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 accrdits du Qubec

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

CMA New Brunswick 1
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.


2 CMA New Brunswick
Management Accounting
1. (-) Staff management, as opposed to line management,

a) is directly responsible for the achievement of the organizations 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
organizations basic objectives.
d) both a) and b) above.
e) both b) and c) above.

2. (-) A factory managers 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.


CMA New Brunswick 3
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.


4 CMA New Brunswick
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 J ob 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 J ob 111?

a) $3,300
b) $2,000
c) $4,500
d) $2,200
e) $800


CMA New Brunswick 5
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.


6 CMA New Brunswick

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 $13
Direct labour 12
Variable overhead 11
Fixed overhead 6
Unit 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 $540,000
Cost of sales 346,500 324,000 400,500 378,000 423,000
Variances:
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
511,500 514,000 505,500 508,000 503,000
Operating 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


CMA New Brunswick 7
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.


8 CMA New Brunswick
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). The
direct 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 companys 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.


CMA New Brunswick 9
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 Relays 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


10 CMA New Brunswick
18. The budgeted income for RST Ltd. for next year is as follows:

Sales 100,000 units @ $20 $2,000,000
Variable manufacturing costs $800,000
Fixed manufacturing costs 300,000
Sales commissions - $1.50 per unit 150,000
Fixed selling and administration expenses 350,000 1,600,000
Operating 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 investments 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

Yipanns 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.


CMA New Brunswick 11
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


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 units
Actual production volume 39,000 units

Budgeted raw materials (40,000 x 2 grams @ $10 per gram) $ 800,000
Actual raw materials (39,000 x 2.2 grams @ $12 per gram) 1,029,600
Variance (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 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.



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 companys 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/unit
Variable selling cost $10/unit
Fixed 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 companys vice-president of finance?

a) Minimize the risks taken by the company.
b) Maximize the current value per share of the companys existing stock.
c) Maximize the asset value of the entire company.
d) Maximize the companys current accounting profit.
e) Maximize the companys 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%

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
$ 100
900
Long-term debt
Preferred equity
Common equity
$ 400
100
500
$1,000 $1,000

Cost of debt (k
d
) 8%
Cost of preferred equity (k
p
) 9%
Corporate tax rate (t
c
) 40%
Beta (B) 1.2
Expected 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.

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.
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.

54. The elements of production scheduling include

a) loading.
b) preventive maintenance.
c) sequencing.
d) both a) 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-workers calendar
to find an appropriate time to schedule a meeting is an extranet application.
c) Enabling a companys 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.

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

a) Customized for organizations 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.

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.


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.
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 suppliers capabilities.
d) Long-range tax planning.

70. A market penetration strategy

a) consists of introducing the organizations 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 organizations 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.

73. If economies of scale are an industrys primary entry barrier, a new entrants 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 Porters 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.

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.

Human Resources

85. Sam is transferred to a new department with a new supervisor. The new supervisor
looks at Sams 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
Sams episodes of lateness as caused by

a) external attributions.
b) stereotyping.
c) selective perception.
d) events out of Sams 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 organizations 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.

90. Houses 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 problems 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 organizations promotional strategy.
b) various seller needs with an organizations distribution channels.
c) various buyer needs with an organizations marketing mix.
d) various seller needs with an organizations pricing policy.


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.

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.

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



On J anuary 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%
-------------------------------


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 customers 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 $62,500
Estimated accrued benefits (projected benefit obligation) on J an. 1, Year 10 $522,800
Pension benefits paid to retirees in Year 10 $38,250
Assumed 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.

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 corporations 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 J esson 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.

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 segments revenue to the enterprises total revenue.
e) The method of accounting for any transactions between segments.


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 countrys
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, J anuary 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 J anuary 1, Year 1.
3) Capital stock was issued on J anuary 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
J anuary 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 AWIs 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 DFCs
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.

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.


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
companys 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 individuals 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 corporations 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 companys 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.


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.

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 managements 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.

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 companys 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
departments copies of receiving reports.

