CIA Unit 11

An incoming order calls for delivery of 2,000 banana hooks in 2 weeks. The company has no finished banana hooks in current inventory. If no safety stocks are required for inventory, what are the company's net requirements for swag hooks and screws needed to fill this order? Swag Hooks Wood Screws

1,700 3,600 This answer is correct. The company needs 2,000 banana hooks and therefore 2,000 swag hooks (1 × 2,000) and 4,000 wood screws (2 × 2,000). Given that 300 swag hooks and 400 wood screws are on hand, the company must obtain 1,700 swag hooks (2,000 - 300) and 3,600 wood screws (4,000 - 400).

Aaron Co's vendor will be offering discounts next year. Which of the following credit terms offered by the vendor is most beneficial to Aaron?

5/20, net 60. This answer is correct. Credit terms are expressed in these terms: "Discount percentage"/ "Pay by date to receive discount rate," net "Balance must be paid by date." The term 5/20, net 60 means that the customer may either (1) subtract 5% of the invoice amount if it is paid within 20 days or (2) pay the entire balance by the 60th day. This credit term offers the greatest discount percentage and longest payment period among the four options. Thus, 5/20, net 60 is the best choice.

Which of the following changes in accounting policies resulting from a significant change in the expected pattern of economic benefit will increase profit?

A change from FIFO to weighted-average inventory valuation when costs are falling.

An inventory planning method that minimizes inventories by arranging to have raw materials and subcomponents arrive immediately preceding their use is called

A just-in-time inventory system.

Which one of the following provides a spontaneous source of financing for a firm?

Accounts payable. This answer is correct. Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. Because of its ease in use, trade credit is the largest source of short-term financing for many firms, both large and small.

The average collection period for a firm measures the number of days

After a typical credit sale is made until the firm receives the payment.

Which of the following is used in determining the economic order quantity (EOQ)?

Calculus

The main reason that a firm would strive to reduce the number of days sales outstanding is to increase

Cash. This answer is correct. A low days sales outstanding value means that it takes a company fewer days to collect accounts receivables. A company that collects accounts receivables quickly will have an increase in cash.

Fact Pattern: An entity had the following opening and closing inventory balances during the current year: 1/1 12/31 Total inventory US $415,000 US $565,000 If the entity's raw materials inventory as of December 31 of the current year (ending inventory) was miscounted and the true figure was higher than US $130,000, one effect on the year-end financial statements would be that

Cost of goods sold is overstated. If the ending inventory of materials is understated, materials used is overstated, cost of goods produced is overstated, and cost of goods sold is overstated.

DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize the revenue from these 1,000 units when

DEF sells the goods and informs ABC of the sale.

A production team has been together for several years and has worked well together. However, severe arguments have recently occurred between two members of the group, and other members have begun to take sides. This problem has had a negative effect on production performance. The best leadership style for the manager in this situation is

Directive. This answer is correct. Directive leadership provides highest subordinate satisfaction when a team encounters substantive internal conflict. Thus, directive leadership is the appropriate complement to the environmental factors. The leader should intervene to compensate for the stress and strife in the workplace.

Which of the following best describes a comprehensive system that processes and monitors electronic transactions, communications, and business interactions?

Electronic business (e-business). Electronic business (e-business) is broadly defined as all methods of conducting business electronically. E-business may occur via online transactions on public networks and email.

Which inventory pricing method generally approximates current cost for each of the following? Ending Cost of Inventory Goods Sold

FIFO - ending inventory LIFO - COGS

The chief audit executive is attempting to standardize the engagement procedures used throughout the organization. Many of the internal auditors are employed at distant locations. The CAE wants to select a process that will encourage input from a cross section of internal auditors, facilitate differing perspectives, and encourage acceptance of changes that might result from the standardization. The decision-making process that will most effectively achieve the CAE's goals is

Group-aided decision making.

Current liabilities include which of the following items? 1. Obligations due on demand within 1 year 2. Obligations callable at any time by the creditor 3. Obligations that will be replaced by other current liabilities

I and III only.

A major benefit of computer-integrated manufacturing (CIM) is

Increased flexibility.

Which must be part of any risk model involving inventory valuation?

Inventory shrinkage expense.

he purpose of the economic order quantity model is to

Minimize the sum of the order costs and the holding costs.

An organization would usually offer credit terms of 2/10, net 30 when

Most competitors are offering the same terms, and the organization has a shortage of cash.

