000 + $2,500,000 + $240,000 + $1,000,000) = 19.3% Choice d) – Uses January 1 retained earnings: ($1,000,000 - $150,000)/($1,440,000 + $2,500,000 + $240,000) = 20.3%

119. Answer: c.

Section 3400.14 of the CICA Handbook indicates that the percentage-of-completion method should be used when performance consists of the execution of more than one act. Choices a), d), and e) apply to both types of revenue recognition. For choice b), the completed contract method would be appropriate.



120. Answer: b. To be accounted for as a capital lease by the lessee, one or more of the following conditions must be met: 1) There is reasonable assurance that the lessee will obtain ownership of the leased

property by the end of the lease term. 2) The lease term is 75% or more of the economic life of the leased property. 3) The present value of the minimum lease payments is 90% or more of the fair value of

the leased property. Only choice b) meets one of these conditions.

121. Answer: a.

$522,800 x 1.09 + $62,500 - $38,250 = $594,102. 122. Answer: e. 123. Answer: d.

Provisions for warranty repairs are not deductible for tax purposes. Only costs actually incurred for warranty repairs during the year are deductible. Therefore, a provision for future repair costs will create a timing difference whereby non-deductible expenses in one year will be deductible in a future year when the actual expenditure is incurred. Choices a), b) and c) represent permanent differences.

124. Answer: e.

In accordance with generally accepted accounting principles, development costs (but not research costs) can be capitalized if certain criteria are met. Choices a), b) and d) relate to three of the specified criteria for capitalizing development costs. Choice c) must be answered before even considering the criteria. Only choice e) is not one of the criteria for capitalizing development costs.

125. Answer: c.

Choices a), b), d) and e) do not qualify as extraordinary items because they result from risks inherent in the enterprise’s normal business activities. The expropriation of land (choice c) is clearly not typical, infrequent and not dependent primarily on a management decision; therefore, it qualifies as an extraordinary item.

126. Answer: d. 127. Answer: c. 128. Answer: b.

The total asset turnover ratio equals sales divided by total assets. An increase in reported inventory will increase total assets and decrease the ratio. Choices a), d) and e)are not directly affected by inventory. Fictitious inventory being recorded would increase choice c), not decrease it.



129. Answer: b. Activity ratios indicate how quickly certain assets can be turned into cash. This provides information related to how efficiently the enterprise utilizes its assets. The receivables turnover ratio is considered to be an activity ratio.

130. Answer: b. 131. Answer: a.

Section 1701.05 of the CICA Handbook states that segment cash flow need not be disclosed.

132. Answer: c.

Since AWI is financially and operationally independent of its Canadian parent, it is a self-sustaining foreign operation and its statements should be translated using the current rate method. Under the current rate method, assets and liabilities should be translated using the December 31, Year 2, exchange rate of 0.34 and income statement items should be translated using the 0.32 average rate for Year 2: inventory = 75,000 FC x .34 = $25,500; sales = 600,000 FC x .32 = $192,000; amortization = 10,000 FC x .32 = $3,200. Choice a) – uses the average rate for Year 2 of .32 for all. Choice b) – uses the Dec. 31, Year 2, rate of .34 for all. Choice d) – uses the Year 2 4th quarter average for inventory (.35) and the Dec. 31, Year 2, rate of .34 for sales and amortization. Choice e) – uses the Year 2 4th quarter average rate for inventory (.35) and the Year 2 average rate of .32 for sales and amortization.

133. Answer: b.

Year 2 Rate Translated Cash 150,000 FC .34 $ 51,000 dr Accounts receivable 90,000 FC .34 30,600 dr Inventory (FIFO basis) 75,000 FC .34 25,500 dr Capital assets 180,000 FC .34 61,200 dr Accounts payable 25,000 FC .34 8,500 cr Capital stock 10,000 FC .36 3,600 cr Retained earnings, January 1 240,000 FC .33 79,200 cr Sales 600,000 FC .32 192,000 cr Cost of sales 250,000 FC .32 80,000 dr Amortization expense 10,000 FC .32 3,200 dr Other operating expenses 120,000 FC .32 38,400 dr Cumulative translation gain 6,600 cr

Choice a) – Uses the temporal method. Choice c) – Capital stock and retained earning translated at the year-end rate for Year 2 of 0.34. Choice d) – Capital stock translated at the year-end rate for Year 2 of 0.34. Choice e) – Assumes all accounts are translated at the same rate.



