FMAC exam questions

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Part
A
–MULTIPLE
CHOICE and TRUE/FALSE (1 mark each x 15 questions = 15 marks). Choose the one alternative that best
completes the statement or answers the question.

1.
The globalization of business activity has
resulted in which of the following?

a.
Increased corruption and unethical behavior.

b.
The FASB and IASB working jointly on a
project to converge accounting standards.

c.
The requirement that major Canadian companies
use International Financial Reporting Standards.

d.
All of the above.

e.
b and c.

2.
The manipulation of the allowance for
doubtful accounts by management would be best indicated by when a company:

a.
tightens its credit
standards and the allowance account decreases.

b.
lowers its credit standards
and the allowance account decreases.

c.
tightens its credit standards
and the allowance account increases.

d.
lowers its credit standards
and the allowance account increases.

3.
The best measure for determining how well a
firm operates within its industry is

a.
Gross Profit

b. Operating Profit

c.
Earnings before Taxes

d.
Net profit

4.
A change in retained earnings from one year
end to the next can result from cash flows related to both operating and
financing activities. (True/false)

5.
Consider the following statements

I. The cash
conversion cycle of a firm can be improved by decreasing the days inventory
held and days payable outstanding, while decreasing the average collection
period.

II. The
DuPont System helps the analyst see how a firm’s decisions and activities over
an accounting period interact to produce return on equity.

a.
Only Statement I is true.

b.
Only Statement II is true.

c. Both Statements I and II are true.

d.
Both Statements I and II are
false.

6.
How should a company report total
comprehensive income?

a. On the face of its income statement.

b. In a separate statement of comprehensive
income.

c. In its statement of stockholders’ equity.

d. All of the above ways are acceptable.

7.
Currently, management accounting information
within government and nonprofit organizations is in greater demand because:

a. public
and private donors are demanding accountability

b. citizens
are requesting responsive and efficient performance from their governing units

c. more
nonprofit organizations are competing for limited funds

d. All
of the above are correct.

8.
The measurement of the objectives for the
Balanced Scorecard

a. creates
focus for the future.

b. communicates
an important message to all employees.

c. focuses
the entire organization on strategic implementation of company’s outcomes.

d. All
of the above are correct.

9.
The strategy MOST LIKELY to reduce the
break-even point would be to:

a. increase
both the capacity-related (fixed) costs and the contribution margin per unit.

b. decrease
both the capacity-related (fixed) costs and the contribution margin per unit.

c. decrease
the capacity-related (fixed) costs and increase the contribution margin per
unit.

d. increase
the capacity-related (fixed) costs and decrease the contribution margin per
unit.

10.The major
reason for using practical capacity as the denominator for activity driver
calculations is to:

a. avoid
distortions created by the assignment of unused capacity costs to the products
produced or customers served.

b. simplify
the calculations of the activity cost drivers.

c. reduce
the cost of unused capacity.

d. place
less emphasis on the cost of unused capacity.

11.An
activity-based costing system is most useful when:

a.
Operations throughout the
plant are fairly similar.

b.
There are small amounts of
overhead costs.

c.
Products produced in the
company all show large profits.

d.
Products make diverse demands
on resources because of differences in volume, process steps, batch size, or
complexity.

12.Which of the
following is NOT an option to transform breakeven or loss customers into
profitable ones?

a. Use more discipline in granting discounts
and allowances.

b. Improve the process used to produce, sell, deliver and service the
customer.

c. Use less menu-based pricing that allows
customers to select features and services it wishes to pay for.

d.
Improve margins by lowering costs.

13.A
performance measurement system should accomplish all of the following except:

a.
communicate the company’s strategy.

b.
motivate employees to achieve strategic
objectives.

c.
identify financial measures to evaluate an
organization’s intangible assets.

d.
help managers allocate resources to the most
productive alternatives.

14.Committed costs are those that the organization agrees must
be set aside to cover product costs through the three major stages of the life
cycle. (True/False)

15.Budgeting
provides all of the following EXCEPT:

a. a means to communicate the organization’s
short-term goals to its members

b. support for the management functions of
planning and coordination

c. a means to anticipate problems

d. an ethical framework for decision making


Part B – Short Answer (10 questions; 50 marks).
Please highlight your answers and show your work to receive partial credit for
incorrect answers.

1.
(2 marks) Assume that Zebra Company has no
opening inventory. The following purchases of inventory occurred during the
year:

Date Purchases (units) Purchase Price per Unit

Jan 2 2 $3

Feb. 15 3 $5

March 30 4 $7

July 29 6 $6

October 30 5 $4

Assume Zebra sells 10 items on October 31 and uses
the LIFO method of inventory valuation.

Required: What
amount would appear as cost of goods sold on the income statement?

2.
(5 marks) The following calculations have
been made for Rogers Company:

Growth
Rate

2012
to 2013

Net sales 10.5%

Total accounts receivable 21.3%

Allowance for doubtful accounts 2.6%

2013 2012

Allowance for doubtful accounts as a

percentage of total accounts
receivable 3.8% 5.4%

Required: Analyze the accounts receivable and
allowance for doubtful accounts changes and provide plausible explanations for
the results.