An organization would usually offer credit terms of 2/10, net 30 when

Most competitors are offering the same terms, and the organization has a shortage of cash. Because these terms involve an annual interest cost of over 36%, a company would not offer them unless it desperately needed cash. Also, credit terms are typically somewhat standardized within an industry. Thus, if most companies in the industry offer similar terms, a firm will likely be forced to match the competition or lose market share.

The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances

Permanent current assets with short-term debt.

With regard to inventory management, an increase in the frequency of ordering will normally

Reduce total carrying costs. This answer is correct. If orders are placed more frequently, fewer items are carried and carrying costs fall.

The effect of just-in-time production approaches

Reduces the cost of implementing strategies. This answer is correct. A just-in-time (JIT) inventory system can reduce the cost of production by lowering or eliminating inventory costs.

A major justification for investments in computer-integrated manufacturing (CIM) projects is

Reduction in the costs of spoilage, reworked units, and scrap.

In an economic order quantity (EOQ) model, both the costs per order and the holding costs are estimates. If those estimates are varied to determine how much the changes affect the optimal EOQ, such an analysis would be called a

Sensitivity analysis.

According to Hersey and Blanchard's situational theory, which leadership style is used when followers are closely supervised?

Telling.

The difference between a tall organization structure and a flat organization structure is that, in the former,

The communication process takes longer and is of poorer quality. Flat organizational structures have relatively few levels from top to bottom. Tall organizational structures have many levels between top and bottom. Flat structures have the advantages of fast information flow from top to bottom of the organization and increased employee satisfaction.

Why would an entity maintain a compensating cash balance?

To pay for banking services.

Why would an entity maintain a compensating cash balance?

To pay for banking services. This answer is correct. The compensating cash balance is the money left in a checking account in the bank in order to compensate the bank for services it provides.

What is the cost of ending inventory given the following factors? Beginning inventory US $ 5,000 Total production costs 60,000 Cost of goods sold 55,000

US $10,000 This answer is correct. Beginning inventory, plus purchases (or other inventory additions), minus cost of goods sold, equals ending inventory. Thus, ending inventory equals US $10,000 ($5,000 + $60,000 - $55,000).

A working capital method that delays the outflow of cash is

a draft

If ending inventory is underestimated due to an error in the physical count of items on hand, the cost of goods sold for the period will be <List A> and net earnings will be <List B>. List A List B

list A - overestimated list B - underestimated

An aging of accounts receivable measures the

Amount of receivables that have been outstanding for given lengths of time.

All of the following are elements included in the economic order quantity (EOQ) except -Annual demand. -Carrying cost. -Variable cost per order.

Average level of inventory.

A firm is changing its credit terms from net 30 to 2/10, net 30. The least likely effect of this change would be a(n)

Increase in short-term borrowings.

As a company becomes more conservative in its working capital policy, it tends to have a(n)

Increase in the ratio of current assets to current liabilities.

Assuming other factors are constant, which action is the most appropriate when carrying costs of inventory are increasing significantly?

Increase total orders.

When the economic order quantity (EOQ) decision model is employed, the <List A> are being offset or balanced by the <List B>.

Ordering costs list A Carrying costs list B

One of the elements included in the economic order quantity (EOQ) formula is

Yearly demand. The basic EOQ formula is used to minimize the total of inventory carrying and ordering costs. The basic EOQ equals the square root of a fraction consisting of a numerator equal to the product of twice the unit periodic demand and the variable cost per order and a denominator equal to the unit periodic carrying cost.

The EOQ (economic order quantity) model calculates the cost-minimizing quantity of a product to order, based on a constant annual demand, carrying costs per unit per annum, and cost per order. What is the EOQ if the annual demand for a product is 5,000 units, carrying costs are US $1 per item per annum, and the cost of placing an order is US $10?

316 (2 x $10 x 5,000)/($1) Square root of 2ad/k

The market value of RST's ordinary shares at the end of Year 6 was US $100 per share. What is RST's current ratio at the end of Year 6?

4.5 to 1. This answer is correct. The current ratio equals current assets divided by current liabilities. At the end of Year 6, it was 4.5 to 1 (US $54,000 ÷ $12,000).

