CIA Test Bank III

A device used to connect dissimilar networks is a: a. Gateway. b. Bridge. c. Router. d. Wiring concentrator.

a. Correct. A gateway, often implemented via software, translates between two or more different protocol families and makes connections between dissimilar networks possible. b. Incorrect. A bridge joins network segments so that they appear to be one physical segment. c. Incorrect. A router connects two or more network segments, such that the segments maintain their separate logical identities. d. Incorrect. A wiring concentrator accepts twisted-pair cabling from each of several personal computers in the same local area network

The most difficult aspect of using Internet resources is: a. Making a physical connection. b. Locating the best information source. c. Obtaining the equipment required. d. Getting authorization for access.

b. Correct. The most difficult aspect of using Internet resources is locating the best information given the large number of information sources. a. Incorrect. There is no limitation on the number of access ports. c. Incorrect. The only equipment required for accessing Internet resources is a computer, a modem, a telephone or other access line, and basic communication software. d. Incorrect. Organizations routinely provide Internet access to their employees, and individuals can obtain access through individual subscriptions to commercial service providers.

Which must be part of any risk model involving inventory valuation? a. Product warranty policies. b. Vendor pricing policies. c. Inventory shrinkage expense. d. Annual sales forecasts.

c. Correct. The amount of inventory loss through shrinkage directly impacts inventory valuation. Inventory shrinkage must be considered in risk models involving inventory valuation. a. Incorrect. Warranties are not a part of inventory valuation. b. Incorrect. Vendor pricing policies have no impact on inventory valuation until goods are purchased. The price at the time of purchase is the only price that matters in inventory valuation, and changes in vendor pricing policies would not necessarily impact valuation. d. Incorrect. Sales forecasts do not affect inventory valuation.

Use the following information to answer questions 39 through 40. 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 $10.00 April 1 5,000 $9.00 July 1 5,000 $8.00 October 1 5,000 $7.50 There are 10,000 units in inventory on December 31. 39. If the company uses the first-in, first-out (FIFO) method of inventory valuation, the ending inventory balance will be: a. $77,500. b. $85,000. c. $86,250. d. $95,000. 40. If the company uses the last-in, first-out (LIFO) method of inventory valuation, cost of goods sold for the year will be: a. $77,500. b. $86,250. c. $87,500. d. $95,000.

39. A 40. 40. A

A company has excess capacity in productionrelated fixed assets. If in a given year these fixed assets were being used to only 80 percent of capacity and the sales level in that year was $2,000,000, the full capacity sales level is: a. $1,600,000. b. $2,000,000. c. $2,500,000. d. $10,000,000.

C

The economic value of a firm will rise following an increase in: a. Net cash flow. b. Systematic risk. c. Unsystematic risk. d. The discount rate.

Correct. The value of the firm is given by the expression: N V = Σ CFt t=1 (1 + k) t where V is value, CF is net cash flow, k is the discount rate (cost of capital), and t is time. It follows that value will rise as CF increases. b. Incorrect. An increase in systematic (or market) risk will increase the overall cost of capital and thereby increase K, the discount rate. As a result, the value of the firm will fall. c. Incorrect. An increase in unsystematic (or firm-specific) risk is diversifiable and will have no affect on the value of the firm. d. Incorrect. An increase in the discount rate will reduce the value of the firm.

Use the following information to answer questions 51 through 52. A company harvests, packs, and ships all of its own produce. The company operates three packing lines. A summary of completed inventory costs is as follows: Packing-line employee salary expense $150,000 Packing-line supervision salary expense $90,000 Quality control salary expense $30,000 Packing crates expense $15,000 Electricity expense $3,000 Depreciation expense $66,000 51. Costs for the packing lines would be accumulated in part by: a. Recording payroll expense by employee job category. b. Computing depreciation expense. c. Producing monthly financial statements. d. Forecasting monthly material shortages. 52. At the end of the reporting period, 600,000 units had been packed and shipped. No inventory remained on hand. If the company used process costing, the cost per unit would be: a. $0.197 b. $0.275 c. $0.315 d. $0.590

51. a. Correct. Cost accumulation is performed by accounting systems that organize data by an appropriate catalog. Actual costs, rather than predicted costs, are accumulated. b. Incorrect. Computing depreciation expense would not organize data into categories. c. Incorrect. Producing financial statements would not organize data into categories. d. Incorrect. Forecasting material shortages would not organize data into categories. 52. d. Correct. Process costing is the average cost per unit produced, or total cost divided by the number of units. ($150,000 + 90,000 + 30,000 + 15,000 + 3,000 + 66,000 = $354,000/600,000 = $0.59).

Which of the following statements are correct regarding electronic mail security? I. Electronic mail can be no more secure than the computer system on which it operates. II. Confidential electronic mail messages should be stored on the mail server as electronic mail for the same length of time as similar paper-based documents. III. In larger organizations, there may be several electronic mail administrators and locations with varying levels of security. a. I only. b. I and II only. c. I and III only. d. II and III only.

C. I and III only I. Correct. This is a true statement. III. Correct. This is a true statement. II. Incorrect. A confidential mail message should not be retained on the server once the user has downloaded it to a personal computer.

A value-added tax is collected on the basis of: a. The difference between the value of a company's sales and the value of its purchases from other domestic companies. b. The difference between the selling price of real property and the price the company originally paid for the property. c. The value of a company's sales to related companies. d. The profit earned on a company's sales.

a. Correct. A value-added tax is collected on the basis of the value created by the firm. This is measured as the difference between the value of its outputs and its inputs. b. Incorrect. This is a description of how to calculate capital gains tax. c. Incorrect. This is a description of an internal transfer price. d. Incorrect. This is a description of how to calculate income tax.

A bank is developing a computer system to help evaluate loan applications. The information systems (IS) staff interview the bank's mortgage underwriters to extract their knowledge and decision processes for input into the computer system. The completed system should be able to process information the same as do the underwriters and make final recommendations regarding loan decisions. This approach is called: a. An expert system. b. A neural network. c. An intelligent agent. d. Fuzzy logic.

a. Correct. An expert system is a knowledge-intensive computer program that captures the expertise of a human in limited domains of knowledge. b. Incorrect. A neural network is software that attempts to emulate the processing patterns of the biological brain. c. Incorrect. Intelligent agents are software programs that use a built-in or learned knowledge base to carry out specific, repetitive, and predictable tasks for an individual user, business process, or software application. On the Internet, an intelligent agent is generally a program that gathers information or performs some other service without the user's immediate presence and on some regular schedule. d. Incorrect. Fuzzy logic is rule-based artificial intelligence that tolerates imprecision by using nonspecific terms called membership functions to solve problems

The process of adding resources to shorten selected activity times on the critical path in project scheduling is called: a. Crashing. b. The Delphi technique. c. ABC analysis. d. A branch-and-bound solution.

a. Correct. Crashing is the process of adding resources to shorten activity times on the critical path in project scheduling. b. Incorrect. The Delphi technique is a qualitative forecasting approach. c. Incorrect. ABC analysis is an inventory model. d. Incorrect. The branch-and-bound solution is an integer programming solution.

What language interface would a database administrator use to establish the structure of database tables? a. Data definition language. b. Data control language. c. Data manipulation language. d. Data query language.

a. Correct. Data definition language (DDL) is used to define (that is, determine) the database. b. Incorrect. Data control language (DCL) is used to specify privileges and security rules. c. Incorrect. Data manipulation language (DML) provides programmers with a facility to update the database. d. Incorrect. Data query language (DQL) is used for ad hoc queries.

