2011 ee sample exam

© 2011 The Society of Management Accountants of Canada. All rights reserved. ®/™ Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada.

No part of this document may be reproduced in any form without the permission of the copyright holder.

2011 Sample

Entrance Examination

(Time Allowed: 4 hours) Notes: i) All answers must be indicated on the scannable multiple-choice answer sheet.

Work done on the question paper and examination foolscap will NOT be marked. ii) Included in the examination envelope is a supplement consisting of formulae and

tables. It is a standard supplement that may be useful for answering questions on this paper.

iii) Examination materials must NOT BE REMOVED from the examination

writing centre. All examination materials (i.e. answer sheet, used and unused foolscap sheets, envelope, supplement and question paper) must be submitted to the presiding officer before you leave the examination room.

April 29, 2011 Version

2011 Sample Entrance Exam

© 2011 The Society of Management Accountants of Canada. All rights reserved. ®/™ Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada.

No part of this document may be reproduced in any form without the permission of the copyright holder.

TABLE OF CONTENTS Examination:

Instructions ......................................................................................... 1

Questions ............................................................................................ 3

Solution:

Summary .......................................................................................... 38

Solutions ........................................................................................... 39

Supplement of Formulae and Tables ..................................................... 71

* This supplement is provided to all candidates with the examination.


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INSTRUCTIONS: Use the multiple-choice answer sheet provided to record your answers to the questions. Be sure to enter your four-digit envelope number on the multiple-choice answer sheet. Select the BEST answer for each of the following 101 questions and record your answer on the multiple-choice answer sheet by blackening the appropriate answer space (i.e. oval) with a soft lead (HB) pencil. Answer all questions. Mark ONLY ONE ANSWER for each question. Sample Question: 189. (-) Market research and public relations costs are

a) engineered variable costs. b) discretionary variable costs. c) committed fixed costs. d) discretionary fixed costs. e) engineered fixed costs.

Assuming you select choice d) for your answer, you should blacken the “d” space on line 189 in the “ANSWERS” area of the multiple-choice answer sheet as shown below: 189 a b c d e Question Weighting Your performance will be based on the total weighted value of the questions answered correctly. Note that all questions are assigned the same weight, except for those specified with a plus (+) sign (i.e. has a higher weight) or minus (-) sign (i.e. has a lower weight). In the above example, there is a minus (-) sign at the beginning of the question, signifying that the question has a lower weighted value than the average question. Singular Versus Plural Phrasing For simplicity of wording, all questions are phrased as though there is a single correct answer, even when there are multiple correct answers. For example, the correct answer to a question that is worded, “Which of the following is...,” may be the choice that refers to two or more of the other choices, e.g. “Both a) and b) above.”


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Calculator Policy and Supplement The following models of calculators are authorized for use on the Entrance Examination: Texas Instruments TI BA II Plus (including the Professional model) Hewlett Packard HP 10bII (or HP 10Bii) Sharp EL-738C (EL-738) The supplement accompanying the Entrance Examination contains present value tables.


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Strategic Management 1. If economies of scale are an industry’s primary entry barrier, a new entrant’s major risk

is its inability to a) get buyers to switch to its products. b) access superior sources of raw materials for its products. c) match the pace of innovation of its established rivals. d) produce in sufficient volume to match the cost advantages of established industry

competitors. e) ensure quality of its finished products.

2. Conducting an analysis of a company’s financial ratios is beneficial because it

a) is a central component of value-chain analysis. b) identifies external opportunities for the company to pursue. c) uncovers critical industry trends. d) provides insights into a company’s financial position. e) none of the above.

3. The bargaining power of suppliers decreases when

a) there are many substitutes for the item supplied. b) there are many buyers in the market. c) the number of suppliers decreases. d) buyers cannot integrate backward along the value chain. e) costs are high for buyers to switch suppliers.

4. A company that currently competes in a single industry is seeking to reduce its

dependency on that industry by expanding into other industries. This company is using a a) forward integration strategy. b) diversification strategy. c) horizontal integration strategy. d) differentiation strategy. e) backward integration strategy.

5. JB Ltd. is a mid-sized company that produces light bulbs which are distributed in

Canada. Which of the following sources of differentiation would be most desirable for JB Ltd. to preserve a long-term competitive advantage? a) Reducing its price point below the competition. b) Expanding its distribution to Europe. c) Providing superior customer service to its retailers. d) Updating its packaging to stand out from the market. e) None of the above.


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6. (-) The levelling and initial decrease in sales growth of a product takes place in which stage of the product life cycle? a) The decline stage. b) The introductory stage. c) The maturity stage. d) The growth stage. e) The product development stage.

7. Speed of product development in uncertain, competitive environments characterizes

today’s competitive landscape. Which of the following organizational structures best helps a company accelerate the product development process in order to address rapid technological change? a) Multidivisional b) Matrix c) Functional d) Strategic Business Unit (SBU) e) Geographic

8. WH Retail has come to an agreement with one of its suppliers, UT Ltd. to open a new,

independent retail operation called WHUT Stores which would sell only UT products. Both companies have invested equal amounts of start-up capital, and both companies share revenues, costs and control of this new store. This is best described as a) an organic growth strategy. b) a joint venture. c) a strategic alliance. d) forward integration by UT Ltd. e) an acquisition by WH Retail.

9. When conducting a SWOT analysis, which of the following is NOT an example of an

external threat? a) Rising rate of national inflation. b) Increasing intensity of competition in the industry. c) Reduction in the number of suppliers. d) Diminishing production process when compared to competitors. e) Decreasing consumer confidence in the economy.


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Risk Management and Governance 10. When considering the effectiveness of a system of internal control, it should be

recognized that inherent limitations do exist. Which of the following is an example of an inherent limitation in a system of internal control? a) The effectiveness of procedures depends on the segregation of employee duties. b) Procedures are designed to assure the execution and recording of transactions in

accordance with management’s authorization. c) In the performance of most control procedures, there are possibilities of errors

arising from mistakes in judgement. d) Procedures for handling large numbers of transactions are processed by electronic

data processing equipment. e) None of the above.

11. (-) The primary responsibility for preventing fraud in an organization lies with

a) management. b) the internal auditor. c) security personnel. d) the audit committee of the board of directors. e) the external auditor.

12. Internal control consists of the overall plan of organization and the procedures that are

mainly concerned with a) safeguarding the assets and providing reliable financial records. b) promoting organizational efficiency and policy adherence. c) optimizing the use of resources. d) both a) and b) above. e) all of a), b) and c) above.

13. The audit committee of a public company helps facilitate good corporate governance

by a) being comprised of management and staff. b) evaluating the risk for fraud. c) allowing management to select and hire the external auditor. d) managing all financial processes of the company. e) All of the above.


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14. The returns of various companies over a 5-year period are as follows:

Year Company M Company N Company O Company P 6 (1%) (2%) 6% 10% 7 1% (10%) 7% (6%) 8 3% (6%) 5% (5%) 9 8% 4% 1% 6%

10 10% 8% 8% (1%) Based only on this historical information, which of the following statements is most correct? a) Company M has the least amount of risk. b) Company P has the greatest amount of risk. c) Company N has the greatest amount of risk. d) Company O has the least amount of risk. e) Both c) and d) above.

15. The responsibility of a Board of Directors at a publicly-traded company does NOT

include

a) providing expert advice to management. b) represent the shareholders’ best interests. c) participating in operations management. d) ensuring the organization meets disclosure requirements. e) overseeing strategic management.

16. The external auditor uses the audit risk model in determining the nature, timing and

extent of audit procedures. The audit risk model a) indicates that audit risk is only a function of inherent risk. b) defines audit risk as a threshold the auditor is willing to accept that the financial

statements may be materially misstated at the start of the audit engagement. c) indicates the extent to which audit procedures would decline when the auditor

detects an improvement in internal controls. d) suggests that inherent risk can only be assessed after extensive testing of

transactions. e) requires exact quantification of all components of the audit risk model.


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17. PDM Ltd. is a rapidly-growing chain of drug stores in Manitoba. PDM has 11 stores in 5 cities and plans to open 8 new stores in the next 2 years. The Vice-President of Information Technology reported to the CEO that the present information system is not adequate to handle the planned growth next year. At the present time, PDM uses software that is specifically designed for retail drug stores. To achieve successful development of the new information system, management should respond to the situation by a) issuing requests for proposals from at least three software vendors. b) hiring an information technology consultant to lead the project because

management does not have the time or technical skills required to evaluate alternatives.

c) assigning the internal auditor to lead the project because she will ensure adequate controls are included in the new system.

d) selecting a steering committee from the top levels of management, including senior management from each of the user groups.

e) adding more hardware to increase system capacity. 18. Which of the following is LEAST LIKELY to be detected by an internal control

system? a) Fraudulent actions by a group of employees b) Duplicate payments to suppliers c) Deviations from written procedures d) Fraudulent actions by an individual employee e) Unauthorized disbursements

19. Which of the following is NOT a component of internal control?

a) The control environment b) Information and communication c) Control activities d) Risk assessment e) Process appraisal

Performance Management 20. (-) Which of the following best describes the function of an enterprise resource

planning (ERP) system? a) Integrate the information systems of all functional areas of the organization. b) Manage the flows of products, services and information among organizations. c) Provide access to data and analysis tools for making complex, non-routine

decisions. d) Present structured, summarized information about aspects of business important

to executives. e) Apply reasoning capabilities and acquired knowledge within a specialized area to

provide advice and make recommendations.


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21. RSA Inc. manufactures a single product using an activity-based costing system. The

distribution of resources used in Year 2 across the cost pools are as follows:

Order size Order

Processing Customer Support

Manufacturing overhead 80% 10% 10% Selling and administration 10% 60% 30% Total activity 500,000 units 500 orders 60 customers

The company has the following indirect costs for Year 2:

Manufacturing overhead $600,000 Selling and administration 285,000 Total indirect costs $885,000

A customer placed 15 orders in Year 2. How much overhead would have been charged to this customer during Year 2 for order processing? a) $462 b) $6,930 c) $231,000 d) $26,550 e) $1,800

22. (-) In preparing the budget for the upcoming year, a manufacturer of consumer

products has budgeted $100,000 for advertising a particular product. This cost would be classified as a) a direct product cost. b) a discretionary period cost. c) a sunk fixed cost. d) an indirect conversion cost. e) a prime period cost.


