1.

Which of the following types of management services is not directly related to accounting
and finance functions?
a. Cost analysis of major investment decision.
b. Long range planning.
c. Design, installation and review of budgetary system.
d. Valuation of capital stock of companies for purposes of merger or sales.

2. A Certified Public Accountant’s scope of management services is broad and covers all of
the following except
a. Change management engagements. c. Audit engagements.
b. Computerization engagements. d. Re-engineering jobs.

3. Which of the following is not classifiable as a management advisory service by CPAs?

a. Systems design. c. Make or buy analysis.
b. Project feasibility study. d. Assistance in budgeting.

4. Which of the following is not classifiable as a management advisory service by CPAs?

a. Annual financial planning and budgeting. c. Information systems.
b. Public relations work. d. Lease-or-buy analysis.

5. Management services of certified public accountant cover all of the following except
a. Project feasibility studies.
b. Systems design development and implementation.
c. Organizational development and planning
d. Audit, tax and legal services.

6. To which function of management is CVP analysis most applicable?

A. Planning C. Directing
B. Organizing D. Controlling

7. The systematic examination of the relationships among selling prices, volume of sales and
production, costs, and profits is termed:
A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis

8. The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs.

9. Cost-volume-profit analysis allows management to determine the relative profitability of a

product by
A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various
levels of production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum.

10. Cost-volume-profit analysis cannot be used if which of the following occurs?

A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change.

11. The concept of “management by exception” refers to management’s consideration of

A. only those items that vary materially from expectations.
B. only rare events.
C. samples selected at random.
D. only significant unfavorable deviations.

12. A formal written statement of management’s plans for the future, packaged in financial
terms, is a:
A. Responsibility report. C. Cost of production report.
B. Performance report. D. Budget.

13. Budgets are related to which of the following management functions?

A. Planning C. Control
B. Performance evaluation D. all of these

14. Budgeting supports the planning process by encouraging all of the following activities
except:
A. Requiring all organizational units to establish their goals for the coming period.
B. Increasing the motivation of managers and employees by providing agreed-upon
expectations.
C. Improving overall decision making by considering all viewpoints, options, and cost control
programs.
D. Directing and coordinating operations during the period.

15. Which of the following advantages does a budget mostly provide?

A. Coordination is increased.
B. Planning is emphasized.
C. Communication is continuous.
D. Comparison of actual versus budgeted data.

16. In most cases, businesses hire management consultants to do the following except:

a. Help define specific problems and develop solutions

b. Train client personnel

c. Help improve intra-company communications

d. Implement recommendations

17. Periodic internal performance reports based upon a responsibility accounting system
should not

a. Distinguish between controllable and uncontrollable costs

b. Be related to the organization chart

c. Include allocated fixed overhead in determining performance evaluation

d. Include variances between actual and budgeted controllable costs

18. When a balance sheet amount is related to an income statement amount in

computing a ratio,
a. The income statement amount should be converted to an average for the
year.
b. Comparisons with industry ratios are not meaningful.
c. The balance sheet amount should be converted to an average for the year.
 d. The ratio loses its historical perspective because a beginning-of-the-year
amount is combined with an end-of-the-year amount.

19. How are financial ratios used in decision making?

a. They can help identify the reasons for success and failure in business, but
decision making requires information beyond the ratios.
b. They remove the uncertainty of the business environment.
c. They aren’t useful because decision making is too complex.
d. They give clear signals about the appropriate action to take.

20. A useful tool in financial statement analysis is the common-size financial

statement. What does this tool enable the financial analyst to do?
a. Evaluate financial statements of companies within a given industry of
approximately the same value.
b. Determine which companies in the same industry are at approximately the
same stage of development.
c. Compare the mix of assets, liabilities, capital, revenue, and expenses within
a company over time or between companies within a given industry
without respect to relative size.
d. Ascertain the relative potential of companies of similar size in different
industries.

21. Which of the following is not revealed on a common size balance sheet?
a. The debt structure of a firm.
b. The capital structure of a firm.
c. The peso amount of assets and liabilities.
d. The distribution of assets in which funds are invested.

