2010 Sample Entrance Examination: Notes

2010 Sample Entrance Examination
(Time Allowed: 4 hours) Notes: i) ii) All answers must be indicated on the multiple-choice answer sheet. Work done on the question paper and examination foolscap will NOT be marked. 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. 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.
iii)
Updated June 2010
2010 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.
TABLE OF CONTENTS
Examination: Instructions ........................................................................................ 1 Questions ........................................................................................... 3
Solution: Summary ......................................................................................... 46 Solutions .......................................................................................... 47
Supplement of Formulae and Tables .................................................... 81

* This supplement is provided to all candidates with the examination.
2010 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.
INSTRUCTIONS:
Use the multiple-choice answer sheet provided to record your answers to the questions. Be sure to enter your four-digit envelope number on the multiple-choice answer sheet. Select the BEST answer for each of the following 116 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) b) c) d) e) engineered variable costs. discretionary variable costs. committed fixed costs. discretionary fixed costs. 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 will be based on the total weighted value of the questions answered correctly. Note that all questions are assigned the same weight, except for those specified with a plus (+) sign (i.e. has a higher weight) or minus (-) sign (i.e. has a lower weight). In the above example, there is a minus sign at the beginning of the question, signifying that the question has a lower weighted value than the average question. Singular Versus Plural Phrasing: For simplicity of wording, all questions are phrased as though there is a single correct answer, even when there are multiple correct answers. For example, the correct answer to a question that is worded, Which of the following is..., may be the choice that refers to two or more of the other choices, e.g. Both a) and b) above.
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Calculator Policy and Supplement The following models of calculators are authorized for use on the Entrance Examination effective January 2008: Texas Instruments Hewlett Packard Sharp TI BA II Plus (including the Professional model) HP 10bII (or HP 10Bii) EL-738C (EL-738)
The supplement accompanying the Entrance Examination contains present value tables.
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Strategic Management
1. (-) The main purpose of a companys mission statement is to provide a context and direction for a) b) c) d) e) 2. legislative lobby groups. product/market/technology areas. inside claimants of the company. outside claimants of the company. strategy formulation.
Continuous strategy evaluation is important for companies today because a) b) c) d) e) international markets are fluctuating. product development life cycles are shorter. foreign competition is strong. both a) and b) above. all of a), b) and c) above.
3.
(-) A diversification strategy focuses on a) b) c) d) e) existing customers and existing products and services. existing customers and new products and services. new customers and existing products and services. new customers and new products and services. none of the above.
4.
Which of the following statements about barriers to entry is FALSE? a) b) c) d) e) It determines the extent of the threat of new entrants to existing competitors. It typically includes economies of scale, product differentiation, and capital costs. It cannot be created by government policy. Customer loyalty is typically not a factor in creating a barrier to entry. Both c) and d) above.
5.
Which of the following best describes the concept of a distinctive competence? a) The technical know-how that a company uses to create leading edge product features. b) Something a company does very well relative to competitors. c) A primary activity that the company uses to create value for customers. d) The ability of a company to perform an activity consistently well and at an acceptable cost. e) Something a company does well relative to other internal activities.
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6.
In completing a SWOT (strengths, weaknesses, opportunities, threats) analysis, which of the following is NOT an example of an external threat? a) b) c) d) e) Growing bargaining power of the companys suppliers. Weakening brand image in relation to competitors. Shifting of buyer preferences to a competing industry. Election of a new federal government. Higher than expected inflation rate.
7.
In which of the following situations would a joint venture strategy be LEAST useful? a) b) c) d) e) The available opportunity is very complex and risky. Broader knowledge and skills are needed in a new industry. The supply chain is short and established. It is difficult to gain access into a foreign market. Two relatively small companies are having difficulty competing with a large company.
8.
Research in the widget industry has revealed that: i) there are many manufacturers where the smaller manufacturers compete on product differentiation and high quality, whereas the larger companies compete on price and availability; ii) the raw materials required for this industry are plentiful and provided by many suppliers; iii) the manufacturing process is highly labour intensive, mainly consisting of lowskilled labour. Based on these findings, what can be concluded about the widget industry? a) b) c) d) e) Entry barriers in this industry are high. Consumer bargaining power is high. Supplier bargaining power is low. Rivalry among competing suppliers in this industry is low. Consumers place more value on product quality than price in this industry.
9.
A company that currently competes in a single industry is seeking to reduce its dependency on that industry by expanding into other industries. This company is using a a) b) c) d) e) forward integration strategy. diversification strategy. horizontal integration strategy. differentiation strategy. backward integration strategy.
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10.
Which of the following statements about the implementation of balanced scorecard in an organization is correct? a) The scorecard should include only four performance perspectives, including learning and growth, internal business process, customers and financial. b) Performance perspectives and indicators included in an organizations corporate scorecard, divisional scorecard and individual employee scorecard should be identical. c) Performance perspectives and indicators of critical success factors should be driven by the organizations mission, vision, and strategy. d) The scorecard should include a balanced set of financial, quantitative, objective, and lagging indicators. e) The cause-and-effect relationship among the different performance perspectives must be precise and tested.
Risk Management and Governance

11. When internal controls are implemented in an organization, there is often resistance from individuals. One way to minimize resistance to internal controls is to a) have an open forum for employees to suggest implementation methods. b) ensure support from ownership and the Board of Directors. c) assign the task of implementing the controls to an impartial staff person who has no direct relationship or authority over the affected individuals. d) both a) and b) above. e) both b) and c) above. 12. Which of the following is NOT a typical role of an audit committee? a) b) c) d) e) 13. Decide which public accounting firm to retain. Resolve conflicts between the public accounting firm and management. Discuss and review findings of internal audits. Delegate audit responsibilities to senior management. Determine the scope of services of the public accounting firm.
The main purpose of an internal control system within an organization is to a) provide timely and relevant information to the organization about its goals and objectives. b) safeguard the assets within the organization. c) confirm the reliability and integrity of information within the organization. d) ensure efficient use of resources. e) ensure the behaviour of employees are consistent with organizational objectives and strategies.
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14.
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by a) employment of temporary personnel to aid the separation of duties. b) the continuous review of all aspects of the business by the owner of the business, including the output of the accounting system. c) engaging an outside accountant to perform the monthly accounting duties. d) delegation of a full, clear-cut responsibility to each employee for the functions assigned to each. e) ensuring that the accounting function takes precedence over all other functions in the business.
15.
The role or duties of the board of directors of public companies has become increasingly important since the passing of legislation such as Sarbanes-Oxley in the United States and the Canadian Securities Administrators Multi-Lateral Instruments. Which of the following is NOT a role of the board of directors? a) Overseeing the companys direction, strategy, and business approaches. b) Aligning key executive and board remuneration with shorter-term interests of the company and its shareholders. c) Evaluating the calibre of senior executives strategy-making and strategy-executing skills. d) Monitoring the effectiveness of the companys governance practices. e) Ensuring the integrity of the corporations accounting and financial reporting systems.
16.
John works for a small company and is responsible for making disbursements by cheque and also to reconcile the monthly bank statements. Which of the following best describes the control impact of this arrangement? a) b) c) d) This arrangement improves the companies control over the cash account. John is in a position to make and conceal unauthorized payments. John is able to make unauthorized adjustments to the cash account. Internal control is enhanced because John has two opportunities to discover inappropriate disbursements. e) There is no negative impact since this is best practice for small companies. The internal auditors of an organization should a) b) c) d) e) identify areas of risk that need to be addressed in the control systems. continuously monitor and maintain the control systems. appoint the external auditors. both a) and b) above. all of a), b) and c) above.
17.
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18.
Which of the following is an INVALID concept of internal control? a) Once a control risk is identified, it is necessary to adopt an internal control to mitigate the risk. b) The recorded accountability for assets should be compared with the existing assets at reasonable intervals and appropriate action should be taken if there are differences. c) Accounting control procedures may appropriately be applied on a test basis in some circumstances. d) Procedures designed to detect errors and irregularities should be performed by persons other than those who are in a position to perpetrate them. e) Internal control should be the responsibility of every member of senior management.
19.
A Canadian exporting company wishes to reduce the risk of the Canadian dollar dropping in value relative to the foreign currency (FC) of its customers. However, it wants to retain the flexibility to benefit from any possible future increases in value of the Canadian dollar relative to the FC. Which of the following strategies should the company use with respect to the FC? a) b) c) d) e) Buy a forward contract. Buy FC. Buy an option. Both b) and c) will equally mitigate risk. None of the above.
20.
A pharmaceutical company is considering investing in 3 new drugs. It estimates that cash flows from any 1 drug will last 10 years and its cost of capital is 20%. Probability of Government Approval of the Drug 30% 40% 20%
Drug H Drug I Drug J
Development Costs $6,000,000 $5,800,000 $6,800,000
Annual Cash Flow (if the drug is approved) $6,500,000 $4,450,000 $9,500,000
Based on this information, how should the projects be prioritized? a) b) c) d) e) Drug J, then Drug I, then Drug H. Drug H, then Drug I, then Drug J. Drug I, then Drug J, then Drug H. Drug H, then Drug J, then Drug I. Drug I, then Drug H, then Drug J.
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Performance Management
21. A company manufactures two products, Y and Q. Each product requires the following processing: Process I 2 hours 4 hours Process II 1 hour 3 hours
Y Q
The available time for processing the two products is 100 hours per week in Process I and 90 hours per week in Process II. The contribution margin is $5 per unit of Y and $7 per unit of Q. The company would like to maximize profits, but the time availability of these two processes have constrained the number of units that can be produced. Applying the linear programming technique, how would the objective function be expressed? a) b) c) d) e) Maximize contribution margin = 5/3Y + 7/7Q Maximize contribution margin = 100/(2Y + 4Q) + 90/(Y + 3Q) Maximize contribution margin = 5Y + 7Q Maximize contribution margin = (2Y x 5) + (4Q x 7) + (4Y x 5) + (3Q x 7) Balance constraints: 5/2Y + 7/4Q = 5/1Y + 7/3Q
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The following data pertains to questions 22 and 23.

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. 22. 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) b) c) d) e) 23. $75,000. $180,000. $100,000. $225,000. $120,000.
(+) 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. _____________________ 24. At the end of the financial year, the cost accountant finds that the actual expenses for fixed factory overhead exceed the budgeted amounts by $15,000. If the decision is made to close out the balance remaining in the manufacturing overhead account to cost of goods sold, what would be the effect on the companys financial results? a) b) c) d) e) A decrease in cost of goods manufactured. An increase in operating income. A decrease in gross profit. A decrease in contribution margin. An increase in cost of ending inventory.
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25.
(+) ZZ Co. has two production departments, A and B, and two service departments, information technology (IT) and maintenance. The service department costs are allocated to departments based on number of computer hours used for IT and the department size in square metres for maintenance. Department A B IT Maintenance Total Computer Hours 2,000 1,500 300 200 4,000 Square Metres 2,200 4,000 400 200 6,800 Direct Costs $ 925,000 600,000 80,000 30,000 $1,635,000
Assuming ZZ Co. uses the direct allocation method, what is the total cost of Department A after allocating the service department costs (rounded to the nearest dollar)? a) $1,048,167 b) $981,359 c) $982,647 d) $974,706 e) $978,243
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26.
JYD Inc. is introducing a new product next year. Costs pertaining to this product are budgeted as follows: Variable manufacturing costs per unit Variable selling expenses per unit Variable administration expenses per unit Fixed manufacturing costs Fixed selling expenses Fixed administration expenses $89.00 $22.50 $10.90 $870,000 $545,000 $275,000
The marketing department estimates the following sales at various selling prices: Price $180 $170 $160 $150 $140 Volume 59,000 75,000 90,000 120,000 145,000
In order to maximize profits, what price should JYD Inc. set for the new product? a) b) c) d) e) $180 $170 $160 $150 $140
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11
The following information pertains to questions 27 and 28.

ABC Company manufactures widgets and uses a standard process costing system. During production, two different types of materials are used: 100% of material XY is added at the beginning of the production process; 60% of material RT is added halfway through the production process while the remaining 40% is added when the widget is 90% converted. Conversion costs are added uniformly throughout the entire production process. Quality testing is conducted at 90% conversion just prior to adding the remaining amount of material RT and rejected units are accounted for as spoilage. For Year 5, the standard costs per equivalent unit for material XY, material RT and conversion costs are $15.00, $21.00 and $9.00, respectively. Production data for May Year 5 are as follows: Work in process inventory, May 1, Year 5 (95% converted) Started in production Completed production Work in process inventory, May 31, Year 5 (60% converted) 27. (+) The amount of spoilage costs for May is: a) b) c) d) e) 28. $ 7,140. $ 9,000. $10,710. $ 8,820. $ 7,320. 5,500 units 8,800 units 9,100 units 5,000 units
The value of work-in-process inventory at May 31 is a) b) c) d) e) $225,000. $165,000. $207,000. $183,000. $161,250.
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29.
HEB Ltd. manufactures widgets. In the production of the widgets, two different types of materials are used: 100% of Material K is added at the beginning of the production process; 100% of Material Z is added when the widget is 60% converted. Conversion costs are added uniformly throughout the entire production process. Quality testing is conducted at the 60% conversion point prior to adding Material Z. Rejected units at quality testing are accounted for as spoilage. Production data for June, Year 15, are as follows: Work-in-process inventory, June 1, Year 15 (50% converted) Started in production Completed production Work-in-process inventory, June 30, Year 15 (90% converted) 600 units 8,900 units 9,100 units 250 units
(+) Assume HEB Ltd. uses a first-in, first-out (FIFO) process costing system. The equivalent units of production for conversion costs for June are a) b) c) d) e) 30. 8,965. 9,415. 9,115 9,500. 9,175.
(+) Yabco Inc. produces three design types of product X: A, B, and C. The budgeted gross margin per unit for Year 5 is as follows: A $400 100 50 60 20 230 $170 B $250 80 50 40 20 190 $ 60 C $150 40 50 10 20 120 $ 30
Price Direct materials Direct labour Variable overhead Fixed overhead Gross margin per unit
The fixed overhead allocation rate is based on the Year 4 sales of 5,000 units of A, 10,000 units of B and 20,000 units of C. In addition, the budgeted total administration costs for Year 5 amount to $500,000, all of which are fixed costs. Assuming the sales mix in Year 5 will be the same as in Year 4, what is the breakeven sales volume for Year 5 (rounded up to the nearest 10 units)? a) 8,540 units b) 2,180 units c) 11,250 units d) 8,840 units e) 15,280 units
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31.
The following represents the budgeted and actual manufacturing data for LPT Ltd. for Year 3: Budget 65,000 units 100,000 hours 60,000 hours $325,000 $275,000 $300,000 Actual 75,000 units 120,000 hours 70,000 hours $380,000 $340,000 $320,000
Units of direct materials Direct labour hours Machine hours Direct materials Direct labour Overhead
Assuming overhead is applied based on direct labour hours, by how much was overhead overapplied or underapplied in Year 3? a) b) c) d) e) 32. $40,000 overapplied $70,000 underapplied $20,000 underapplied $60,000 overapplied $10,000 underapplied
Enterprise Resource Planning (ERP) has been around since the early 1990s. A successful ERP a) b) c) d) e) is a back office function. can extend to include suppliers. runs off a single database. changes the way a company does business. all of the above.
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33.
(+) AUP Ltd. produces three chemicals from a joint process. The three chemicals can be sold immediately after the split-off point. One of the chemicals, Chemical O, can be further processed and sold as Chemical O3. In addition to the main chemicals, a byproduct emerges from the joint process. This by-product must be disposed of at the end of the joint process. During August, 5,000 litres of inputs were processed in the joint process and 1,000 litres of Chemical O were further refined to produce 1,000 litres of Chemical O3. The following are data regarding production and sales for the month of August: Chemical D O $120 $150 2,200 1,500 2,100 1,400
Selling price per litre Total output at split-off Sales during August
A $200 1,200 900
O3 $225 950
By-product $0 100 0
There were no inventories of any of the chemicals at the beginning of August. During the month, the joint processing costs incurred by the company amounted to $480,000 and the additional costs to produce Chemical O3 amounted to $40,000. Using the estimated net realizable value method of joint cost allocation, the total joint costs for August allocated to Chemical O (rounded to the nearest hundred dollars) is a) b) c) d) e) $116,200. $ 47,100. $ 44,800. $ 49,000. $ 62,200.
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15

DBS Ltd. produces a single product. For the current year, budgeted sales volume is 90,000 units and budgeted production volume is 100,000 units. The following standards were used in preparing the current years budget: Selling price Direct materials Direct labour hours Direct labour rate Variable manufacturing overhead rate Variable selling and administration costs Fixed manufacturing overhead Fixed selling and administration 34. $200 $70 1.5 $20 $18 $6 $2,800,000 $300,000 per unit per unit hours per unit per hour per direct labour hour per unit per year per year
Assuming DBS Ltd. uses standard variable (direct) costing, what is its budgeted net profit for the current year? a) b) c) d) e) $3,600,000 $2,930,000 $3,740,000 $1,660,000 $3,210,000
35.
If DBS Ltd. changes from standard variable costing to standard absorption costing, by what amount would budgeted net profit for the current year change? a) b) c) d) e) $311,111 increase $311,111 decrease no change $280,000 increase $280,000 decrease