The funds-needed line does not pass through the origin unless the firm has a: a. 100 percent dividend payout policy. b. Zero percent dividend payout policy. c. 100 percent sales growth rate. d. Zero percent sales growth rate.

a. Correct. If all earnings are paid out as dividends, then there is no earnings retention. All sales growth must be financed from spontaneous or external sources. b. Incorrect. The funds-needed line only passes through the origin in the special case where all earnings are paid out as dividends. c. Incorrect. The funds-needed line is a graph of the relationship between sales growth rates and additional financing needs. It is not drawn for just one point, or one level of sales growth. d. Incorrect. While the sales growth rate would be zero at the point where the funds-needed line passed through the origin, funds needed may be non-zero when sales growth is zero.

Both users and management approve the initial proposal, design specifications, conversion plan, and testing plan of an information system. This is an example of: a. Implementation controls. b. Hardware controls. c. Computer operations controls. d. Data security controls.

a. Correct. Implementation controls occur in the systems development process at various points to ensure that implementation is properly controlled and managed. b. Incorrect. Hardware controls ensure that computer hardware is physically secure and check for equipment malfunction. c. Incorrect. Computer operations controls apply to the work of the computer department and help ensure that programmed procedures are consistently and correctly applied to the storage and processing of data. d. Incorrect. Data security controls ensure that data files on either disk or tape are not subject to unauthorized access, change, or destruction.

If a high percentage of a firm's total costs is fixed, the firm's operating leverage will be: a. High. b. Low. c. Unchanged. d. Unable to be determined.

a. Correct. In business terminology, a high degree of operating leverage, other things held constant, means that a relatively small change in sales will result in a large change in operating income. Therefore, if a high percentage of a firm's total cost is fixed, the firm is said to have a high degree of operating leverage. b. Incorrect. The opposite is true; see answer "a". c. Incorrect. See answer "a". d. Incorrect. See answer "a".

If bonds are sold at a discount and the effective interest method of amortization is used, interest expense will: a. Increase from one period to another. b. Remain constant from one period to another. c. Equal the cash interest payment each period. d. Be less than the cash interest payment each period.

a. Correct. Interest expense equals the carrying value of the liability at the beginning of the period times the effective interest rate. The carrying value of the liability equals the face value of the bond minus the discount. As the discount is amortized over the life of the bond, the carrying value increases. Consequently, the interest expense increases over the life of the bond. b. Incorrect. See answer "a". c. Incorrect. Interest expense exceeds the cash interest payment. The excess is the amount of discount amortized each period. d. Incorrect. See answer "c".

Utility programs can be used to read files which contain all authorized access user codes for a server. A control to prevent this is: a. Internally encrypted passwords. b. A password hierarchy. c. Log-on passwords. d. A peer-to-peer network.

a. Correct. Internally encrypted passwords are controls designed to preclude users browsing the password file with a utility software application. b. Incorrect. A password hierarchy represents a set of interrelated authorization codes to distinguish between action privileges such as reading, adding, or deleting records. c. Incorrect. Logon passwords represent the initial user authorization access codes to the typical system. d. Incorrect. A peer-to-peer network is a system, which relies on a series of equal microcomputers for processing.

Which of the following correctly describes the introduction of a government tax credit on investments? a. Corporate investments will have higher net present values, all else equal, than without the tax credit. b. Tax credits on investments are designed to restrain inflation. c. Tax credits on investments increase investment costs, and all else equal, reduce the level of corporate investment. d. Tax credits on investments are taxes that are typically levied on individual projects rather than on groups of projects.

a. Correct. Investment tax credits are deductions from the corporate tax bill. The result is a lower investment cost and higher project net present values, all else equal. b. Incorrect. Tax credits are deductions from the actual corporate tax bill, and since more of profits are available for dividends, inflation would not be restrained. c. Incorrect. The opposite is true. d. Incorrect. Investment tax credits are not taxes levied on projects.

If a lease agreement transfers substantially all of the benefits and risks of ownership of the asset to the lessee, the asset value is recognized on the lessee's books as <List A> asset and the lease is <List B> lease. List A List B a. A tangible A capital b. An intangible A capital c. A tangible An operating d. An intangible An operating

a. Correct. Leased assets are recognized as tangible assets. When lease agreements transfer the risks and benefits of ownership of the asset to the lessee, the lease is referred to as a capital lease since it is essentially a form of financing, or capital, for the lessee. b. Incorrect. Leased assets are not recognized as intangibles. c. Incorrect. If substantially all of the risks and benefits of ownership of the asset are transferred to the lessee, then the lease is referred to as a capital lease, not an operating lease. d. Incorrect. See answers "b" and "c".

Successful electronic data interchange (EDI) implementation begins with which of the following? a. Mapping the work processes and flows that support the organization's goals. b. Purchasing new hardware for the EDI system. c. Selecting reliable vendors for translation and communication software. d. Standardizing transaction formats and data.

a. Correct. Marked benefits come about when EDI is tied to strategic efforts that alter, not mirror, previous practices. Applying EDI to an inefficient process results in the ability to continue doing things wrong, only faster. b. Incorrect. The prerequisite for EDI success is an understanding of the mission of the business and the processes and flows that support its goals, followed by cooperation with external partners. Hardware concerns come later. c. Incorrect. Before applying EDI technology to the business, EDI must be viewed as part of an overall integrated solution to organizational requirements. d. Incorrect. EDI is not a solution by itself. Instead of thinking about how to send transactions back and forth, a company has to first think about the entire process from both ends.

An appropriate technique for planning and controlling manufacturing inventories, such as raw materials, components, and subassemblies, whose demand depends on the level of production is: a. Materials requirements planning. b. Regression analysis. c. Capital budgeting. d. Linear programming.

a. Correct. Materials requirements planning (MRP) is a planning and controlling technique for managing dependent-demand manufacturing inventories. b. Incorrect. Regression analysis is a statistical procedure for estimating the relation between variables. c. Incorrect. Capital budgeting is used for analyzing and evaluating long-term capital investments. d. Incorrect. Linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints.

What technology is needed in order to convert a paper document into a computer file? a. Optical character recognition. b. Electronic data interchange. c. Bar-code scanning. d. Joining and merging.

a. Correct. Optical character recognition (OCR) software converts images of paper documents, as read by a scanning device, into text document computer files.

Which of the following is a tool of monetary policy that a nation's central bank could use to stabilize the economy during an inflationary period? a. Selling government securities. b. Lowering bank reserve requirements. c. Lowering bank discount rates. d. Encouraging higher tax rates.

a. Correct. Selling government securities is contractional because it takes money out of circulation. b. Incorrect. Lower reserve requirements would fuel the economy because banks could lend more money. c. Incorrect. Lower discount rates would fuel the economy because borrowing would be encouraged. d. Incorrect. This is fiscal policy, not monetary policy.

A U.S. company and a European company purchased the same stock on a European stock exchange and held the stock for one year. If the value of the euro weakened against the U.S. dollar during the period, in comparison with the European company's return, the U.S. company's return will be: a. Lower. b. Higher. c. The same. d. Indeterminate from the information provided.

a. Correct. Since the return to the U.S. company is adversely affected and the return to the European company is unaffected, the return to the U.S. company will definitely be lower than the return to the European company. b. Incorrect. The return to the U.S. company is adversely affected by the exchange rate movement. c. Incorrect. The return to the U.S. company is directly affected by the exchange rate movement, while the return to the European company is not. d. Incorrect. See answer "a".

The use of teams in total quality management is important because: a. Well-managed teams can be highly creative and are able to address complex problems better than individuals can. b. Teams are quicker to make decisions, thereby helping to reduce cycle time. c Employee motivation is higher for team members than for individual contributors. d. The use of teams eliminates the need for supervision, thereby allowing a company to become leaner and more profitable.

a. Correct. Teams can use the diverse knowledge and skills of all team members. b. Incorrect. Teams are often inefficient and costly. c. Incorrect. Although employee motivation may be high in teams, the high motivation does not always translate directly to quality improvement. d. Incorrect. Although need for supervision may be reduced, it is not eliminated.