22. If a transaction causes total liabilities to decrease but does not affect the owners’
equity, what change if any, will occur in total assets?
a. Assets will be increased. c. No change in total assets.
b. Assets will be decreased. d. None of the above.
23. Compared to other firms in the industry, a company that maintains a
conservative working capital policy will tend to have a
a. Greater percentage of short-term financing.
b. Greater risk of needing to sell current assets to repay debt.
c. Higher ratio of current assets to fixed assets.
d. Higher total asset turnover.

24. A firm following an aggressive working capital strategy would

a. Hold substantial amount of fixed assets.
b. Minimize the amount of short-term borrowing.
c. Finance fluctuating assets with long-term financing.
d. Minimize the amount of funds held in very liquid assets.

25. The working capital financing policy that subjects the firm to the greatest risk of
being unable to meet the firm’s maturing obligations is the policy that finances
a. Fluctuating current assets with long-term debt.
b. Permanent current assets with long-term debt.
c. Permanent current assets with short-term debt.
d. Fluctuating current assets with short-term debt.

26. Determining the appropriate level of working capital for a firm requires
a. Evaluating the risks associated with various levels of fixed assets and the
types of debt used to finance these assets.
b. Changing the capital structure and dividend policy for the firm.
c. Maintaining short-term debt at the lowest possible level because it is
ordinarily more expensive than long term debt.
d. Offsetting the profitability of current assets and current liabilities against
the probability of technical insolvency.
e. Maintaining a high proportion of liquid assets to total assets in order to
maximize the return on total investments.
 27. Starrs Company has current assets of PhP300,000 and current liabilities of
PhP200,000. Starrs could increase its working capital by the
A. Prepayment of PhP50,000 of next year's rent.
B. Refinancing of PhP50,000 of short-term debt with long-term debt.
C. Purchase of PhP50,000 of temporary investments for cash.
D. Collection of PhP50,000 of accounts receivable.
28. Cost of capital is

a. The amount the company must pay for its plant assets.

b. The dividends a company must pay on its equity securities.

c. The cost the company must incur to obtain its capital resources.

d. The cost the company is charged by investment bankers who handle the issuance of
equity or long-term debt securities.

29. All of the following are examples of imputed costs except

a. The stated interest paid on a bank loan.

b. Assets that are considered obsolete that maintain a net book value.

c. Decelerated depreciation.

d. Lending funds to a supplier at a lower-than-market rate in exchange for receiving

the supplier’s products at a discount.

30. The theory underlying the cost of capital is primarily concerned with the cost of

A. Long-term funds and old funds.

B. Short-term funds and new funds.

C. Long-term funds and new funds.

D. Any combination of old or new, short-term or long-term funds.

31. Management knowledge of the cost of capital is useful for each of the following except

a. Making capital investment decisions.

b. Managing working capital.

c. Setting the maximum rate of return on new investments.

d. Evaluating performance.

32. The pre-tax cost of capital is higher than the after-tax cost of capital because

a. interest expense is deductible for tax purposes.

b. principal payments on debt are deductible for tax purposes.

 c. the cost of capital is a deductible expense for tax purposes.

d. dividend payments to stockholders are deductible for tax purposes.

33. An optimal capital budget is determined by the point where the marginal cost of
capital is
A. Minimized.
B. Equal to the average cost of capital.
C. Equal to the rate of return on total assets.
D. Equal to the marginal rate of return on investment.
34. The following statements refer to the accounting rate of return (ARR)
1. The ARR is based on the accrual basis, not cash basis.
2. The ARR does not consider the time value of money.
3. The profitability of the project is considered.
From the above statements, which are considered limitations of the ARR
concept?
A. Statements 2 and 3 only. C. All the 3 statements.
B. Statements 3 and 1 only. D. Statements 1 and 2 only.
35. The payback method assumes that all cash inflows are reinvested to yield a
return equal to
A. the discount rate. C. the internal rate of return.
B. the hurdle rate. D. zero.