YEH Manufacturing Company produces two models of lawnmowers: Standard and Extreme. Yalena Yoon, Manager of Marketing and Sales, estimates that YEH can sell between 6,000 and 15,000 units of either product during the upcoming year, Year 8. The following information has been provided by the accounting department: Standard $280 $ 80 20 10 30 $140 Extreme $350 $100 40 20 60 $220
Expected selling price Standard cost per unit: Direct materials Direct labour (@$20 per hour) Variable overhead (@$10 per DLH) Fixed overhead (@$30 per DLH) Standard cost per unit
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Direct labour is a variable manufacturing cost and factory workers are paid by the hour. An annual practical capacity of 24,000 direct labour hours (DLH) is used in establishing the manufacturing overhead rates. Plant capacity allows up to a maximum of 30,000 direct labour hours. Overtime pay above and beyond the practical capacity is 1 times regular pay and a maximum of 6,000 direct labour hours is allowed for overtime under the union contract. YEH also has a hiring freeze policy for Year 8. Variable selling and administrative costs are $10 per unit for each of the Standard and Extreme model, and the total fixed selling and administrative costs budgeted for Year 8 are $480,000. Fixed manufacturing overhead as well as fixed selling and administrative costs budgeted for Year 8 will not be affected by the production plan. CP Hardware Store, a national chain, approaches YEH and increases its order of the Standard Model from 1,000 units to 4,000 units for Year 8, and a price discount of 5% is given on the order. Ms Yoon revises her sales forecasts for the Standard model from 12,000 units to 15,000 units (including the CP order) and the Extreme model from 12,000 units to 10,000 units, respectively, to reflect changes in the industrys economic condition. 36. (+) YEH should accept the CP order of 4,000 units as net income will increase by: a) b) c) d) e) 37. $438,000. $ 78,000. $108,000. $154,000. $168,000.
(+) Because of changes in consumers preference, YEH decides to focus its labour capacity on the production of the Extreme model first. Ms Yoon revises her sales forecast of the Extreme model to 12,000 units for Year 8, and the remaining capacity will be used to manufacture the Standard model. In Year 8, YEH should produce 12,000 units of the Extreme model
a) for a budgeted income of $960,000. b) and 6,000 units of the Standard model for a budgeted income of $1,920,000. c) and 6,000 units of the Standard model for a budgeted income of $1,860,000. d) for a budgeted income of $1,080,000. e) and 6,000 units of the Standard model of a budgeted income of $1,720,000. _____________________________ 38. Which one of the following statements about the cost hierarchies of activity-based costing is correct? a) Engineering costs incurred to change product designs is a facility-sustaining cost. b) If the cost of an activity increases with each hour of machine time, it is an input-level cost. c) The cost of resources used each time in setting up the machine for a production run is a batch-level cost. d) The compensation for a quality engineer, who is responsible for continuous quality improvement projects implemented in the plant, is a product-sustaining cost. e) The cost of hiring security for the plant is a product-sustaining cost.
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39.
Which of the following descriptions of pricing is correct? a) Target price, a cost-based price, is the estimated price for a product or service that potential customers will pay. b) Peak-load pricing is the practice of charging a lower price for the same product or service when demand approaches physical capacity limits. c) Collusive pricing, which is in compliance with regulations, occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price. d) Predatory pricing or dumping occurs when a company sells a product in a foreign country at a price below the market value in its home country and this action materially injures or threatens to materially injure an industry in the foreign country. e) Discriminatory pricing occurs when a company charges different customers different prices for a product because of differences in the costs of manufacturing, marketing and distributing the product.
40.
CCN Inc. manufactures hockey sticks, and expected sales for the four quarters of Year 6 are as follows: Quarter First Second Third Fourth Units 115,000 27,000 122,000 138,000
The company generally maintains an ending finished goods inventory volume of 15% of the next quarters sales volume and it keeps no work-in-process inventory. The hockey stick sells for $55 and the standard cost of production is $24 per unit. What will be the budgeted cost of goods manufactured for the third quarter of Year 6? a) b) c) d) e) $2,870,400 $2,928,000 $3,782,000 $2,985,600 $3,424,800
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JH Plastics uses a standard costing system and predetermined overhead rates in determining product costs. The standard cost per unit of Product K is as follows: Direct materials ($6.00 x 2 kg) Direct labour ($24.00 x 0.5 direct labour hour) Variable overhead ($10.00 x 0.3 machine hour) Fixed overhead ($20.00 x 1 machine hour) $12.00 12.00 3.00 20.00 $47.00
Predetermined overhead rates are based on a practical capacity of 12,000 machine hours per month. In July, 35,000 kg of direct materials, 7,500 direct labour hours, and 5,000 machine hours were used in producing 15,900 units of Product K. 41. Which of the following variances for July is unfavourable? a) b) c) d) e) 42. Direct materials quantity (usage) variance. Direct labour efficiency variance. Variable overhead efficiency variance. Both a) and c) above. Both b) and c) above.
(+) Assume that actual total overhead incurred in July is $365,500 and the fixed overhead spending variance is $15,000 favourable. What is the variable overhead spending variance? a) b) c) d) e) $ 90,500 unfavourable. $ 5,500 unfavourable. $236,000 unfavourable. $ 9,500 favourable. $140,500 favourable.
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19

A company manufactures two types of sports balls: baseballs and soccer balls. Both types of balls pass through the processes involving cutting and stitching. The baseballs sell for $5.40 each and the soccer balls sell for $9.55 each. There is an unlimited market for the baseballs, but the retailer demand for soccer balls is limited to 25,000 balls per year. Factory operations of each process are limited to 10,000 hours per year. Direct labour is $10 per hour. Variable overhead is applied based on total processing hours at $2 per hour. Direct materials cost $1 and $2.25 per ball for baseballs and soccer balls, respectively. Processing hours per ball are as follows: Cutting 0.1 0.2 Stitching 0.1 0.3 Total 0.2 0.5
Baseball Soccer ball 43.
Which of the following would be an appropriate objective function in determining the production mix that would maximize total contribution? a) b) c) d) e) Maximize $5.40 baseball + $9.55 soccer ball Maximize $3.40 baseball + $7.75 soccer ball Maximize $2.00 baseball + $1.30 soccer ball Maximize $2.40 baseball + $2.30 soccer ball Maximize $4.40 baseball + $7.30 soccer ball
44.
Assume that, to maximize total contribution, the company should maximize its production of soccer balls. How many units of baseballs can be produced?
a) 6,500 b) 35,000 c) Zero d) 25,000 e) 50,000 _____________________ 45. Manufacturing costs incurred in April to produce 500 units of a product were as follows: $3,000 for direct materials, $2,000 for direct labour, $4,000 for variable overhead and $6,000 for fixed overhead. Assuming the manufacturing cost behaviour in May will be the same as that in April and that 400 units will be produced in May, what would be the manufacturing cost per unit in May? a) b) c) d) e) $34.50 $33.00 $35.00 $37.50 $30.00
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46.
Company RT would like to increase overall sales by marketing its current product to new markets. This market-product approach is best described as a a) b) c) d) e) market development strategy. market penetration strategy. differentiation strategy. product development strategy. diversification strategy.
Performance Measurement
47. A balanced scorecard is a multi-faceted performance evaluation system that is tied in to a companys strategy. Measures that evaluate innovation in operations, such as creating new services for customers, relate mainly to which component of the balanced scorecard? a) b) c) d) e) 48. Financial perspective. Customer perspective. Internal business process perspective. Learning and growth perspective. None of the above.
Job design strategies can be used to improve employee motivation. One strategy that is designed to give employees more autonomy and responsibility over the work that they do is called a) b) c) d) e) job enrichment. job rotation. job sharing. job enlargement. mutual goal setting.
49.
In his first week of employment, an employee completed projects beyond his job description. Since then, the employee stopped completing extra projects and his performance was marginal. This resulted in an overall favourable performance review for the employee. This is an example of the employee taking advantage of which of the following perceptual errors? a) b) c) d) e) Primacy effect. Recency effect. Projection. Halo effect. Self-fulfilling prophecy.
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21