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The following information pertains to questions 23 to 24. Acme Beds Inc. produces two models of beds: Regular and Majestic. Budget and actual data are as follows: Budget Actual Regular Majestic Regular Majestic Selling price per unit $300 $800 $325 $700 Sales volume in units 4,500 5,500 7,200 4,800 Variable costs per unit $220 $590 $238 $583

Master Budget Actual Sales revenue $5,750,000 $5,700,000 Variable costs 4,235,000 4,512,000 Contribution margin 1,515,000 1,188,000 Fixed costs 882,500 919,500 Operating income $ 632,500 $ 268,500

Market Data: Expected total market sale of beds 500,000 beds Actual total market sales of beds 666,667 beds

23. The sales price variance is

a) $437,500 unfavourable. b) $300,000 unfavourable. c) $50,000 unfavourable. d) $660,000 unfavourable. e) $69,000 favourable.

24. (+) The industry volume (market size) variance is (to the nearest hundred dollars)

a) $69,000 unfavourable. b) $202,000 unfavourable. c) $505,000 favourable. d) $454,500 favourable. e) $330,000 favourable.


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The following information pertains to questions 25 and 26. MC Ltd. manufactures two widgets, Standard and Supreme. Direct material is the only variable manufacturing cost because the production process is fully automated. The only variable selling cost is a 5% commission on the selling price. All other manufacturing, selling, general and administrative costs are fixed and the production capacity is limited to 235,000 machine hours. Budgeted information for Year 12:

Standard Supreme Budgeted sales (units) 100,000 90,000 Regular selling price $300 $450 Direct materials $100 $160 Machine time per unit 1 hour 1.4 hours

Manufacturing costs, other than direct materials, budgeted for Year 12 are $1,590,000 and are allocated to Standard and Supreme based on units. Selling, general and administrative costs, other than commission, budgeted for Year 12are $3,895,000 and are allocated to Standard and Supreme based on sales revenue. 25. Buyer Ltd. has approached MC Ltd. and would like to purchase 10,000 customized

units of the Supreme widget for $440 each. Because of capacity concerns, possible opportunity costs, and a one-time setup cost of $100,000, the manager of sales is willing to cut the commission from the regular 5% to 3% on this special order. The opportunity cost in accepting the special order is a) $955,510. b) $925,000. c) $1,000,000. d) $1,035,880. e) $1,500,000.

26. If MC Ltd. accepts the special order, its income will increase by

a) $2,568,000. b) $1,743,000. c) $1,775,000. d) $1,643,000. e) $1,230,500.


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27. NNK Manufacturing has two production departments, Cutting and Assembly and three support departments Custodial, Administration and IT. The company allocates variable costs on the basis of actual usage. For March, the costs and distribution of usage of services are as follows:

Custodial Admin IT Cutting AssemblyVariable costs $70,000 $120,000 $180,000 $540,000 $320,000 Custodial (m2) 200 100 800 1,000 Administration (hours) 100 200 700 600 IT (hours) 10 200 400 300

When applying the step-down method, the highest percentage of services provided to other service departments is the criterion used in setting the sequence for cost allocation. For March, the service costs allocated to the Cutting and Assembly departments in the first step of the step-down method of cost allocation are (rounded to the nearest ten dollars) a) Cutting: $52,500; and Assembly: $45,000. b) Cutting: $79,120; and Assembly: $59,340. c) Cutting: $26,670; and Assembly: $33,330. d) Cutting: $102,860; and Assembly: $77,140. e) Cutting: $113,020; and Assembly: $66,980.

28. Which of the following describes the core concept of kaizen budgeting?

a) Expenditures are budgeted on a program basis. b) Budgets are initiated on an incremental basis. c) Continuous improvement is built into the budget figures. d) Budgets are focused on the costs of the activities needed to produce and market

the organization’s products and services. e) Managers and employees jointly set budget targets.


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29. (+) ZZ Co. has two production departments, A and B, and two service departments, information technology (IT) and maintenance. The service department costs are allocated to departments based on number of computer hours used for IT and the department size in square metres for maintenance.

Department Computer Hours Square Metres Direct Costs A 2,000 2,200 $ 925,000 B 1,500 4,000 600,000 IT 300 400 80,000 Maintenance 200 200 30,000 Total 4,000 6,800 $1,635,000

Assuming ZZ Co. uses the direct allocation method, what is the total cost of Department A after allocating the service department costs (rounded to the nearest dollar)? a) $1,048,167 b) $981,359 c) $982,647 d) $974,706 e) $978,243

30. Given the following information for the manufacturing operations of REW Ltd. what is

the cost of goods manufactured for Year 5?

Opening Inventory January 1, Year 5

Ending Inventory December 31, Year 5

Direct materials $260,000 $235,000 Work in process $95,000 $75,000 Finished goods $350,000 $360,000

Direct materials purchased $350,000 Direct labour payroll $160,000 Direct labour hours 6,500 Factory overhead rate per direct labour hour $10.00

a) $600,000 b) $360,000 c) $555,000 d) $620,000 e) $595,000


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The following information pertains to questions 31 and 32. RG Ltd. is a manufacturer that makes printers, the T5X and T5XLL. Operating data for the printers for Year 5 is as follows:

T5X T5XLL Budgeted sales (units) 50,000 30,000 Expected selling price per unit $80 $120

T5X T5XLL Direct materials $10 $25 Direct labour ($10 per DLH) $10 $15 Variable overhead ($30 per MCH) $15 $15 Fixed overhead ($30 per MCH) $15 $15 Standard cost per unit $50 $70

Manufacturing overhead is allocated to the products based on machine hours (MCH), and an annual practical capacity of 55,000 machine hours is used in setting the fixed overhead rate. Variable selling and administrative costs are 5% of the selling price and the total fixed selling and administrative costs budgeted for the year are $900,000. 31. (+) With the given budgeted sales mix in units, the total break-even sales for Year 5

are a) 18,849 units. b) 53,403 units. c) 48,572 units. d) 77,863 units. e) 25,500 units.

32. If there were no flexible budget cost variances, and sales in Year 5 were 48,500 units

of T5X at $80 each and 32,000 units of T5XLL at $110 each, then analysis of the sales volume variance shows income is higher by: a) $61,500. b) $118,000. c) $56,500. d) $99,000. e) $62,500.


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33. A manufacturer had the following budgeted and actual production and overhead data:

Budgeted Department 1 Allocation base Machine hours Machine hours 15,000 Direct labour hours 20,000 Manufacturing overhead $620,000

Actual Department 1 Machine hours 15,900 Direct labour hours 20,120 Manufacturing overhead $640,500

How much was manufacturing overhead overallocated or underallocated (applied)? a) $16,700 overallocated b) $2,432 underallocated c) $16,780 underallocated d) $55,594 underallocated e) $58,930 overallocated

34. VT Inc. sells telephones for $50 per unit. Variable costs are $20.00 per unit and fixed

costs are $590,000. How many units of product must be sold to realize a profit of 20% of sales (rounded up to the nearest 10 units)? a) 19,970 b) 14,750 c) 59,000 d) 3,940 e) 29,500

The following information pertains to questions 35 and 36. A manufacturer processes 100,000 kg of direct materials to produce three products: Product X, Product Y, and Product Z. Products Y and Z can be further processed into specialized products, Y1 and Z1. There is a loss of 10% in output units between Y1 and Y and a loss of 20% in output units between Z1 and Z. The following information is for Year 4:

Production (kg)

at Split-Off Selling Price at Split-Off

Further Processing Costs

Selling Price of Final Product

Product X 15,000 $70 Product Y (Y1) 45,000 $80 $10/kg produced $120 Product Z (Z1) 40,000 $90 $30/kg produced $140

There were no beginning work-in-process inventories, and all production runs were completed at the end of Year 4. The total costs incurred in the joint manufacturing process were $1,000,000.


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35. (+) Which of the following statements is correct? a) Product Y should be processed further into Product Y1, and Product Z should not

be processed further into Product Z1. b) Products Y and Z should not be processed further into Products Y1 and Z1. c) Product Y should not be processed further into Product Y1, and Product Z should

be processed further into Product Z1. d) Products Y and Z should both be processed further into Products Y1 and Z1. e) The further processing decision cannot be made because joint costs have not yet

been allocated to Products Y and Z. 36. Using the relative sale value at split-off method, the joint costs allocated to Products X,

Y and Z are (rounding to the nearest dollar) a) Product X: $291,667; Product Y: $333,333; Product Z: $375,000. b) Product X: $127,273; Product Y: $436,364; Product Z: $436,364. c) Product X: $101,058; Product Y: $467,757; Product Z: $431,184. d) Product X: $150,000; Product Y: $450,000; Product Z: $400,000. e) Product X: $0; Product Y: $500,000; Product Z: $500,000.

-------------------------------- 37. When simple linear regression analysis is applied in estimating cost behaviour, all of

the following are criteria used to evaluate the estimated regression model EXCEPT a) validity of the assumptions of regression analysis. b) irrelevant high-low outliers. c) goodness of fit. d) significance of regression coefficient. e) economic plausibility.

38. Which of the following statements best describes a product in the mature stage of the

product life cycle? a) Sales and costs are increasing, and profits are declining. b) Sales are increasing at a diminishing rate, and competitors are plentiful. c) Sales, profits and competition are decreasing. d) Sales are increasing, costs are decreasing, and competition is increasing. e) Sales are low, costs are high, and there are few competitors.


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39. ABC Ltd. produces widgets and expected sales are as follows:

Month Units April 5,000 May 7,500 June 8,000 July 6,000

The company generally maintains an ending finished goods inventory volume of 15% of the next month’s sales volume and it keeps no work-in-process inventory. The widget sells for $120 and the standard cost of production is $80 per unit. What will be the budgeted cost of goods manufactured for June? a) $616,000 b) $712,000 c) $544,000 d) $640,000 e) $924,000

40. Which one of the following statements about the cost hierarchies of activity-based

costing is correct? a) Engineering costs incurred to change product designs is a facility-sustaining cost. b) If the cost of an activity increases with each hour of machine time, it is an input-

level cost. c) The cost of resources used each time in setting up the machine for a production

run is a batch-level cost. d) The compensation for a quality engineer, who is responsible for continuous quality

improvement projects implemented in the plant, is a product-sustaining cost. e) The cost of hiring security for the plant is a product-sustaining cost.

41. The budgeted total fixed and variable costs of the machine insertion activity centre for

XYZ Corp. in Year 8 is $530,000, assuming an activity level of 50,000 parts inserted. Cost behaviour analysis indicates that the variable cost per part inserted is $2.20 and that fixed costs remain the same within the relevant range of 48,000 to 52,000 parts inserted. Activity analysis indicates that the cost driver for the machine insertion activity is the number of parts inserted. In preparing a flexible budget for Year 8 at an activity level of 51,000 parts inserted, what would be the budgeted total costs of the machine insertion activity (rounded to the nearest hundred dollars)? a) $112,200 b) $642,200 c) $540,600 d) $532,200 e) $530,000


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42. Identifying the activities that are essential to a process is a component of which of the following steps of business process reengineering? a) Understand the current process. b) Identify a process for reengineering. c) State a case for action. d) Create a new process design. e) Evaluate enablers for reengineering.