Order-filling costs, as opposed to order-getting costs, include all but which of the
following items?
a. Credit check of new customers. c. Collection of payments for
sales orders.
b. Packing ad shipping of sales orders. d. Mailing catalogs to current
customers.
36. Which condition justifies accepting a low inventory turnover ratio?
a. High carrying costs. c. Short inventory order lead
times.
b. High stock-out costs. d. Low inventory order costs.
37. Which of the following inventory items would be the most frequently reviewed
in an ABC inventory control system?
a. Expensive, frequently used, high stock-out cost items with short lead times.
b. Expensive, frequently used, low stock-out cost items with long lead times.
c. Inexpensive, frequently used, high stock-out cost items with long lead time.
d. Expensive, frequently used, high stock-out cost items with long lead time.

38. In an ABC inventory analysis, the items that are most likely to be controlled with
a red-line system are the
a. A items. c. C items.
b. B items. d. items on a perpetual inventory.

39. The materials control method that is based on physical observation that an order
point has been reached is the:
A. cycle review method C. two-bin method
B. min-max method D. ABC plan

40. The underlying philosophy of “just-in-time” inventory system is that

a. The status of quantities on hand must be periodically reviewed where high-
value items or critical items are examined more frequently than low-cost or
non-critical items.
b. It is a quest toward continuous improvement in the environmental conditions
that necessitates inventories.
c. The quantities of most stock items are subject to definable limits.
d. It is impractical to give equal attention to all stock items, hence the need to
classify and rank them according to their cost significance.

41. Companies that adopt just-in-time purchasing systems often experience

a. An increase in carrying costs.
b. A reduction in the number of suppliers.
c. Fewer deliveries from suppliers.
d. A greater need for inspection of goods as the goods arrive.
42. An inventory control system which employs mathematical models as an aid in
making inventory decision is known as
a. Order cycling system c. Statistical inventory control
system.
b. Two-bin system d. Mini-max system

43. Which of the following is used in determining the economic order quantity
(EOQ)?
a. Regression analysis. c. Markov process.
b. Calculus. d. Queuing theory.

44. In inventory management, the problem of avoiding excessive investment in

inventories and at the same time avoiding inventory shortages can be solved by
applying a quantitative technique known as
a. Payback analysis c. Economic order quantity
b. Probability analysis d. High-low point method
45. Hatchet Company is considering replacing a machine with a book value of
P400,000, a remaining useful life of 5 years, and annual straight-line depreciation of
P80,000. The existing machine has a current market value of P400,000. The
replacement machine would cost P550,000, have a 5-year life, and save P75,000 per
year in cash operating costs. If the replacement machine would be depreciated
using the straight-line method and the tax rate is 40%, what would be the net
investment required to replace the existing machine?
A. P90,000. B. P150,000 C. P330,000 D.
P550,000
46. Diliman Republic Publishers, Inc. is considering replacing an old press that cost
P800,000 six years ago with a new one that would cost P2,250,000. Shipping and
installation would cost an additional P200,000. The old press has a book value of
P150,000 and could be sold currently for P50,000. The increased production of the
new press would increase inventories by P40,000, accounts receivable by P160,000
and accounts payable by P140,000. Diliman Republic’s net initial investment for
analyzing the acquisition of the new press assuming a 35% income tax rate would be
A. P2,450,000 B. P2,425,000 C. P2,600,000 D.
P2,250,000
47. Key Corp. plans to replace a production machine that was acquired several years
ago. Acquisition cost is P450,000 with salvage value of P50,000. The machine being
considered is worth P800,000 and the supplier is willing to accept the old machine at
a trade-in value of P60,000. Should the company decide not to acquire the new
machine, it needs to repair the old one at a cost of P200,000. Tax-wise, the trade-in
transaction will not have any implication but the cost to repair is tax-deductible. The
effective corporate tax rate is 35% of net income subject to tax. For purposes of
capital budgeting, the net investment in the new machine is
A. P540,000 B. P610,000 C. P660,000 D.
P800,000
48. Great Value Company is planning to purchase a new machine costing P50,000
with freight and installation costs amounting to P1,500. The old unit is to be traded-
in will be given a trade-in allowance of P7,500. Other assets that are to be retired as
a result of the acquisition of the new machine can be salvaged and sold for P3,000.
The loss on retirement of these other assets is P1,000 which will reduce income
taxes of P400. If the new equipment is not purchased, repair of the old unit will have
to be made at an estimated cost of P4,000. This cost can be avoided by purchasing
the new equipment. Additional gross working capital of P12,000 will be needed to
support operation planned with the new equipment.
The net investment assigned to the new machine for decision analysis is
A. P50,200 B. P52,600 C. P53,600 D. P57,600

*** Items 49 and 50 are based on the following information. Historically, Power Hill
Products has had no significant bad debt experience with its customers. Cash sales
have accounted for 10% of total sales, and payments for credit sales have been
received as follows.