An organization sells a product for which demand is uncertain. Management would like to ensure that there is sufficient inventory on hand during periods of high demand so that it does not lose sales (and customers). To do so, the organization should

Keep a safety stock. This answer is correct. Safety stock is inventory maintained to reduce the number of stockouts resulting from higher-than-expected demand during lead time. Maintaining a safety stock avoids the costs of stockouts, e.g., lost sales and customer dissatisfaction.

The most likely reason for employee resistance to organizational change is

Lack of needed skills.

An early model of leader behavior was developed at Ohio State University. According to that model, which behavior pattern indicates a passive leader?

Low consideration and low structure.

The reliability and integrity of all critical information of an organization, regardless of the media in which the information is stored, is the responsibility of

Management.

Which of the following effects would a lockbox most likely provide for receivables management?

Minimized collection float.

A retail company analyst is comparing North Company to South Company. The analyst notes that receivables for both companies' private label credit cards have significantly increased balances in the current year. North's customers' monthly payment averaged 15% of their balances, while South's customers' monthly payment averaged 22% of their balances. What should the analyst conclude?

North's customers may be having a harder time paying down their credit card debt than South's customers.

An internal auditor performs an analytical review by comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The internal auditor notes a significant increase in the gross margin at one division. The internal auditor does some preliminary investigation and also notes that no changes occurred in products, production methods, or divisional management during the year. The most likely cause of the increase in gross margin is a(n)

Overstatement of year-end inventory. An overstatement of year-end inventory results in an increase in the gross margin (sales - cost of sales). Overstating ending inventory understates cost of sales.

A company, the largest provider of mental health services in its area, was encountering personnel problems. The company's facilities housed many clients, but funding never seemed adequate to hire quality, live-in staff. A new administrator is determined to facilitate long-term employment of the best possible care-giving staff. Besides paying better wages, the administrator believes that the staff should be strongly motivated by the work itself. According to Maslow's hierarchy of needs, the best employees would have a need for

Self-actualization. This answer is correct. Self-actualization is the highest level need in Maslow's hierarchy. Self-actualization refers to the desire to become what one is capable of becoming, to realize one's potential and accomplish to the limit of one's ability. It becomes important only after the lower level needs have been met. The work itself becomes the motivator after all lower level needs are satisfied.

Which one of the following would not be considered a carrying cost associated with inventory?

Shipping costs. This answer is correct. Carrying costs are incurred to hold inventory. Examples include such costs as warehousing, insurance, the cost of capital invested in inventories, inventory taxes, and the cost of obsolescence and spoilage. Shipping costs and the initial cost of the inventory are the purchase costs.

A company had total sales of US $500,000 in the first quarter of the year, which was the same amount as it recorded in the first quarter of the prior year. However, its accounts receivable balance increased from US $230,000 last year to US $300,000 this year. Which one of the following is the most likely explanation for the increase in the accounts receivable balance?

The company discontinued the use of factoring in the current year.

A company had total sales of US $500,000 in the first quarter of the year, which was the same amount as it recorded in the first quarter of the prior year. However, its accounts receivable balance increased from US $230,000 last year to US $300,000 this year. Which one of the following is the most likely explanation for the increase in the accounts receivable balance?

The company discontinued the use of factoring in the current year. This answer is correct. Factoring is a transfer of receivables to a third party (a factor) who assumes the responsibility of collection. The factor often operates more efficiently than its clients because of the specialized nature of its services. If the company stopped selling accounts receivable to the factor, there would be more accounts receivable in the current year.

A manufacturer is considering using bar code identification for recording information on parts used by the manufacturer. A reason to use bar codes rather than other means of identification is to ensure that

The movement of parts is easily and quickly recorded. This answer is correct. Bar code scanning is a form of optical character recognition. Bar codes are a series of bars of different widths that represent critical information about the item.

An established firm sells computer hardware, software, and services. The firm is considering a change in its credit policy. It has been determined that such a change would not change the payment patterns of the current customers. To determine whether such a change would be beneficial, the firm has identified the proposed new credit terms, the expected additional sales, the expected contribution margin on the sales, the expected bad debt losses, and the investment in additional receivables and the period of the investment. What additional information, if any, does the firm require to determine the profitability of the proposed new policy as compared to the current credit policy?

The opportunity cost of funds. This answer is correct Opportunity cost is the maximum benefit forgone by choosing an investment. Thus, the missing relevant information is the best alternative return on the funds to be invested in receivables.

A perpetual inventory system uses a minimum quantity on hand to initiate purchase ordering procedures for restocking. In reviewing the appropriateness of the minimum quantity level established by the stores department, the internal auditor is least likely to consider

The safety stock level.