43. JYD Inc. is introducing a new product next year. Costs pertaining to this product are

budgeted as follows:

Variable manufacturing costs per unit $89.00 Variable selling expenses per unit $22.50 Variable administration expenses per unit $10.90 Fixed manufacturing costs $870,000 Fixed selling expenses $545,000 Fixed administration expenses $275,000

The marketing department estimates the following sales at various selling prices:

Price Volume $180 59,000 $170 75,000 $160 90,000 $150 120,000 $140 145,000

In order to maximize profits, what price should JYD Inc. set for the new product? a) $180 b) $170 c) $160 d) $150 e) $140


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44. (+) A manufacturer has the following data:

Hours Required per Unit Department

Available Annual Machine Hours

Widget A

Widget B

Assembly 10,000 3 4 Packaging 4,000 1 2

Contribution margin per unit for Widget A is $12 and for Widget B is $14. Current market demand for Widget A is limited to 2,500 units per year. What is the yearly product mix that maximizes profitability? a) 0 Widget A, 2,000 Widget B b) 2,000 Widget A, 1,000 Widget B c) 2,500 Widget A, 625 Widget B d) 0 Widget A, 2,500 Widget B e) 3,333 Widget A, 0 Widget B

Performance Measurement 45. Company E is a large manufacturer that treats its divisions as profit centres. Division X

produces an electronic component at the following costs:

Variable production costs $80/unit Variable selling costs $10/unit Fixed costs (based on 10,000 units) $10/unit

Division Y currently purchases a similar component from an outside supplier for $105/unit. It has determined that the component produced by Division X could be used instead with no adverse effects on the quality of the final product. Currently, Division X, which is operating at full capacity, sells all of its output to outside customers at $112/unit per component. What is the lowest price at which Division X would agree to transfer the component to Division Y? a) $112. b) $90. c) $100. d) $102. e) $80.


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46. (+) PPT Ltd. has two divisions operating as profit centres, East and West. East produces widgets and currently sells only to external customers for $700 per widget. The variable manufacturing costs and variable selling expenses for each widget is $450 and $20 respectively. The following is production data for East during a normal year:

Production and sales capacity 20,000 Units Production and sales volume 18,000 units

West is planning on manufacturing a new product and will require 5,000 widgets to produce 5,000 units of a new product. West could meet its requirements by purchasing widgets from East or an external supplier for $665 per unit. East would not incur any variable selling expenses on internal sales. What is the minimum transfer price per unit that East would be willing to accept to supply West with 5,000 widgets? a) $588 b) $665 c) $700 d) $680 e) $450

47. Robert Motoz is the manager of Division B of a large manufacturing company.

Division B purchases all of its direct materials from Division A at a negotiated transfer price. Division B manufactures a product and sells this product on the market. Robert Motoz makes all production efficiency decisions for the division, including replacing and upgrading manufacturing equipment. The above represents which of the following types of responsibility centre? a) Cost centre. b) Revenue centre. c) Profit centre. d) Investment centre. e) Discretionary centre.

48. After an analysis of a company's operations, it was evident that department

performance varied and that every department worked independently to achieve departmental objectives. The company would like to improve overall product output which would require improvement from all departments. To achieve this improvement, the organization should a) introduce an employee stock program. b) develop a wage structure. c) increase the employee bonus program. d) launch a plant-wide incentive plan. e) None of the above.


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49. Supersales Inc. is a small but aggressive sales company with a high employee turnover. It provides lucrative incentives based on achieving individual sales targets and turning over inventory within its territory. Which human resource policy reinforces its incentive program? a) Promoting based on performance. b) Developing a clear policy of ethics. c) Ensuring employee career development. d) Maintaining consistent employee relations. e) Developing a strong employment equity statement.

50. A company has two divisions that are treated as investment centres. Data for each

division are as follows:

East Division West Division Revenue $80,000 $260,000 Net income $20,000 $35,000 Average total investment $180,000 $270,000

The company has a target rate of return of 12% for all investments. In evaluating the performance of these divisions, it can be concluded that a) East Division met the target minimum rate of return. b) West Division performed better because both its return on investment and residual

income are higher. c) West Division performed better because its return on investment is higher but its

residual income is lower. d) East Division performed better because both its return on investment and residual

income are higher. e) Both divisions met the target minimum rate of return.

51. Residual income is a better measure for performance evaluation of an investment

center manager than return on investment because a) the problems associated with measuring the asset base are eliminated. b) desirable investment decisions will not be neglected by high-return divisions. c) only the gross book value of assets needs to be calculated. d) returns do not increase as assets are depreciated. e) the arguments over the implicit cost of interest are eliminated.


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52. Which of the following is an example of an ethically questionable action committed by a management accountant? a) Near the end of a fiscal year with lower than expected profits, suggesting that an

expensive advertising campaign be delayed until the next fiscal year. b) Accepting a gift of a box of chocolates from a regular supplier and sharing the

chocolates with all of the company’s employees. c) At the request of a manager, capitalizing instead of expensing the development

costs of a new product when the probability of its success in the market is low. d) Reporting to the controller a suspicion that a line manager is providing incorrect

production data in an effort to increase his year-end bonus. e) Near the end of a fiscal year with lower than expected income, suggesting that

performance incentives to sales staff for the fourth quarter be increased. 53. Job enrichment provides more motivation than job enlargement because the

employees a) are assigned more tasks than before. b) have more control over planning their work. c) have more responsibility for scheduling. d) both a) and b) above. e) both b) and c) above.

54. A corporation declares a dividend in kind to its sole shareholder. The asset used for

this dividend has the following information:

Historical cost $150,000 Book value $85,000 Fair value $95,000

The tax effect of this dividend for the corporation is equivalent to the corporation disposing of the asset at a) $150,000. b) $85,000. c) $95,000. d) $10,000. e) $55,000.

55. The organizational performance measurement tool, Six-Sigma, can be best described

as a system that a) utilizes both financial and non-financial measurements. b) applies only to reducing manufacturing defects. c) uses facts and data to drive better customer-focused improvements. d) translates the company strategy into four balanced measurement perspectives. e) is focused on several categories including leadership, strategic planning and

results.


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56. To achieve the desired business outcomes, a company’s reward system would be most effective if it a) not only links incentives to factors that are spelled out in the strategic plan, but

also to factors that go beyond the strategic plan. b) includes both monetary and nonmonetary rewards linked to both individual and

corporate performance. c) bases incentives and rewards of all employees on achieving departmental annual

objectives. d) Both a) and b) above. e) Both b) and c) above.

57. (+) LOP Ltd. has the following results for two of its divisions.

Winnipeg Division Regina Division Revenues $2,100,000 $3,480,000 Operating income $540,000 $720,000 Average operating assets $2,340,000 $2,874,000 Target rate of return 14% 17%

After analyzing these results, you conclude that a) the Regina Division outperformed the Winnipeg Division because it generated a

better return on investment and residual income. b) the Regina Division outperformed the Winnipeg Division because it has a higher

target profit margin. c) the Winnipeg Division outperformed the Regina Division because it generated a

better residual income. d) the Winnipeg Division outperformed the Regina Division because it had a lower

operating leverage. e) the divisions performed equally.

Financial Management 58. (+) A bond was issued on June 1, Year 1, and it matures on June 1, Year 20. The

present date is June 1, Year 8, and the June 1, Year 8, coupon payment has just been paid. The bond has a face value of $50,000, a coupon rate of 6% compounded semi-annually, and a current yield of 8% compounded semi-annually. Ignoring taxes, what is the current dollar price of the bond (to the nearest hundred dollars)? a) $40,200. b) $42,500. c) $58,500. d) $61,500. e) $42,400.


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59. Actual and projected sales of a company for May and June are as follows:

Cash Sales Credit Sales May (actual) $185,000 $270,000 June (projected) $225,000 $290,000

All credit sales are collected in the month following the month in which the sale is made. The cash balance as at May 31 is $50,000. Cash disbursements for operating expenses in June are projected to be $350,000. The company plans to declare a $50,000 cash dividend on June 30 but will not pay it until 30 days later. A $160,000 down payment on a piece of equipment will be made in June. To ensure a $60,000 cash balance on June 30, what amount should the company plan to borrow in June? a) $295,000 b) $250,000 c) $75,000 d) $25,000 e) $185,000

60. West Coast Customs is evaluating the option of purchasing a new computer system

for $250,000. Given the system’s unique features, it is expected that sales will increase by $212,500 annually, while the system is in use. The contribution margin on the sales is 40%. The new system should provide the company benefits over the next seven years, at which point it will be scrapped. The capital cost allowance rate for the machine is 35%.The company’s tax rate if 40% and its cost of capital is 12%. Assuming that the computer equipment is to be purchased at the beginning of the first year and the cost savings are at the end of each year, which of the following represents the net present value (NPV) of the new machine? a) ($17,440) b) $53,039 c) $177,479 d) $401,879 e) $208,079


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61. (+) The sole shareholder of HTZ Ltd. is selling her business. Income before taxes for the fiscal year ended December 31, Year 9, was $240,000, a level that is expected to be maintainable into the foreseeable future. Currently, the shareholder’s son is employed by HTZ Ltd. and is earning $80,000 per year. The son’s services can be replaced by hiring a new employee for $45,000 per year. Upon a sale, the son will no longer be involved in the business. HTZ Ltd. also incurs $10,000 per year in administrative costs that are considered to be personal in nature. HTZ Ltd.’s tax rate is 40% and the appropriate earnings multiple is 10. Based on a capitalized earnings approach to business valuation, what is the value of the HTZ Ltd.’s shares? a) $1,500,000 b) $1,710,000 c) $1,440,000 d) $1,650,000 e) $2,850,000

62. (+) BXN Inc. has the following capital structure:

Current liabilities $250,000 Long-term debt $500,000 Preferred shares $300,000 Common equity $600,000

The long-term debt consists of a single bond issue paying 8% interest annually. These bonds currently yield 6% in the market. The current cost of the preferred shares is 7%. The market value of the common shares is $25 per share. A dividend of $2 per common share was recently paid. Common dividends are expected to grow at a rate of 3% per year. The company’s tax rate is 40%. What is BXN Inc.’s weighted average cost of capital (rounded to the nearest tenth of a percent)? a) 7.0% b) 8.5% c) 7.6% d) 8.0% e) 6.2%

63. During Year 4, a company sold its last piece of equipment. Prior to the sale of the

equipment, the UCC balance in its equipment class account was $100,000. The equipment cost $140,000 and sold for $110,000. Direct selling fees were $5,000. What is the recapture income from the sale of the equipment? a) $40,000 b) $10,000 c) $45,000 d) $5,000 e) A terminal loss of $30,000


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64. Which of the following is NOT a significant consideration in determining a desirable dividend policy for a firm? a) The firm’s reinvestment opportunities for retained earnings as compared with the

reinvestment opportunities for the shareholders of the firm. b) The shareholder’s desire for current income. c) The shareholder’s tax rate on dividends versus capital gains. d) The firm’s ability to repurchase shares in the open market. e) The firm’s cash position, both current and projected.