The operating data for XYZ Companys three investments centres are as follows: Operating Income Before Taxes $50,000 $40,000 $65,000
North South West
Total Assets $450,000 $375,000 $475,000
Total Liabilities $225,000 $275,000 $110,000
XYZ Company requires a minimum return on investment (ROI) of 10% in evaluating the performance of the investment centres. There is a new proposal which requires an investment of $80,000 with an expected operating income before taxes of $10,000. 50. If the managers are awarded increasing bonuses for increasing investment centre ROI above 10%, which manager would be most motivated to accept the proposal? a) b) c) d) e) 51. North. South. West. Both a) and b) above. All of a), b), and c) above.
If the managers bonuses are determined using residual income (RI), the manager of which investment centre would be motivated to accept the proposal?
a) North. b) South. c) West. d) Both a) and c) above. e) All of a), b) and c) above. _____________________ 52. Residual income is a better measure for performance evaluation of an investment center manager than return on investment because a) b) c) d) e) the problems associated with measuring the asset base are eliminated. desirable investment decisions will not be neglected by high-return divisions. only the gross book value of assets needs to be calculated. returns do not increase as assets are depreciated. the arguments over the implicit cost of interest are eliminated.
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53.
(-) Various theories of motivation recognize that achievement and self actualization are high level needs that motivate employee performance. To encourage employees to strive towards higher achievement, a manager should a) b) c) d) e) develop recognition programs. set challenging goals jointly with employees. provide periodic feedback on their performance. both a) and c) above. all of a), b) and c) above.
54.
Which of the following statements about performance measures is INCORRECT? a) Return on investment is a productivity measure for evaluating performance of investment centres, e.g. strategic business unit. b) Revenue per sales person is a partial factor productivity measure for evaluating performance of revenue centres, e.g. sales department. c) Units of output per direct labour hour is a partial factor productivity measure for evaluating performance of engineered expense centres, e.g. production department. d) Units of output per dollar of production resources is a partial factor productivity measure for evaluating performance of engineered expense centres, e.g. production department. e) Number of patents per R&D employee is a partial factor productivity measure for evaluating performance of discretionary expense centres, e.g. research and development (R&D) department.
55.
Data for two divisions that are treated as investment centres are as follows Division X (000's) $35,000 $15,000 $79,000 Division Y (000's) $65,000 $22,000 $130,000
Revenue Net income Average total investment
The companys balanced scorecard includes a target minimum rate of return of 18% for all investments. In evaluating the performance of these divisions, it can be concluded that a) Division X performed better because both its return on investment and residual income are higher. b) Division Y performed better because its net income is higher. c) Division Y performed better because its return on investment is higher. d) Division X did not meet the target minimum rate of return. e) Both divisions met the target minimum rate of return.
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56.
RG Inc. operates as a decentralized multidivisional company. The West Division purchases most of its assembly parts from the East Division who currently have sufficient excess capacity to meet the West Divisions parts requirements. The East Divisions incremental costs for manufacturing the parts is $50 per unit and the current market price is $90. Assuming the divisions are treated as profit centres, which of the following statements is true? a) The minimum transfer price the East Division is willing to accept on sales to the West Division is $50. b) The minimum transfer price the East Division is willing to accept on sales to the West Division is $90. c) The maximum transfer price the West Division is willing to pay on purchases from the East Division is $90. d) Both b) and c) above. e) Both a) and c) above.
57.
Leather Division is transferring 12,000 units of leather to the Stitching Division. Costing from the Leather Division is as follows Direct Material Direct Labour Variable Overhead Variable Selling and Admin Total Variable Costs Fixed Overhead Fixed Selling and Admin Total Fixed Costs Total Costs Selling Price per Unit $150,000 36,000 24,000 60,000 $270,000 $165,000 65,000 $230,000 $500,000 $80
Based on absorption costing, the 12,000 units of leather would be transferred at a total cost of a) b) c) d) e) $351,000. $435,000. $375,000. $500,000. $210,000.
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58.
An electrician is working on a new building among various other tradespeople and is paid an individual bonus based on the number of fixtures installed within a specified period of time. The benefit(s) of including this incentive based on individual performance includes a) b) c) d) e) improved individual output. increased cooperation among employees. higher quality of installation. Both a) and b). None of the above.
59.
After an analysis of a company's operations, it was evident that department performance varied and that every department worked independently to achieve departmental objectives. The company would like to improve overall product output which would require improvement from all departments. To achieve this improvement, the organization should a) b) c) d) e) introduce an employee stock program. develop a wage structure. increase the employee bonus program. launch a plant-wide incentive plan. None of the above.
60.
(+) OKP Corporation has the following results for two of its divisions. West Division $1,850,000 $510,000 $2,180,000 $980,000 15% Coastal Division $3,500,000 $750,000 $2,525,000 $1,055,000 18%
Revenues Operating income Average operating assets Total liabilities Target Rate of Return
After analysis of these results, you conclude that a) The Coastal Division outperformed the West Division because they have a higher profit margin. b) The Coastal Division outperformed the West Division because they generated a better return on investment and residual income. c) The West Division performed better because it required fewer assets to achieve its targets. d) The West Division outperformed the Coastal Division because they carried fewer liabilities. e) The divisions performed equally.
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61.
Which of the following statements is (are) true? a) Responsibility accounting is a system that measures the actions (actual results) against the plans (budgets) of each responsibility centre. b) Responsibility accounting associates financial items with managers who have the most knowledge and information about the specific items if and only if they have the ability to exercise control. c) Controllability is absolute as managers have the ability to exercise full control on their responsibility centres activities. d) Both (a) and (b). e) All of (a), (b), and (c).
62.
An employee is motivated to work harder because he believes more effort leads to better performance which would then lead to better rewards. This belief is based on which motivational theory? a) b) c) d) e) Theory Y/Theory X Maslow's hierarchy of needs Expectancy Theory Motivation-Hygiene Equity Theory
63.
(-) Incentives for ethical behaviour comes from several sources. An incentive that motivates employees to comply with company ethical standards would be best described as an incentive that is a) b) c) d) e) professional-based. organization-based. individual-based. market-based. regulatory-based.
Financial Management
64. Why does the Capital Asset Pricing Model (CAPM) NOT value unsystematic risk? a) The CAPM assumes that investors are risk neutral, and not risk averse. b) The CAPM assumes that investors will be holding anywhere from one security to the entire market of securities. c) The CAPM assumes that unsystematic risk represents that aspect of financial risk which is unique to that security and not related to the financial risk of the market. d) The CAPM assumes that unsystematic risk can be eliminated in a well-diversified portfolio. e) The CAPM only values systematic risk.
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65.
(+) BG Corporation is considering a bid to take over SM Limited. Should the takeover occur, BG Corporation would benefit from SM Limited's before-tax operating cash flows of: i) $500,000 per year for the first three years, ii) $700,000 per year from the fourth year into perpetuity, and iii) $225,000 per year of synergistic savings before taxes in perpetuity. Assume that the cash flows occur at the end of each year, the tax rate is 40% for both companies, and BG Corporations after-tax required rate of return is 13%. What is the maximum amount that BG Corporation should be willing to pay to take over SM Corporation (rounded to the nearest thousand dollars)? a) b) c) d) e) $7,666,000 $2,947,000 $1,909,000 $6,643,000 $3,986,000
66.
(-) Normally, the issuance of a stock dividend of one share for every ten shares currently held will a) b) c) d) e) increase shareholders equity. decrease future earnings per share. cause the market price of the shares to fall. cause the market price of the shares to increase. do both b) and c) above.
67.
The following table sets out the aging schedule for a firms accounts receivables. What is the average collection period? Aging Schedule Age of Account % of Total Value of Sales Cash Sales 20% 20 days 40% 60 days 40% a) b) c) d) e) 32 days 40 days 60 days 24 days 27 days
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68.
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 $370,000. What is the effect of this sale on the companys Year 3 taxable income? a) b) c) d) e) $46,000 recapture $17,500 terminal loss $50,000 recapture $80,000 terminal loss $10,000 recapture
69.
XYZ company recently issued rights to raise financing. The shares are currently trading for $18 per share on the TSX. The subscription price for the rights offering is $14 per share and an investor will require 3 rights to purchase one share. The value of one right is a) $12.00. b) $1.67. c) $1.00. d) $0. e) $4.00.
70.
(+) HTY Inc. has the following capital structure: Current liabilities Long-term debt Preferred shares Common equity $950,000 $1,300,000 $2,920,000 $5,780,000
The long-term debt consists of a single bond issue paying 7.5% interest annually. These bonds currently yield 6.5% in the market. The current cost of the preferred shares is 6%. The current cost of the common shares is 15%. The companys tax rate is 40%. What is HTY Inc.s weighted average cost of capital (rounded to the nearest tenth of a percent)? a) 10.3% b) 10.9% c) 6.8% d) 9.2% e) 11.3%
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71.
An investor purchased $50,000 worth of newly-issued, 12-year, 10% bonds on December 31, Year 4, for $46,750. The interest payment dates are June 30 and December 31 each year. On January 1, Year 12, the investor decided to sell his bonds. The annual yield for similar bonds in the marketplace is 8%. How much money will the investor receive for his bonds (rounded to the nearest ten dollars)? a) b) c) d) e) $50,000 $75,000 $33,800 $54,080 $70,780
72.
LPY Ltd. has cash of $500,000 that will be used to create an investment portfolio. The portfolio will be invested evenly in two assets: an equity investment that has a beta of 1.70 and a risk-free, interest bearing certificate. The current risk-free rate in the market is 3% and the expected market return is 9%. What return should LPY Ltd. expect to earn on its portfolio? a) b) c) d) $ 7,500 $30,000 $33,000 $66,000 e) $40,500
73.
Management constantly makes decisions regarding financial leverage. Which of the following ratios would management NOT consider in estimating financial leverage? a) b) c) d) e) Contribution margin Debt-to-equity ratio The difference between Return on Equity and Return on Assets Debt-to-asset ratio Times Interest Earned
74.
A company is considering investing $750,000 into either: i) Investment A with a quoted interest of 13.0% compounded semi-annually. ii) Investment B with a quoted interest of 12.25% compounded daily. iii) Investment C with a quoted interest of 12.5% compounded quarterly. Which investment(s) should the company choose? a) b) c) d) e) Only A. Only B. Only C. Either A or B. Any of the three as they all have the same effective annual rate.
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75.
The following information relates to Reward Inc (RI), a Canadian Controlled Private Corporation (CCPC): Refundable Dividend Tax on Hand (RDTOH) balance January 1, Year 9 Refundable portion of part I tax for Year 9 Part IV tax payable for Year 9 Cash dividends paid to shareholders in Year 9 Taxable stock dividends paid to shareholders in Year 9 The dividend refund that RI is entitled to for Year 9 is a) b) c) d) e) $33,000. $20,000. $13,000. $ 8,000. $ 5,000.
$20,000 $ 5,000 $ 8,000 $24,000 $15,000
76.
A company is considering the following projects: W $620,000 $2,000,000 9% 4 years X $1,000,000 $5,000,000 11% 5 years Y $2,000,000 $10,000,000 13% 7 years
Annual after-tax cash inflows Initial Project Cost Discount rate Project life
Based only on profitability index, which project(s) should the company invest in? a) b) c) d) e) Only W. Only X. Only Y. Both W and Y. All three projects.
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77.
A company requires new equipment with a 5-year life and is considering the following equipment options: Operating Lease Equipment Price After-tax annual lease payment Lease term Annual CCA (straight-line basis) Salvage value after 5 years $550,000 5 years $600,000 $1,000,000
Buy $4,000,000
The first lease payment would be due on delivery and the remaining lease payments are due at the beginning of the year. The company's after-tax cost of borrowing is 6% and its tax rate is 40%. Based on this information and ignoring the half-year rule, the net present value of leasing the equipment is (rounded to the nearest thousand) a) ($ 580,000). b) $ 28,000. c) ($ 214,000). d) ($1,730,000). e) $ 797,000. 78. A bond with a BBB rating is best described as a) b) c) d) e) 79. a junk bond. an investment grade bond. a bond with a lower yield than an AA graded bond. very highly speculative. a bond sold only on high-yield US markets.
A portfolio is equally made up of three stocks with the following projections Expected Return Stock V Stock W Stock X 15% 18% 10% 8% 2% 9%
Bull market Bear market
Probability 0.30 0.70
What is the expected return on this portfolio? a) b) c) d) e) 14.3% 8.7% 4.2% 10.3% 8.0%
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80.
(+) A company is introducing 30-day credit terms for customers with the expectation that annual sales will increase from $700,000 to $775,000. To finance this investment in receivables, the company will use its line of credit, which has a 5% rate of interest. It estimates that it would have to hire an AR clerk for $45,000 and incur annual bad debt of $20,000. If the company's tax rate is 40%, what is the NPV of extending credit (rounded to the nearest hundred)? a) $ 56,300 b) $136,300 c) ($ 53,700) d) $ 10,000 e) $200,000
81.
A company has the following information from Year 12. Sales price per unit Units sold Variable costs per unit Fixed costs Common equity Tax rate $250 25,000 $110 $725,000 $890,000 40%
Given the above information, what is the degree of operating leverage? a) b) c) d) e) 82. 3.93 4.83 2.25 1.26 0.76
TTE Inc. plans to issue preferred shares to raise capital. Each preferred share will be issued with a par value of $500 and a cumulative dividend of $35. The preferred shares will result in underwriting expenses of $15 per share. The underwriting expenses are tax deductible and TTEs tax rate is 40%. If TTE Inc. decided to issue these preferred shares, which one of the following represents the cost of the preferred shares? a) b) c) d) e) 7.00% 4.52% 7.13% 4.20% 7.21%
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Financial Reporting
83. HIJ Ltd. has five operating segments all producing different products with the following results: Total Revenues $ 50 50 160 270 40 $570 Operating Profits (Losses) $ 4 3 10 25 2 $44 Total Assets $ 100 75 350 500 125 $1,150 Total Liabilities $150 100 175 275 60 $760
Segments Q R S T U Total
Based on the quantitative thresholds, which segment(s) would be reported separately? a) b) c) d) e) 84. T only. S and T only. S, T and U only. Q, R and U only. All segments would report separately.
On March 1, Year 8, Muchmoney Inc. purchases 25% of the outstanding shares of FD Ltd. for $5,000,000. On August 31, Year 8 FD announces and pays a cash dividend of $100,000 and an annual net income of $400,000. What is the balance in the investment in FD Ltd. account on Muchmoney Inc.'s records on August 31, Year 8? a) b) c) d) e) $5,000,000 $5,075,000 $5,500,000 $5,100,000 $5,200,000
85.
As a result of a water leak during July, a portion of XYZ Ltds inventory was damaged. After assessing the damaged goods, the following values were determined on July 31. Net Realizable Value per Unit $15 $30 $85
Item A B C
Units 5,000 3,000 2,000
Cost per Unit $25 $35 $80
What inventory value should be reported at July 31? a) b) c) d) e) $400,000 $335,000 $390,000 $325,000 $430,000
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86.
The following selected amounts are taken from an adjusted trial balance. Sales Sales discounts Cost of goods sold Accrued liabilities Allowance for doubtful accounts Operating expenses Contributed surplus Unrealized holding gain $500,000 $ 10,000 $245,000 $ 12,000 $ 8,000 $125,000 $ 20,000 $ 5,000
Based on the information above, comprehensive income would be a) b) c) d) e) 87. $ 62,000. $ 70,000. $ 85,000. $145,000. $125,000.
(+) The following information relates to Senior Ltd.s defined benefit pension plan: Service costs for Year 20 Interest on accrued benefits (projected benefit obligation) in Year 20 Return on pension fund assets for Year 20 Pension benefits paid to retirees in Year 20 What was Senior Ltd.s net pension expense for Year 20? a) b) c) d) e) $251,000 $196,000 $ 76,000 $126,000 $ 44,000 $120,000 $250,000 $174,000 $50,000
88.
HUL Ltd. owns 10,000 shares of ML Company. To minimize market risk, HUL purchased an option to sell the ML shares. Three months later, HUL sold the ML shares for a gain. How should the option be recorded at the time the shares of ML were sold? a) b) c) d) e) Since there was a gain, the option does not need to be recorded. The option remains in Other Comprehensive Income. The option is only recorded at the time of purchase. The loss on the option is recorded at the same time as the sale of the ML shares. The option remains a liability until adjustment at fiscal year end.
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89.
Company K purchased 35% of the outstanding shares of Company W giving Company K significant influence over Company W. How would this investment be classified? a) b) c) d) e) Held-to-maturity Available-for-sale Strategic Fair Value through Profit and Loss Temporary
90.
Which one of the following accounting treatments for inventory is appropriate? a) Telco Phones is creating their first batch of cell phones and the entire fiscal year has been geared towards production only. It is planning on using either the LIFO or weighted-average methods to account for their inventory for fiscal year and beyond. b) PA Corp had $20,000 in inventory as at December 31, 2008. In May 2009, PA Corp wrote down their inventory to its net realizable value of $13,000. In June 2009, the inventory was back in favour, resulting in a new net realizable value of $26,000. PA Corp reversed the inventory impairment loss, and recorded inventory at the new value of $26,000. c) Auto Pro Ltd. had an abnormal amount of wasted material during their production of certain transmissions. Auto Pro Ltd. included these abnormal costs into inventory because management believes that the cost of the goods will still be recovered by future sales. d) Texas Utensils had adopted a policy to test their inventory for the lower of cost and market, whereby the market is defined as replacement cost. e) During fiscal 2008, LR Corp wrote down their inventory to a net realizable value of $30,000. The original cost of the inventory was $40,000. In June 2009, the inventory was back in favour, resulting in a new net realizable value of $45,000. LR Corp reversed the inventory impairment loss recorded in fiscal 2008 and recorded the inventory cost at $40,000.
91.
Which of the following qualitative characteristics of accounting information provides the connection between the users of the financial information and the decisions they make? a) b) c) d) e) Relevance Understandability. Completeness. Reliability. Neutrality.
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92.
TCH Inc.s year-end long-term debt and shareholders equity at December 31, Year 5, consisted of the following: Convertible bonds; 7% interest; issued at par June 30, Year 5; maturing June 30, Year 10 (each $1,000 bond is convertible into 150 common shares) Common shares; 1,000,000 issued Preferred shares; 6% cumulative; 35,000 issued; no dividend in arrears Retained earnings
$9,985,000 $5,000,000 $875,000 $1,800,000
In Year 5, TCH Inc. reported net income after taxes of $5,000,000 (assume a 40% tax rate). At the end of Year 5, a common dividend of $0.10 per share was declared and paid. What is TCH Inc.s basic earnings per share for Year 5 (rounded to the nearest cent)? a) b) c) d) e) 93. $5.00 $4.97 $4.83 $2.83 $4.95
On April 15, Year 5, SFC Inc. consigned 80 units of Product A to HGL Inc. Each unit cost SFC Inc. $450 to produce and it cost $1,000 to ship the consigned units to HGL Inc. On December 31, Year 5, HGL Inc. reported that it had sold 40 units for $800 each, and remitted to SFC Inc. the proceeds of sales, less a 15% commission, and $850 in delivery costs to customers. What profit on the consigned sales will SFC Inc. report for Year 5? a) $7,850 b) $15,700 c) $26,350 d) $7,350 e) $13,500
94.
On January 1, Year 9, ABC Inc. issued $500,000 of 10% bonds due in ten years, with semi-annual interest payments of $25,000 payable on June 30 and December 31 each year. Investors are willing to accept an annual interest rate of 6% (compounded semiannually). What will be the amount of the premium on bonds payable on January 1, Year 10, assuming the effective interest method is used to amortize premiums and discounts (rounded to the nearest hundred dollars)? a) b) c) d) e) $136,100 $137,300 $ 20,000 $148,900 $147,000
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CMA Canada
95.
Under IFRS, intangible assets that may be capitalized include a) b) c) d) e) internally generated goodwill. internally developed brands. overhead costs related to development activities. borrowing costs related to research activities. all of the above.
96.
(+) FRC Ltd. is a foreign subsidiary of a Canadian company. At the end of the first fiscal year (December 31), the following balances appeared on FRC Ltd.s financial statements denominated in the host countrys foreign currency (FC): Accounts receivable (A/R) Sales Purchases Amortization expense Inventory (FIFO basis) 85,000 FC 960,000 FC 625,000 FC 45,000 FC 55,000 FC
Other Information: 1) Accounts receivable (A/R) relates to sales that occurred evenly over the 4th quarter. 2) The goods in inventory at year end were purchased evenly over the 4th quarter. 3) Sales, purchases and expenses occurred evenly throughout the year. 4) Exchange rates were as follows: 1 FC = $ CDN 0.85 0.70 0.82 0.73
January 1 December 31 Average for the year Average for the 4th quarter
If the functional currency is the foreign currency (FC), the amounts that should appear on the current years translated financial statements of FRC Ltd. (in Canadian dollars) are a) b) c) d) e) 97. A/R $59,500, cost of goods sold $472,350, amortization expense $38,250. A/R $69,700, cost of goods sold $467,400, amortization expense $36,900. A/R $62,050, cost of goods sold $416,100, amortization expense $32,850. A/R $59,500, cost of goods sold $467,400, amortization expense $36,900. A/R $59,500, cost of goods sold $399,000, amortization expense $31,500.
Which of the following actions would result in an improvement in a companys cash total debt coverage ratio? a) b) c) d) e) Selling surplus equipment for cash. Acquiring an asset through a capital/finance lease. Capitalizing product development costs. Changing from declining balance to straight line depreciation on its equipment. None of the above.
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The following information pertains to questions 98 to 100.

Company A, a retail chain, has the following financial data (in thousands of dollars) for Years 12 and 11: Year 12 $ 34,100 57,300 114,800 372,800 $579,000 Accounts payable Other current liabilities Long-term liabilities Preferred shares Common shares Retained earnings $ 50,410 61,400 205,100 75,000 151,400 35,690 $579,000 Sales Cost of goods sold (40% fixed) Salary expense Amortization expenses Other expenses (50% fixed) Interest expense Income tax expense Total expenses Net income Preferred dividends paid Common dividends paid 98. $273,000 144,000 48,100 16,900 13,200 20,100 9,210 251,510 $ 21,490 $10,000 $15,000 Year 11 $ 24,600 52,000 120,500 365,200 $562,300 $ 46,400 39,800 210,500 75,000 151,400 39,200 $562,300 $235,700 103,500 54,900 14,600 11,300 18,800 9,780 212,880 $ 22,820 $10,000 $30,000
Cash Accounts receivable Inventory Property, plant and equipment (net)
What is Company As gross margin ratio for Year 12? a) b) c) d) e) 65.9% 7.9% 18.6% 47.3% None of the above
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CMA Canada
99.
What is Company As inventory turnover ratio for Year 12? a) b) c) d) e) 2.32 times 1.22 times 0.82 times 2.43 times 0.61 times
100.
What is Company As quick ratio for Year 12?
a) 1.81 b) 1.22 c) 0.82 d) 1.84 e) 0.65 _________________________ 101. During Year 8, TIL Construction Ltd. started a construction job with a contract price of $2 million. The initial estimated profit on the project was $800,000. The job was completed in Year 10 and the following information is available: Year 8 $300,000 950,000 400,000 370,000 Year 9 $775,000 625,000 800,000 780,000 Year 10 $1,405,000 0 2,000,000 1,900,000
Costs incurred to date Estimated costs to complete Billings to date Collections to date
According to IAS 11, what is the profit that would have been recognized for the year ended December 31, Year 9? a) b) c) d) e) $ 25,000 $332,142 $152,100 $316,666 $ 84,000
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102.
(+) Nu-Row Co. is a manufacturing company with the following transactions during Year 10: 1) 2) Earned net income of $1,000,000. Sold a piece of manufacturing equipment for $1,000,000 and recorded a loss of $50,000. 3) Took out a $200,000 bank loan. 4) Inventory decreased from $390,000 to $350,000. 5) Declared dividends of $40,000 on Dec. 15, Year 10, to be paid on Jan. 5, Year 11. 6) Accounts payable decreased by $110,000. 7) Purchased equipment in exchange for $25,000 cash and furniture valued at $15,000. 8) Mortgage payments totalled $470,000. 9) Recorded amortization of $95,000. 10) Sold $500,000 in 5% convertible bonds. What would be the net increase in cash from operating activities reported on the Cash Flow Statement for the year ended Year 10? a) b) c) d) e) $1,135,000 $1,060,000 $ 930,000 $1,075,000 $ 995,000
103.
VB Ltd. has agreed to lease a piece of equipment for $15,000 per year over 10 years with the first payment due January 1, Year 10. At the end of the lease, the equipment will have a market value of $20,000 and VB Ltd. can purchase the equipment for $8,000. The interest rate implicit in the lease contract is 4% and the fair value of the equipment is $115,000. According to IAS 17, what asset amount should VB Ltd. record for this lease on January 1, Year 10? a) b) c) d) e) $131,933 $115,000 $107,000 $121,665 $0 since this is an operating lease.
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CMA Canada
104.
(+) PL Recreation, a not-for-profit organization, received the following in Year 2: i) $250,000 of unrestricted grants for the general fund. ii) $100,000 of endowments to be maintained indefinitely. iii) $6,000 of interest income from the endowment investments (all endowment interest earned is unrestricted). During Year 2: i) $50,000 of restricted donations received at the end of Year 1 was spent on equipment at the beginning of Year 2. The equipment has a useful life of five years with no expected salvage value. ii) $35,000 spent on Year 2 general operating activities. PL Recreation uses the deferral method of accounting for contributions and does not set up a separate fund for restricted donations for equipment. What is the total amount that PL Recreation should report as revenue in the statement of operations for Year 2? a) b) c) d) e) $400,000 $266,000 $350,000 $356,000 $191,000
105.
Prior to year-end adjusting entries, WRX Ltd. has the following available for sale investment information. Original Cost $ 50,000 $ 40,000 $ 60,000 $150,000 Carrying Value $ 65,000 $ 55,000 $ 65,000 $185,000 Current Market Value $105,000 $ 60,000 $ 40,000 $205,000
Investment LP Investment HW Investment EB Total
To adjust for the change in market values, the year-end journal entry to the Other Comprehensive Income account should be a) b) c) d) e) 106. $35,000. $45,000. $55,000. $20,000. $25,000.
A preferred share that gives the investor the right to sell the shares back to the issuer is best described as: a) b) c) d) e) retractable. floating rate. hybrid. cumulative. convertible.
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107.
Criteria to determine if development costs can be capitalized include: a) b) c) d) e) the intangible asset is technically feasible. the ability to use or sell the intangible asset. reliable, measurable expenditures attributable to the intangible asset. adequate, available resources to complete the development. all of the above.
108.
When assets are acquired as a donation or gift a company is required to record that asset at fair value. If that donation is made by an owner or shareholder, what account should be credited? a) b) c) d) e) Contributed Surplus Donated Capital. Other Comprehensive Income. Revenue. Only b) and c) are acceptable. a), b) and c) are acceptable.
109.
PLT Ltd. has calculated its basic EPS at $6.00 at the end of Year 8. It also has the following outstanding debt and equity information. i) ii) $1,000,000 in 8% convertible bonds. Each $1,000 bond could be converted to 7 common shares. 30,000 outstanding stock options awarded at the start of Year 8 to executives at PLT with an exercise price of $45. During the year, the price of PLT stock reached a high of $40 on December 1, Year 8. 50,000 convertible preferred shares issued at the start of year 8, each with a $50 annual dividend, cumulative and paid at the end of each year. Each preferred share could be converted to 20 common shares.
iii)
The corporate tax rate is 40%. Which of the above items would dilute the basic EPS? a) b) c) d) e) i) only ii) only iii) only i) and ii) only All of i), ii) and iii)
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CMA Canada
Cross Competency The following information pertains to questions 110 and 111
Hightow Ltd. is replacing its computer equipment network that was purchased four years ago with a new network. The original cost of the current equipment was $350,000 and was being amortized on a straight-line basis over five years. The purchase price of the new equipment is $250,000 with a salvage value zero at the end of four years. The new machine will be amortized over four years on a straight-line basis. Both machines belong to asset pool class 46 with a maximum capital cost allowance (CCA) rate of 30%. The corporate tax rate is 40%. 110. (-) The original cost of the current equipment would be classified as a a) b) c) d) e) 111. conversion cost. period cost. sunk cost. relevant cost. product cost.
If Hightow Ltd. uses a discount rate of 14%, what is the present value of the CCA tax shield from the new equipment (rounded to the nearest ten dollars)? a) b) c) d) e) $89,590 $75,000 $52,140 $64,000 $25,600
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The following information pertains to questions 112 to 114