If certain goods owned by an entity were not recorded as a purchase and were not counted in ending inventory, in error, then

There will be no effect on cost of goods sold or profit for the period.

Fact Pattern: Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units, which results in a total average inventory of 1,750 units. Annual inventory holding costs equal 25% of the average inventory. It costs the company US $4 per unit to buy the product. It costs the company US $150 to place a detailed order, and the annual demand for the product is 48,000 units.

US $1,750 This answer is correct. Given that demand is constant and the EOQ is 2,500 units, the average inventory without regard to safety stock is 1,250 units (2,500 ÷ 2). Adding safety stock results in an average of 1,750 units (1,250 + 500). Given also that annual holding costs are 25% of average inventory and that unit cost is US $4, total annual holding cost is US $1,750 [(1,750 units × US $4) × 25%].

An entity sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of US $5 per unit, resulting in an average inventory of 250 units. No safety stocks are held. If the entity has a cost of capital of 12%, its annual opportunity cost of carrying inventory is

US $150 This answer is correct. The annual opportunity cost of carrying inventory equals the average inventory level, times the per-unit purchase price, times the cost of capital. The average inventory level is the order quantity divided by 2. Thus, the annual opportunity cost of carrying inventory is US $150 [(500 units ÷ 2) × $5 × .12].

The following selected data from statements of financial position on December 31, Year 1, and December 31, Year 2, are presented below: 12/31/Year 1 12/31/Year 2 Trade accounts payable US $62,000 US $49,000 Additional information for Year 2: Cash payments to suppliers of merchandise were US $180,000. Beginning and ending inventory are equal. Purchases in Year 2 were

US $167,000 This answer is correct. Purchases equal ending accounts payable, plus payments to suppliers, minus beginning accounts payable. Purchases equal US $167,000 ($49,000 ending accounts payable + $180,000 payments to suppliers - $62,000 beginning accounts payable).

Which of the following effects would a lockbox most likely provide for receivables management?

Which of the following effects would a lockbox most likely provide for receivables management?

The most likely span of control to apply over 14 data-entry clerks who do essentially the same job and work in the same office would be

Wide. This answer is correct. Underlying variables influence the number of subordinates a manager can supervise. In general, if jobs are similar, procedures are standardized, and physical dispersion is minimized, a wide span of control is most effective.

An entity started in Year 1 with 200 scented candles on hand at a cost of US $3.50 each. These candles sell for US $7.00 each. The following schedule represents the purchases and sales of candles during Year 1: Transaction Quantity Unit Number Purchased Cost (Goods on-hand) 200 US $3.50 1 250 3.30 2 200 3.10 3 350 3.00 If the entity uses periodic FIFO inventory pricing and 750 units were sold, the gross profit for Year 1 is

US $2,805 This answer is correct. The FIFO method assumes that the first goods purchased are the first goods sold and that ending inventory consists of the latest purchases. Moreover, whether the inventory system is periodic or perpetual does not affect FIFO measurement. The cost of goods sold is US $2,445 {beginning inventory (200 units × $3.50) + purchases [(250 units × $3.30) + (200 units × $3.10) + (350 units × $3.00)] - ending inventory (250 units × $3.00)}. Thus, the gross profit for Year 1 using FIFO is US $2,805 [sales (750 units × $7.00) - cost of goods sold of $2,445].

Fact Pattern: Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units, which results in a total average inventory of 1,750 units. Annual inventory holding costs equal 25% of the average inventory. It costs the company US $4 per unit to buy the product. It costs the company US $150 to place a detailed order, and the annual demand for the product is 48,000 units. Total inventory ordering costs per year equal

US $2,880 This answer is correct. Total annual demand is 48,000 units. Total annual ordering costs therefore equal US $2,880 [US $150 cost per order × (48,000 units ÷ 2,500 EOQ)].

dditional information: The entity had no opening inventory. The items sold on March 15 were purchased on January 12. The items sold on July 8 were purchased on May 5. The per-unit cost of the goods sold on July 8 under the specific identification method of inventory measurement is

US $2.20 This answer is correct. The 500 units sold on July 8 were purchased on March 15 at a cost of US $2.20 per unit. The per-unit cost of these units is therefore US $2.20. Under the specific identification method, the cost of an item reflects the actual physical flow of goods rather than the approximation provided by other inventory measurement methods.