An advantage of using bar codes rather than other means of identification of parts used by a manufacturer is that: a. The movement of all parts is controlled. b. The movement of parts is easily and quickly recorded. c. Vendors can use the same part numbers. d. Vendors use the same identification methods.

b. Correct. A reason to use bar codes rather than other means of identification is to record the movement of parts with minimal labor costs. a. Incorrect. The movement of parts can escape being recorded with any identification method. c. Incorrect. Each vendor has its own part-numbering scheme, which is unlikely to correspond to the buyer's scheme. d. Incorrect. Each vendor has its own identification method, although vendors in the same industry often cooperate to minimize the number of bar-code systems that they use.

When comparing two companies, if all else is equal, the company that has a higher dividend payout ratio will have a: a. Higher marginal cost of capital. b. Lower debt ratio. c. Higher investment opportunity schedule. d. Higher price to earnings ratio.

a. Correct. The higher the dividend payout ratio, the sooner retained earnings are exhausted and the company must seek more costly, outside equity financing. This drives up the marginal cost of capital. b. Incorrect. The debt ratio is computed by dividing total debts by total assets. The dividend payout ratio has no impact on the debt ratio. c. Incorrect. The investment opportunities available to the company are not determined by the level of dividend payout. d. Incorrect. The opposite is true. The price to earnings ratio is computed by dividing price per share by earnings per share, so a company with a higher dividend payout ratio would have a lower price to earnings ratio.

The difference between the required rate of return on a given risky investment and that of a risk-free investment with the same expected return is the: a. Risk premium. b. Coefficient of variation. c. Standard error of measurement. d. Beta coefficient.

a. Correct. The risk premium is the portion of expected return attributed to the increased risk. b. Incorrect. The coefficient of variation represents the standard deviation of an investment's returns divided by the mean returns. c. Incorrect. The standard error represents a measure of variability in the investment's returns. d. Incorrect. The beta coefficient represents the sensitivity of the investment's returns to the market returns.

A flexible budget is a quantitative expression of a plan that: a. Is developed for the actual level of output achieved for the budget period. b. Is comprised of the budgeted income statement and its supporting schedules for a budget period. c. Focuses on the costs of activities necessary to produce and sell products and services for a budget period. d. Projects costs on the basis of future improvements in existing practices and procedures during a budget period.

a. Correct. This is the definition of a flexible budget. b. Incorrect. This is the definition of an operating budget. c. Incorrect. This is the definition of activity-based budgeting. d. Incorrect. This is the definition of Kaizen budgeting.

Under a defined contribution pension plan, <List A> is reported on the balance sheet only if the amount the organization has contributed to the pension trust is <List B> the amount required. List A List B a. An asset Greater than b. An asset Equal to c. A liability Greater than d. A liability Equal to

a. Correct. Under a defined contribution plan, the company reports an asset on the balance sheet only if the contribution to the pension trust is greater than the defined, required contribution. b. Incorrect. An asset is reported only if the contribution is in excess of the required contribution. If the actual contribution is equal to that required, no asset is reported. c. Incorrect. The company would report a liability on the balance sheet only if the contribution was less than the required amount, not greater than the required amount. d. Incorrect. The company would not report a liability on the balance sheet if it contributed the required amount to the pension trust.

Which of the following would be of greatest concern to an auditor reviewing a policy regarding the sale of a company's used personal computers to outside parties? a. Whether deleted files on the hard disk drive have been completely erased. b. Whether the computer has viruses. c. Whether all software on the computer is properly licensed. d. Whether there is terminal emulation software on the computer.

a. Correct. While most delete programs erase file pointers, they do not remove the underlying data. The company must use special utilities that fully erase the data. This is important because of the potential for confidential data on the microcomputers. b. Incorrect. This could create a liability for the company if a virus destroyed the purchasing party's data or programs. However, the purchasing party should use anti-virus software to detect and eliminate any viruses. This concern, while important, is not as serious as the one in answer "a". c. Incorrect. The purchasing party has a responsibility to insure that all their software is properly licensed. If the company represented that all the software was properly licensed, this could create a liability. However, this liability is not as serious as the implication from answer "a". d. Incorrect. Terminal emulation software is widely available.

To avoid invalid data input, a bank added an extra number at the end of each account number and subjected the new number to an algorithm. This technique is known as: a. Optical character recognition. b. A check digit. c. A dependency check. d. A format check.

b. Correct. A check digit is an extra reference number that follows an identification code and bears a mathematical relationship to the other digits. This extra digit is input with the data. The identification code can be subjected to an algorithm and compared to the check digit.

The gross national product will fall following an increase in: a. Consumption expenditures. b. Imports. c. Exports. d. Inflation.

b. Correct. A rise in imports will cause a fall in net exports and GNP. a. Incorrect. By definition, gross national product (GNP) = C + I + G + X, where C is consumption, I is investment, G is government, and X is net exports (exports minus imports). Therefore, GNP will rise with an increase in c. Incorrect. An increase in exports will increase GNP. d. Incorrect. An increase in inflation will increase GNP.

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 analysis would be called a: a. Forecasting model. b. Sensitivity analysis. c. Critical path method analysis. d. Decision analysis.

b. Correct. An economic order quantity (EOQ) sensitivity analysis involves varying the holding costs per unit and/or the order costs to determine how much the changes affect the optimal EOQ. a. Incorrect. Forecasting models involve projecting data over time or developing regression models when time series data are not available. c. Incorrect. Critical path method involves project scheduling. d. Incorrect. Decision analysis involves selecting the best option from alternatives.

The costs of quality that are incurred in detecting units of product that do not conform to product specifications are referred to as: a. Prevention costs. b. Appraisal costs. c. Rework costs. d. Failure costs.

b. Correct. Appraisal costs are those costs (such as test equipment maintenance and destructive testing) incurred to detect which products do not conform to specifications. a. Incorrect. Prevention costs are incurred to prevent the production of products that do not conform to specifications. c. Incorrect. Rework costs, a type of failure cost, are incurred when a nonconforming product is detected and corrections are made. d. Incorrect. Failure costs are incurred in the repair of nonconforming products.

Capital structure decisions involve determining the proportions of financing from: a. Short-term or long-term debt. b. Debt or equity. c. Short-term or long-term assets. d. Retained earnings or common stock.

b. Correct. Both debt and equity are factors in a company's capital structure. a. Incorrect. This answer ignores equity. c. Incorrect. The decision does not directly involve assets. d. Incorrect. The decision involves equity, but does not focus on the type of equity used.

All of the following are useful for forecasting the needed level of inventory except: a. Knowledge of the behavior of business cycles. b. Internal accounting allocations of costs to different segments of the company. c. Information about seasonal variations in demand. d. Econometric modeling.

b. Correct. Internal accounting allocations of costs to different segments of the company are arbitrary assignments of already incurred costs that do not have anything to do with forecasting demand. a. Incorrect. Knowing the behavior of business cycles, understanding seasonal variations in demand for the product, and using econometric models can be valuable when forecasting the required purchases of inventory. c. Incorrect. See answer "a". d. Incorrect. See answer "a".

Which of the following is not a typical output control? a. Reviewing the computer processing logs to determine that all of the correct computer jobs executed properly. b. Matching input data with information on master files and placing unmatched items in a suspense file. c. Periodically reconciling output reports to make sure that totals, formats, and critical details are correct and agree with input. d. Maintaining formal procedures and documentation specifying authorized recipients of output reports, checks, or other critical documents.

b. Correct. Matching the input data with information held on master or suspense files is a processing control, not an output control, to ensure that data are complete and accurate during updating. a. Incorrect. Review of the computer processing logs is an output control to ensure that data are accurate and complete. c. Incorrect. Periodic reconciliation of output reports is an output control to ensure that data are accurate and complete. d. Incorrect. Maintaining formal procedures and documentation specifying authorized recipients is an output control to ensure proper distribution.