112. Brook Ltd. is a large national company that operates in the manufacturing industry. It is looking to grow revenues by purchasing Smallfirm Ltd., a small, private consulting firm. The latest annual financial information on Smallfirm Ltd. is as follows: Revenue EBITD Basic EPS Net Assets Shares Outstanding Dividends Paid $880,000 $290,000 $8.50 $975,000 10,000 $2.00
Research has shown that the price-earnings ratio for companies like Smallfirm Ltd. is 16.5. Based on that ratio, what is the value of Smallfirm Ltd.? a) b) c) d) e) 113. $1,402,500 $975,000 $850,000 $4,785,000 $880,000
Brook Ltd. decided to purchase all outstanding shares of Smallfirm Ltd. to enter new markets and achieve its growth targets. This growth strategy would be best described as a) b) c) d) e) horizontal growth. organic growth. a joint venture. conglomerate diversification. vertical growth.
114.
Brook Ltd. gained some land through the acquisition of Smallfirm. In the fourth year after acquisition, Brook Ltd. sold an excess piece of land that resulted in a capital gain of $50,000. It anticipates that it will sell a second piece of land that will result in a capital loss of $10,000. Good tax planning would suggest the company should declare a capital dividend a) b) c) d) e) before the sale of the second property. after the sale of the second property. before the end of the upcoming fiscal year. after the end of the upcoming fiscal year. only if it has taxable income for the upcoming year.
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The following information pertains to questions 115 to 116.

JH Fashions leases a retail store in a shopping center. In order to sell its inventory, JH pays its staff a 3% commission on gross sales. John Henry, owner of JH Fashions, expects a 25% return on investment and annual fixed costs of $225,000. John invested $300,000 to start up JH Fashions. 115. JH Fashions has no variable costs, except for cost of goods, and sells clothing at a 55% gross margin. What revenue does JH need to generate to break even (rounded up to the nearest hundred dollars)? a) b) c) d) e) 116. $500,000 $387,900 $292,200 $409,100 $432,700
How much revenue does JH Fashions need to generate to achieve Johns required return on investment of 25% (rounded up to the nearest hundred dollars)? a) b) c) d) e) $432,700 $577,000 $545,500 $714,300 $517,300
End of Exam
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Solution 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 27 28 29 30 31 32 33 34 35 36 37 38 39 e e d e b b c c b c d d e b b b a a c b c a d c b b a b c e a e b b d d c c d 40 41 42 43 44 45 46 47 48 49 50 51 52 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 d d a c d b a c a a d e b e d a e c a d b d c b d e e a e c b d e a a c a c b 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 b b d c c b d e b d c e a e a b c d c d b c c d b b d a e a c c d a d a e b
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Solutions
1. Answer: e. A mission statement may or may not cover legislative lobby groups, depending on the type of business the company is engaged in. Although choices b), c) and d) are embodied in a mission statement, its ultimate purpose is to integrate b), c) and d) into the companys strategy formulation process. Answer: e. Strategy evaluation is important because organizations face dynamic environments in which key external and internal factors often change quickly and dramatically. Examples of this include greater fluctuations in the world economies (choice a), shorter times required to develop (choice b) and get products into the marketplace to maintain a competitive advantage, and dealing with foreign competitors such as India and China who are much stronger (choice c) than they were in the past. Therefore, since choices a), b) and c) are all reasons that strategy evaluation is more important for companies today, choice e) is correct and choice d) is incorrect. Answer: d. A diversification strategy focuses on diversifying into new markets, which involve new customers and new products and services. Answer: e. The extent of the threat of new entrants to existing competitors in a market depends on barriers to entry (choice a) and the expected reaction of existing competitors to new entrants. Barriers to entry include government policies (choice c), brand preference and customer loyalty (choice d), economies of scale, product differentiation, and capital costs (choice b), among others. Therefore, choice e) is the correct answer. Answer: b. A distinctive competence is a core competence that is competitively superior. Choice a) Technical know-how is a resource that can be used to create a competitive advantage. Choice c) This describes an activity in the value chain that could be a core competence or a distinctive competence or a company competence. Choice d) This describes a company competence, which may or may not be a distinctive competence. Choice e) This describes a core competence. 6. Answer: b. Weakening brand image in relation to competitors is an internal weakness, not an external threat. Choices a), c), d) and e) are all examples of external threats. Answer: c. Joint ventures are useful when the supply chain is long and uncertain (not short and established). Choices a), b), d) and e) represent situations where a joint venture strategy would be beneficial.
2.
3.
4.
5.
7.
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8.
Answer: c. Although there is no shortage of the raw material, and many suppliers, the supplier bargaining power is low. Choice a) There are many companies in the industry and the skill level of the labour is low. These are all indicators that there are low barriers to entry. The only barrier in evidence is the limited number of suppliers of the raw material. However, because there appears to be no shortage of the material, this is likely not a significant barrier to entry. Choice b) There is no indication of brand loyalty nor consumers readily switching brands so consumer bargaining power cannot be clearly identified. Choice d) With a high number of competitors and plentiful raw materials, rivalry would be high. Choice e) There is evidence that a few consumers place more value on quality than price (i.e. some of the smaller companies use quality as a competitive advantage); however, it appears that the majority of consumers place more value on price than quality (i.e. the larger companies compete on price and there is low brand loyalty).
9.
Answer: b. Diversification strategies strive to reduce the dependency of the firm on a single industry or single class of product or service. Choice a) A forward integration strategy would be expanding to gain control over its distribution (not supply) chain. Choice c) A horizontal integration strategy would involve strengthening its presence in the current industry internally (e.g. through research and development) or externally (e.g. acquiring a competitor). Choice d) Differentiation strategies emphasize creating value through the uniqueness of the good or services being provided. Choice e) Vertical integration involves gaining control over a function in the value chain that was previously performed by a supplier (backward integration) or by a distributor (forward integration). Gaining control of the supply chain is an example of backward integration.
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10.
Answer: c. Performance perspectives and indicators of critical success factors should be driven by the organizations mission, vision, and strategy. Choice a) There are organizations, e.g. the Faculty of Health Sciences, University of Newcastle, in which their balanced scorecard include more than four performance perspectives: Our People: Learning, Growth and Innovation; Our Financial Sustainability and Accountability; Our Partners; Our Internal Processes; and Our Students and Community. Choice b) The performance perspectives of an organizations corporate scorecard, divisional scorecard and individual employee scorecard can be identical but the performance indicators are not necessarily the same. For example, return on investment is the financial indicator for the corporation while sales revenue is the financial indicator for the sales manager. Choice d) The scorecard should include a balanced set of financial and nonfinancial, quantitative and qualitative, objective and subjective, as well as leading and lagging indicators. Choice e) The cause-and-effect relationship is not necessarily precise and may not be tested.
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11.
Answer: d. There are various ways to deal with resistance to internal controls, such as the following: 1. Augment the total company image by establishing an overall company reputation for competence and integrity throughout the organization. 2. Provide adequate rationale for the controls. Controls are better received if there is some understanding of the objectives of the control process and how it needs to operate. 3. Communicate and present the controls in a courteous manner and provide affected individuals the opportunity to question them and adjust to them. [Therefore choice a) is correct.] 4. Ensure that the controls are sponsored by a sufficiently high level of authority. People especially resent controls that are imposed by persons not believed to have the authority to impose them. 5. Allow affected individuals the opportunity to participate in the formulation of the control itself. Although it is often not practical for all parties who are subject to control to be able to participate in the formulation of the control itself, the further the organization moves in that direction, the greater will be the acceptance of the control. As such, the participation of the responsible manager with his superiors in setting the controls would significantly contribute to minimizing resistance to controls. [Therefore, choice b) is correct.] 6. Administer the control in a manner that is not arbitrary and demonstrates an understanding of the problems involved. Both choices a) and b) would minimize resistant to internal controls; therefore, choice d) is the correct answer. Choice c) Individuals are less likely to accept controls if they feel that the person imposing the controls does not have sufficient authority. Line workers would feel that a staff person does not have the authority or sufficient understanding of the operational challenges to set or implement the controls. Choice e) This choice is not correct because choice c) is incorrect.
12.
Answer: d. One purpose of the audit committee is to keep management and auditors independent. Hence, they would not delegate audit responsibilities to management. Choice a), b), c), e) are all typical duties performed by an audit committee.
13.
Answer: e. a) to d) are all parts of internal control but in a broader sense, internal control is mainly concerned with how policies and procedures affect the total effectiveness of the management process and consistency with the organizations objectives and strategies.
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14.
Answer: b. The most effective means of mitigating the risks resulting from having insufficient employees for proper division of responsibilities is the continuous review by the owner of all aspects of the business. Choice a) Hiring temporary personnel would be helpful, but would not be as effective as owner involvement in all aspects of the business. Choice c) Relying on one accountant, either internal or external, to handle all aspects of accounting and cash handling is at great risk. Choice d) Delegation of clear-cut responsibilities would not mitigate the initial risks resulting from improper division of responsibilities. Choice e) Although the accounting function is important for internal control, it would likely not be efficient or effective to shift priorities from the operating functions.
15.
Answer: b. The board of directors has many roles or duties including overseeing the companys direction, strategy, and business approaches (choice a); evaluating the calibre of senior executives strategy-making and strategy-executing skills (choice c); monitoring the effectiveness of the companys governance practices (choice d); and, ensuring the integrity of the corporations accounting and financial reporting systems (choice e). Key executives and board remuneration should be aligned with the longer-term interests rather than the shorter-term interests of the company and shareholders. Therefore, choice b) as stated is not correct and is the answer. Answer: b. Independent reconciliation of bank accounts is necessary for effective internal control. Persons involved in making disbursements or receiving payments should not reconcile the bank statement with the accounting records. Segregating these functions reduce the opportunity for perpetrating and concealing an irregularity. Choice a) is incorrect because someone who does not have custody of assets (i.e. does not make disbursements by cheque) should reconcile the bank statements to accounting records. Choice c) is incorrect because there is no indication that the treasurer has access to the accounting records and thus have the ability to make unauthorized adjustments to the cash account. Choice d) is incorrect because effective control measures would provide the two opportunities to two different persons in positions of responsibility (e.g. the treasurer and the controller). Choice e) is incorrect because best practice in this case is to segregate these functions.
16.
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17.
Answer: a. The internal auditors are responsible for examining and evaluating the effectiveness of other functions within the organization. These responsibilities include assessing the control systems, identifying areas of risk that need to be addressed in the control system, and making recommendations for improving the internal control process. Choice b) The responsibility for monitoring and maintaining internal controls is part of managements overall responsibility for the ongoing activities of the business it is not the internal auditors responsibility. Choice c) The board of directors or the audit committee is responsible for appointing the external auditors, not the internal auditors.
18.
Answer: a. When a control risk is identified, it is necessary to determine the cost of implementing and maintaining the controls that would mitigate the risk. It is not always cost-effective to adopt the controls. Choices b), c), d) and e) are all valid concepts of internal control. Answer: c. Buying an option gives the buyer the opportunity, but not the obligation, to buy FC at a given price in the future. If the Canadian dollar increases in value, the company can let the option expire. Buying a forward contract in FC (choice a), and buying FC (choice b) tie the Canadian company into a commitment which it cannot get out of if the Canadian dollar increases in value.
19.
20.
Answer: b. Correct order based on greatest NPV.