65. An investor purchased $60,000 worth of 10-year, 6% bonds on December 31,

Year 10, for $56,000. The interest payment dates are June 30 and December 31 each year. On January 1, Year 14, the investor decided to sell his bonds. The annual yield for similar bonds in the marketplace is 8%. How much money will the investor receive for his bonds (rounded to the nearest ten dollars)? a) $51,330 b) $53,630 c) $59,990 d) $51,822 e) $57,350

66. (+) CBV Ltd. had income for accounting purposes before taxes of $200,000 in

Year 10. In calculating this amount, expenses included $40,000 for amortization, $10,000 for charitable donations and $30,000 in entertainment expenses. The capital cost allowance claimed for Year 10 is $50,000 and $20,000 in dividends were paid to CBV’s shareholders. The company’s net income for tax purposes for Year 10 is a) $185,000. b) $215,000. c) $205,000. d) $235,000. e) $195,000.


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The following information pertains to questions 67 and 68. PPO Ltd. has the following financial results:

Year 5 Year 6 Year 7 Sales $540,000 $615,000 $695,000 Earnings before interest and taxes $160,000 $175,000 $210,000 Interest $20,000 $18,000 $15,000 Taxes $64,000 $70,000 $84,000 Earnings per share $1.52 $1.74 $2.22

67. What is the financial leverage for Year 6?

a) 1.38 b) 1.54 c) 1.04 d) 0.15 e) 6.75

68. What is the combined leverage for Year 7?

a) 1.38 b) 1.04 c) 1.00 d) 2.12 e) 1.54

-------------------------------- 69. A company with a debt-to-equity ratio above 1 recently paid down their long-term debt

with cash from the issuance of common stock. This transaction will impact the company’s debt-to-equity ratio and return on equity as follows: a) There will be no impact on the debt-to-equity ratio or return on equity. b) The debt-to-equity ratio will increase and the return on equity will decrease. c) The debt-to-equity ratio will decrease and the return on equity will increase. d) Both the debt-to-equity ratio and return on equity will decrease. e) Both the debt-to-equity ratio and return on equity will increase.

70. PTU Ltd. is issuing preferred shares to raise capital. Each preferred share will be

issued with a par value of $500 and a $35 cumulative dividend. The preferred shares will result in underwriting expenses of $20 per share. The underwriting expenses are tax deductible and the tax rate is 40%. What is the cost of the preferred shares? a) 7.17% b) 4.20% c) 7.00% d) 7.29% e) 4.30%


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71. (+) Large Ltd. is considering a bid to take over GWL Ltd. Should the takeover occur, Large Ltd. would benefit from GWL Ltd's cash flows before tax and interest of:

i) $200,000 per year for the first three years, and ii) $220,000 per year from the fourth year into perpetuity.

Assume that the cash flows occur at the end of each year, the tax rate is 30% for both companies, and Large Ltd’s after-tax required rate of return is 12%. What is the maximum amount that Large Ltd. should be willing to pay to take over GWL Ltd. (rounded to the nearest thousand dollars)? a) $1,786,000 b) $2,170,000 c) $1,642,000 d) $1,250,000 e) $1,394,000

Financial Reporting 72. Prior to recording the December 31, Year 5, year-end adjusting entries for a small

business, revenues exceed expenses by $200,000. The following information was known at December 31, Year 5:

i) Dividends of $20,000 were declared on December 31, Year 5 and are to be paid January 15, Year 6.

ii) Sales included $10,000 for services to be provided from January 1, Year 6 to January 31, Year 6.

iii) $5,000 was paid and expensed on December 1, Year 5 for insurance that provides insurance coverage for Year 6.

Assuming the company prepares financial statements only at year end, what is its accounting income before taxes for Year 5? a) $195,000 b) $235,000 c) $190,000 d) $205,000 e) $200,000

73. Disclosure notes are considered a part of audited financial statements. Which of the

following would NOT be a part of disclosure notes? a) Related party transactions. b) The method of accounting that is used to account for investments. c) Management’s view of the future within their industry. d) The cost of defined contribution pension plans. e) Value method to account for stock option awards.


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74. On July 1, Year 3, BYER Ltd. purchased 20,000 shares of XD, a public company, for $20 per share. At the end of Year 3, shares of XD were worth $25. If BYER designated its investment in XD as available-for-sale and has a fiscal year-end of December 31, what would BYER record on December 31, Year 3? a) Investment income of $100,000 on its income statement. b) $100,000 of other comprehensive income. c) Nothing is recorded until the shares are sold. d) Investment income of $50,000 on its income statement. e) $50,000 of other comprehensive income.

75. BPL Ltd. purchased an asset on January 1, Year 5 for $500,000. On, January 1,

Year 8, the asset had a carrying value of $171,000 but was reassessed and it was found that the asset could be sold on the market for $150,000 after selling costs. The cash flow generated by the asset in each of the next 5 years is $34,000 with no salvage value at the end of Year 12. The rate of return from the asset is 6%. According to IAS 36, the reassessment would result in a) an impairment loss of $21,000. b) an impairment loss of $1,000. c) an impairment loss of $27,792. d) no impairment loss because the asset has not been sold. e) no impairment loss because the recoverable amount is higher than the carrying

value. 76. Which of the following will create a temporary difference between accounting and

taxable incomes for which future income tax debits or credits must be recorded? a) Dividends received on Canadian investments b) Political contributions c) Membership dues to a country club at which clients are entertained d) Provision for warranty repairs e) None of the above


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77. HIJ Ltd., a publicly traded company, has five operating segments all producing different products with the following results:

Segments Total

Revenues Operating

Profits (Losses) Total

Assets Total

Liabilities Q $ 50 $ 4 $ 100 $150 R 50 3 75 100 S 160 10 350 175 T 270 25 500 275 U 40 2 125 60

Total $570 $44 $1,150 $760 Based on the quantitative thresholds, which segment(s) would be reported separately? a) T only. b) S and T only. c) S, T and U only. d) Q, R and U only. e) All segments would report separately.

78. On January 1, Year 1, PPL Ltd. paid $1 million to acquire a gravel pit that it will use in

its operations. At that time PPL estimated that the pit would be used for 10 years and at the end of 10 years, PPL would have to spend $300,000 to restore the site to environmental regulations. At the beginning of Year 6, there was a change in environmental regulations and it was estimated that an additional $100,000 will have to be spent to restore the site. Assuming an interest rate of 4% and use of the straight-line method, the depreciation expense related to the gravel pit for Year 6 is (rounded to the nearest hundred) a) $100,000. b) $140,000. c) $120,300. d) $150,000. e) $136,700.

79. GF Ltd., a Canadian company using Accounting Standards for Private Enterprise, has

a 500,000 FC (foreign currency) note payable due in four years. The exchange rate was $1 Canadian = 1 FC when the note was issued on January 1, Year 1. On December 31, Year 1, the exchange rate was $1 Canadian = 1.25 FC. What would be the foreign exchange gain or loss recognized in GF’s income statement for Year 1? a) $100,000 gain b) $100,000 loss c) $25,000 gain d) $25,000 loss e) Nothing is recorded on the income statement for Year 1.


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80. (+) In its first year of operations, HAS Charities received: 1. $100,000 of restricted donations for medical research. 2. $50,000 of unrestricted grants for the general fund. 3. $250,000 of endowments to be maintained permanently. 4. $4,000 of interest income from the endowment investments (all endowment

interest earned is unrestricted). During its first year, the following expenses were incurred: 1. $20,000 spent on medical research. 2. $35,000 spent on general operating activities. HAS Charities uses the deferral method of accounting for contributions and does not set up a separate fund for restricted donations for medical research. What is the total amount that HAS Charities should report as revenue in the statement of operations? a) $70,000 b) $74,000 c) $154,000 d) $55,000 e) $59,000

81. (+) JPL Construction uses the percentage-of-completion method on its long-term

construction contracts. In Year 2, JPL agreed to construct a project for a contract price of $20 million. The job was completed in Year 5 with the following information:

(in millions) Year 3 Year 4 Year 5 Costs incurred to date $5 $12 $17 Estimated costs to complete $10 $5 $0 Billings to date $7 $13 $20 Collections during the year $6 $7 $7

What amount of the total contract price would be recognized as revenue in Year 4? a) $6,666,000 b) $14,118,000 c) $13,000,000 d) $7,452,000 e) $7,000,000

82. A distinguishing factor in classifying an item as a change in accounting estimate as

opposed to an error is that a change in an accounting estimate a) is largely a matter of professional opinion as opposed to a question of fact. b) results from new information. c) affects more than one accounting period. d) is very rare. e) all of the above.


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83. XOM Inc.’s year-end long-term debt and shareholders’ equity at December 31, Year 5, consisted of:

Common shares: 10,000,000 issued $50,000,000Preferred shares: 5.75% cumulative; 500,000 issued; no dividend in arrears $20,000,000Retained earnings $5,500,000Convertible bonds: 6.5% interest; issued at par January 1, Year 2; maturing January 1, Year 12 (each $1,000 bond is convertible into 200 common shares) $18,000,000

In Year 5, XOM Inc. reported net income after taxes of $8,000,000 (assume a 40% tax rate). At the end of Year 5, a common dividend of $0.12 per share was declared and paid. What are XOM Inc.’s basic earnings per share for Year 5 (rounded to the nearest cent)? a) $1.35 b) $0.73 c) $0.69 d) $0.80 e) $0.59

84. Company X and Company Y are unrelated companies who have chosen to apply

Accounting Standards for Private Enterprises. They have agreed on the following exchange of assets: Company X gives Company Y two cars plus $25,000 cash; Company Y gives Company X two trucks. The transaction does not have commercial substance. Company X would record a) a loss of $25,000. b) the two trucks at the fair value of the two cars less $25,000. c) the two trucks at the fair value of the two cars plus $25,000. d) the two trucks at the carrying amount of the two cars less $25,000. e) the two trucks at the carrying amount of the two cars plus $25,000.