Which of the following would provide the least security for sensitive data stored on a notebook computer? a. Encrypting data files on the notebook computer. b. Using password protection for the screensaver program on the notebook computer. c. Using a notebook computer with a removable hard disk drive. d. Locking the notebook computer in a case when not in use.

b. Correct. Password protection for a screen-saver program can be easily bypassed. a. Incorrect. Data encryption provides adequate security for notebook computers. c. Incorrect. Removable hard drives would provide adequate security. d. Incorrect. Security is promoted by physically locking the notebook computer in a case.

Which of the following is a product cost for a manufacturing company? a. Insurance on the corporate headquarters building. b. Property taxes on a factory. c. Depreciation on a salesperson's vehicle. d. The salary of a sales manager.

b. Correct. Property taxes on a factory are a product cost. a. Incorrect. Insurance on the corporate headquarters building is not a cost of production and is therefore a period cost. c. Incorrect. Depreciation on salespersons' vehicles is not a cost of production and is therefore a period cost. d. Incorrect. The salary of a sales manager is not a cost of production and is therefore a period cost.

Residual income is often preferred over return on investment (ROI) as a performance evaluation because: a. Residual income is a measure over time while ROI represents the results for a single time period. b. Residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI. c. The imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI. d. Average investment is employed with residual income while year-end investment is employed with ROI.

b. Correct. Residual income concentrates on earnings in excess of the minimum desired return. With ROI, a segment may reject a project that exceeds the minimum return if the project will decrease the segments overall ROI. For example, a project that earns ROI of 22%, which is greater than the target rate of 20%, might be rejected if the segment is currently earning 25%, because the project will decrease the segment's ROI. This would not occur with residual income. a. Incorrect. This is incorrect because both measures represent the results for a single time period. c. Incorrect. This is not correct because the target rate for ROI is the same as the imputed interest rate used in the residual income calculation. d. Incorrect. This is incorrect because average investment should be employed in both methods. At any rate, the investment base employed for both methods would be the same.

Revenue tariffs are designed to: a. Develop new export opportunities. b. Provide the government with tax revenues. c. Restrict the amount of a commodity that can be imported in a given period. d. Encourage foreign companies to limit the amount of their exports to a particular country.

b. Correct. Revenue tariffs are usually applied to products that are not produced domestically. Their purpose is to provide the government with tax revenues. a. Incorrect. See answer "b". c. Incorrect. Import quotas are designed to restrict the amount of a commodity that can be imported in a period of time. d. Incorrect. Voluntary export restrictions, which have the same effect as import quotas, encourage foreign firms to limit their exports to a particular country.

A total interruption of processing throughout a distributed information technology system can be minimized through the use of: a. Exception reporting. b. Fail-soft protection. c. Backup and recovery. d. Data file security.

b. Correct. The capability to continue processing at all sites except a nonfunctioning one is called fail-soft protection, an advantage of distributed systems. a. Incorrect. Exception reporting can be used to control correctness and timeliness of updates but cannot minimize the impact of an interruption. c. Incorrect. Backup procedures are intended to prevent the recovery process from introducing any erroneous changes into the system after computer failure. d. Incorrect. Data file security is intended to prevent unauthorized changes to data files.

Why would a company maintain a compensating cash balance? a. To make routine payments and collections. b. To pay for banking services. c. To provide a reserve in case of unforeseen fluctuations in cash flows. d. To take advantage of bargain purchase opportunities that may arise.

b. Correct. The cash balance called the compensating balance is the money left in a checking account in the bank in order to compensate the bank for services that it provides. a. Incorrect. The cash balance maintained for making routine payments and collections is called the transactions balance. c. Incorrect. The cash balance maintained as a reserve for unforeseen cash flow fluctuations is called the precautionary balance. d. Incorrect. It is the speculative cash balance that is maintained in order to enable the firm to take advantage of any bargain purchase opportunities that may arise.

The efficient markets theory implies that securities prices are: a. Not a good estimate of future cash flows. b. Fair and a reflection of all publicly available information. c. Not the best benchmark for corporate financial decisions. d. Always less than their fair value.

b. Correct. The market is continuously adjusting to new information and acting to correct pricing errors. a. Incorrect. Securities prices are a good estimate of future cash flows under this theory. c. Incorrect. Securities prices are the best benchmark under this theory. d. Incorrect. Securities prices equal their fair value as perceived by investors.

Which of the following would be a reasonable basis for allocating the material handling costs to the units produced in an activity-based costing system? a. Number of production runs per year. b. Number of components per completed unit. c. Amount of time required to produce one unit. d. Amount of overhead applied to each completed unit.

b. Correct. There is a direct causal relationship between the number of components in a finished product and the amount of material handling costs incurred. a. Incorrect. This allocation basis is related to batch costs and not to individual unit costs. c. Incorrect. This allocation basis is the traditional basis for allocating overhead costs to the units produced when the production process is labor-intensive. d. Incorrect. This is not an allocation basis but rather the result of the allocation process when determining product costs.

A company produced and sold 100,000 units of a component with a variable cost of $20 per unit. Of the units produced, 1,200 failed the company's tolerance specifications and were reworked at a cost of $12 per unit. Reworked units were sold as factory seconds at $45 each, and first-quality units were sold at $50 each. If the company had implemented a quality assurance program to ensure that all units produced conformed to specifications, the increase in the company's contribution margin from this component would have been: a. $14,400. b. $20,400. c. $21,600. d. $39,600.

b. Correct. This answer correctly includes both the cost of rework and the income lost when units were sold as factory seconds rather then first-quality units: [$12 + ($50 - $45)] x 1,200 = 20,400. a. Incorrect. This answer only takes into account the rework cost and excludes the income that was lost when the units were sold as factory seconds: $12 x 1,200 = 14,400. c. Incorrect. This answer computes what the contribution margin would have been if the reworked items had been sold as first-quality units: [$50 - ($20 + $12)] x 1,200 = 21,600. d. Incorrect. This answer incorrectly computes the contribution margin for the reworked units, ignoring the $20 variable costs per unit. ($45 - $12) x 1,200 = 39,600.

Which of the following hiring procedures provides the most control over the accuracy of information submitted on an employment application? a. Applicants are required to submit unofficial copies of their transcripts along with the application as verification of their educational credentials. b. The hiring organization calls the last place of employment for each finalist to verify the employment length and position held. c. Letters of recommendation which attest to the applicant's character must be mailed directly to the hiring organization rather than being submitted by the applicant. d. Applicants are required to sign that the information on the applicant is true and correct as a confirmation of the truth of the information in the application.

b. Correct. This represents an independent verification of employment since the hiring organization is performing the verification process. a. Incorrect. The applicant is providing the transcript, leading to a loss of independence. In addition, the transcript is unofficial, making it very easy to change the information and send a photocopy of the altered transcript. c. Incorrect. There is nothing to prevent the applicants from writing the letters themselves, putting fraudulent return address information on the letters, and mailing them. d. Incorrect. If an applicant is going to lie about information, there is no reason to believe that the applicant will not sign the applicant's own name to the fraudulent information. This is not an independent verification.