40% of credit sales in the month of the sale

30% of credit sales in the first subsequent month

25% of credit sales in the second subsequent month

5% of credit sales in the third subsequent month

The forecast for both cash and credit sales is as follows:

Month Sales

January P 95,000

February 65,000

March 70,000

April 80,000
 May 85,000

49. What is the forecasted cash inflow for the Power Hill Products for May?

a. P 70,875 b. P 76,500 c. P 79,375 d. P 83,650

50. Due to deteriorating economic conditions Power Hill Products has now decided that its
cash forecast should include a bad debt adjustment of 2% of credit sales, beginning with sales
for the month of April. Because of this policy change, the total expected cash inflow related to
sales made in April will

a. Be unchanged c. Decrease by P 1,440.00

b. Decrease by P 1,260.00 d. Decrease by P 1,530,00

Each unit of Product XK-46 requires 3 direct labor hours. Employee benefit costs are treated as
direct labor costs. Data on direct labor are as follows:

Number of direct employees 25

Weekly productive hours per employee 35

Estimated weekly wages per employee P 245

Employee benefits (related to weekly wages) 25%

51. The standard direct labor cost per unit of Product XK-46 is

a. P 21.00 b. P 26.25 c. P 29.40 d. P 36.75

*** Items 52 through 56 are based on the following information. Landmark

Manufacturing Corp. has a process accounting system. A monthly analysis compares
actual results with both a monthly plan and a flexible budget. Standard direct labor
rates used in the flexible budget are established at the time the annual plan is
formulated and held constant for the entire year.

Standard direct labor rates in effect for the fiscal year ending June 30 and standard
hours allowed for the output in April are:

Standard DL Rate per Hour Standard DLH Allowed for Output

Labor Class III P 8.00 500

Labor Class II P 7.00 500

Labor Class I P 5.00 500

 The wage rates for each labor class increased on January 1 under the terms of a new
union contract negotiated in December of the previous fiscal year. The standard wage
rates were not revised to reflect the new contract.

The actual direct labor hours (DLH) worked and the actual direct labor rates per hour
experienced for the month of April were as follows:

Actual Direct Labor Rate per hour Actual Direct Labor hours

Labor Class III P 8.50 550

Labor Class II P 750 650

Labor Class I` P 5.40 375

52. What is the total direct labor variance?

P 1,575 unfavorable b. P 750 unfavorable c. P 325 unfavorable d.P500 unfavorable

53. The direct labor rate variance is

a. P 750 U b. P 825 U c. P 750 F d. P 825 F

54. The direct labor efficiency variance is

a. P 750 U b. P 625 F c. P 600 U d. P 825 U

55. What is the labor yield variance for Landmark in April?

a. P 500 b. P 750 c. P 825.50 d. P 1,500

56. What is the labor mix variance for Landmark in April?

a. P 50.00 b. P 325.00 c. P 66.67 d. P 180.00

57. House of Fashion Company had the following financial statistics for 2006:
Long-term debt (average rate of interest is 8%) P400,000
Interest expense 35,000
Net income 48,000
Income tax 46,000
Operating income 107,000
What is the times interest earned for 2006?
A. 11.4 times C. 3.1 times
B. 3.3 times D. 3.7 times
58. Based on the following data for the current year, what is the inventory turnover?
Net sales on account during year P 500,000
Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000
Inventory, end of year 110,000
A. 3.3 C. 3.7
B. 8.3 D. 3.0

59. Clay Corporation follows an aggressive financing policy in its working capital management while Lott
Corporation follows a conservative financing policy. Which one of the following statements is correct?
(E)
A. Clay has a low ratio of short-term debt to total debt while Lott has a high ratio of short-term debt
to total debt.
B. Clay has a low current ratio while Lott has a high current ratio.
C. Clay has less liquidity risk while Lott has more liquidity risk.
D. Clay's interest charges are lower than Lott's interest charges.