85. (+) On January 1, Year 1, JVC Inc. issued $750,000 of 6% bonds due in five years,

with semi-annual interest payments payable on June 30 and December 31 each year. Investors are willing to accept an annual interest rate of 4% (compounded semi-annually). What will be the amount of the premium on bonds payable on January 1, Year 2, assuming the effective interest method is used to amortize premiums and discounts (rounded to the nearest hundred dollars)? a) $258 b) $54,600 c) $90,000 d) $269,400 e) $117,100


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86. Arts & Crafts Ltd. currently has current assets of $45,000, total assets of $75,000, current liabilities of $31,500, and total liabilities of $66,000. Management is looking to reduce its investment working capital. Which one of the following strategies would reduce the working capital? a) Change the inventory turnover ratio from 4 times to 3 times. b) Decrease the payables turnover from 15 times to 10 times. c) Increase the days in receivable from 18.25 days to 24.3 days. d) Decrease the days in payables from 36.5 days to 24.3 days. e) Decrease the receivables turnover from 20 times to 15 times.

87. An intangible asset is recognized when: the expenditures are reliably measureable;

there is an ability and intention to use or sell the asset and a) completion of the asset is technically feasible. b) there are sufficient resources to complete and sell or use the asset. c) there is an existing market for the asset. d) only a) and b). e) All of the above.

88. (-) According to IAS 39, which of the following types of investments may result in other

comprehensive income? a) Significant influence investment b) Held for trading investment c) Held to maturity investment d) Available for sale investment e) All of the above

The following information pertains to questions 89 to 91. Selected data from OST Inc.’s financial statements are presented below (in thousands):

December 31 Year 2 Year 1 Cash $ 48 $ 39 Marketable securities 254 241 Accounts receivable (net) 315 286 Merchandise inventory 660 588 Tangible fixed assets 720 616 Total assets 2,096 1,848 Current liabilities 555 515 Total liabilities 976 1,050 Common shares 339 294 Retained earnings 781 504


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Year 2 Operations Net sales (75% on account) $6,262 Cost of goods sold 4,320 Interest expense 75 Income tax 265 Net income 577 Dividends declared and paid 300

89. What is the quick ratio for Year 2?

a) 1.11 b) 0.54 c) 2.30 d) 2.15 e) 3.78

90. What is the accounts receivable turnover in days (using 365 days) for Year 2?

a) 17.5 days b) 59.2 days c) 22.2 days d) 23.4 days e) 15.6 days

91. What is the times interest earned for Year 2?

a) 12.2 times b) 8.2 times c) 11.2 times d) 7.7 times e) 8.7 times

-------------------------------- 92. KR Ltd. has agreed to lease a piece of equipment for $15,000 per year over seven

years with the first payment due January 1, Year 5. At the end of the lease, the equipment will have a market value of $10,000 and KR Ltd. can purchase the equipment for $7,000. The interest rate implicit in the lease contract is 4% and the fair value of the equipment on January 1, Year 5, is $99,000. What amount should WC Ltd. record on the balance sheet for this lease on January 1, Year 5? a) $99,000 b) $90,030 c) $98,950 d) $93,630 e) $0 since this is an operating lease.


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93. A local business was purchased including its entire inventory, a piece of land and the office building situated on the land, all for one lump sum price. How would the purchase price be allocated among the assets? a) Relative fair value. b) Relative book value. c) Amortized cost. d) Historical cost. e) Undepreciated capital cost.

94. (+) The following information is for XYZ Ltd.’s defined benefit pension plan for Year 18:

Current service cost $150,000Benefits paid to retirees $80,000Contributions (funding) remitted on December 31 $100,000Interest on accrued benefits (accrued benefit obligation) 6%Actual and expected return on plan assets $70,000Accrued benefit obligation, January 1 $1,100,000

XYZ Ltd also calculated the Year 18 amortization of actuarial losses as $25,000. What was XYZ Co.’s pension expense for Year 18? a) $171,000 b) $146,000 c) $251,000 d) $91,000 e) $51,000

95. The following relates to the investment activity of Vast Ltd. for Year 15:

i) January 1, Vast acquires 200,000 shares (35%) of YHG Ltd. for $1,000,000. ii) July 1, YHG Ltd. announces and pays a cash dividend of $0.20 per share. iii) YHG Ltd. reports net income of $350,000 for the fiscal year. iv) At December 31, Year 15, the shares of YHG Ltd. had a fair value of $6.50.

Assuming Vast Corporation has significant influence over YHG, what would be the balance in the Investment in YHG Ltd. at December 31, Year 15, on the books of Vast Corporation? a) $1,122,500 b) $960,000 c) $1,082,500 d) $1,162,500 e) $1,300,000


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96. Based on past experience, 1% of FSL Inc.’s credit sales are uncollectible. As at January 1, Year 4, FSL Inc. had a credit balance of $10,000 in the allowance for uncollectible accounts. Sales for Year 4 were $2 million of which $1.5 million were credit sales. During Year 4, FSL Inc. wrote off $16,500 of uncollectible accounts consisting of sales made during Year 3. Also in Year 4, the company received $4,100 as payment of an account receivable that had been written off as uncollectible in Year 3. Using the percentage-of-sales method, what credit balance should FSL Inc. report for the allowance for uncollectible accounts in its December 31, Year 4, balance sheet? a) $8,500 b) $15,000 c) $17,600 d) $12,600 e) $25,000

97. In defining an asset, which of the following is NOT essential?

a) The transaction or event giving rise to the asset must have already occurred. b) The asset must have a capacity to contribute to future net cash flows. c) There must be a related expenditure. d) The entity must control access to the benefit. e) All of the above are required.

98. (+) Below are transactions of XYZ Company that occurred during Year 10:

i) Mortgage payments totalled $60,000. ii) Took out a $100,000 five-year loan. iii) Inventory decreased $20,000. iv) Declared dividends of $15,000 on December 31, Year 10, to be paid on

January 5, Year 11. Dividends paid were classified as financing in Year 9. v) Purchased equipment in exchange for $10,000 cash and furniture valued at

$15,000. vi) Earned net income of $100,000. vii) Accounts payable decreased by $15,000. viii) Recorded amortization of $20,000.

What would be the net increase in cash from operating activities reported on the Cash Flow Statement for the year ended December 31, Year 10? a) $105 000 b) $140,000 c) $115,000 d) $125,000 e) $110,000


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Cross Competencies The following information pertains to questions 99 to 101. MMM Ltd. is a raw materials supplier and it is looking to grow its top line revenue. It is considering buying one of its customers, XYZ Refining, to achieve that growth objective. XYZ Refining’s most recent balance sheet is as follows:

Assets Cash $ 125,500 Accounts receivable 245,000 Inventory 175,000 Equipment (net) 400,500 Building and land (net) 800,000 Total Assets $1,746,000

Liabilities and Equity Accounts payable $ 124,500 Long-term debt 300,000 Mortgage payable 274,500 Common shares 700,000 Retained earnings 347,000 Total Liabilities and Equity $1,746,000

99. Research of XYZ’s assets found that equipment was over-valued by $50,000, building

and land was under-valued by $125,000 and accounts receivable is over-valued by $8,000. All other assets and liabilities had book values equal to fair value. Negotiations between owners have resulted in a purchase price of $1,200,000. Based on the $1,200,000 purchase price, how much would MMM pay for goodwill? a) $698,500 b) $700,000 c) $153,000 d) $86,000 e) $347,000

100. (-) If MMM Ltd was going to use the purchase of XYZ to achieve their growth

objective, what strategy have they employed? a) Alliance b) Vertical integration c) Merger d) Joint Venture e) Horizontal integration


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101. MMM Ltd. would finance the purchase by using $250,000 of retained earnings, issuing $650,000 5-year non-convertible bonds at 8% and borrowing the remainder as a long-term loan from the bank at an interest rate of 5%. The owners of MMM require a return of 12%. Assume MMM current capital structure weightings are unchanged, what is the weighted average cost of capital (WACC)? a) 8.08% b) 8.33% c) 12.0% d) 7.05% e) 9.11%

End of Exam


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Solution Summary

1 d 35 a 69 d 2 d 36 b 70 a 3 a 37 b 71 d 4 b 38 b 72 a 5 c 39 a 73 c 6 c 40 c 74 b 7 b 41 d 75 a 8 b 42 a 76 d 9 d 43 b 77 c

10 c 44 c 78 e 11 a 45 d 79 a 12 e 46 a 80 b 13 b 47 d 81 d 14 e 48 d 82 b 15 c 49 a 83 c 16 c 50 b 84 e 17 d 51 b 85 b 18 a 52 c 86 b 19 e 53 e 87 e 20 a 54 c 88 d 21 b 55 c 89 a 22 b 56 b 90 d 23 b 57 a 91 a 24 c 58 e 92 d 25 b 59 d 93 a 26 d 60 b 94 a 27 b 61 b 95 c 28 c 62 c 96 d 29 b 63 b 97 c 30 d 64 d 98 d 31 b 65 b 99 d 32 c 66 c 100 b 33 a 67 b 101 a 34 e 68 d


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Solutions 1. Answer: d.

Economies of scale, the “primary” entry barrier in the question, do not deter an entrant from accomplishing choices a), b), c) and e). If significant cost advantages result from economies of scale, it becomes difficult, if not impossible, for a new entrant to produce on a scale comparable to that of its established rivals and achieve such cost advantages. On the other hand, even if a large-scale production is possible, it involves a greater risk of mammoth initial capital costs, which may easily turn into sunk costs.

2. Answer: d.

Financial ratio analysis identifies how an organization is performing according to its balance sheet and income statement from a historical perspective to detect trends. Ratio analysis also allows for an organization to compare its financial performance against that of other organizations in the same industry and/or industry norms. This trend and comparative analysis serves as an indicator of the organization’s strengths and weaknesses. Choice a) Value-chain analysis views the organization as a sequential process of

value-creating activities. It is very useful in determining the organization’s competitive advantage. Financial analysis does not provide sufficient detail regarding the various activities in the value chain.

Choice b) Ratio and comparative analysis is useful for determining strengths and weaknesses, not opportunities and threats.

Choice c) Ratio and comparative analysis examines internal trends, not external industry trends.

3. Answer: a.

When there are many substitutes, buyers have more choices which lessen the supplier’s bargaining power. Choices b) to e) all increase the bargaining power of suppliers.

4. Answer: b.

Diversification strategies strive to reduce the dependency of the firm on a single industry or single class of product or service. Choice a) A forward integration strategy would be expanding to gain control over its

distribution (not supply) chain. Choice c) A horizontal integration strategy would involve strengthening its presence in

the current industry internally (e.g. through research and development) or externally (e.g. acquiring a competitor).

Choice d) Differentiation strategies emphasize creating value through the uniqueness of the good or services being provided.

Choice e) Backward integration involves gaining control over a function in the value chain that was previously performed by a supplier.