(A) Potential (B) Annual Prob. of Cash Flow Success Drug H Drug I Drug J $6,500,000 $4,450,000 $9,500,000 30% 40% 20% (D) PVIFA (20%, 10yrs) 4.193 4.193 4.193 (F) Development Costs $6,000,000 $5,800,000 $6,800,000
(C) = (A) * (B) 1,950,000 1,780,000 1,900,000
(E) = (C) * (D) 8,176,350 7,463,540 7,966,700
NPV =(E) (F) $2,176,350 $1,663,540 $1,166,700
Choice a), c), d), e) see solution
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21.
Answer: c. The objective function would be to maximize the contribution margin, which is correctly expressed in choice c: Contribution margin = 5Y + 7Q. Choice a) This divides contribution margin by total hours of processing. Choice b) This combines the two processing constraints. Choice d) This incorrectly applies the contribution margin to the number of units processed in each process and then sums them. Choice e) This equates the contribution margin per constraint.
22.
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
23.
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 Answer: c. The decision to close the excess of actual cost over budgeted costs to cost of goods sold would result in an increase in cost of goods sold and a decrease in gross profit. The cost of goods manufactured would increase, the operating income would decrease and there would be no effect on contribution margin or ending inventory. Answer: b. Department A costs = Direct costs + IT allocated costs + Maintenance allocated costs = $925,000 + [2,000/(2,000 + 1,500)] x $80,000) + [(2,200/(2,200 + 4,000)] x $30,000) = $925,000 + $45,714 + $10,645 = $981,359 Choice a) Used Department B hours & sq.m. in the denominators: = $925,000 + (2,000/1,500 x $80,000) + (2,200/4,000 x $30,000) = $925,000 + $106,667 + $16,500 = $1,048,167 Choice c) Used total hours and sq.m. in the denominators and used Department B sq.m. for maintenance: = $925,000 + (2,000/4,000 x $80,000) + (4,000/6,800 x $30,000) = $925,000 + $40,000 + $17,647 = $982,647 Choice d) Used total hours and sq.m. in the denominators: = $925,000 + (2,000/4,000 x $80,000) + (2,200/6,800 x $30,000) = $925,000 + $40,000 + $9,706 = $974,706 Choice e) Adjusted the denominators by the other service departments usage/size: = $925,000 + [2,000/(4,000 - 300)] x $80,000) + [2,200/(6,800 - 200)] x $30,000) = $925,000 + $43,243 + $10,000 = $978,243
24.
25.
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26.
Answer: b. Price $180 a) $170 b) $160 c) $150 d) $140 e)
Var. Cost/Unit $122.40 $122.40 $122.40 $122.40 $122.40
CM/Unit $57.60 $47.60 $37.60 $27.60 $17.60
Volume 59,000 75,000 90,000 120,000 145,000
Monthly CM $3,398,400 $3,570,000 $3,384,000 $3,312,000 $2,552,000
Total fixed costs for this product = $870,000 + $545,000 + $275,000 = $1,690,000. The contribution margin at each price is enough to cover fixed costs. The highest expected monthly income would occur at a price of $170 per unit (i.e. $3,570,000 - $1,690,000 = $1,880,000). 27. Answer: a. Spoiled units = 5,500 + 8,800 9,100 5,000 = 200 units Spoilage costs = ($15 x 200) + ($21 x 60% x 200) + ($9 x 90% x 200) = $7,140 Choice b) Ignores percentages ($15 x 200) + ($21 x 200) + ($9 x 200) = $9,000 Choice c) Incorrectly calculates spoiled units 9,100-8,800 = 300 ($15 x 300) + ($21 x 60% x 300) + ($9 x 90% x 300) = $10,710 Choice d) Incorrectly includes 100% of all material costs ($15 x 200) + ($21 x 200) + ($9 x 90% x 200) = $8,820 Choice e) Incorrectly includes 100% of all conversion costs ($15 x 200) + ($21 x 60% x 200) + ($9 x 200) = $7,320 28. Answer: b. Actual units 5,000 5,000 5,000 Percentage complete 100% 60% 60% Cost per EU $15.00 $21.00 $9.00
Material XY Material RT Conversion costs Total value
$75,000 $63,000 $27,000 $165,000
Choice a) Assumes 100% complete in inventory: 5,000 x ($15+$21+$9) = $225,000 Choice c) Assumes 100% of material RT: 5,000 x ($15+$21) + ($27,000) = $207,000 Choice d) Assumes 100% of conversion costs: 5,000 x ($15+$9) + $63,000 = $183,000 Choice e) Assumes 95% of material XY: 5,000 x 95% x $15 + $63,000 + $27,000 = $161,250
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29.
Answer: c. Units 600 8,500 150 250 9,500 Conversion Cost 300 8,500 90 225 9,115
Beginning work in process Units started and completed Spoiled units * Ending work in process Total units accounted for * 9,100 + 250 + spoiled units = 600 + 8,900 Spoiled units = 150 30.
Answer: e. Total fixed costs: [$20(5,000 + 10,000 + 20,000)] + $500,000 = $1,200,000 Contribution margin per unit: A = $400 - ($100 + $50 + $60) = $190 B = $250 - ($80 + $50 + $40) = $80 C = $150 - ($40 + $50 + $10) = $50 Weighted average contribution margin per unit: [($190 x 1) + ($80 x 2) + ($50 x 4)]/(1 + 2 + 4) = ($190 + $160 + $200)/7 = $550/7 = $78.57 Breakeven volume = $1,200,000/$78.57 = 15,280 (rounded) Choice a) Uses gross margin per unit: $500,000/{[($170 x 1) + ($60 x 2) + ($30 x 4)]/7} = $500,000/($410/7) = 8,540 Choice b) Uses groups of 7: $1,200,000/$550 = 2,180 Choice c) Uses mix of 1:1:1: $1,200,000/[($190 + $80 + $50)/3] = $1,200,000/($320/3) = 11,250 Choice d) Uses variable cost per unit: $1,200,000/{[($210 x 1) + ($170 x 2) + ($100 x 4)]/7} = $1,200,000/($950/7) = 8,840
31.
Answer: a. Budgeted overhead application rate = $300,000/100,000 hours = $3/hour Applied overhead = 120,000 hours x $3 = $360,000 $320,000 actual - $360,000 applied = $40,000 overapplied Choice b) Uses actual direct labour hours to determine the overhead rate and uses budgeted activity for applied overhead: $320,000 - [($300,000/120,000) x 100,000] = $320,000 - $250,000 = $70,000 underapplied Choice c) Uses total budgeted overhead instead of applied overhead: $320,000 $300,000 = $20,000 underapplied Choice d) Uses budgeted instead of actual overhead: $300,000 - $360,000 applied = $60,000 overapplied Choice e) Uses applied direct labour instead of overhead: $340,000 ($275,000/100,000 x 120,000) = $340,000 - $330,000 = $10,000 underapplied
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32.
Answer: e. All of the items listed are present in a successful ERP. Choice a) Because an ERP deals with internal processes and not directly with customers, it is considered back office. Choice b) Systems can extend beyond the organization. Choice c) This is one of the goals of ERP to have all of the information in one place and accessible to all. Choice d) In order to achieve success the business must change to take advantage of the ERP system.
33.
Answer: b. Sales price Produced (litres) Final sales value Less separable costs Net realizable sales value Weighting Joint cost allocated (rounded) A $200 1,200 $240,000 D $120 2,200 $264,000 O $150 500 $75,000 O3 $225 1,000 $225,000 $40,000 $185,000 24.21% $116,230 Total 4,900 $804,000 $40,000 $764,000 100% $480,000
$240,000 31.41% $150,785
$264,000 34.55% $165,864
$75,000 9.82% $47,120
34.
Answer: b. Budgeted profit = [($200 - $70 - $30 - $27 - $6) x 90,000] - ($2,800,000 + $300,000) = $6,030,000 - $3,100,000 = $2,930,000 Choice a) Uses 100,000 units instead of 90,000 units for sales: ($67 x 100,000) $3,100,000 = $3,600,000. Choice c) Does not multiply variable overhead by 1.5 direct labour hours: [($200 - $70 $30 - $18 - $6) x 90,000] - $2,010,000 = $6,840,000 - $3,100,000 = $3,740,000 Choice d) Uses 90,000 units for sales and 100,000 units for manufacturing costs (i.e. no inventory): [($200 - $6) x 90,000] - [($70 + $30 + $27) x 100,000] $3,100,000 = $12,700,000 - $3,100,000 = $1,660,000 Choice e) Uses absorption costing: Fixed manufacturing rate = $2,800,000/100,000 = $28 per unit; Budgeted profit = [($200 - $70 - $30 - $27 - $28 - $6) x 90,000] $300,000 = $3,510,000 - $300,000 = $3,210,000.
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35.
Answer: d. $28/unit fixed manufacturing overhead x 10,000 units ending inventory = $280,000 increase in net profit ($3,210,000 using absorption costing - $2,930,000 using variable costing = $280,000 increase in net profit). Choice a) ($28 x 100,000 units 90,000) x 10,000 increase in inventory = $311,111 increase. Choice b) Same as b) except assumed that budgeted net profit would decrease. Choice c) Incorrectly assumes that the net profit would be the same. Choice e) Correct amount, wrong direction: $280,000 decrease.
36.
Answer: d. The Standard and Extreme models require 1 DLH and 2 DLH per unit in production, respectively. Contribution margin per unit: Standard (CP): $280 - $110 - $10 5% x $280 = $146 (for CP order) Standard: $280 - $110 - $10 = $160 (between 6,000 and 15,000 units) Extreme: $350 - $160 - $10 = $180 (without overtime) Extreme (OT): $350 ($160 + 2DLH x 50% x $20) - $10 = $160 (with overtime) Contribution margin per DLH: Standard (CP): $146/ 1 DLH = $146 per DLH Standard: $160 / 1 DLH = $160 per DLH Extreme: $180 / 2 DLH = $ 90 per DLH Extreme (OT): $160 / 2 DLH = $ 80 per DLH Optimal production plan without CP order: Standard: 12,000 units 12,000 DLH Extreme: 6,000 units 12,000 DLH Extreme (OT): 3,000 units 6,000 DLH Revised production plan with CP order: Standard: 11,000 units 11,000 DLH Standard (CP): 4,000 units 4,000 DLH Extreme: 4,500 units 9,000 DLH Extreme (OT): 3,000 units 6,000 DLH Change in operating income with CP order = -1,000 units x $160 + 4,000 units x $146 1,500 units x $180 = $154,000 The CP order should be accepted with an increase in income of $154,000. Choice a) Increase in income with 3,000 units of Std model to CP = 3,000 units x $146 = $438,000 Choice b) Increase in income with 3,000 units of Std model to CP = 3,000 units x $146 2,000 units x $180 = $78,000 Choice c) Increase in income with 3,000 units of Std model to CP, using gross margin = 3,000 units x ($280 - $140 - $10 5%x$280) 2,000 units x ($350 - $220 $10) = $108,000 Choice e) Increase in income with 3,000 units of Std model to CP, using gross margin = 3,000 units x ($280 - $140 - $10 5% x $280) 1,500 units x ($350 - $220 - $10) = $168,000
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37.
Answer: c. Total fixed manufacturing overhead = $30 x 24,000 = $720,000 Total fixed selling and administrative costs = $480,000 Total fixed costs = $1,200,000 The Standard and Extreme models require 1 DLH and 2 DLH per unit in production, respectively. Production plan and DLH requirement: Extreme: 12,000 units 24,000 DLH Standard (OT): 6,000 units 6,000 DLH (with overtime) Contribution margin per unit: Standard (OT): $280 - ($110 + 1 DLH x 50% x $20) - $10 = $150 (with overtime) Extreme: $350 - $160 - $10 = $180 (without overtime) Operating income = 12,000 units x $180 + 6,000 units x $150 - $1,200,000 = $1,860,000 Choice a) Operating income = 12,000 units x $180 $1,200,000 = $960,000 Choice b) Operating income = 12,000 units x $180 + 6,000 units x $160 - $1,200,000 = $1,920,000 Choice d) Operating income = 12,000 units x ($350 - $220 - $10) + 6,000 units x ($280 - $140 1 DLH x 50% x $20 - $10) - $480,000 = $1,680,000 (using gross margin per unit) Choice e) Operating income = 12,000 units x ($350 - $220 - $10) + 6,000 units x ($280 - $140 - $10) - $480,000 = $1,740,000 (using gross margin per unit)
38.
Answer: c. Setup resources, which are used each time when the machine is set up to produce a batch, is a batch-level cost. Choice a) Engineering costs incurred to change product designs are a productsustaining cost. Choice b) If the cost of an activity increases with each hour of machine time used in production, it is an output-level cost. Choice d) The compensation for a quality engineer, who is responsible for continuous quality improvement projects that affect all production in the plant, is a facilitysustaining cost. Choice e) The cost of hiring security for the plant is a facility-sustaining cost.
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39.
Answer: d. Predatory pricing or dumping occurs when a company sells a product in a foreign country at a price below the market value in its home country and this action materially injures or threatens to materially injure an industry in the foreign country. Choice a) Target price is a market-based price. It is the estimated price for a product or service that potential customers will pay. Choice b) Peak-load pricing is the practice of charging a higher price for the same product or service when demand approaches physical capacity limits. Choice c) Collusive pricing is illegal and it occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price. Choice e) Discriminatory pricing occurs when a company charges some customers a higher price than is charged to other customers for the same product in which the costs of manufacturing, marketing and distributing the product to different customers are the same.
40.
Answer: d. Third quarter cost of goods manufactured: Budgeted sales in units + Target ending inventory (15% x 138,000) - Beginning inventory (15% x 122,000) Units to be produced x Standard cost of production Budgeted cost of goods manufactured 122,000 20,700 142,700 -18,300 124,400 x $24 $2,985,600
Choice a) Assumes ending inventory is 15% of current months production: [122,000 + (15% x 122,000) (15% x 138,000)] = 119,600 x $24 = $2,870,400. Choice b) Assumes cost of goods manufactured is the same as cost of goods sold: 122,000 x $24 = $2,928,000. Choice c) Uses contribution margin instead of production costs: 122,000 x $31 = $3,782,000. Choice e) Ignores ending inventory: 142,700 x $24 = $3,424,800. 41. Answer: d. Direct materials quantity variance = $6 x (35,000 2 x 15,900) = $19,200 unfavourable Direct labour efficiency variance = $24 x (7,500 0.5 x 15,900) = $10,800 favourable Variable overhead efficiency variance = $10 x (5,000 0.3 x 15,900) = $2,300 unfavourable Both direct materials quantity variance and variable overhead efficiency variance are unfavourable, i.e. (a) and (c) are TRUE. Choice a), b), c) and e) - see solution.
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42.
Answer: a. Budgeted total fixed overhead = $20 x 12,000 MCH = $240,000 Actual total fixed overhead = $240,000 - $15,000 favourable = $225,000 Actual total variable overhead = $365,500 - $225,000 = $140,500 Variable overhead spending variance = $140,500 - [$10 x 5,000] = $90,500 (U) Choice b) Does not adjust for the fixed overhead spending variance Budgeted total fixed overhead = $20 x 12,000 MCH = $240,000 Actual total variable overhead = $365,500 - $240,000 = $125,500 Variable overhead spending variance = $125,500 - $10 x 12,000 = $5,500 unfavourable Choice c) Used the denominator activity level to determined budgeted total fixed overhead: Budgeted total fixed overhead = $20 x 0.1 MCH x 12,000 = $24,000 Actual total fixed overhead = $24,000 - $15,000 unfavourable = $9,000 Actual total variable overhead = $365,000 - $9,000 = $356,000 Variable overhead spending variance = $356,000 - $10 x 12,000 = $236,000 unfavourable Choice d) Added rather than deducted the fixed overhead spending variance: Actual total fixed overhead = $240,000 + $15,000 favourable = $255,000 Actual total variable overhead = $365,500 - $255,000 = $110,500 Variable overhead spending variance = $110,500 - $10 x 12,000 = $9,500 favourable Choice e) Assumes variable overhead is favourable.
43.
Answer: c. Selling price Direct material Direct labour @ $10/cutting hr. Variable overhead @ $2 per total hours Total variable costs Contribution margin per unit Baseball $5.40 1.00 2.00 0.40 3.40 $2.00 Soccer ball $9.55 2.25 5.00 1.00 8.25 $1.30
Therefore, the objective function is to maximize $2.00 baseball + $1.30 soccer ball.
44.
Answer: d. Cutting hours constraint: 10,000 - (.2 x 25,000) = 5,000 cutting hours available 5,000 0.1 = 50,000 baseballs can be produced Stitching hours constraint: 10,000 - (.3 x 25,000) = 2,500 stitching hours available 2,500 0.1 = 25,000 baseballs can be produced From the above, we see that the stitching hours constraint is binding; therefore, only 25,000 baseballs can be produced.
60
CMA Canada
45.
Answer: b. ($3,000 + $2,000 + $4,000) 500 + ($6,000 400) = $18.00 + $15.00 = $33.00 Choice a) ($3,000 + $2,000 + $4,000) 400 + ($6,000 500) = $34.50 Choice b) ($3,000 + $2,000) 500 + ($4,000 + $6,000) 400 = $35.00 Choice c) ($3,000 + $2,000 + $4,000 + $6,000) 400 = $37.50 Choice d) ($3,000 + $2,000 + $4,000 + $6,000) 500 = $30
46.
Answer: a. This is the description of a market development strategy. Choice b) This strategy takes current products and tries to sell more to the current market. Choice c) This is an overall strategy that companies use to separate themselves from the competition. Choice d) This strategy takes new products to existing markets. Choice e) This strategy takes new products to new markets.
47.
Answer: c. The internal business process perspective focuses on internal operations that further both the customer perspective and the value perspective. It comprises three principal sub-processes: the innovation process, the operations process and post-sales services. Measures that evaluate a companys ability to create products, services and processes that will meet the needs of customers relate mainly to the internal business process perspective. Choice a) Measures such as operating income, economic value added or revenue growth relate to the financial perspectives. Choice b) Measures such as market share and customer satisfaction relate to the customer perspective. Choice d) Measures such as employee skill levels or employee turnover relate to the learning and growth perspectives. Choice e) There are only four perspectives to a balanced scorecard.
48.
Answer: a. Job enrichment adds tasks to employees jobs, allowing them to assume more responsibility and accountability for planning, organizing, controlling and evaluating their own work. It is based on the idea that motivation is increased when the job provides opportunities for recognition, responsibility, advancement, achievement and personal growth.
CMA Canada
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49.
Answer: a. The primacy effect is where we quickly form an opinion about persons based on the first information we receive about them. In the performance review, the initial good performance was given more weight than the overall marginal performance. Choice b) The recency effect is a perceptual error in which the most recent information dominates our perception about a person. Choice c) Projection bias occurs when we believe that other people hold the same beliefs and attitudes that we do. Choice d) The halo effect is when our general impression of a person, usually based on a prominent characteristic, biases our perception of other characteristics of that person. Choice e) Self-fulfilling prophecy is a phenomenon in which an observers expectations of someone cause that person to act in a way consistent with the observers expectations.
50.
Answer: d. The current return on investment without the investment proposal for each division is as follows: North ($50,000 $450,000) = 11.1% South ($40,000 $375,000) = 10.7% West ($65,000 $475,000) = 13.7% Return on investment on investment proposal: ($10,000 $80,000) = 12.5% The ROI for each division with the investment proposal would be as follows: North ($50,000 + $10,000) ($450,000 + $80,000) = 11.3% South ($40,000 + $10,000) ($375,000 + $80,000) = 11.0% West ($65,000 + $10,000) ($475,000 + $80,000) = 13.5% Since the investment will improve the ROI for both North and South, those managers would be motivated to accept the investment.
51.
Answer: e. As long as the residual income for the investment proposal is positive, all the managers should be willing to accept the proposal. The residual income on the proposal is [$10,000 - ($80,000 x 10%)] = $2,000. Therefore, all three managers would be willing to accept the investment proposal.
52.
Answer: b. The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that, from the viewpoint of the organization as a whole, should be accepted. Using residual income would avoid this motivation as long as the project earns a rate of return in excess of the required return for investments, divisional managers would be motivated to accept the project. Choices a), c) and d) all pertain to the asset base used in the calculation the problems involved in asset base are the same for calculating residual income as they are for calculating return on investment. The implicit cost of interest (choice e) is not an argument related to management performance evaluation measures.
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CMA Canada
53.
Answer: e. Achievement motivation does not work well when employees are performing routine or boring tasks, or where there is no competition. The development of recognition programs would motivate employees to strive towards higher achievement; therefore, choice a) is correct. High achievers like to set their own goals that are challenging, but achievable; they avoid extremely difficult goals (i.e. goals that require a significant amount of luck rather than ability); therefore, choice b) is correct. High achievers prefer tasks that provide immediate feedback; therefore, choice c) is correct. Consequently, choice e) is the correct answer. Answer: d. Production resources include direct materials, direct labour and other manufacturing overhead. Thus, units of output per dollar of production resources is a total factor productivity measure. Choice a) Return on investment is computed as the ratio of income to assets. Assets are the inputs used to generate income, a comprehensive output measure. Return on investment is a productivity measure. Choice b) Sales persons, who are the input, are directly involved in generating sales revenue, which is the output. Revenue per sales person is a partial factor productivity measure. Choice c) Units of output per direct labour hour is a partial factor productivity measure. Choice e) R&D employees, who are the input, are directly involved in the development of new products and services, which are the output. Patents granted for these new products and services are a measure of output of the R&D department. Number of patents per R&D employee is a partial factor productivity measure.
54.
55.
Answer: a. ROI Division X = $15,000 $79,000 = 18.99% ROI Division Y = $22,000 $130,000 = 16.9% RI Division X = $15,000 - ($79,000 x .18) = $780 RI Division Y = $22,000 - ($130,000 x .18) = ($1,400) Division X met the target minimum rate of return of 18% and has a higher ROI and RI. Choice b) Division Ys net income was higher, but because its investment was also greater, it did not perform as well as Division X. Choice c) Division Ys return on investment was lower than that of Division X. Choice d) Division X met the 18% target rate of return. Choice e) Only Division X met the 18% target rate of return.
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56.
Answer: e Since the East Division has excess capacity, there is no opportunity cost for transferring the parts to the West Division up to full capacity. Thus, the minimum transfer price acceptable to the East Division is the incremental costs for manufacturing the parts, $50 per part (choice a). If East Division were operating at full capacity, there would be opportunity costs associated transferring to the West Division and the minimum acceptable transfer price would $90. On the other hand, since the West Division can purchase the parts for $90 in the market, this is the maximum transfer price the West Division is willing to pay (choice c). Since choices a) and c) are both correct and choice b) is incorrect, the correct answer is choice e. Answer: c. Absorption cost in 000s = $150 + $36 + $24 + $165 = $375,000 Choice a) Choice b) Choice d) Choice e) Excludes variable overhead. Includes variable selling and administration in costing. Includes variable and fixed selling and administration in costing. Ignores fixed costs.
57.
58.
Answer: a. Individual incentives encourage employees to exceed the standard to achieve their bonus which leads to improved output. Choice b) Individual incentives lead to pursuit of individual goals and away from improved teamwork/cooperation. Choice c) Given a prescribed period of time to complete the task, the electrician is under time constraints which would lead to cutting corners in order to meet the time constraint and achieve the incentive. Choice d) b) is not a benefit. Choice e) a) is a benefit.
59.
Answer: d. Although this will not address the varying performance, it will direct the efforts of all employees towards a common goal of improved product output. Choices a) and c) These do not address the differences between departments nor the need for overall improvement. It may increase the gaps in departmental performance. Choice b) A wage structure creates a logical hierarchy of wages with more important jobs paid more and does not address the overall goal of output improvement. Choice e) d) is an appropriate recommendation.
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CMA Canada
60.
Answer: b. ROI RI Profit Margin West 510,000 2,180,000 = 23.4% 510,000 (2,180,000 X 15%) = 183,000 510,000 1,850,000 = 27.6% Coastal 750,000 2,525,000 = 29.7% 750,000 (2,525,000 X 18%) = 295,500 750,000 3,500,000 = 21.4%
Choice a) West has the better profit margin. Choice c) Amount of assets is not a convincing performance measurement. Choice d) Amount of liabilities is not a performance measurement. 61. Answer: d. Both statements (a) and (b) are TRUE. Choice a) The statement is not the only TRUE statement. Choice b) The statement is not the only TRUE statement. Choice c) Controllability is not absolute as managers only have the ability to exercise some control on their responsibility centres activities. The statement is FALSE. Choice e) The statement (c) is FALSE. 62. Answer: c. This theory maintains that performance will achieve a goal. Motivation is a combination of effort, achievability of goals, and desire. An individual who has a particular goal must practice a certain behaviour to achieve it. Choice a) Theory Y suggests that people are fundamentally born good (conversely in theory X: evil) and are thus naturally motivated (conversely: lazy) . Choice b) People have multiple needs, loosely classifiable as physiological, psychological, growth and transcendent needs. As one need is satisfied, then another (higher) need becomes apparent. Choice d) This proposes that intrinsic job factors motivate and extrinsic factors placate employees. Choice e) Equity theory of motivation suggests that people will compare outcomes for themselves with others. 63. Answer: b. This describes an organization-based incentive. Choice a) This incentive is defined by professional associations, like a Code of Conduct. Choice c) This incentive pertains to one's ethical values to do the right thing. Choice d) This is provided by markets imposing substantial costs on organizations that engage in unethical behaviour. Choice e) This is induced through regulations by imposing sanctions and fines for unethical behaviour. 64. Answer: d. The CAPM is based on a number of assumptions, including one that bases the price on the investor holding a well-diversified portfolio (the market portfolio). It has been shown that the vast majority of security-specific risk can be diversified away in such a portfolio.