3.
(5 marks) Analyze the common size income
statements below:

2013

2012

Net sales

100%

100%

COGS

54

63

Gross margin

46

37

Research
and development

14

20

Selling,
general and administrative

5

9

Restructuring,
asset impairments and other charges

1

8

Income from operations

26

0

Interest
expense

(1)

(2)

Income (loss) before income taxes

25

(2)

Provision
for income taxes

8

0

Net income (loss)

17%

(2)%

Sales
revenue increase, 2012 to 2013

80%

Operating expense increase, 2012 to
2013

31%

4.
(7 marks) Yak Corporation reported the
following information:

(1) Net income for the year was $52 million.

(2) Purchases of equipment were $12 million.

(3) Customer accounts receivable decreased by
$6 million.

(4) Dividends paid to common shareholders
were $10 million.

(5) Depreciation expense was $18 million.

(6) Income tax payable decreased by $3
million.

(7) Long-term debt decreased by $14 million.

(8) Accounts payable increased by $8 million.

(9) Inventories decreased by $5 million.

(10) Opening cash balance was $4 million.

Required:
Based on the above information, calculate the ending cash balance.


5.
(4 marks) Able Manufacturing uses
departmental cost driver rates to allocate manufacturing support costs to
products. Manufacturing support costs are allocated on the basis of machine
hours in Department A and on the basis of direct labor hours in Department B.
At the beginning of 2013, the following estimates were provided for the coming
year:

Dept. A Dept. B

Direct labor cost $600,000 $1,800,000

Manufacturing overhead
costs $400,000 $600,000

Direct labor-hours 25,000 60,000

Machine-hours 10,000 12,000

The accounting records of the company
show the following data for Job #123:

Dept.
A
Dept. B

Direct labor-hours 10 20

Machine-hours 2 15

Direct material cost $100 $200

Required: Calculate the total
manufacturing costs of Job #123.

6.
(6 marks) Pete’s Publishing, Inc. has excess
capacity. Company management is approached by a new customer to fill a large
one-time order for 1,000 books, a product similar to one offered to regular
customers. The following information applies to sales to regular customers:

Sales (100,000 units) $12,000,000

Direct materials $5,000,000

Direct labor 4,000,000

Variable manufacturing support 500,000

Fixed manufacturing support 200,000

Total manufacturing costs 9,700,000

Profit $2,300,000

Required:
What is the minimum acceptable price at which overall profit will not change?

7.
(3 marks) Bob’s Boots Ltd. manufactures three
different products –boots, slippers, and runners. Considerable market demand
exists for all models. The following per unit data apply:

Boots Slippers Runners

Selling price $150 $20 $85

Direct materials 100 8 40

Direct labor ($20 per hour) 20 5 10

Variable support costs ($4 per machine
hour)10 2 12

Fixed costs 8 4 20

Gross profit 12 1 3

Required:
If there is no excess capacity, what should the company do to maximize profits?

8.
(8 marks) Engineers at Jones & Smith Ltd.
developed the following standard costs for direct material and direct labor for
one of their major products:

Standard
quantity
Standard price

Direct
materials 10 kilograms $5 per kilogram

Direct labor 0.5 hours $30
per hour

During 2013,
the company produced and sold 100,000 units using 990,000 kilograms of direct
materials at an average cost of $4.95 per kilogram,and total direct labour
costs of $1,428,000 (51,000 DLHs incurred).

Required:
Calculate the 2013 price and quantity (efficiency) variances, and total
variances, for direct material and direct labour.

9.
(5 marks) Mercury Manufacturing produces a
single product that sells for $30. Variable (flexible) costs per unit equal
$20. Management believes that a 5% reduction in the selling price will result
in a 15% increase in unit sales, currently 10,000 units. The company expects
the total capacity-related costs to rise from $10,000 to $15,000 to accommodate
the required increase in production if this proposed reduction in selling price
is implemented.

Required:
What will happen to profits?

10.(5 marks)
Marcel’s Manufacturing, Inc., is considering reorganizing its plant into
manufacturing cells. The following
estimates have been prepared to evaluate the benefits from the reorganization:

Before the change After the change

Total annual sales $600,000 $800,000

Costs as a percentage of
sales:

Direct materials 23% 20%

Direct labor 9% 7%

Manufacturing Support
costs 18% 13%

Work-in-process inventory $125,000 $ 90,000

Inventory
carrying costs are estimated to be 10% per year.

Required:
Calculate the amount that total benefits are projected to increase annually as
a result of switching to a cellular manufacturing operation.


Part
C – Problems (3 problems, 65 marks in total). Show your work to receive partial
credit for incorrect answers.