An entity had 1,000 units of opening inventory that cost US $10 per unit. On May 1, 1,000 units were purchased at a cost of US $11 each, and on September 1 another 1,000 units were purchased at a cost of US $12 each. If 2,000 units were sold during the year, what is cost of goods sold if the FIFO method of inventory measurement is used?

US $21,000 This answer is correct. Under FIFO, the first items purchased are presumed to be the first sold. Given that 3,000 units were available and 2,000 units were sold, FIFO cost of goods sold must have been US $21,000 [(1,000 × $10) BI + (1,000 × $11) May 1 purchase].

On January 1, a company has no opening inventory balance. The following purchases are made during the year: Units Unit Purchased Cost January 1 5,000 US $10.00 April 1 5,000 9.00 July 1 5,000 8.00 October 1 5,000 7.50 There are 15,000 units in inventory on December 31. If the company uses the last-in, first-out (LIFO) method of inventory valuation, cost of goods sold for the year will be

US $37,500 This answer is correct. A total of 20,000 units was available for sale (0 beginning inventory + 20,000 purchased during year). Because 15,000 remain in ending inventory, 5,000 were sold (20,000 available - 15,000 remaining). Under the LIFO method, the units sold were assumed to be purchased in October. Cost of goods sold for the year therefore equaled US $37,500 (5,000 units × $7.50).

On January 1, a company has no opening inventory balance. The following purchases are made during the year: Units Unit Purchased Cost January 1 5,000 US $10.00 April 1 5,000 9.00 July 1 5,000 8.00 October 1 5,000 7.50 There are 5,000 units in inventory on December 31. If the company uses the first-in, first-out (FIFO) method of inventory valuation, the ending inventory balance will be

US $37,500 This answer is correct. Under the first-in, first-out (FIFO) inventory method, the 5,000 units in ending inventory are assumed to have been the most recent items purchased. The cost of the most recent 5,000 units purchased is US $37,500 (5,000 units × $7.50).

If the company uses the first-in, first-out (FIFO) method of inventory measurement, the per-unit cost of the goods sold on May 1 is

US $5.00 This answer is correct. Under FIFO, the first items purchased are presumed to be the first sold. Given that the first 10,000 items purchased cost US $5.00 per unit, the FIFO cost per unit of the first 3,000 items sold also must be US $5.00.

A service entity's working capital at the beginning of January was US $70,000. The following transactions occurred during January: Purchased office equipment for cash US $ 2,000 Paid short-term bank loan 6,500 Paid salaries 10,000 What is the amount of working capital at the end of January?

US $58,000 This answer is correct. Working capital is the excess of total current assets (CA) over total current liabilities (CL). Thus, working capital at the end of January equals US $58,000 computed as follows: 70,000-2,000-10,000 =58,000

An entity purchased a machine on January 1, Year 1, for US $1,000,000. The machine had an estimated useful life of 9 years and a residual value of US $100,000. The company uses straight-line depreciation. On December 31, Year 1, the machine was sold for US $835,000. The gain or loss that should be recorded on the disposal of this machine is

US $65,000 loss. This answer is correct. The accumulated depreciation was US $100,000 {[($1,000,000 historical cost - $100,000 residual value) ÷ 9 years estimated useful life] × 1 year}, so the carrying amount was US $900,000 ($1,000,000 - $100,000). Thus, the loss was US $65,000 ($900,000 carrying amount - $835,000 sales price).

A retail entity maintains a markup of 25% based on cost. The entity has the following information for the current year: Purchases of merchandise US $690,000 Freight-in on purchases 25,000 Sales at cost 720,000 Sales at retail 900,000 Ending inventory 80,000 Beginning inventory was

US $85,000 This answer is correct. Cost of goods sold for a period equals beginning inventory, plus purchases, plus freight-in, minus ending inventory. Given that sales reflect 125% of cost, cost of goods sold must equal US $720,000 ($900,000 sales ÷ 1.25). Consequently, the beginning inventory must have been US $85,000 ($720,000 COGS + $80,000 EI - $690,000 purchases - $25,000 freight-in).

An organization sells a product for which demand is certain and carrying costs are high. Management wants to minimize inventory costs. The organization should

Use a just-in-time (JIT) inventory system. This answer is correct. A JIT system reduces inventory on hand. Decreased inventory reduces the effect of increased carrying costs. Also, constant demand encourages small, equal shipments of inventory that occur when needed.