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CMA Canada
65.
Answer: e. The maximum amount that BG Corporation should be willing to pay for SM Corporation is the present value of the incremental cash flows using a discount rate of 13%. Year 1 to 3 present value of operating after-tax cash flows from SM Corporation = $500,000 x .6 x 2.361 = $708,300 Year 4 and beyond present value of operating after-tax cash flows from SM Corporation = ($700,000 x .6) .13 x .693 = $2,238,923 Present value of synergies = ($225,000 x .6) .13 = $1,038,462 Net present value = $708,300 + $2,238,923 + 1,038,462 = $3,985,685 = $3,986,000 (rounded) Choice a) Uses the values of the perpetuities at the beginning of Year 4 (i.e. they are not discounted to the present): $708,300 + [($700,000) x .6]/.13 + $3,727,000 = $7,666,069 = $7,666,000 (rounded). Choice b) Ignores the synergies of $225,000 per year: $708,300 + $2,238,923 = $2,947,223 = $2,947,000 (rounded). Choice c) The synergies are subtracted from cash flows instead of added: $708,300 + $2,238,923 - $1,038,462 = $1,908,761 = $1,909,000 (rounded). Choice d) Uses before tax cash flows: ($500,000 x 2.361) + ($700,000 .13 x .693) + ($225,000 .13) = $1,180,500 + $3,731,538 + $1,730,769 = $6,642,807 = $6,643,000 (rounded)
66.
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. Answer: a. Average collection period = (.2 x 0) + (.4 x 20) + (.4 x 60) = 32 days. Choice b) Choice c) Choice d) Choice e) Average of 20 days and 60 days aging: (20 + 60)/2 = 40 days. Uses 60 days at 100%. Uses 60 days only: 60 days x 40% = 24 days. Uses the average of 0, 20 and 60 days: (0 + 20 + 60)/3 = 27 days
67.
66
CMA Canada
68.
Answer: e. Capital cost allowance will be recaptured when the proceeds of disposition exceed undepreciated capital cost (UCC) (i.e. when assets in a class have been overdepreciated relative to their disposal value): 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 $370,000 - UCC of $360,000 = $10,000 recapture. Choice a) Residual value is incorrectly deducted before calculating UCC: $500,000 - $50,000 = $450,000 UCC at the end of Year 1 = $450,000 - ($450,000 x 20% x 50%) = $405,000 UCC at the end of Year 2 = $405,000 x 80% = $324,000 Proceeds of $370,000 - UCC of $324,000 = $46,000 recapture Choice b) Incorrectly uses straight-line amortization and ignores half-year rule: $500,000 - $50,000 = $450,000 Accumulated amortization = $450,000/8 x 2 = $112,500 NBV at the end of Year 2 = $500,000 - $112,500 = $387,500 Proceeds of $370,000 - NBV of $387,500 = $17,500 terminal loss Choice c) Ignores the half-year rule: UCC at the end of Year 1 = $500,000 - ($500,000 x 20%) = $400,000. UCC at the end of Year 2 = $400,000 x 80% = $320,000. Proceeds of $370,000 - UCC of $320,000 = $50,000 recapture Choice d) Ignores CCA: $500,000 - $50,000 = $450,000 Proceeds of $370,000 - $450,000 = $80,000 terminal loss
69.
Answer: c. Vr = ($18-$14)/(3+1) = $1 Choice a) Incorrectly multiplies by the number of rights: 3 x ($18 - $14) = $12. Choice b) Multiplies the cash required by the number of rights and divides by the current value of the shares: ($14 x 3)/$18 = $2.33 Choice d) This is correct if the market price of a share is less than the subscription price of a share with three rights. Choice e) Ignores the number of rights: $18 - $14 = $4
CMA Canada
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70.
Answer: b. After-tax cost of debt = 6.5% x (1 - .4) = 3.9% Cost of preferred shares = 6%; Cost of common equity = 15% Total long-term debt + equity = $1,300,000 + $2,920,000 + $5,780,000 = $10,000,000 WACC = (3.9% x 1.3/10) + (6% x 2.920 10) + (15% x 5.780 10) = .507% + 1.752% + 8.67% = 10.929% = 10.9% (rounded) Choice a) Includes current liabilities as part of debt: WACC = (3.9% x 2.25 10.95) + (6% x 2.920 10.95) + (15% x 5.780 10.95) = .8014% + 1.6% + 7.918% = 10.319 = 10.3% (rounded) Choice c) Incorrectly converts cost of preferred (6% x (1 - 40%)) and cost of common (15% x (1 40%)) to an after-tax cost: WACC = (3.9% x 1.3 10) + (3.6% x 2.92 10) + (9% x 5.78 10) = 6.76% = 6.8% (rounded) Choice d) Uses average of all three rates: (6.5 + 6 + 15) 3 = 9.167% = 9.2% (rounded) Choice e) Does not take after-tax cost of debt: WACC = (6.5% x 1.3 10) + (6% x 2.920 10) + (15% x 5.780 10) = .845% + 1.752% + 8.67% = 11.267% = 11.3% (rounded)
71.
Answer: d. The price of the bond when it was issued is not relevant to the current market price. The current market value is equal to the present value of the future cash flows, using 10 periods at 4%: ($50,000 x 0.676) + ($2,500 x 8.111) = $33,800 + $20,277 = $54,077.50 = $54,080 (rounded) Choice a) Switches the coupon rate and the required rate: ($50,000 x 0.614) + ($2,500 x 7.722) = $30,700 + $19,305 = $50,005 = $50,000 (rounded) Choice b) Uses the face value only. $50,000 + (10 x $2,500) = $75,000 Choice c) PV of bonds only: $50,000 x 0.676 = $33,800 Choice e) Does not use the present value on the principal: $50,000 + ($2,500 x 8.111) = $50,000 + $20,277 = $70,277 = $70,780 (rounded)
72.
Answer: e. The expected return on the equity investment is calculated with the Capital Asset Pricing Model (CAPM) = 3% + 1.7(6%) = 13.2%. Expected return = $250,000 x 13.2% = $33,000. The expected return on the interest bearing certificate is 3% x $250,000 = $7,500. Therefore, the combined return of the portfolio is $40,500.
68
CMA Canada
73.
Answer: a. Financial leverage measures a companys use of debt with fixed interest rates. The contribution margin measures the degree of operating leverage (variable versus fixed costs). Choice b) Debt-to-equity ratio: Measures the extent of debt financing in comparison to equity financing in a firms capital structure. Choice c) Financial leverage ratio (ROE ROA): The financial leverage ratio, as measured by the difference between the Return on Equity and the Return on Assets, is a measure of financial leverage employed. Leverage is positive when the rate of return on the companys assets exceeds the average aftertax interest rate on its borrowed funds. Choice d) Debt-to-asset ratio: Measures the extent of debt used to finance a firms assets. Choice e) Times Interest Earned: This shows how many times earnings will cover fixedinterest payments on long-term debt.
74.
Answer: a. Effective interest rate = (1+Ratequoted/n)n -1 Investment A = (1 + .13/2)2 - 1 = 13.42% Investment B = (1 + .1225 365)365 - 1 = 13.03% Investment C = (1 + .125 4)4 - 1 = 13.10% Since Investment A has the highest effective rate, the company should invest all her money in A.
75.
Answer: c. Dividends ($24,000 + 15,000) x 1/3; cash and stock dividends are included in the calculation Choice a) Choice b) Choice d) Choice e) $33,000 (ending balance RDTOH $20,000 + 5, 000 + 8,000) $20,000 (beginning balance in RDTOH) $8,000 (cash dividends x 1/3) $5,000 (stock dividends x 1/3)
76.
Answer: a. Profitability Index = PV cash inflows/PV cash outflows Project W = [620(3.240)]/2,000 = 1.004 Project X = [1,000(3.696)]/5,000 = 0.7392 Project Y = [2,000(4.423)]/10,000 = 0.8846 Since project W has a profitability index greater than 1, it is the only project the company should invest in.
CMA Canada
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77.
Answer: c. NPV of the lease = $4,000 - $550 - $550PVIFA6%,4 - ($600 x 40%)PVIFA6%,5 - $1,000PVIF6%,5 = $3,450 - $1,905.75 - $1,010.88 - $747 = - $213.63 Choice a) assumes lease payments are at the end of the year Choice b) ignores salvage value Choice d) ignores tax on CCA Choice e) ignores CCA
78.
Answer: b. A BBB-graded bond is the lowest grade for an investment grade bond. Choice a) Bonds rated below BBB are junk bonds. Choice c) BBB bonds are more risky than AA bonds and as a result have higher yields. Choice d) BBB bonds are adequate credit quality versus junk bonds which are much more speculative. Choice e) Generally junk bonds are sold on the high-yield US markets.
79.
Answer: b. Expected Return (V) = 15%(.30) + 8%(0.70) = 10.1% Expected Return (W) = 18%(.30) + 2%(0.70) = 6.8% Expected Return (X) = 10%(.30) + 9%(0.70) = 9.3% Expected Return (Portfolio) = (1/3 x 10.1%) + (1/3 x 6.8%) + (1/3 x 9.3%) = 8.72% Choice a) Only considers bull market. Choice c) Only considers bear market. Choice d) Takes average of all stocks. Choice e) Takes average of the difference of stocks.
80.
Answer: b. Initial investment is the cash that will be tied up in receivables. = 30 days X ($775,000 365) = $63,699 Incremental before-tax cash flow = ($775,000-$700,000) - $20,000 - $45,000 = $10,000 After-tax = $10,000 x (1-40%) = $6,000 After-tax discount rate = 5% x (1-40%) = 3% NPV = -$63,699 + ($6,000 0.03) = $136,301 Choice a) Misses after-tax discount rate: -$63,699 + $6,000/5% = $56,301 Choice c) Does not discount incremental cash flow: -$63,699 + $10,000 = -$53,699 Choice d) Takes sales increase less additional costs = $75,000 - $45,000 - $20,000 = $10,000 Choice e) Present value of d) = $10,000 .05 = $200,000
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CMA Canada
81.
Answer: d DOL = [25,000 x ($250 - $110)] [25,000 x ($250 - $110) - $725,000] = 1.261 Choice a) uses equity in denominator: $3.5M/$890,000 = 3.93 Choice b) uses just fixed costs in dominator: $3.5M/$725,000 = 4.83 Choice c) uses gross sales in numerator: $6.25M/$2.775M = 2.25 Choice e) uses after-tax contribution margin in numerator: $2.1M/$2.775M = 0.76
82.
Answer: c The total cost of the preferred shares is calculated as follows: Amount per share: $500 Underwriting costs: ($9) $15 x (1 - .40) Net proceeds: $491 Dividend per share: $35 Cost per share: $35 / $491 = 7.128% ~ 7.13%
83.
Answer: c. An operating segment must only satisfy one of the following quantitative thresholds to be considered a reportable segment. (a) its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments; (b) the absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of: (i) the combined reported profit of all operating segments that did not report a loss; or (ii) the combined reported loss of all operating segments that did report a loss; and (c) its assets are 10 per cent or more of the combined assets of all operating segments. Choice a) Choice b) Choice d) Choice e) S and T have revenues greater than 10% of combined revenues. U has assets greater than 10% of combined assets. Liabilities have to impact on quantitative thresholds. Therefore, S, T and U should report separately.
84.
Answer: b. Because Muchmoney owns 25%, it has significant influence, so the equity method is used. Initial investment: Net Income: Dividend paid: $5,000,000 DR $ 100,000 DR (25% of $400,000) $ 25,000 CR (25% of $100,000) $5,075,000
CMA Canada
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85.
Answer: d. Units 5,000 3,000 2,000 Cost per Unit $25 $35 $80 Total $125,000 $105,000 $160,000 Net Realizable Value per Unit $15 $30 $85 Total $75,000 $90,000 $170,000 Lower of Cost and NRV $75,000 $90,000 $160,000 $325,000
A B C
86.
Answer: e. Comprehensive Income includes Net Income plus Other Comprehensive Income that bypasses net income but affects shareholders' equity. The calculation includes: Sales - Sales Discounts - Cost of Goods Sold Operating expenses + Unrealized Holding Gain (500 - 10 - 245 - 125 + 5 = 125) Choice a) Fails to include the Unrealized Holding Gain and deducts the Allowance for Doubtful Accounts as an expense ($75 5 8 = $62). Choice b) Fails to include the Unrealized Holding Gain in the calculation ($75 5 = $70). Choice c) Fails to deduct the Sales Discount in the calculation ($75 + 10 = $85). Choice d) Includes the contributed surplus ($125 + 20 = $145).
87.
Answer: b. Pension expense = service costs + interest on accrued benefits - return on pension fund assets = $120,000 + $250,000 - $174,000 = $196,000. Answer: d. Accounting standards require that the gain/loss on a hedge be recorded in net income at the same time that the gain/loss on the item being hedged is recognized. Answer: c. Strategic investments occur when we take a significant equity position in another company and are in a position to either control the other company or significantly influence its operational or financial policies. Choices a), b), d) and e) are all non-strategic classifications.
88.
89.
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CMA Canada
90.
Answer: e. IAS 2 - Inventory, allows for the reversal of a writedown in a subsequent period if the net realizable value of the inventory increases, but not above the original cost. In this case, inventory with an original cost of $40,000 was written down to $30,000 (loss of $10,000). Once conditions changed, the inventory had a new NRV of $45,000 but LT correctly recorded the inventory at its original cost. Choice a) LIFO is no longer an appropriate cost flow formula. Therefore, this alternative is inappropriate. Choice b) The reversal of the writedown is limited to the amount of the original writedown (i.e. cannot be greater than the original cost). Since PA Corp reversed the writedown to $26,000, which is beyond the cost of $20,000 this alternative is inappropriate. Choice c) Abnormal amounts of wasted material, labour or other production costs are not included in inventories (IAS 2. Para 16a). Choice d) Inventory is valued at the lower of cost or net realizable value, not replacement cost.
91.
Answer: a Relevance - information is relevant when it influences the economic decisions of users. Choice b) Information is readily understandable by users. Choice c) Completeness refers to the inclusion of all information within the bounds of materiality and cost. An omission can cause information to be false or misleading. Choice d) Reliability is the qualitative concept that describes accounting information as being verifiable and is a faithful representation of the underlying economic reality. Choice e) Neutrality means that information cannot be selected to favour one set of stakeholders over another.
92.
Answer: e. Net income available for common shareholders = $5,000,000 - (6% x $875,000) = $4,947,500 Basic EPS = net income available for common shareholder weighted average common shares outstanding = $4,947,500/1,000,000 = $4.95 Choice a) Does not deduct preferred dividends: $5,000,000 1,000,000 = $5.00 Choice b) Deducts taxes from dividends: [$5,000,000 - (6% x $975,000 x .6)] 1,000,000 = $4,968,500 1,000,000 = $4.97 Choice c) Calculates earnings per common and preferred share: $5,000,000 (1,000,000 + 35,000) = $4.83 Choice e) Uses fully diluted number of shares: 1,000,000 + ($9,985,000 1,000,000 x 150 x ) = 1,748,875 shares; EPS = $4,947,500 1,748,875 = $2.83
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93.
Answer: a. Proceeds from sale of 40 units = [($800 - $120 commission) x 40] - $850 delivery costs = $26,350 Cost of sales = ($450 x 40) + ($1,000 x 40/80) = $18,500 Profit from consignment sales = $26,350 - $18,500 = $7,850 Choice b) Assumes SFC Inc. records sales for all 80 units on consignment and accrues the expected expenses associated with the unsold units: [($800 - $120 $450) x 80] - [$850 x 80/40] - $1,000 = $15,700. Choice c) Remittance amount of ($800 - $120) x 40 - $850 = $26,350. Choice d) Deducts full $1,000 shipping cost: $26,350 - [($450 x 40) + $1,000] = $7,350. Choice e) Ignores the costs incurred by the consignee: ($800 - $450) x 40 - ($1,000 x 40/80) = $13,500.
94.
Answer: b. n = 18; i = 3% Premium = (PV of $500,000 + PV of semi-annual interest of $25,000) - $500,000; = [$500,000 x .587) + ($25,000 x 13.753)] - $500,000 = $293,500 + $343,825 - $500,000 = $137,325 = $137,300 (rounded)
95.
Answer: c. This is the only cost eligible for capitalization. It has future benefit and can be distinguished from other costs and appropriately measured. Choice a) This does not meet the criteria. Choice b) This cannot be distinguished and measured and is specifically excluded for these reasons. Choice d) Interest on development not research can be capitalized. Choice e) See above.
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CMA Canada
96.
Answer: d. In this case, 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 exchange rate of 0.70 and income statement items should be translated using the 0.82 average rate for the year: A/R = 85,000 FC x .70 = $59,500 Cost of goods sold = (625,000 FC - 55,000 FC) x .82 = 570,000 FC x .82 = $467,400. Amortization expense = 45,000 FC x .82 = $36,900 Choice a) Uses the temporal method: Accounts receivable = 85,000 FC x .70 = $59,500; Cost of goods sold = (625,000 FC x 0.82) - (55,000 FC x 0.73) = $472,350; Amortization expense = 45,000 FC x .85 = $38,250. Choice b) Uses the average rate for the year: A/R = 85,000 FC x .82 = $69,700; Cost of goods sold = (625,000 FC - 55,000 FC) x .82 = $467,400; Amortization expense = 45,000 FC x .82 = $36,900 Choice c) Uses the average rate for the 4th quarter: A/R = 85,000 FC x .73 = $62,050; Cost of goods sold = (625,000 FC - 55,000 FC) x .73 = $416,100; Amortization expense = 45,000 FC x .73 = $32,850 Choice e) Uses current rate for all: A/R = 85,000 FC x .70 = $59,500; Cost of goods sold = (625,000 FC - 55,000 FC) x .70 = $399,000; Amortization expense = 45,000 FC x .70 = $31,500
97.
Answer: c. Candidates need to consider the impact of the items on cash flow from operations and/or total liabilities. Cash total debt coverage = Cash provided by (used in) operations average total liabilities. Capitalizing product development costs would not change total cash but would improve cash from operations as cash would be classified as an investment rather than operating expense. Choice a) Selling surplus equipment for cash would improve cash but not cash from operations. Choice b) Acquiring an asset through a capital lease would increase liabilities as lease capitalized. (Provides some symmetry with response c) as both involve capitalization.) Choice d) Changing from declining balance to straight-line depreciation on its equipment would impact the add back on the cash flow statement but not the net cash flow from operations.
98.
Answer: d. Gross margin ratio = (Sales Cost of goods sold) Sales = ($273,000 - $144,000) $273,000 = $129,000 $273,000 = 47.3% Choice a) Calculates contribution margin ratio: [$273,000 - ($144,000 x 60%) ($13,200 x 50%) $273,000 = 65.9%. Choice b) Deducted all the expenses: ($273,000 $251,510) $273,000 = 7.9% Choice c) Uses operating income in the numerator: ($129,000 - $48,100 - $16,900 - $13,200) $273,000 = 18.6%.
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99.
Answer: b. Inventory turnover ratio = Cost of goods sold/Average inventory = $144,000 [($114,800 + $120,500) 2] = $144,000 $117,650 = 1.22 times Choice a) Uses sales in the numerator: $273,000 $117,650 = 2.32 times Choice c) Flips the numerator and the denominator = $117,650 $144,000 = 0.82 times Choice d) Divides average inventory by average accounts payable: $117,650 [($50,410 + $46,400) 2] = 2.43 times: Choice e) Adds beginning and ending inventory in the denominator: $144,000 ($114,800 + $120,500) = 0.62 times
100.
Answer: c. Quick ratio = Cash + accounts receivable/Accounts payable + Other current liabilities = ($34,100 + $57,300)/($50,410 + $61,400) = $91,400/$111,810 = 0.82 Choice a) Choice b) Choice d) Choice e) Uses accounts payable in the denominator: $91,400/$50,410 = 1.81 Flips the numerator and the denominator = $111,810/$91,400 = 1.22 Use current assets/current liabilities = ($91,400 + $114,800)/$111,810 = 1.84 Uses current assets/total liabilities = ($91,400 + $114,800)/($111,810 + $205,100) = 0.65
101.
Answer: c. Year 8 expected gross profit is $750,000 ($2M - $1.25M). Therefore, recorded gross profit in Year 8 is $180,000 (24% of $750,000). In Year 9, the total project costs was $775k + $625k = $1,400,000. A total of 55.35% of the costs were incurred ($775k / $1,400k). Expected gross profit is $600,000 ($2M - $1.40M). Therefore, recorded gross profit in Year 9 is [(55.35% of $600,000) 180,000] = $152,100. Choice a) Used the difference between the billings to date and the costs incurred to date to determine the gross profit in each year. Year 8: $400,000 - $300,000; Year 9: $800,000 - $775,000 Choice b) For Year 9, the gross of $332,142 represents 55.35% of $600,000, which therefore does not deduct the portion of gross profit that was earned in Year 8 (i.e. $180,000). Choice d) Does not adjust the total project costs for the new information obtained in each year. Year 8 $300,000 / $1,200,000 = 25%; 25% of $800,000 = $200,000 Year 9 $775,000 / $1,200,000 = 64.58%; 64.58% of $800,000 = $516,666 Less Year 8 gross profit of $200,000 = $316,666 Choice e) Uses billings to date as a metric to measure progress. Year 8 - $400,000 / $2,000,000 = 20%; 20% of $750,000 = $150,000 Year 9 - $780,000 / $2,000,000 = 39%; 39% of $600,000 ($2,000,000 $775,000 - $625,000) = $234,000 Less gross profit in Year 8 of $150,000 = $84,000
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CMA Canada
102.
Answer: d The amounts would be reported under operating activities on the Cash Flow Statement. Net income earned Add back amortization recorded Add back decrease in inventory Add back loss on equipment Deduct decrease in accounts payable Increase (decrease) in cash from operating activities Choice a) Choice b) Choice c) Choice e) $1,000,000 95,000 40,000 50,000 (110,000) $1,075,000
Does not include change in accounts payable. Incorrectly adds back cash used to purchase equipment. Ignores the amortization. Incorrectly deducts dividends declared.
103.
Answer: b. Value recorded is the lower of fair value or PV of minimum lease payments. PV of minimum lease payments: $15,000 + $15,000 PV 9,4% + $8,000 PV 10,4% = $131,933 Therefore, the lease is recorded as a $115,000 asset. Choice a) Incorrectly uses the PV of the lease payments. Choice c) Incorrect takes fair value less purchase price. Choice d) Incorrectly calculates PV at the end of each year. $15,000 PV 10,4% = $121,665 and uses that amount. Choice e) Since there is a bargain purchase price, this is a finance lease.
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104.
Answer: b. Restricted contributions Match revenues to expenses for the period; revenues to be used against expenses for future periods should be deferred. The $50,000 received in Year 1 was not recognized as revenue in Year 1, it was deferred. The amount of revenue from this donation to be recognized in Year 2 will be equal to the amortization expensed in Year 2. Therefore, recognize $10,000 ($50,000/5) of restricted contributions in Year 2. The entire $250,000 of unrestricted grants is recognized in Year 2. The endowment contribution is not recognized as revenue on the statement of operations; instead, it is recognized as a direct increase to net assets. Unrestricted interest income from endowments is recognized as revenue in the period that the interest is earned. Therefore, for Year 5, revenue = $10,000 + $250,000 + $6,000 = $266,000. Choice a) Recognizes all the restricted contributions including those deferred from Year 4: $250,000 + $100,000 + $50,000 = $400,000. Choice c) Treats interest as a restricted revenue: $250,000 + $100,000 = $350,000. Choice d) Includes all revenue received in Year 5: $250,000 + $100,000 + $6,000 = $356,000. Choice e) Matches all revenue to expenses and includes the endowment: $50,000 + $35,000 + $6,000 + $100,000= $191,000.
105.
Answer: d. As available for sale investments, the adjustment should be the difference between the current market value and the carrying value ($185,000 - $205,000). Choice a) Incorrectly uses the difference between carrying value and original cost. Choice b) Incorrectly uses the difference between market value and carrying value for LP and HW only. Choice c) Incorrectly uses the difference between market value and original cost. Choice e) Incorrectly uses the difference between market value and original cost for EB only.
106.
Answer: a. This is the description of a retractable preferred share. Choice b) This refers to a preferred share whose dividend is readjusted every three to six months to be in line with current market interest rates. Choice c) This refers to a security that is part equity and part debt. Choice d) This refers to preferred shares that must receive dividends that are current and in arrears before dividends are paid to common shares. Choice e) This refers to preferred shares that can be converted to common shares.
107.
Answer: e. All of the choices are criteria to determine whether or not to capitalize development costs.
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CMA Canada
108.
Answer: a Since the contribution is made by an owner or shareholder, the account that is credited would be a Contributed Surplus account, Donated Capital. Choice b) Other comprehensive income or net income would be the correct answer if the contribution were made by a non-owner. A contribution by a non-owner meets the definition of an item of comprehensive income and can be included in Other comprehensive income. Choice c) Other comprehensive income or net income would be the correct answer if the contribution were made by a non-owner. A contribution by a non-owner meets the definition of an item of comprehensive income and can be included in Net Income. Choice d) A contribution by a non-owner meets the definition of an item of comprehensive income and can be included in other comprehensive income or net income, therefore b) or c) is acceptable if the contribution were from a non-owner. Choice e) This foil may be attractive if the student does not realize that there is a difference in the treatment of donated assets depending on the source of the donation.
109.
Answer: c. i) ($1,000,000 x 8%) (1-0.4) = $48,000 1,000 bonds x 7 = 7,000 common shares $48,000/7,000 = $6.86 NOT dilutive ii) options are not in the money NOT dilutive iii) $50/20 common shares = $2.50 dilutive Answer: c. The original cost of the old equipment is not relevant (choice d) to the decision to dispose of it and purchase new equipment. Therefore, it is a sunk cost in this situation (choice c). The amortization of the production equipment would be classified as a product cost (choice e) as part of overhead rather than a period cost (choice b). The costs have nothing to do with production so conversion cost is not correct (choice a). Therefore, choice c) is correct. Answer: d. Present Value =
110.
111.
CdT 1 + 0.5k (d + k ) 1 + k
250,000x30%x40% 1 + 0.5(14%) = 68,182 x 0.9386 = $63,995.62 = $64,000 (30% + 14%) 1 + 14%