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 I
F
b
=

1
1 ( )

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

b) Cost of Preferred Shares:
k
D
NP
p
p
p
=
where D
p
=stated annual dividend payment on shares
NP
p
=net proceeds on preferred share issue

c) Cost of Common Equity:

i) Cost of Common Shares (Capitalization of Dividends with Constant Growth
Rate):
k
D
NP
g
e
e
= +
1

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

ii) Cost of Retained Earnings:
k r
D
P
g
re e
e
= = +
1

where P
e
=market price of a share
r
e
=expected return on common equity


iii) Capital Asset Pricing Model:

( )
R R R R
j f j m f
= +
where R
j
=expected rate of return on security j
R
f
=risk-free rate
R
m
=expected return for the market portfolio

j
=beta coefficient for security j (measure of systematic risk)

d) Weighted Average Cost of Capital:
k
B
V
k
P
V
k
E
V
k
b 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 =
CdT
d k
k
k
CdT
d+ k
k
k +
+
+
=
+
+
2
21
1 05
1 ( )
.

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly
Acquired
Present Value = UCC
dT
d+k

c) Present Value of Total Tax Shield Lost From Salvage
( ) ( )
Present Value =
S
+k
dT
d+k
or
S
+k
dT
d+k
n n
n
1 1
1 n
, depending on cashflowassumptions

Notation for above formulae:
C =net initial investment
UCC =undepreciated capital cost of asset
S
n
=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 (contd)
( )
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 (contd)
( )
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 (contd)
( )
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
i
n
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
0.962
1.886
2.775
3.630
4.452
0.952
1.859
2.723
3.547
4.330
0.943
1.833
2.673
3.465
4.212
0.935
1.808
2.624
3.387
4.100
0.926
1.783
2.577
3.312
3.993
0.917
1.759
2.531
3.240
3.890
0.909
1.736
2.487
3.170
3.791
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
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
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
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.224
8.560
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
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
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
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
14.029
14.451
14.857
15.247
15.622
12.821
13.163
13.489
13.799
14.094
11.764
12.042
12.303
12.550
12.783
10.836
11.061
11.272
11.469
11.654
10.017
10.201
10.371
10.529
10.675
9.292
9.442
9.580
9.707
9.823
8.649
8.772
8.883
8.985
9.077