Net Income, CFBT, ARR, Payback Period

Pinewood Craft Company is considering the purchase of two different items of equipment, as described
below:

Machine A. A compacting machine has just come onto the market that would permit Pinewood Craft
Company to compress sawdust into various shelving products. At present the sawdust is disposed of
as a waste product. The following information is available on the machine:

a. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-
year useful life. The company uses straight-line depreciation and considers salvage value in
computing depreciation deductions.
b. The shelving products manufactured from use of the machine would generate revenues of
P300,000 per year. Variable manufacturing costs would be 20% of sales.
c. Fixed expenses associated with the new shelving products would be (per year): advertising,
P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800.
Machine B. A second machine has come onto the market that would allow Pinewood Craft Company
to automate a sanding process that is now done largely by hand. The following information is available:

a. The new sanding machine would cost P234,000 and would have no salvage value at the end
of its 13-year useful life. The company would use straight-line depreciation on the new
machine.
b. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a
scrap value of P9,000.
c. The new sanding machine would provide substantial annual savings in cash operating costs. It
would require an operator at an annual salary of P16,350 and P5,400 in annual maintenance
costs. The current, hand-operated sanding procedure costs the company P78,000 per year in
total.

Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases. Also, the
company will not purchase equipment unless the equipment has a payback period of 4.0 years or less.
(In all the following questions, please ignore income tax effect)

60. The expected income each year from the new shelving products (Machine A) is:
A. P 52,500 C. P 84,000
B. P240,000 D. P 92,500

61. The annual savings in cost if Machine B is purchased is

A. P56,250 C. P38,250
B. P43,250 D. P21,750

62. The simple rate (%) of return for Machine A is:

A. 12.5 percent C. 25.0 percent
B. 20.0 percent D. 18.0 percent

63. The simple rate of return for Machine B is:

A. 16.3 percent C. 25.0 percent
B. 17.0 percent D. 34.0 percent

64. The payback period for Machine A is:

A. 3.0 years C. 5.0 years
 B. 4.5 years D. 7.5 years

65. The payback period for Machine B is:

A. 4.0 years. C. 6.1 years.
B. 4.2 years. D. 5.9 years.

66. Based on the following data, what is the quick ratio, rounded to one decimal point?

Accounts payable $ 30,000

Accounts receivable 65,000

Accrued liabilities 7,000

Cash 25,000

Intangible assets 40,000

Inventory 72,000

Long-term investments 100,000

Long-term liabilities 75,000

Marketable securities 36,000

Notes payable (short-term) 20,000

Property, plant, and equipment 625,000

Prepaid expenses 2,000

a. 2.2

b. 3.5

c. 3.0

d. 1.6

67. Mott Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Mott
has the opportunity to invest the money at 24% per annum. The company spends, on the average,
P40 for every cash conversion to marketable securities.

What is the optimum average cash balance?

a. P60,000 c. P45,000
 b. P55,000 d. P27,500

68. The Whitehead Co. produces quality jewelry items for various retailers. For the
coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs
for a year are $2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces,
what would be the estimate for Whitehead’s total carrying costs for the coming
year?
a. $200
b. $250
c. $100
d. $1,000

69. Clear View Co. manufactures various glass products including a car window. The
setup cost to produce the car window is $1,200. The cost to carry a window in
inventory is $3 per year. Annual demand for the car window is 12,000 units. What is
the most economical production run (rounded to the nearest unit)?

a. 6,000 units
b. 3,000 units
c. 9,295 units
d. 3,098 units

70. A company annually consumes 10,000 units of Part C. The carrying cost of this
part is $2 per year and the ordering costs are $100. The company uses an order
quantity of 500 units. If the company operates 200 days per year, and the lead time
for ordering Part C is 5 days, what is the order point?

a. 250 units
b. 1,000 units
c. 500 units
d. 2,000 units