uses old equipment cost of $350,000: = 89,593.64 = $89,590 (rounded) amortization for one year: = 30% of $250,000 = $75,000 uses 40% in denominator = $52,144.44 = $52,140 (rounded) uses difference in equipment costs in numerator (i.e. $100,000) = $25,598.18 = $25,600 (rounded)
Choice a) Choice b) Choice c) Choice e)
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112.
Answer: a. Fair share price = $8.50 x 16.5 = $140.25 Value = $140.25 x 10,000 shares = $1,402,500 Choice b) uses net assets Choice c) uses EPS x shares outstanding Choice d) uses EBITD x 16.5 Choice e) uses revenue
113.
Answer: d. The definition is diversifying into an industry unrelated to the current industry, which is what Brook Ltd. is doing with Smallfirm. Choice a) is achieved by expanding operations into other geographic locations and/or increasing the range of products and services offered to current markets. Choice b) is achieved by growing through existing channels in the existing industry. Choice c) is often used to combine resources and expertise needed to develop a new product or technology. Choice e) is achieved by taking over a function previously provided by a supplier or distributor.
114.
Answer: a. It is best to pay a capital dividend before the sale of the second property as the loss will reduce the balance in the capital dividend account (CDA) that can be paid out tax free to shareholders. Answer: e. Breakeven Revenue = FC/Contribution Margin % = $225,000/(55%-3%) = $432,692 = $432,700 rounded Answer: b. ROI = income / investment 25% = income / $300,000
115.
116.
income = $75,000
Income = (revenue - inventory cost) - FC - commission $75,000 = Revenue x 55% - $225,000 - 3% x Revenue $300,000 = 0.52 x Revenue Revenue = $576,923 = $577,000 rounded
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CMA Canada
Supplement of Formulae and Tables Formulae