A company using electronic data interchange (EDI) made it a practice to track the functional acknowledgments from trading partners and to issue warning messages if acknowledgments did not occur within a reasonable length of time. What risk was the company attempting to address by this practice? a. Transactions that have not originated from a legitimate trading partner may be inserted into the EDI network. b. Transmission of EDI transactions to trading partners may sometimes fail. c. There may be disagreement between the parties as to whether the EDI transactions form a legal contract. d. EDI data may not be accurately and completely processed by the EDI software.

b. Correct. Tracking of customers' functional acknowledgments, when required, will help to ensure successful transmission of EDI transactions. a. Incorrect. To address this issue, unauthorized access to the EDI system should be prevented, procedures should be in place to ensure the effective use of passwords, and data integrity and privacy should be maintained through the use of encryption and authentication measures. c. Incorrect. Contractual agreements should exist between the company and the EDI trading partners. d. Incorrect. The risk that EDI data may not be completely and accurately processed is primarily controlled by the system

If all else is equal, firms with higher profit margins require less additional financing for any sales growth rate. If the profit margin of a company increased, the funds-needed line would shift: a. Up and become less steep. b. Up and become more steep. c. Down and become less steep. d. Down and become more steep.

c. Correct. A higher profit margin would reduce the additional financing needed, shifting the funds needed line down. a. Incorrect. A higher profit margin would reduce the additional financing needed, as stated in the question. The result would be a downward, not an upward, shift in the funds-needed line. b. Incorrect. See answer "a". d. Incorrect. The line would become less, not more, steep if the firm had a higher profit margin.

Which of the following is a malicious program, the purpose of which is to reproduce itself throughout the network and produce a denial of service attack by excessively utilizing system resources? a. Logic bomb. b. Virus. c. Worm. d. Trojan horse.

c. Correct. A worm is an independent program that reproduces by copying itself from one system to another over a network and consumes computer and network resources. a. Incorrect. A logic bomb is a mechanism for releasing a system attack of some kind, which is triggered when a particular condition (for example, a certain date or system operation) occurs. b. Incorrect. A virus is a code fragment (not an independent program) that reproduces by attaching to another program. d. Incorrect. A Trojan horse is an independent program that appears to perform a useful function, but hides another unauthorized program inside it.

Which control, when implemented, would best assist in meeting the control objective that a system have the capability to hold users accountable for functions performed? a. Programmed cutoff. b. Redundant hardware. c. Activity logging. d. Transaction error logging.

c. Correct. Activity logging provides an audit trail of user activity. a. Incorrect. Programmed cutoff controls mitigate the risk of recording transactions in the wrong period. b. Incorrect. Redundant hardware is a control over hardware malfunction. d. Incorrect. Transaction error logging controls transactions rather than user terminal activity.

Which of the following would not be appropriate to consider in the physical design of a data center? a. Evaluation of potential risks from railroad lines and highways. b. Use of biometric access systems. c. Design of authorization tables for operating system access. d. Inclusion of an uninterruptible power supply system and surge protection.

c. Correct. Authorization tables for operating system access address logical controls, not physical controls. a. Incorrect. External risks should be evaluated to determine the center's location. b. Incorrect. Biometric access systems control physical access to the data center. d. Incorrect. Power supply systems and surge protection are included in data center design.

When film is sold for use with a camera, this is an example of which of the following product mix pricing strategies? a. By-product pricing. b. Optional product pricing. c. Captive product pricing. d. Product bundle pricing.

c. Correct. Captive products are those that must be used along with the main product. Sellers often make their money on the captive products, rather than on the main product that is sold at a low price. The captive products therefore will be priced well above the storage and delivery costs. a. Incorrect. There are no additional costs incurred other than storage and delivery for the development of this product. Therefore, the manufacturer will make a profit on any price over the cost of storage and delivery. b. Incorrect. Optional products are those offered for sale along with the main product. They are unlikely to have zero production cost so the seller must receive a price above the storage and delivery costs for such products. d. Incorrect. Product bundles are combinations of products sold together at a reduced price, such as season tickets for a theater. Products are bundled in order to promote the sale of certain items that consumers might not otherwise purchase. The combined price of the bundle must be low enough to encourage consumers to buy the bundle, but must recover production costs and provide some profit for the seller. The price must exceed storage and delivery costs.

A manufacturer of complex electronic equipment such as oscilloscopes and microscopes has been shipping its products with thick paper manuals but wants to reduce the cost of producing and shipping this documentation. Of the following, the best medium for the manufacturer to use to accomplish this is: a. Write-once-read-many. b. Digital audio tape. c. Compact disc/read-only memory. d. Computer-output-to-microform.

c. Correct. Compact-disc/read-only memory (CD-ROM) would be cheaper to produce and ship than the existing paper yet permit large volumes of text and images to be reproduced. Users of the electronic equipment are likely to have access to CD-ROM readers on personal computers so that they could use the documentation on CD-ROM. a. Incorrect. Write-once-read-many (WORM) is an optical storage technique often used as an archival medium. b. Incorrect. Digital audiotape (DAT) is primarily used as a backup medium in imaging systems and as a master for CD-ROM. d. Incorrect. Computer-output-to-microform (COM) is used for frequent access to archived documents such as canceled checks in banking applications.

The sales manager for a builder of custom yachts developed the following conditional table for annual production and sales: Demand 10 20 30 50 Probability 0.1 0.2 0.5 0.2 Yachts Built - 10 Expected Profit - 10, 10, 10, 10 Yachts Built - 20 Expected Profit - 0, 20, 20, 20 Yachts Built - 30 Expected Profit - -10, 10, 30, 30 Yachts Built - 50 Expected Profit - -30, -10, 10, 50 According to the table, how many yachts should be built? a. 10. b. 20. c. 30. d. 50.

c. Correct. Computation: 0.1(-$10)+0.2($10)+0.5($30)+0.2($30) = $22. To achieve the maximum expected profit, 30 yachts should be built. For each level of production, multiply the probability of demand by the expected profit: a. Incorrect. Computation: 0.1($10)+0.2($10)+0.5($10)+0.2($10) = $10. b. Incorrect. Computation: 0.1($0)+0.2($20)+0.5($20)+0.2($20) = $18. d. Incorrect. Computation: 0.1(-$30)+0.2(-$10)+0.5($10)+0.2($50) = $10.

A company would like to contract for janitorial services for one year with four option years. The specifications require the potential contractor to perform certain cleaning services at specified intervals. Which of the following is the best contract type for this requirement? a. Cost-reimbursable. b. Indefinite delivery. c. Fixed-price. d. Time-and-materials.

c. Correct. Fixed-price contracts are used when the requirements are well-defined, uncertainties can be identified and costs estimated, and there is adequate competition. a. Incorrect. Cost-reimbursable contracts are used when the requirements are complex and costs cannot be easily identified and estimated. b. Incorrect. Indefinite delivery contracts are used only when the supplies and/or service of future deliveries are not known at the time of contract award. d. Incorrect. Time-and-materials contracts are used when it is not possible at the time of placing the contract to estimate accurately the duration of the work.

Image processing systems have the potential to reduce the volume of paper circulated throughout an organization. To reduce the likelihood of users relying on the wrong images, management should ensure that appropriate controls exist to maintain the: a. Legibility of image data. b. Accessibility of image data. c. Integrity of index data. d. Initial sequence of index data.

c. Correct. If index data for image processing systems are corrupted, users will likely be relying on the wrong images. a. Incorrect. Legibility of image data is important to its use, but is independent of using the wrong image. b. Incorrect. Accuracy of image data is important to its use, but is independent of using the wrong image. d. Incorrect. Maintaining the initial sequence of index data may not be possible as the image data is modified and images are added/dropped.

Which of the following is true about the impact of price inflation on financial ratio analysis? a. Inflation impacts only those ratios computed from balance sheet accounts. b. Inflation impacts financial ratio analysis for one firm over time, but not comparative analysis of firms of different ages. c. Inflation impacts financial ratio analysis for one firm over time, as well as comparative analysis of firms of different ages. d. Inflation impacts comparative analysis of firms of different ages, but not financial ratio analysis for one firm over time.

c. Correct. Inflation impacts both aspects. a. Incorrect. Inflation also distorts depreciation charges, inventory costs, and profits. b. Incorrect. Inflation impacts both aspects. d. Incorrect. Inflation impacts both aspects.