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5. Answer: c. Comprehensive customer service tends to yield a longer lasting and more profitable competitive edge, making it the most desirable of the choices listed. Choice a) This approach would be easily copied by competitors which would lead to a

short-term advantage making it less desirable. Choice b) This will not differentiate itself from the competition and be a considerable

investment for a mid-size company. Choice d) JB Ltd. is already differentiated from the competition with its packaging, so

a further change will not provide a long-term solution. 6. Answer: c.

New products can be seen to follow a life cycle pattern beginning with the introductory stage where customers begin to try the product and company profits on the product start in the negative range. Once consumers start to accept the product, it will enter the growth stage where we see rapid sales growth and high profitability. As more companies enter the market for that product, enticed by the high profitability, and competition thus increases, we see downward pressure on price and a squeezing of profit margins. Here sales growth for the company begins to decline and this is referred to as the maturity stage. Without new product innovation and improvement, the product will enter the decline stage of the life cycle.

7. Answer: b.

Only a matrix structure allows a different mix of resources at various stages of a technologically complex product. It provides the flexibility required for the availability of a proper combination of organizational resources when products or processes change dramatically. Choices a), c), d) and e) are wrong because, under these structural choices, project-specific technological expertise cannot be combined with the vertical flows of authority and communication.

8. Answer: b.

A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity and sharing in the revenues, expenses, and control of the enterprise. Choice a) Organic growth is growth experienced within existing companies and

excludes new business enterprises. Choice c) A strategic alliance does not include equity investment and generally is an

agreement between two companies to share resources. Choice d) Integration relates to acquisition of companies in the value chain. Choice e) Acquisition is the purchasing of another company. This is the creation of a

company. 9. Answer: d.

Diminishing production process in relation to competitors is an internal weakness, not an external threat. Choices a), b), c) and e) are all examples of external threats.


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10. Answer: c. At some point in any process, individual judgement will be relied on and it is neither controllable nor always correct. Choice a) Internal controls would create the segregation of duties appropriate to

maximize effectiveness. Choice b) Procedures are created to assure management that employees are acting

in accordance to proper authorization. Choice d) Electronic processing is relied upon to increase control as equipment,

assuming correct setup, will be error-free. 11. Answer: a.

The principal mechanism for preventing fraud is control. Primary responsibility for establishing and maintaining control rests with management. Such prevention is ultimately a matter of policies and procedures established by management.

12. Answer: e.

The definition of internal control indicates that it consists of the policies and procedures established and maintained by management to assist in achieving its objective of ensuring the orderly and efficient conduct of the entity’s business. This includes the strategic plan of organization and all the related methods adopted within the business to optimize the use of resources (choice c), prevent and detect errors and fraud, compliance with policies, plans, laws and regulations, safeguard assets (choice a), assure accuracy and reliability of accounting records (choice a), promote organizational economy and efficiency (choice b) and encourage use of effective decision-making processes. Therefore, choice e) is the correct answer.

13. Answer: b.

The board of directors passes on responsibility for evaluating the risk of fraud to the audit committee as it has oversight responsibility for the financial reporting process. Choice a) Part of good governance includes having members who are independent

including an audit committee comprised entirely of independent members. Choice c) This is a typical duty of the audit committee: to hire and monitor

performance of the external auditor. Choice d) This is the role of the company’s senior financial management staff and not

the audit committee. 14. Answer: e.

Company N has the greatest spread of returns (18%) and there is no information that would guarantee Year 11 is positive. Therefore, Company N has the greatest risk.

Company O has the smallest spread, 7%, which would lead to the least risk. Choice a) Company M has a spread of returns of 11% which is greater than

Company O. Choice b) Company P has a spread of returns of 16% which is less than Company N. Choices c) and d) are correct. Hence e) is correct.


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15. Answer: c. This is a common downfall of Boards. A Board should hire and oversee management who are responsible for execution and management of the operations that adhere to the policies and strategy created by the Board. Choice a) This is the typical role of a Board. Choice b) Boards are created to have a body that represents and directs

management in the best interests of the organization’s owners. Choice d) This is a requirement from the Sarbanes-Oxley Act. Choice e) The critical role of the Board is to create and oversee the strategic

management of the organization. 16. Answer: c.

The auditor will require less evidence if the control risk decreases (detection risk will be larger). Choice a) Audit risk is a function of inherent risk, control risk, and planned detection

risk. Choice b) Audit risk is a measure of how willing the auditor is to accept that the

financial statements may be materially misstated after the audit engagement is completed and an unqualified opinion has been issued.

Choice d) The auditor performs risk assessment procedures to gain an understanding of the entity through enquiries of management, analytical procedures, observation and inspection. Testing of transactions is used for testing the controls in place and for substantive tests of balances.

Choice e) An understanding of the relationship between model components and the effect which changes in the components have on the amount of evidence needed will allow practitioners to use the model by classifying risk in terms of high, moderate or low.

17. Answer: d.

The steering committee guides the system development life cycle. The user departments must be represented on the committee. Management is ultimately responsible to the board and shareholders for the system adopted. Choice a) There has been no system planning or system analysis performed.

Vendors could not propose a system without parameters. Choice b) While a consultant could be helpful, management is ultimately responsible

for approving the new system. Choice c) Adequate controls are important to the new system, but the development of

the new system is beyond the competence of any one person, especially one who may not have the IT skills necessary to lead it.

Choice e) Both hardware and software are part of the system. It is unreasonable to assume that hardware alone will solve the growth issue.

18. Answer: a.

Fraudulent actions by a group of employees (i.e. collusion) are difficult to detect by an internal control system. Such controls can be circumvented by a group of employees who collude to defraud the company.


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19. Answer: e. There are five distinct components to internal control; process appraisal is not one of them. Choices a) to d) are components and the fifth component is monitoring of controls – to assess the quality of the controls over a period of time.

20. Answer: a.

Enterprise resource planning systems enable all functional areas within an organization to be part of an integrated information system. Choice b) This is a supply chain management system. Choice c) This is a decision support system. Choice d) This is an executive information system. Choice e) This is an expert system.

21. Answer: b.

10% x $600,000 manufacturing overhead costs = $60,000 60% x $285,000 selling and administrative costs = $171,000 Total customer support costs = $60,000 + $171,000 = $231,000 Allocation rate = $231,000/500 = $462 per order Order processing costs charged to the customer = $462 x 15 = $6,930 Choice a) Applies the rate on the basis of number of customers: $462 x 1 = $462 Choice c) Ignores allocation rate: $231,000 Choice d) Uses activity rate: 15/500 x $885,000 = $26,550 Choice e) Only uses manufacturing overhead: $60,000/500 = $120 x 15 orders = $1,800

22. Answer: b.

A period cost is matched against revenues on a time period basis and, for a manufacturing company, is a cost other than one included as part of the costs of manufacturing goods. Because advertising is not related to the production of the product, it is a period cost. A discretionary cost is one that has no clearly measurable cause-and-effect relationship between output and resources used, and that arises from periodic decisions regarding the maximum amount of costs to be incurred. The cost of advertising is an example of a discretionary cost. Choice a) A direct cost is one that is related to a particular cost object and can be

traced to it in an economically feasible way. A product cost for this company would be one that is involved in the manufacture of the product and would be matched against sales (as opposed to being matched against a time period). Advertising could be considered a direct cost if the cost object is the marketing department, but it would not be considered a product cost in a manufacturing company.

Choice c) A sunk cost is a past cost that cannot be changed. The advertising cost is a planned cost that has not yet been expended. Therefore, although it is a fixed cost, it is not a sunk cost.

Choice d) A conversion cost is a manufacturing cost other than the cost of direct materials, and can be direct or indirect. An advertising cost is not a manufacturing cost; therefore, it is not a conversion cost.

Choice e) A prime cost is a direct manufacturing cost, usually the cost of direct materials and direct manufacturing labour. Advertising is a period cost, but it is not a prime cost of manufacturing.


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23. Answer: b.

Sales Price Variance = Actual sales volume x (Actual price - Budgeted price) Regular 7,200 x ($325 - $300) = $180,000 F Majestic 4,800 x ($700 - $800) = 480,000 U $300,000 U

Choice a) Uses budgeted volume: (4,500 x $25) - (5,500 x $100) = $437,500 U Choice c) Total sales variance: $5,700,000 - $5,750,000 = $50,000 U Choice d) Assumes variance pertaining to Regular is unfavourable: $180,000 +

$480,000 = $660,000 U Choice e) Sales volume variance: [$80 x (7,200 - 4,500)] + [$210 x (4,800 - 5,500)] =

$69,000 F 24. Answer: c

Industry volume variance = (Actual market size - Budgeted market size) x Budgeted market share x Budgeted average contribution margin = (666,667 - 500,000) x [(4,500 + 5,500)/500,000] x [$1,515,000/(4,500 + 5,500)] = $505,000 F Choice a) Sales quantity variance: [(7,200 - 4,500) x $80] + [(4,800 - 5,500) x $210]

= $69,000 unfavourable Choice b) Market share variance: [(12,000/666,667) - (10,000/500,000)] x 666,667 x

($1,515,000/10,000) = $202,000 unfavourable Choice d) Uses actual market share: (666,667 - 500,000) x [(7,200 + 4,800)/666,667]

x [$1,515,000/(4,500 + 5,500)] = $454,500 favourable Choice e) Uses actual average contribution margin: (666,667 - 500,000) x [(4,500 +

5,500)/500,000] x [$1,188,000/(7,200 + 4,800)] = $330,000 favourable


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25. Answer: b. Machine time requirement: 10,000 units of Supreme for special order 14,000 hours 90,000 units of Supreme 126,000 100,000 units of Standard 100,000 Total machine time required 240,000 hours Standard Supreme Selling price $300 $450 Variable costs Direct materials $100.00 $160.00 Commission $15.00 $22.50 Total variable costs $115.00 $182.50 One-time fixed costs Throughput per unit $185.00 $267.50 Throughput per machine hour $185.00 $191.07

* $100,000/10,000 units = $10 FC per unit. Since the throughput per machine hour of the Standard is lower than the throughput per machine hour of the Supreme, production of the Standard should be reduced. Reduce production of standard widget by 5,000 hours to remain within 235,000 hour capacity. 5,000 hours = 5,000 standard widgets Opportunity cost of special order = 5,000 units x $185 = $925,000 Choice a) Reduces production of Supreme: 3,572 units x $267.50 = $955,510 Choice c) Misses commission costs: 5,000 x $200 = $1,000,000 Choice d) Reduces production of Supreme and misses commission: 3,572 x $290 =

$1,035,880 Choice e) Only uses selling price: 5,000 x $300 = $1,500,000

26. Answer: d.

Increase in income = [10,000 x ($440 – $160 – [3% x $440])] - $100,000 – (5,000 x $185) = $2,668,000 – 100,000 – 925,000 = $1,643,000 Choice a) Misses opportunity cost: $2,668,000 – 100,000 = $2,568,000 Choice b) Misses the set-up fee: $2,668,000 – 925,000 = $1,743,000 Choice c) Misses commission reduction: $2,800,000 – 100,000 – 925,000 =

$1,775,000 Choice e) Uses Supreme as opportunity cost: $2,668,000 – 100,000 – (5,000 x

$267.50) = $1,230,500


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27. Answer: b. Percentage of services allocated:

from Custodial to Administration & IT = 300/2,100 = 14.3% from Administration to Custodial & IT = 300/1,600 = 18.7% from IT to Custodial & Administration = 210/910 = 23.1% Allocation of IT service costs to: Cutting = $180,000 x 400/910 = $79,120 Assembly = $180,000 x 300/910 = $59,340 Choice a) Incorrectly allocates Administration service costs. Choice c) Incorrectly allocates Custodial service costs. Choice d) Incorrectly allocates all IT costs. Choice e) Uses costs to calculate allocation:

Cutting = 180,000 x 540/860 = 113,020 Assembly = 180,000 x 320/860 = 66,980

28. Answer: c.

Kaizen budgeting is a budgetary approach that explicitly incorporates continuous improvement during the budget period into the resultant budget numbers. An example would be budgeting 6.5 machine hours per unit in the first quarter, 6.2 machine hours in the second quarter, 5.9 machine hours per unit in the third quarter and 5.7 machine hours per unit in the fourth quarter. Choice a) describes program budgeting. Choice b) describes incremental or traditional budgeting. Choice d) describes activity-based budgeting. Choice e) describes participative budgeting.