1. CAPITAL STRUCTURE a) After-Tax Marginal Cost of Debt: (1 T)I kb = k(1 T) or F where k = interest rate T = corporate tax rate I = annual interest payment on debt F = face value of debt Cost of Preferred Shares:
kp = Dp NPp
b)
where
Dp = stated annual dividend payment on shares NPp = net proceeds on preferred share issue
c)
Cost of Common Equity: i) Cost of Common Shares (Capitalization of Dividends with Constant Growth Rate):
ke = D 1 +g NP e
where
D1 = dividend expected for period 1 NPe = net proceeds on common share issue g = annual long-term dividend growth rate
D 1 +g P e
ii)
Cost of Retained Earnings:

kre = re =
where Pe re iii)
= market price of a share = expected return on common equity
Capital Asset Pricing Model:

Rj = Rf + j Rm Rf
where
Rj Rf Rm j
= expected rate of return on security j = risk-free rate = expected return for the market portfolio = beta coefficient for security j (measure of systematic risk)
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d)
Weighted Average Cost of Capital:

E B P k = kb + kp + ke V V V
where
B P E V
= amount of debt outstanding = amount of preferred shares outstanding = amount of common equity outstanding = 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 = Ctd 2 + k CdT 1 + 0.5k 2 (1 + k ) = (d + k ) 1 + k (d + k )
b)
Present Value of Total Tax Shield from CCA for an Asset that is Not Newly Acquired
dT Present Value = UCC d +k

c) Present Value of Total Tax Shield Lost From Salvage Present Value =
Sn Sn dT dT or , depending on cash n n 1 (1 + k ) d + k (1 + k ) d + k flow assumptions
Notation for above formulae: C = net initial investment UCC = undepreciated capital cost of asset = salvage value of asset realized at end of year n Sn T = corporate tax rate k = discount rate or time value of money d = maximum rate of capital cost allowance n = total life of investment
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CMA Canada
Table 1 Present Value of One Dollar Due at the End of n Years

P= 1
(1+ i) n
6% 0.943 .890 .840 .792 .747 .705 .665 .627 .592 .558 .527 .497 .469 .442 .417 .394 .371 .350 .331 .312 .294 .278 .262 .247 .233 7% 0.935 .873 .816 .763 .713 .666 .623 .582 .544 .508 .475 .444 .415 .388 .362 .339 .317 .296 .277 .258 .242 .226 .211 .197 .184 8% 0.926 .857 .794 .735 .681 .630 .583 .540 .500 .463 .429 .397 .368 .340 .315 .292 .270 .250 .232 .215 .199 .184 .170 .158 .146 9% 10% 0.917 0.909 .842 .826 .772 .751 .708 .683 .650 .621 .596 .564 .547 .513 .502 .467 .460 .424 .422 .386 .388 .350 .356 .319 .326 .290 .299 .263 .275 .239 .252 .218 .231 .198 .212 .180 .194 .164 .178 .149 .164 .135 .150 .123 .138 .112 .126 .102 .116 .092
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1% 0.990 .980 .971 .961 .951 .942 .933 .923 .914 .905 .896 .887 .879 .870 .861 .853 .844 .836 .828 .820 .811 .803 .795 .788 .780
2% 0.980 .961 .942 .924 .906 .888 .871 .853 .837 .820 .804 .788 .773 .758 .743 .728 .714 .700 .686 .673 .660 .647 .634 .622 .610
3% 0.971 .943 .915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 .587 .570 .554 .538 .522 .507 .492 .478
4% 0.962 .925 .889 .855 .822 .790 .760 .731 .703 .676 .650 .625 .601 .577 .555 .534 .513 .494 .475 .456 .439 .422 .406 .390 .375
5% 0.952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 .436 .416 .396 .377 .359 .342 .326 .310 .295
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Table 1 (contd) Present Value of One Dollar Due at the End of n Years
P= 1
(1+ i) n
16% 0.862 .743 .641 .552 .476 .410 .354 .305 .263 .227 .195 .168 .145 .125 .108 .093 .080 .069 .060 .051 .044 .038 .033 .028 .024 17% 0.855 .731 .624 .534 .456 .390 .333 .285 .243 .208 .178 .152 .130 .111 .095 .081 .069 .059 .051 .043 .037 .032 .027 .023 .020 18% 0.847 .718 .609 .516 .437 .370 .314 .266 .225 .191 .162 .137 .116 .099 .084 .071 .060 .051 .043 .037 .031 .026 .022 .019 .016 19% 0.840 .706 .593 .499 .419 .352 .296 .249 .209 .176 .148 .124 .104 .088 .074 .062 .052 .044 .037 .031 .026 .022 .018 .015 .013 20% 0.833 .694 .579 .482 .402 .335 .279 .233 .194 .162 .135 .112 .093 .078 .065 .054 .045 .038 .031 .026 .022 .018 .015 .013 .010
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
11% 0.901 .812 .731 .659 .593 .535 .482 .434 .391 .352 .317 .286 .258 .232 .209 .188 .170 .153 .138 .124 .112 .101 .091 .082 .074
12% 0.893 .797 .712 .636 .567 .507 .452 .404 .361 .322 .287 .257 .229 .205 .183 .163 .146 .130 .116 .104 .093 .083 .074 .066 .059
13% 0.885 .783 .693 .613 .543 .480 .425 .376 .333 .295 .261 .231 .204 .181 .160 .142 .125 .111 .098 .087 .077 .068 .060 .053 .047
14% 0.877 .769 .675 .592 .519 .456 .400 .351 .308 .270 .237 .208 .182 .160 .140 .123 .108 .095 .083 .073 .064 .056 .049 .043 .038
15% 0.870 .756 .658 .572 .497 .432 .376 .327 .284 .247 .215 .187 .163 .141 .123 .107 .093 .081 .070 .061 .053 .046 .040 .035 .030
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CMA Canada
P= 1
(1+ i) n
26% 0.794 .630 .500 .397 .315 .250 .198 .157 .125 .099 .079 .062 .050 .039 .031 .025 .020 .016 .012 .010 .008 .006 .005 .004 .003 27% 0.787 .620 .488 .384 .303 .238 .188 .148 .116 .092 .072 .057 .045 .035 .028 .022 .017 .014 .011 .008 .007 .005 .004 .003 .003 28% 0.781 .610 .477 .373 .291 .227 .178 .139 .108 .085 .066 .052 .040 .032 .025 .019 .015 .012 .009 .007 .006 .004 .003 .003 .002 29% 0.775 .601 .466 .361 .280 .217 .168 .130 .101 .078 .061 .047 .037 .028 .022 .017 .013 .010 .008 .006 .005 .004 .003 .002 .002 30% 0.769 .592 .455 .350 .269 .207 .159 .123 .094 .073 .056 .043 .033 .025 .020 .015 .012 .009 .007 .005 .004 .003 .002 .002 .001
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
21% 0.826 .683 .564 .467 .386 .319 .263 .218 .180 .149 .123 .102 .084 .069 .057 .047 .039 .032 .027 .022 .018 .015 .012 .010 .009
22% 0.820 .672 .551 .451 .370 .303 .249 .204 .167 .137 .112 .092 .075 .062 .051 .042 .034 .028 .023 .019 .015 .013 .010 .008 .007
23% 0.813 .661 .537 .437 .355 .289 .235 .191 .155 .126 .103 .083 .068 .055 .045 .036 .030 .024 .020 .016 .013 .011 .009 .007 .006
24% 0.806 .650 .524 .423 .341 .275 .222 .179 .144 .116 .094 .076 .061 .049 .040 .032 .026 .021 .017 .014 .011 .009 .007 .006 .005
25% 0.800 .640 .512 .410 .328 .262 .210 .168 .134 .107 .086 .069 .055 .044 .035 .028 .023 .018 .014 .012 .009 .007 .006 .005 .004
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P= 1
(1+ i) n
36% 0.735 .541 .398 .292 .215 .158 .116 .085 .063 .046 .034 .025 .018 .014 .010 .007 .005 .004 .003 .002 .002 .001 .001 .001 .001 37% 0.730 .533 .389 .284 .207 .151 .110 .081 .059 .043 .031 .023 .017 .012 .009 .006 .005 .003 .003 .002 .001 .001 .001 .001 .001 38% 0.725 .525 .381 .276 .200 .145 .105 .076 .055 .040 .029 .021 .015 .011 .008 .006 .004 .003 .002 .002 .001 .001 .001 .001 .001 39% 0.719 .518 .372 .268 .193 .139 .100 .072 .052 .037 .027 .019 .014 .010 .007 .005 .004 .003 .002 .001 .001 .001 .001 .001 .001 40% 0.714 .510 .364 .260 .186 .133 .095 .068 .048 .035 .025 .018 .013 .009 .006 .005 .003 .002 .002 .001 .001 .001 .001 .001 .001
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
31% 0.763 .583 .445 .340 .259 .198 .151 .115 .088 .067 .051 .039 .030 .023 .017 .013 .010 .008 .006 .005 .003 .003 .002 .002 .001
32% 0.758 .574 .435 .329 .250 .189 .143 .108 .082 .062 .047 .036 .027 .021 .016 .012 .009 .007 .005 .004 .003 .002 .002 .001 .001
33% 0.752 .565 .425 .320 .240 .181 .136 .102 .077 .058 .043 .033 .025 .018 .014 .010 .008 .006 .004 .003 .003 .002 .001 .001 .001
34% 0.746 .557 .416 .310 .231 .173 .129 .096 .072 .054 .040 .030 .022 .017 .012 .009 .007 .005 .004 .003 .002 .002 .001 .001 .001
35% 0.741 .549 .406 .301 .223 .165 .122 .091 .067 .050 .037 .027 .020 .015 .011 .008 .006 .005 .003 .002 .002 .001 .001 .001 .001
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CMA Canada
Table 2 Present Value of One Dollar Per Year n Years at i%

1 1 1+ i n ) ( P = n i
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1% 0.990 1.970 2.941 3.902 4.854 5.796 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 18.857 19.661 20.456 21.244 22.023
2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 17.011 17.658 18.292 18.914 19.523
3% 0.971 1.914 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.753 14.324 14.877 15.415 15.937 16.444 16.936 17.413
4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 14.029 14.451 14.857 15.247 15.622
5% 0.952 1.859 2.723 3.547 4.330 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 12.821 13.163 13.489 13.799 14.094
6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 11.764 12.042 12.303 12.550 12.783
7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 10.836 11.061 11.272 11.469 11.654
8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.224 8.560 8.851 9.122 9.372 9.604 9.818 10.017 10.201 10.371 10.529 10.675
9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 9.292 9.442 9.580 9.707 9.823
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 8.649 8.772 8.883 8.985 9.077
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Table 2 (contd) Present Value of One Dollar Per Year n Years at i%

1 1 1+ i n ) ( P = n i
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 8.075 8.176 8.266 8.348 8.422
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 7.562 7.645 7.718 7.784 7.843
13% 0.885 1.668 2.361 2.975 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.303 6.462 6.604 6.729 6.840 6.938 7.025 7.102 7.170 7.230 7.283 7.330
14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 6.687 6.743 6.792 6.835 6.873
15% 0.870 1.626 2.283 2.855 3.352 3.785 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.725 5.847 5.954 6.047 6.128 6.198 6.259 6.313 6.359 6.399 6.434 6.464
16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 4.344 4.607 4.833 5.029 5.197 5.342 5.468 5.576 5.669 5.749 5.818 5.878 5.929 5.973 6.011 6.044 6.073 6.097
17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.585 5.628 5.665 5.696 5.723 5.747 5.766
18% 0.848 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.384 5.410 5.432 5.451 5.467
19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.487 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101 5.127 5.149 5.167 5.182 5.195
20% 0.833 1.528 2.107 2.589 2.991 3.326 3.605 3.837 4.031 4.193 4.327 4.439 4.533 4.611 4.676 4.730 4.775 4.812 4.844 4.870 4.891 4.909 4.925 4.937 4.948
88
CMA Canada

1 1 1+ i n ) ( P = n i
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
21% 0.826 1.510 2.074 2.540 2.926 3.245 3.508 3.726 3.905 4.054 4.177 4.279 4.362 4.432 4.489 4.536 4.576 4.608 4.635 4.657 4.675 4.690 4.703 4.713 4.721
22% 0.820 1.492 2.042 2.494 2.864 3.167 3.416 3.619 3.786 3.923 4.035 4.127 4.203 4.265 4.315 4.357 4.391 4.419 4.442 4.460 4.476 4.488 4.499 4.507 4.514
23% 0.813 1.474 2.011 2.448 2.804 3.092 3.327 3.518 3.673 3.799 3.902 3.985 4.053 4.108 4.153 4.189 4.219 4.243 4.263 4.279 4.292 4.302 4.311 4.318 4.323
24% 0.807 1.457 1.981 2.404 2.745 3.021 3.242 3.421 3.566 3.682 3.776 3.851 3.912 3.962 4.001 4.033 4.059 4.080 4.097 4.110 4.121 4.130 4.137 4.143 4.147
25% 0.800 1.440 1.952 2.362 2.689 2.951 3.161 3.329 3.463 3.571 3.656 3.725 3.780 3.824 3.859 3.887 3.910 3.928 3.942 3.954 3.963 3.971 3.976 3.981 3.985
26% 0.794 1.424 1.923 2.320 2.635 2.885 3.083 3.241 3.366 3.465 3.543 3.606 3.656 3.695 3.726 3.751 3.771 3.786 3.799 3.808 3.816 3.822 3.827 3.831 3.834
27% 0.787 1.407 1.896 2.280 2.583 2.821 3.009 3.156 3.273 3.364 3.437 3.493 3.538 3.573 3.601 3.623 3.640 3.654 3.664 3.673 3.679 3.684 3.689 3.692 3.694
28% 0.781 1.392 1.868 2.241 2.532 2.759 2.937 3.076 3.184 3.269 3.335 3.387 3.427 3.459 3.483 3.503 3.518 3.529 3.539 3.546 3.551 3.556 3.559 3.562 3.564
29% 0.775 1.376 1.842 2.203 2.483 2.700 2.868 2.999 3.100 3.178 3.239 3.286 3.322 3.351 3.373 3.390 3.403 3.413 3.421 3.427 3.432 3.436 3.438 3.441 3.442
30% 0.769 1.361 1.816 2.166 2.436 2.643 2.802 2.925 3.019 3.092 3.147 3.190 3.223 3.249 3.268 3.283 3.295 3.304 3.311 3.316 3.320 3.323 3.325 3.327 3.329
CMA Canada
89

1 1 1+ i n ) ( P = n i
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
31% 0.763 1.346 1.791 2.131 2.390 2.588 2.739 2.854 2.942 3.009 3.060 3.100 3.129 3.152 3.170 3.183 3.193 3.201 3.207 3.211 3.215 3.217 3.219 3.221 3.222
32% 0.758 1.332 1.766 2.096 2.345 2.534 2.678 2.786 2.868 2.930 2.978 3.013 3.040 3.061 3.076 3.088 3.097 3.104 3.109 3.113 3.116 3.118 3.120 3.121 3.122
33% 0.752 1.317 1.742 2.062 2.302 2.483 2.619 2.721 2.798 2.855 2.899 2.931 2.956 2.974 2.988 2.999 3.007 3.012 3.017 3.020 3.023 3.025 3.026 3.027 3.028
34% 0.746 1.303 1.719 2.029 2.260 2.433 2.562 2.658 2.730 2.784 2.824 2.853 2.876 2.892 2.905 2.914 2.921 2.926 2.930 2.933 2.935 2.937 2.938 2.939 2.939
35% 0.741 1.289 1.696 1.997 2.220 2.385 2.508 2.598 2.665 2.715 2.752 2.779 2.799 2.814 2.826 2.834 2.840 2.844 2.848 2.850 2.852 2.853 2.854 2.855 2.856
36% 0.735 1.276 1.674 1.966 2.181 2.339 2.455 2.540 2.603 2.650 2.683 2.708 2.727 2.740 2.750 2.758 2.763 2.767 2.770 2.772 2.773 2.775 2.775 2.776 2.777
37% 0.730 1.263 1.652 1.936 2.143 2.294 2.404 2.485 2.544 2.587 2.618 2.641 2.658 2.670 2.679 2.685 2.690 2.693 2.696 2.698 2.699 2.700 2.701 2.701 2.702
38% 0.725 1.250 1.630 1.906 2.106 2.251 2.356 2.432 2.487 2.527 2.556 2.576 2.592 2.603 2.611 2.616 2.621 2.624 2.626 2.627 2.629 2.629 2.630 2.630 2.631
39% 0.719 1.237 1.609 1.877 2.070 2.209 2.308 2.380 2.432 2.469 2.496 2.515 2.529 2.539 2.546 2.551 2.555 2.557 2.559 2.561 2.562 2.562 2.563 2.563 2.563
40% 0.714 1.225 1.589 1.849 2.035 2.168 2.263 2.331 2.379 2.414 2.438 2.456 2.469 2.478 2.484 2.489 2.492 2.494 2.496 2.497 2.498 2.499 2.499 2.499 2.499
90
CMA Canada

2010 Sample Entrance Examination: Notes

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2010 Sample Entrance Examination

Updated June 2010