Temporary and permanent differences between taxable income and pre-tax financial income differ in that: a. Temporary differences do not give rise to future taxable or deductible amounts. b. Only permanent differences have deferred tax consequences. c. Only temporary differences have deferred tax consequences. d. Temporary differences include items that enter into pre-tax financial income but never into taxable income.

c. Correct. Permanent differences have no deferred tax consequences because they affect only the period in which they occur. Permanent differences include (1) items that enter into pre-tax financial income but never into taxable income and (2) items that enter into taxable income but never into pre-tax financial income. In contrast, temporary differences result in taxable or deductible amounts in some future year(s), when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. Temporary differences therefore do have deferred tax consequences while permanent differences do not. a. Incorrect. It is temporary differences that result in taxable or deductible amounts in some future year(s), when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. b. Incorrect. Temporary differences have deferred tax consequences while the permanent differences do not. Permanent differences affect only the period in which they occur. d. Incorrect. Permanent differences, not temporary differences, include items that enter into pretax financial income but never into taxable income.

Minimizing the likelihood of unauthorized editing of production programs, job control language, and operating system software can best be accomplished by: a. Database access reviews. b. Compliance reviews. c. Good change control procedures. d. Effective network security software.

c. Correct. Program change control comprises: (1) maintaining records of change authorizations, code changes, and test results; (2) adhering to a systems development methodology (including documentation); (3) authorizing changeovers of subsidiary and headquarters' interfaces; and (4) restricting access to authorized source and executable codes. a. Incorrect. Frequently, the purpose of database reviews is to determine if: (1) users have gained access to database areas for which they have no authorization, and (2) authorized users can access the database using programs that provide them with unauthorized privileges to view and/or change information. b. Incorrect. The purpose of compliance reviews is to determine whether an organization has complied with applicable internal and external procedures and regulations. d. Incorrect. The purpose of network security software is to provide logical controls over the network.

Which of the following refers to taxes that do not necessarily take a larger absolute share of an increase in income? a. Progressive. b. Proportional. c. Regressive. d. Flat.

c. Correct. Regressive taxes are those for which the average tax rate falls as income rises. They take a smaller percentage of income as income rises, so they will not necessarily take a larger absolute amount of income as income rises. a. Incorrect. Progressive taxes, for which the average tax rate rises as income rises, take both a larger percentage of income and a larger absolute amount of income as income rises. b. Incorrect. Proportional taxes, for which the average tax rate is constant for all income levels, always take a larger absolute amount of income as income rises. d. Incorrect. A flat tax would have the same percentage tax rate regardless of income and would therefore take a larger absolute amount of income as income rises.

Computer program libraries can best be kept secure by: a. Installing a logging system for program access. b. Monitoring physical access to program library media. c. Restricting physical and logical access. d. Denying access from remote terminals.

c. Correct. Restricting physical and logical access secures program libraries from unauthorized use, in person and remotely via terminals. a. Incorrect. Installing a logging system for program access would permit detection of unauthorized access but would not prevent it. b. Incorrect. Monitoring physical access to program library media would control only unauthorized physical access. d. Incorrect. Denying all remote access via terminals would likely be inefficient and would not secure program libraries against physical access.

Query facilities for a database system would most likely include all of the following except: a. Graphical output capability. b. Data dictionary access. c. A data validity checker. d. A query-by-example interface.

c. Correct. The least likely feature of a query tool would be a data validity checker because the database system has already enforced any validity constraints at the time the data were inserted in the database. Any further data validity checking would be a function of a user application program rather than a query. a. Incorrect. Most query tools include the capability of presenting the results of queries graphically. b. Incorrect. Query tools include data dictionary access because that is how they know what table attributes to present to users. d. Incorrect. Query tools typically have a query-by-example interface.

An electronics company has decided to implement a new system through the use of rapid application development techniques. Which of the following would be included in the development of the new system? a. Deferring the need for system documentation until the final modules are completed. b. Removing project management responsibilities from the development teams. c. Creating the system module by module until completed. d. Using object development techniques to minimize the use of previous code.

c. Correct. The new system would be developed module by module. a. Incorrect. System documentation is not eliminated or deferred by using rapid application development. b. Incorrect. Project management involves development teams. d. Incorrect. Object development might not be of use; if it were, it would increase usage of previous code.

Inefficient usage of excess computer equipment can be controlled by: a. Contingency planning. b. System feasibility studies. c. Capacity planning. d. Exception reporting.

c. Correct. The plan should include goals and objectives, an inventory of current capacity, and a forecast of future needs. a. Incorrect. Contingency planning refers to the arrangements for alternative processing facilities in the event of equipment failure. b. Incorrect. The feasibility study is one of the phases in the systems development life d. Incorrect. Exception reports are meant to highlight problems and bring them to the attention of management.

A balanced scorecard is primarily concerned with: a. Staff. b. Structure. c. Strategy. d. Systems.

c. Correct. The scorecard is primarily a tool to assist the organization in describing and clarifying its strategy and then alignment of its performance measures to that strategy. a. Incorrect. Although a balanced scorecard should be developed with staff in mind, the primary aim is the alignment of performance measures with strategy. b. Incorrect. Structure should be created after the scorecard has been developed to ensure that responsibilities, competencies and measures are appropriate to achieve the agreed-upon strategies. d. Incorrect. Systems are a means to achieving objectives that have been established after the development of the scorecard.

Activity A Time - 5 days Immediate Processor - None Activity B Time - 3 days Immediate Processor - None Activity C Time - 4 days Immediate Processor - A Activity D Time - 2 days Immediate Processor - B Activity E Time - 6 days Immediate Processor - C, D The earliest completion time for the project is: a. 11 days. b. 14 days. c. 15 days. d. 20 days.

c. Correct. The two paths are 5 + 4 + 6 = 15 days, and 3 + 2 + 6 = 11 days. The longest path, and therefore the earliest completion time, is 15 days. a. Incorrect. Eleven days is the shortest, not the longest, time to completion. b. Incorrect. Fourteen days sums 5 + 3 + 6, but is not a path to completion. d. Incorrect. Twenty days is the sum of all of the activity times.

Which of the following actions would best address a concern that data uploaded from a desktop computer may be erroneous? a. The mainframe computer should be backed up on a regular basis. b. Two persons should be present at the desktop computer when it is uploading data. c. The mainframe computer should subject the data to the same edits and validation routines that on-line data entry would require. d. Users should be required to review a random sample of processed data.

c. Correct. This could help prevent data errors. a. Incorrect. This practice is a wise control, but it does not address the issue of the integrity of uploaded data. Backups cannot prevent or detect data-upload problems, but can only help correct data errors that a poor upload caused. b. Incorrect. This control may be somewhat helpful in preventing fraud in data uploads, but it is of little use in preventing errors. d. Incorrect. This control is detective in nature, but the error could have already caused erroneous reports and management decisions. Having users try to find errors in uploaded data would be costly.

A company uses straight-line depreciation for financial reporting purposes, but uses accelerated depreciation for tax purposes. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements? a. Accumulated depreciation. b. Cash. c. Retained earnings. d. Gross fixed assets.

c. Correct. Under accelerated depreciation, depreciation expense is higher and net income is lower. Retained earnings would therefore be lower for tax-reporting purposes than for general purpose financial reporting based on straight-line depreciation. a. Incorrect. The balance of accumulated depreciation would be higher in the financial statements for tax purposes, since higher depreciation expense would be reported under accelerated depreciation than under straight-line depreciation. b. Incorrect. Depreciation expense is a non-cash charge. The cash balance is unaffected by the depreciation method used. d. Incorrect. The historic cost of fixed assets is recorded in the gross fixed assets account. The historic cost of the assets is unaffected by the depreciation method used.