134. Answer: e. According to section 4400.15 of the CICA Handbook, transfers between funds do not result in increases or decreases in the economic resources of the organization as a whole and therefore are reported in the statement of changes in net assets rather than in the statement of operations. Choices a), b), c) and d) all are in accordance with generally accepted accounting principles.

135. Answer: e.

In accounting for a not-for-profit organization such as a church, there is no ‘equity’ section on the balance sheet. Instead, fund balances are shown. All surpluses and deficits are reflected in the fund balances.

Taxation 136. Answer: a.

A person who either enters or leaves Canada part way through the year on a permanent basis is a part-year resident rather than a deemed full-time resident.

137. Answer: b.

Attribution of income or loss from property will occur where an individual transfers property to a spouse [ssec. 74.1(1)]. Section 85 permits a tax-tree rollover of property to a corporation, but only as long as the transferor accepts shares as part of the consideration for the transfer and an election is made by both the transferee and the transferor of the transfer price (which must be between the adjusted cost base and the fair market value of the transferred capital property). Therefore, choice a) is a tax-free rollover, resulting in the tax on any gain being deferred. Choice c) describes income splitting, which is a legitimate tax planning strategy, as long as the salary is reasonable in the circumstances and based on the value of the actual services performed for the business.

138. Answer: e. 139. Answer: b.

Salary, commission & bonus ($30,000 + $19,500 + $3,000) $52,500 Travel allowance ($200 x 12) 2,400 Less: Travel expenses [$2,500 + $1,000 + (1.2 x $500)] (3,750) Total employment income $51,150 Items not included in calculation: • Employer’s contribution to private health plans are not taxable benefits under

paragraph 6(1)(a). • Income taxes withheld are not deductible. • CPP & EI are eligible for non-refundable tax credits under Division E. • Charitable donations are deductible under Division B. • Canada Savings Bond payments made through payroll deductions are not

deductible.



140. Answer: a. This is how the system attempts to integrate the taxation of individuals and corporations to avoid double taxation of corporate profits. Choices b) and c) are incorrect because dividends received by an individual must be included in income from property under subsection 12(1) of the ITA. Choice d) is incorrect because it omits the dividend tax credit which relieves the potential double taxation of corporate profits. Choice e) is incorrect because the relief comes in the form of a tax credit (section 121 of Division E of the ITA), not a deduction.

141. Answer: a.

UCC at the end of Year 1 = $500,000 – ($500,000 x 20% x 50%) = $450,000. UCC at the end of Year 2 = $450,000 x 80% = $360,000. Proceeds of $350,000 - UCC of $360,000 = $10,000 terminal loss.

142. Answer: d.

On the date that control was acquired by the non-related person, legislation restricts the utilization of prior losses as follows: 1. Net capital losses, allowable business investment losses and property losses expire

and are not carried forward beyond the deemed taxation year (i.e. the taxation year ending on the date that control was acquired).

2. Accrued losses of various kinds are deemed to be realized and, thus, increase the amount of non-capital losses, which are subject to time restrictions as to their deductibility.

3. Non-capital business losses may be utilized only against income from the same business (or a similar business).

143. Answer: a. 144. Answer: e. 145. Answer: b.

Because the small business deduction is a credit against the tax otherwise payable, it has nothing to do with the determination of income for tax purposes (choice b). The small business deduction represents a credit against the tax otherwise payable on income from an active business carried on in Canada, and is designed for only small Canadian-controlled private corporations. However, a corporation does not have to be “small” in order to qualify for the credit. The benefits of the small business deduction are phased out for very large Canadian-controlled private corporations in accordance with a prescribed formula (choice d). To be eligible, the company must have been a Canadian-controlled private corporation throughout the year (choice a). In calculating the small business deduction, income from foreign sources is removed from the base (choice c) and the business limit is reduced by any portion allocated to associated corporations (choice e).

Internal Control



146. Answer: b. 147. Answer: c. 148. Answer: c.

The following steps must be followed in establishing controls: 1. Develop objectives (choice d). 2. Measure results (choice a). 3. Compare actual results to objectives (choice b). 4. Analyze causes of differences. 5. Determine appropriate action (choice e). 6. Take action. 7. Continual reappraisal. Hiring an auditor choice c) may be an appropriate action in some circumstances, but is not required for a sound internal control system.

149. Answer: e.

This is an example of a detective control. It allows only items meeting specifications to pass through the division.

150. Answer: d. 151. Answer: a.

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