29. Answer: b.

Department A costs = Direct costs + IT allocated costs + Maintenance allocated costs = $925,000 + ([2,000/(2,000 + 1,500)] x $80,000) + ([2,200/(2,200 + 4,000)] x $30,000) = $925,000 + $45,714 + $10,645 = $981,359 Choice a) Used Department B hours and sq. m in the denominators: = $925,000 +

(2,000/1,500 x $80,000) + (2,200/4,000 x $30,000) = $925,000 + $106,667 + $16,500 = $1,048,167

Choice c) Used total hours and sq. m in the denominators and used Department B sq. m for maintenance: = $925,000 + (2,000/4,000 x $80,000) + (4,000/6,800 x $30,000) = $925,000 + $40,000 + $17,647 = $982,647

Choice d) Used total hours and sq. m in the denominators: = $925,000 + (2,000/4,000 x $80,000) + (2,200/6,800 x $30,000) = $925,000 + $40,000 + $9,706 = $974,706

Choice e) Adjusted the denominators by the other service department’s usage/size: = $925,000 + ([2,000/(4,000 - 300)] x $80,000) + ([2,200/(6,800 - 200)] x $30,000) = $925,000 + $43,243 + $10,000 = $978,243


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30. Answer: d. Direct materials used ($260,000 - $235,000 + $350,000) $375,000 Direct labour used 160,000 Factory overhead applied (6,500 x $10/DLH) 65,000 Total manufacturing costs incurred 600,000 Work in process inventory – Jan 1 95,000 Work in process inventory – Dec 31 (75,000) Cost of goods manufactured $620,000

Choice a) Ignores work in process inventory and uses total manufacturing costs. Choice b) Assumes cost is finished goods inventory. Choice c) Misses factory overhead. Choice e) Ignores direct material inventories.

31. Answer: b.

Contribution margin/sales package = 5 x [$80 - $35 - (5% x $80)] + 3 x [$120 - $55 - (5% x $120)]

= $205 + $177 = $382 Fixed manufacturing overhead = (55,000 MCH x $30) = $1,650,000 Total fixed costs = $900,000 + $1,650,000 = $2,550,000 Breakeven sales units = $2,550,000 / $382 x 8 = 53,403 units Choice a) ignores FOH = $900,000 / $382 x 8 = 18,849 units Choice c) Misses commission costs = 5 x ($80 - $35) + 3 x ($120 - $55) = $420

Breakeven sales units = $2,550,000 / $420 x 8 = 48,572 units Choice d) Uses standard costs = 5 x [$80 - $50 - (5% x $80)] + 3 x [$120 - $70 - (5%

x $120)] = $130 + $132 = $262 B/E Sales = $2,550,000 / $262 x 8 = 77,863 units

Choice e) Ignores ratio = [$80 - $35 - (5% x $80)] + [$120 - $55 - (5% x $120)] = $41 + $59 = $100 B/E Sales = $2,550,000 / $100 = 25,500 units

32. Answer: c.

T5X = -1,500 units x [$80-$35-(5%x$80)] = -$61,500 T5XLL = 2,000 x [$120-$55-(5%x$120)] = $118,000 Actual income is $56,500 higher than budgeted because of a favourable sales volume variance of T5XLL. Choice a) only considers T5X. Choice b) only considers T5XLL. Choice d) only considers T5XLL and calculates using actual price of $110. Choice e) misses commission.


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33. Answer: a. Actual overhead – allocated overhead based on machine hours = $640,500 – [($620,000/15,000) x 15,900] = $640,500 – $657,200 = $16,700 overallocated Choice b) Combines machine hours and direct labour hours as the allocation base = $640,500 – ([$620,000/(15,000+20,000)] x [15,900+20,120]) = $2,432 underallocated Choice c) Uses labour hours = $640,500 – [($620,000/20,000) x 20,120] = $16,780 underallocated Choice d) Mixes up budgeted and actual hours = $640,500 – [($620,000/15,900) x 15,000] = $55,594 underallocated Choice e) Mixes up budgeted and actual dollars = $620,000 – [($640,500/15,000) x 15,900] = $58,930 overallocated

34. Answer: e.

Required sales volume = $590,000 / [$50 - $20 - ($50 x 20%)] = $590,000 / $20 = 29,500 Choice a) Ignores required profit: $590,000 / $30 = 19,667 = 19,970 rounded Choice b) Adds 20% to the contribution margin: $590,000 / [$50 - $20 + ($50 x 20%)]

= 14,750 Choice c) Uses 20% as gross margin: $590,000 / ($50 x 20%) = 59,000 Choice d) Uses 20% of fixed costs: $590,000 x 20% / ($50 - $20) = 3,933 = 3,940

rounded 35. Answer: a.

Product Y (Y1) Product Z (Z1) Incremental revenue Y: ($120 x 45,000 x 90% - 45,000 x $80) Z : ($140 x 40,000 x 80% - 40,000 x $90)

$1,260,000 $880,000

Incremental cost Y: ($10 x 45,000 x 90%) Z : ($30 x 40,000 x 80%)

$405,000 $960,000

Contribution from further processing $855,000 -$80,000 Therefore, only Product Y should be processed further into Product Y1. Choices b), c), d): See solution. Choice e) Joint costs are irrelevant in further processing decision.


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36. Answer: b. Relative sales value at split-off

Product X: ($70 x 15,000) = $1,050,000 Product Y: ($80 x 45,000) = $3,600,000 Product Z: ($90 x 40,000) = $3,600,000 Total sales value at split-off $8,250,000

Joint costs allocated

Product X: ($1,000,000 x 1,050/8,250) = $127,273 Product Y: ($1,000,000 x 3,600/8,250) = $436,364 Product Z: ($1,000,000 x 3,600/8,250) = $436,364

Choice a) Uses selling price to determine ratios.

Product X: ($1,000,000 x 70/240) = $291,667 Product Y: ($1,000,000 x 80/240) = $333,333 Product Z: ($1,000,000 x 90/240) = $375,000

Choice c) Uses further processing prices to determine final sales value. Relative sales value at split-off Product X: ($70 x 15,000) = $ 1,050,000 Product Y1: ($120 x 45,000 x 90%) = $ 4,860,000 Product Z1: ($140 x 40,000 x 80%) = $ 4,480,000 Total sales value at split-off $10,390,000 Product X: ($1,000,000 x 1,050/10,390) = $101,058 Product Y: ($1,000,000 x 4,860/10,390) = $467,757 Product Z: ($1,000,000 x 4,480/10,390) = $431,184

Choice d) Uses production at split-off. Product X: ($1,000,000 x 15/100) = $150,000 Product Y: ($1,000,000 x 45/100) = $450,000 Product Z: ($1,000,000 x 40/100) = $400,000

Choice e) Assumes X is insignificant. Product Y: ($80 x 45,000) = $3,600,000 Product Z: ($90 x 40,000) = $3,600,000 Total sales value at split-off $7,200,000

Joint costs allocated

Product Y: ($1,000,000 x 3,600/7,200) = $500,000 Product Z: ($1,000,000 x 3,600/7,200) = $500,000


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37. Answer: b. Irrelevant high-low outlier should be excluded in estimating the regression model. This data will not be incorporated in the estimation and will not be used as an evaluation criterion. Choice a) Specification analysis of assumptions provides tests of linearity of the

relevant range, constant variance of residuals, independence of residuals, and normality of residuals, which is imperative in establishing the validity of the estimated regression model.

Choice c) Goodness of fit for an estimated regression model measures how well the dependent variable (y, predicted cost) based on the independent variable (x, cost driver) matches the actual observations. It is one of the criteria used to evaluate regression model.

Choice d) The significance of regression coefficient is one of the evaluative criteria for regression model in which the null hypothesis of no significance is rejected.

Choice e) The estimated regression model must be economically plausible for implementation.

38. Answer: b.

The maturity stage is characterized by a large numbers of competitors, each consuming a portion of the market share leading to a slowing sales growth. Choice a) This is not a typical description of any stage of the product life cycle. Choice c) This describes the decline stage. Choice d) This describes the growth stage. Choice e) This describes the introductory stage.

39. Answer: a.

June cost of goods manufactured:

Budgeted sales in units 8,000 + Target ending inventory (15% x 6,000) 900 8,900 - Beginning inventory (15% x 8,000) -1,200 Units to be produced 7,700 x Standard cost of production x $80 Budgeted cost of goods manufactured $616,000

Choice b) Ignores beginning inventory: 8,900 x $80 = $712,000 Choice c) Ignores ending inventory: 6,800 x $80 = $544,000 Choice d) Uses goods sold: 8,000 x $80 = $640,000 Choice e) Uses selling price: 7,700 x $120 = $924,000


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40. Answer: c. Setup resources, which are used each time when the machine is set up to produce a batch, is a batch-level cost. Choice a) Engineering costs incurred to change product designs is a product-

sustaining cost. Choice b) If the cost of an activity increases with each hour of machine time used in

production, it is an output-level cost. Choice d) The compensation for a quality engineer, who is responsible for continuous

quality improvement projects that affect all production in the plant, is a facility-sustaining cost.

Choice e) The cost of hiring security for the plant is a facility-sustaining cost. 41. Answer: d.