Which combination of ratios can be used to derive return on equity? a. Market value to book value ratio and total debt to total assets ratio. b. Price to earnings ratio, earnings per share, and net profit margin. c. Price to earnings ratio and return on assets. d. Net profit margin, asset turnover, and equity multiplier.

d. Correct. a. Incorrect. The market value to book value ratio is the market value of common equity per share derived by dividing the book value of common equity by the average number of shares outstanding. Neither this ratio nor the total debt to total assets ratio provides any information about net income available to stockholders, which is necessary to calculate the return on equity. b. Incorrect. The price to earnings ratio is the ratio of the stock's market price divided by earnings per share; the earnings per share is the net income available to stockholders divided by the average number of shares outstanding; and the net profit margin is net profit divided by sales. While all three ratios contain much information about the equity account, none of them provides information about the book value of common equity, which is necessary to calculate the return on equity. c. Incorrect. The price to earnings ratio is the ratio of the stock's market price divided by earnings per share, and the return on assets ratio is net income divided by assets. Neither of these two ratios provides information about the book value of common equity, which is necessary to calculate the return on equity.

A means of limiting production delays caused by equipment breakdown and repair is to: a. Schedule production based on capacity planning. b. Plan maintenance activity based on an analysis of equipment repair work orders. c. Pre-authorize equipment maintenance and overtime pay. d. Establish a preventive maintenance program for all production equipment.

d. Correct. A preventive maintenance program will reduce equipment breakdowns and repairs. a. Incorrect. Scheduling production based on capacity utilization ignores other important factors such as demands. b. Incorrect. Budgeting maintenance department activities based on previous work orders will not prevent equipment breakdowns and repairs. c. Incorrect. Standing authorizations of work orders and overtime will not address the problem posed.

Abnormal spoilage is: a. Not expected to occur when standard costs are used. b. Not usually controllable by the production supervisor. c. The result of unrealistic production standards. d. Not expected to occur under efficient operating conditions.

d. Correct. Abnormal spoilage is not expected under efficient operating conditions. It is not an inherent part of the production process. a. Incorrect. Abnormal spoilage is not a function of the costing system; it is a function of the production process. b. Incorrect. Abnormal spoilage may result from any of a variety of conditions or circumstances, which are generally controllable by first-line supervisors. c. Incorrect. Abnormal spoilage may result from any of a variety of conditions or circumstances, which are not necessarily related to standards.

Which of the following security controls would best prevent unauthorized access to sensitive data through an unattended data terminal directly connected to a mainframe? a. Use of a screen-saver with a password. b. Use of workstation scripts. c. Encryption of data files. d. Automatic log-off of inactive users.

d. Correct. Automatic log-off of inactive users may prevent the viewing of sensitive data on an unattended data terminal. a. Incorrect. Data terminals do not normally use screen-saver protection. b. Incorrect. Scripting is the use of a program to automate a process such as startup. c. Incorrect. Encryption of data files will not prevent the viewing of data on an unattended data terminal.

To reduce security exposure when transmitting proprietary data over communication lines, a company should use: a. Asynchronous modems. b. Authentication techniques. c. Call-back procedures. d. Cryptographic devices.

d. Correct. Cryptographic devices protect data in transmission over communication lines. a. Incorrect. Asynchronous modems handle data streams from peripheral devices to a central processor. b. Incorrect. Authentication techniques confirm that valid users have access to the system. c. Incorrect. Call-back procedures are used to ensure incoming calls are from authorized locations.

Which of the following securities is likely to have the least risk? a. Income bonds. b. Debentures. c. Subordinated debentures. d. First-mortgage bonds.

d. Correct. First-mortgage bonds are backed by fixed assets. a. Incorrect. Income bonds only pay interest if interest is earned. b. Incorrect. Debentures are unsecured bonds. c. Incorrect. Subordinated debentures are subordinated to other debt.

To remove the effect of seasonal variation from a time series, original data should be: a. Increased by the seasonal factor. b. Reduced by the seasonal factor. c. Multiplied by the seasonal factor. d. Divided by the seasonal factor.

d. Correct. If the original data (with the four trends) is divided by the seasonal norm, the seasonal component is factored out of the data.

In a two-tier merger offer, shareholders receive a higher amount per share if they: a. Agree to purchase newly issued bonds in the combined firm. b. Agree to sell back to the firm any bonds that they currently own. c. Tender their stock later. d. Tender their stock earlier.

d. Correct. In a two-tier offer, shareholders are enticed to sell to the bidder early by a higher stock price offer for those who tender their stock earlier. a. Incorrect. An offer that is "two-tier" involves two different offer prices for the shares acquired. The terms of the share acquisition do not relate to the issuance or repurchase of bonds in the company. b. Incorrect. See answer "a". c. Incorrect. This is the opposite of the correct answer.

A master budget: a. Shows forecasted and actual results. b. Contains only controllable costs. c. Can be used to determine manufacturing cost variances. d. Contains the operating budget.

d. Correct. The operating budget is a major element of the master budget. a. Incorrect. The master budget does not contain actual results. b. Incorrect. The master budget reflects all applicable expected costs, whether controllable by individual managers or not. c. Incorrect. The master budget is not structured to allow determination of manufacturing cost variances. This is accomplished using the flexible budget and actual results

If a just-in-time purchasing policy is successful in reducing the total inventory costs of a manufacturing company, which of the following combinations of cost changes would be most likely to occur? a. An increase in purchasing costs and a decrease in stockout costs. b. An increase in purchasing costs and a decrease in quality costs. c. An increase in quality costs and a decrease in ordering costs. d. An increase in stockout costs and a decrease in carrying costs.

d. Correct. In this situation, the company will be receiving fewer materials at any point in time, increasing the likelihood of stockout and thereby resulting in an increase in stockout costs. At the same time, the average inventory will be less, resulting in a reduction in the carrying costs. a. Incorrect. The supplier may ask for a concession in its selling price, which would raise the manufacturer's purchasing costs. However, the manufacturing company will be receiving fewer materials at any point in time, increasing the likelihood of stockout and thereby resulting in an increase in stockout costs. b. Incorrect. The supplier may ask for a concession in its selling price, which would raise the manufacturer's purchasing costs. However, the cost of quality would not necessarily be affected by the just-in-time purchasing system. c. Incorrect. With fewer purchase orders being processed by the manufacturer, the ordering costs are likely to decrease. However, the cost of quality would not necessarily be affected by the just-in-time purchasing system.

Which of the following will allow a manufacturer with limited resources to maximize profits? a. The Delphi technique. b. Exponential smoothing. c. Regression analysis. d. Linear programming.

d. Correct. Linear programming is a mathematical technique for maximizing or minimizing a given objective subject to certain constraints. It is the correct technique to optimize the problem of limited resources. a. Incorrect. The Delphi technique is a qualitative forecasting method that obtains forecasts through group consensus. b. Incorrect. Exponential smoothing is a forecasting technique that uses past time series values to arrive at forecasted values. c. Incorrect. Regression analysis is a statistical technique used to develop forecasts based on the relationship between two or more variables.

A password is an example of: a. A physical control. b. An edit control. c. A digital control. d. An access control.

d. Correct. Passwords are a form of access controls since they limit access to computer systems and the information stored in them. a. Incorrect. Physical controls limit access to an area and do not include passwords. b. Incorrect. Edit controls test the validity of data. c. Incorrect. Digital controls are examples of physical controls.