Problem
1 (14 marks)

Over the years, Donna Dow has been a
very successful investor. She
investigates a company thoroughly before purchasing its shares. Donna is interested in the common stock of IBU
Computers Limited. The following data
are available for the company:

2013

2012

2011

Current ratio*

1.9

2.0

2.1

Acid-test ratio

1.1

1.0

.9

Accounts
receivable turnover

3.6X

3.5X

3.0X

Inventory
turnover

4X

5X

6X

Current
liabilities

$1M

$1M

$1M

Sales

$10M

$10M

$10M

Gross Profit
Ratio

30%

30%

30%

Dividends paid
per share**

$4

$3

$2.50

Dividend yield
ratio

5.5%

5.5%

5.5%

Dividend payout
ratio

40%

40%

40%

Return on total
assets

10%

12%

8%

Return on common
stockholders’ equity

8%

14.5%

9%

* Current
assets consist of cash, accounts receivable, and inventory.

**There were no changes in common
stock outstanding over the three-year period.

Donna would like answers to a number
of specific questions regarding this data. Respond in a complete but concise
manner to each of her questions.

1.
Is the market price of the company’s stock
going up or down?,

2.
Is the earnings per share increasing or
decreasing?

3.
Is the company employing financial leverage
to the advantage of the common stockholders?

4.
Is it becoming easier for the company to pay
its bills as they come due?

5.
Are customers paying their bills at least as
fast now as they did in Year 1?

6.
Is the total of accounts receiving
increasing, decreasing, or remaining constant?

7.
Is the level of inventory increasing,
decreasing, or remaining constant?


Problem
2 (16 marks)

AudioFile Products Ltd. is a retailer
that sells sound systems. The company is
planning its cash needs for the month of January, 2013. In the past, AudioFile has had to borrow
money during the post-Christmas season to offset a significant decline in
sales. The following information has
been assembled to assist in preparing a cash flow forecast for January.

a.
January 2013 forecasted income statement:

Sales $200,000

Cost
of goods sold 150,000

Gross
profit 50,000

Variable
selling expenses $ 10,000

Fixed
administrative expenses 20,000
30,000

Forecast
net operating income $ 20,000

b.
Sales are 10% for cash and 90% on credit.

c.
Credit sales are collected over a three-month
period with 40% collected in the month of sale, 30% in the following month, and
20% in the second month following sale. November 2012 sales totaled $300,000
and December sales totaled $500,000.

d.
40% of a month’s inventory purchases are paid
for in the same month. The remaining 60% are paid in the following month.
Accounts payable relate solely to inventory purchases. At December 31, these
totaled $400,000.

e.
The company maintains its ending inventory
levels at 60% of the cost of the merchandise to be sold in the following month.
The merchandise inventory at December 31, 2012 was $90,000. February 2013 sales
are budgeted at $150,000. Gross profit percentage is expected to remain
unchanged.

f.
The company pays a $10,000 monthly cash
dividend to shareholders.

g.
The cash balance at December 31, 2012 was
$30,000; the company must maintain a cash balance of at least this amount at
the end of each month.

h.
The company can borrow on its operating loan
in increments of $10,000 at the beginning of each month, up to a total loan
balance of $500,000. The interest rate on this loan is 1% per month. There is
no operating loan at December 31, 2012.

Required:
Prepare a Cash Flow Forecast for AudioFile for the month of January 2013.
Include appropriate supporting schedules.


Problem
3 (35 marks)

In the past, the Big Dog Carworks Ltd.
(BDCL) allocated indirect manufacturing costs based on direct labour hours.
Recently, management has decided to pilot a system of time-driven
activity-based costing to allocate these costs. The division produces two small
engine models: Basic and Heavy Duty. The following information has been obtained
from the company’s records over the past year:

Basic

Heavy Duty

Units produced

500,000

50,000

Direct material cost per engine

$40

$60

Direct labour cost per hour

$30

$30

Direct labour hours incurred

200,000

40,000

Inspections per engine

2

4

Inspection time per engine (hrs.)

.1

.3

Engines packed and shipped per batch

2,000

500

Individual engine packing time
(hrs.)

.25

.4

Additional preparation time per
batch (hrs.)

30

15

BDCL employs
245 employees to perform indirect labour functions, rotating among machine
setups, engine inspections, and shipping. Each employee is paid $50,000 per
year on average, including benefits. On average, each employee works 1,600
hours per year.

200
automated production machines are leased for $14,000,000 in total each year.
Each machine is available for 1,600 hours per year, including set up time. Once
a machine is set up, no labour is necessary to oversee it. Machine-related
information for the year is as follows:

Basic

Heavy Duty

Machining hours per engine

.4

.6

Set up time per run (hrs.)

300

600

Number of production runs

100

50

Required

a.
(7 marks). Determine the amount of indirect
manufacturing costs allocated to one engine of each type (Basic, Heavy Duty)
based on the existing cost allocation basis (direct labour hours).

b.
(5 marks) Determine the total cost (direct
material, direct labour, indirect manufacturing overhead) of producing one
engine of each type using the existing cost allocation basis.

c.
(15 marks) Determine the indirect
manufacturing support costs for one engine of each type using time-driven
activity-based costing.

d.
(8 marks) Comment on the differences between
results calculated in parts b and c.

Template for Part A

Part
A

Answer

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