Table 2 (contd)
( )
P
i
i
n
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
0.893
1.690
2.402
3.037
3.605
0.885
1.668
2.361
2.975
3.517
0.877
1.647
2.322
2.914
3.433
0.870
1.626
2.283
2.855
3.352
0.862
1.605
2.246
2.798
3.274
0.855
1.585
2.210
2.743
3.199
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
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.785
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
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
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.303
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.725
5.847
5.029
5.197
5.342
5.468
5.576
4.836
4.988
5.118
5.229
5.324
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
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.669
5.749
5.818
5.878
5.929
5.405
5.475
5.534
5.585
5.628
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
7.562
7.645
7.718
7.784
7.843
7.102
7.170
7.230
7.283
7.330
6.687
6.743
6.792
6.835
6.873
6.313
6.359
6.399
6.434
6.464
5.973
6.011
6.044
6.073
6.097
5.665
5.696
5.723
5.747
5.766
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 (contd)
( )
P
i
i
n
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
0.820
1.492
2.042
2.494
2.864
0.813
1.474
2.011
2.448
2.804
0.807
1.457
1.981
2.404
2.745
0.800
1.440
1.952
2.362
2.689
0.794
1.424
1.923
2.320
2.635
0.787
1.407
1.896
2.280
2.583
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
3.167
3.416
3.619
3.786
3.923
3.092
3.327
3.518
3.673
3.799
3.021
3.242
3.421
3.566
3.682
2.951
3.161
3.329
3.463
3.571
2.885
3.083
3.241
3.366
3.465
2.821
3.009
3.156
3.273
3.364
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
4.035
4.127
4.203
4.265
4.315
3.902
3.985
4.053
4.108
4.153
3.776
3.851
3.912
3.962
4.001
3.656
3.725
3.780
3.824
3.859
3.543
3.606
3.656
3.695
3.726
3.437
3.493
3.538
3.573
3.601
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
4.357
4.391
4.419
4.442
4.460
4.189
4.219
4.243
4.263
4.279
4.033
4.059
4.080
4.097
4.110
3.887
3.910
3.928
3.942
3.954
3.751
3.771
3.786
3.799
3.808
3.623
3.640
3.654
3.664
3.673
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
4.476
4.488
4.499
4.507
4.514
4.292
4.302
4.311
4.318
4.323
4.121
4.130
4.137
4.143
4.147
3.963
3.971
3.976
3.981
3.985
3.816
3.822
3.827
3.831
3.834
3.679
3.684
3.689
3.692
3.694
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 (contd)
( )
P
i
i
n
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
0.746
1.303
1.719
2.029
2.260
0.741
1.289
1.696
1.997
2.220
0.735
1.276
1.674
1.966
2.181
0.730
1.263
1.652
1.936
2.143
0.725
1.250
1.630
1.906
2.106
0.719
1.237
1.609
1.877
2.070
0.714
1.225
1.589
1.849
2.035
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
2.433
2.562
2.658
2.730
2.784
2.385
2.508
2.598
2.665
2.715
2.339
2.455
2.540
2.603
2.650
2.294
2.404
2.485
2.544
2.587
2.251
2.356
2.432
2.487
2.527
2.209
2.308
2.380
2.432
2.469
2.168
2.263
2.331
2.379
2.414
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
2.824
2.853
2.876
2.892
2.905
2.752
2.779
2.799
2.814
2.826
2.683
2.708
2.727
2.740
2.750
2.618
2.641
2.658
2.670
2.679
2.556
2.576
2.592
2.603
2.611
2.496
2.515
2.529
2.539
2.546
2.438
2.456
2.469
2.478
2.484
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
2.914
2.921
2.926
2.930
2.933
2.834
2.840
2.844
2.848
2.850
2.758
2.763
2.767
2.770
2.772
2.685
2.690
2.693
2.696
2.698
2.616
2.621
2.624
2.626
2.627
2.551
2.555
2.557
2.559
2.561
2.489
2.492
2.494
2.496
2.497
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
2.935
2.937
2.938
2.939
2.939
2.852
2.853
2.854
2.855
2.856
2.773
2.775
2.775
2.776
2.777
2.699
2.700
2.701
2.701
2.702
2.629
2.629
2.630
2.630
2.631
2.562
2.562
2.563
2.563
2.563
2.498
2.499
2.499
2.499
2.499


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


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


4 CMA New Brunswick
12. Answer: e.
Materials handling: 4,800/(4,800 +7,200) x $300,000 = $120,000
Machine setups: 1,800/(1,800 +3,600) x $324,000 = 108,000
Quality inspections: 1,800/(1,800 +5,400) x $216,000 = 54,000
Total 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 companys
existing shares. The market value of the companys 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 companys 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 companys 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 (R
j
) =R
f
+B(R
m
- R
f
), where R
f
=.14 - .06 =.08
=.08 +1.2(.14 - .08) =.152
WACC =(W
d
)(k
d
)(1-t
c
) +(W
p
)(k
p
) +(W
e
)(k
e
), where k
e
=R
j

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 shareholders 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 shareholders holdings stays the same and the
companys 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. J obs 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
organizations 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.

63. Answer: d.

64. Answer: d.
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 firms 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.

72. Answer: d.

73. Answer: d.
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 companys
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 companys
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 J IT 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 Sams 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 organizations activities and the
changing environment (i.e. therefore, choice b) is not a disadvantage).

90. Answer: a.
Houses 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 people
in 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 efforts 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 dont 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 markets 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 organizations
target market and achieve the companys 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 2
nd
6 months =7% x $51,902/2 =$1,816.57
Amortization of premium 2
nd
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 )] =$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 )
=$850,000 +$35,625 =$885,625

Fully diluted weighted average number of shares =120,000 +(20,000 x ) +
($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 )/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 ) +($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 ) +
($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 J anuary 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 enterprises 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 4
th
quarter average for inventory (.35) and the Dec. 31, Year
2, rate of .34 for sales and amortization.
Choice e) uses the Year 2 4
th
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, J anuary 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:
Employers 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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