The practice of recording advanced payments from customers as liabilities is an application of the: a. Going concern assumption. b. Monetary unit assumption. c. Historic cost principle. d. Revenue recognition principle.

d. Correct. Since the amount received in cash has not yet been earned, it is appropriate to record the advance payment as a liability of the company. This is an example of the revenue recognition principle, which states that revenue should not be recognized until it is earned. a. Incorrect. The going concern assumption is that the business will have a long life. This does not relate directly to the practice of recording unearned revenues as liabilities. b. Incorrect. The monetary unit assumption is that money is the common denominator by which economic activity is conducted, and that the monetary unit provides an appropriate basis for accounting measurement and analysis. It does not relate directly to the practice of recording unearned revenues as liabilities. c. Incorrect. The historic cost principle is the requirement that most assets and liabilities be accounted for and reported on the basis of acquisition price. It does not relate directly to the practice of recording unearned revenues as liabilities.

A competitive marketing strategy in which a firm specializes in serving customers overlooked or ignored by major competitors is called a: a. Market leader strategy. b. Market challenger strategy. c. Market follower strategy. d. Market niche strategy.

d. Correct. Specializing in serving customers overlooked or ignored by major competitors is a market niche strategy. This strategy specializes along market, customer, product, or marketing mix lines. a. Incorrect. Market leader strategies are employed by the major competitors that dominate a market b. Incorrect. Market challenger strategies are followed by runner-up companies that aggressively attack competitors to get more market share. c. Incorrect. Market follower strategies are used by runner-up companies that follow competitor's product offers, pricing, and market programs.

Which of the following costs are not relevant in a special-order decision? a. Incremental costs. b. Opportunity costs. c. Outlay costs. d. Sunk costs.

d. Correct. Sunk costs are always irrelevant because they occurred in the past. a. Incorrect. Incremental costs are relevant if they occur in the future. b. Incorrect. Opportunity costs (benefits foregone) are relevant if they occur in the future. c. Incorrect. Outlay costs are relevant if they occur in the future.

In a large organization, the biggest risk in not having an adequately staffed information center help desk is: a. Increased difficulty in performing application audits. b. Inadequate documentation for application systems. c. Increased likelihood of use of unauthorized program code. d. Persistent errors in user interaction with systems.

d. Correct. The biggest risk in not having an adequately staffed help desk is that users will unknowingly persist in making errors in their interaction with the information systems. a. Incorrect. Application audits should be about the same difficulty with or without an adequately staffed help desk. b. Incorrect. Preparation of documentation is a development function, not a help desk function. c. Incorrect. The likelihood of use of unauthorized program code is a function of change control, not of a help desk.

The best evidence that contingency planning is effective is to have: a. No processing interruptions during the past year. b. Comprehensive documentation of the plan. c. Signoff on the plan by the internal audit activity. d. Successful testing of the plan.

d. Correct. The only way to know whether contingency planning has been effective is to test the plan, by simulating an interruption or by conducting a paper test with a walk-through of recovery procedures. a. Incorrect. The absence of processing interruptions indicates nothing about the interruptions that might occur in the future, especially those that are not under the organization's control. b. Incorrect. A contingency plan may have comprehensive documentation, but until the plan is tested, an organization has no indication of its effectiveness. c. Incorrect. Audit signoff is one indicator of plan quality, but until the plan is tested, an organization has no indication of its effectiveness.

Which of the following is an example of a contingent liability? a. A retail store in a shopping mall pays the lessor a minimum monthly rent plus an agreed-upon percentage of sales. b. A company is refusing to pay the invoice for the annual audit because it seems higher than the amount agreed upon with the public accounting firm's partner. c. A company accrues income tax payable in its interim financial statements. d. A lessee agrees to reimburse a lessor for a shortfall in the residual value of an asset under lease.

d. Correct. This is a guarantee. The liability is contingent on the lessor not receiving the full residual value from a third party. a. Incorrect. There is no uncertainty regarding the amount of rent. Rent expense can be accrued as sales occur. b. Incorrect. A service was received and the company owes an amount. The amount is not contingent on a future event. The company can accrue the amount that it expected the invoice to show. c. Incorrect. As of the date of the interim financial statements, the income tax is payable because earnings have occurred. There is no uncertainty regarding the amount or the timing of the payment as of the date of the interim financial statements.

Which of the following is a major element of the ISO 9000:2000 quality management system standards? a. The principle that improved employee satisfaction will lead to increased productivity. b. The attitude and actions of the board and management regarding the significance of control within the organization. c. The assessment of the risk that objectives are not achieved. d. A requirement for organizations to monitor information on customer satisfaction as a measure of performance.

d. Correct. This is one of the major changes to the ISO 9000 standards made in the 2000 revision a. Incorrect. This is not a part of the ISO 9000 standards. ISO argues that following the eight management principles that underlie the ISO 9000 standards will lead to improved employee satisfaction. b. Incorrect. This is the control environment as defined in the glossary of The IIA's Standards; there is no direct reference to any such concept in the ISO 9000 standards. c. Incorrect. The ISO 9000 approach does not take a risk assessment approach; a risk assessment approach is what underlies internal auditing.

User acceptance testing is more important in an object-oriented development process than in a traditional environment because of the implications of the: a. Absence of design documentation. b. Lack of a tracking system for changes. c. Potential for continuous monitoring. d. Inheritance of properties in hierarchies.

d. Correct. User acceptance testing is more important in object-oriented development because of the fact that all objects in a class inherit the properties of the hierarchy, which means that changes to one object may affect other objects, which increases the importance of user acceptance testing to verify correct functioning of the whole system. a. Incorrect. Instead of traditional design documents, items such as the business model, narratives of process functions, iterative development screens, computer processes and reports, and product descriptions guides are produced in object-oriented development, but the existence of specific documents does not affect the importance of user acceptance testing. b. Incorrect. In general, object-oriented development systems do include tracking systems for changes made to objects and hierarchies. c. Incorrect. Because object-oriented systems are usually developed in client/server environments, there is the potential for continuous monitoring of system use, but continuous monitoring typically occurs during system operation, not during development.

Unauthorized alteration of on-line records can be prevented by employing: a. Key verification. b. Computer sequence checks. c. Computer matching. d. Database access controls.

d. Correct. Users can gain access to databases from terminals only through established recognition and authorization procedures; thus, unauthorized access is prevented a. Incorrect. Key verification ensures the accuracy of selected fields by requiring a different individual to re-key them. b. Incorrect. Sequence checks are used to ensure the completeness of input or update data by checking the use of pre-assigned document serial numbers. c. Incorrect. Computer matching entails checking selected fields of input data with information held in a suspense or master file.

Preventing someone with sufficient technical skill from circumventing security procedures and making changes to production programs is best accomplished by: a. Reviewing reports of jobs completed. b. Comparing production programs with independently controlled copies. c. Running test data periodically. d. Providing suitable segregation of duties.

d. Correct. When duties are separated, users cannot obtain a detailed knowledge of programs and computer operators cannot gain unsupervised access to production programs. a. Incorrect. The reviews of jobs processed will disclose access, but will not prevent it. b. Incorrect. Comparison of production programs and controlled copies will disclose changes, but will not prevent them. c. Incorrect. Periodic running of test data will detect changes, but will not prevent them.

What technique could be used to prevent the input of alphabetic characters into an all numeric identification number? a. An existence check. b. A check digit. c. A dependency check. d. A format check.

d. Correct. With a format check, the computer checks the characteristics of the character content, length, or sign of the individual data fields.

If a country uses trade quotas to overcome chronic trade deficits, the most likely outcome would be that: a. Unemployment and productivity rates will rise. b. Unemployment rates will rise and productivity rates will decline. c. Unemployment rates will decline and productivity rates will rise. d. Unemployment and productivity rates will decline.

d. Correct. With trade quotas, home jobs will be saved; hence, unemployment will decline. Since jobs will be saved for inefficient industries (less efficient than foreign competitors), productivity rates will decline because they will not be specializing in those goods with which they have a comparative advantage.