Fixed machine insertion costs = $530,000 - 50,000 x $2.20 = $420,000 Flexible budget if 51,000 parts are inserted = (51,000 x $2.20) + $420,000 = $532,200 Choice a) Uses variable costs only: 51,000 x $2.20 = $112,200 Choice b) Uses $530,000 as fixed costs: $530,000 + 51,000 x $2.20 = $642,200 Choice c) Uses a ratio: 530/50 = x/51; x = $540,600 Choice e) Assumes budget is unchanged within relevant range.

42. Answer: a.

In reengineering a business process, it is critical to understand which activities add value to the process and are essential to its success. This identification occurs when trying to understand the current process.

43. Answer: b.

Price Var. Cost/Unit CM/Unit Volume Monthly CM a) $180 $122.40 $57.60 59,000 $3,398,400 b) $170 $122.40 $47.60 75,000 $3,570,000 c) $160 $122.40 $37.60 90,000 $3,384,000 d) $150 $122.40 $27.60 120,000 $3,312,000 e) $140 $122.40 $17.60 145,000 $2,552,000

Total fixed costs for this product = $870,000 + $545,000 + $275,000 = $1,690,000. The contribution margin at each price is enough to cover fixed costs. The highest expected monthly income would occur at a price of $170 per unit (i.e. $3,570,000 - $1,690,000 = $1,880,000).


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44. Answer: c. 3A + 4B = 10,000 A + 2B = 4,000 Substituting: 3A + 4[(4,000/2) - A/2] = 10,000 3A + 4(2,000 – 1/2A) = 10,000; A = 2,000 3(2,000) + 4B = 10,000; B = 1,000 The total contribution margin is $12(2,000) + $14(1,000) = $38,000 Confirm using trial and error:

A B Contribution Margin 0 2,000 $28,000 2,500 625 $38,750

Therefore, the optimal product mix is the maximum number of Widget A (2,500) and using the remaining available machine hours to produce 625 units of Widget B. Choice a) Maximizes Widget B based on packaging constraint (contributes $28,000). Choice b) Uses point of intersection even though it does not maximize contribution

margin (contributes $38,000). Choice d) Maximizes Widget B based on assembly constraint (contributes $35,000). Choice e) Ignores demand constraint on Widget A.

45. Answer: d.

Although Division X could receive $112 from outside customers, they save $10 in selling expenses. Consequently, transferring inside at $112 - $10 = $102 leaves them in the same position as selling to outsiders at $112.

46. Answer: a.

East is a profit centre; therefore, it would not be willing to accept a transfer price that would have a negative impact on its divisional income. Available capacity = 2,000 units, therefore the extra capacity required = 3,000 units Lost contribution margin from external sales = ($700 - $450 - $20) x 3,000 units = $690,000 Minimum transfer price per unit of internal sales = $450 + ($690,000/5,000 units) = $450 + $138 = $588. Choice b) Incorrectly uses external supplier price. Choice c) Incorrectly uses West selling price. Choice d) Incorrectly uses regular selling price less variable selling expense. Choice e) Incorrectly uses variable manufacturing costs.

47. Answer: d.

Robert Motoz is responsible for sales, cost control (including the cost of direct materials by negotiating the transfer price), and capital purchasing decisions for Division B. Therefore, Division B represents an investment centre.


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48. Answer: d. Although this will not address the varying performance, it will direct the efforts of all employees towards a common goal of improved product output. Choice a), c) This does not address the differences between departments nor the

need for overall improvement. It may increase the gaps in departmental performance.

Choice b) A wage structure creates a logical hierarchy of wages with more important jobs paid more and does not address the overall goal of output improvement.

Choice e) d) is an appropriate recommendation. 49. Answer: a.

This method of promotion supports the incentive program the most because it also provides employees further purpose to achieve their individual objectives. Choice b) Ethical policy provides parameters within which individuals are expected to

perform. These parameters do not enhance the company goal of increased individual sales performance.

Choice c) The focus of employee development is on advancing the employee’s work life. Since there is high turnover, it is apparent that Supersales Inc. is not interested in development of their staff.

Choice d) Employee relations is concerned with communication to all employees. Since the incentive program is individual-based the need for communications from the organization is lessened.

Choice e) Although important, the equity statement does not support the incentive program.

50. Answer: b.

ROI East Division = $20,000/$180,000 = 11.1% ROI West Division = $35,000/$270,000 = 13.0% RI East Division = $20,000 - ($180,000 x .12) = ($1,600) RI West Division = $35,000 - ($270,000 x .12) = $2,600 West Division met the target minimum rate of return of 12%, and has a higher ROI and RI. Choices a), c), d) and e) are not true.

51. Answer: b.

The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that, from the viewpoint of the organization as a whole, should be accepted. Using residual income would avoid this motivation – as long as the project earns a rate of return in excess of the required return for investments, divisional managers would be motivated to accept the project. Choices a), c) and d) all pertain to the asset base used in the calculation – the problems involved in asset base are the same for calculating residual income as they are for calculating return on investment. The implicit cost of interest (choice e) is not an argument related to management performance evaluation measures.


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52. Answer: c. The management accountant should not capitalize development costs if the probability of success of the product in the market is low. To do so, even at the request of a divisional manager, compromises the management accountant’s competence, objectivity and integrity. Choice a) Delaying an expensive advertising campaign does not represent an

ethically questionable action and could be a reasonable option in the circumstances. Even if the advertising expenditure was not delayed, it could be argued that the matching principle would support expensing the advertising costs in the next fiscal year, if the impact on sales is likely to be felt only in the next fiscal year.

Choice b) Accepting a gift and sharing it with other employees would not represent an ethically questionable action as the gift is small, all employees can partake of the gift and the giver is a regular supplier – it is unlikely that the gift would influence any decisions made by the management accountant or any other employees of the company.

Choice d) This represents a correct response to a suspicion of a co-worker committing an unethical act.

Choice e) Increasing performance incentives is a legitimate option for management to consider in the situation and does not represent an ethically questionable action.

53. Answer: e

Job enrichment involves adding responsibility and control over how you perform and schedule your job (choices b and c). Job enlargement involves adding more tasks (choice a) without the responsibility for making decisions and planning how you perform your work.

54. Answer: c.

All dividends in kind are the equivalent of disposing of the asset at fair value, in this case $95,000.

55. Answer: c.

Six Sigma involves measuring and analyzing business processes to improve quality for the customer through reduced cycle time, reduced defects and improved customer satisfaction. Choice a) This is a more appropriate description of the Balanced Scorecard. Choice b) Six Sigma goes beyond improving just manufacturing processes. Choice d) This is a description of the Balanced Scorecard tool. Choice e) These categories are specifically for application to the Baldridge Award.


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56. Answer: b. When used properly, money is a great motivator, but there are potent advantages to be gained from praise, special recognition, handing out plum assignments, etc. As well, basing rewards on both individual performance and corporate performance provides individual motivation and aligns the rewards to achieving desired business outcomes. Choice a) Rewards should be tightly linked to achieving only those performance

targets spelled out in the strategic plan. Including factors beyond the strategic plan signals that either the strategic plan is incomplete or management’s real agenda is something other than what was stated in the strategic plan.

Choice c) An incentive plan should be linked to both short-term (e.g. annual) and long-term performance targets, which should be tied to individual performance as well as achieving corporate objectives.

57. Answer: a.

Winnipeg Regina ROI 540,000/2,340,000 = 23.1% 720,000/2,874,000 = 25.1% Residual Income

540,000 – (2,340,000 x 14%) = 212,400

720,000 – (2,874,000 x 17%) = 231,420

Profit Margin 540,000/2,100,000 = 25.7% 720,000/3,480,000 = 20.7% Choice b) This is false. Winnipeg had the higher profit margin. Choice c) Regina had the better ROI and RI. Choice d) There is not enough information to calculate operating leverage.

58. Answer: e.

Price = Present value of face value of the bond + Present value of semi-annual interest of 6% x $50,000/2 = $1,500 for 12 x 2 = 24 periods at 8%/2 = 4%. Price = ($50,000 x .390) + ($1,500 x 15.247) = $42,370.50 ≈ $42,400. Choice a) Ignores the semi-annual compounding and uses 20 years (i.e. uses 20

periods at 8%): ($50,000 x 0.215) + ($3,000 x 9.818) = $40,204 ≈ $40,200. Choice b) Ignores the semi-annual compounding (i.e. uses 12 periods at 8%):

($50,000 x 0.397) + ($3,000 x 7.536) = $42,458 ≈ $42,500. Choice c) Reverses the coupon rate and the current yield: ($50,000 x 0.492) +

[($50,000 x 8%/2) x 16.936] = $58,472 ≈ $58,500. Choice d) Ignores the semi-annual compounding, uses 20 years and reverses the

coupon rate and the current yield: ($50,000 x 0.312) + ($4,000 x 11.47) = $61,480 ≈ $61,500.


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59. Answer: d. Required for operating disbursements $350,000Down payment for equipment 160,000Target ending balance 60,000Total cash required: 570,000 Less: May 31 cash balance 50,000Less: Collections ($270K + $225K) 495,000Necessary borrowing $ 25,000 Choice a) Ignores cash collected from May credit sales: $25K + $270K = $295,000 Choice b) Ignores the June cash sales: $25K + $225K = $250,000 Choice c) Includes the dividend: $25K + $50K = $75,000 Choice e) Misses equipment requirement: $25K + $160K = $185,000

60. Answer: b.

The net present value (NPV) is calculated as follows: = -Initial investment + PV of after-tax inflows + PV of tax shield CCA = -$250,000 + [($85,0001 x 60%) x 4.56] + $70,4792 = -$250,000 + $232,560 + $70,479 = $53,039 1 $212,500 increase in sales x 40% contribution margin = $85,000 2 Tax shield: $250,000 x .40 x .35 x (1 + .5 x .12) = $37,100 = $70,479 (0.12 + .35) x (1 + 0.12) 0.5264 Choice a) Does not include the present value of the tax shield. = -$250,000 + [($85,000 x 60%) x 4.56] = -$250,000 + $232,560 = -$17,440 Choice c) Does not discount the $85,000 after-tax increase in contribution margin. = -$250,000 + [($85,000 x 60%) x 7] + $70,4792 = -$250,000 + $357,000 + $70,4792= $177,479 Choice d) Includes only the increase in sales, without considering the cost of the

sales. = -$250,000 + [($212,5001 x 60%) x 4.56] + $70,4792 = -$250,000 + $581,400 + $70,4792= $401,879 Choice e) Does not calculate the present value of the increase in contribution margin

on an after-tax basis (i.e. uses $85,000 as opposed to $51,000). = -$250,000 + [$85,000 x 4.56] + $70,4792 = -$250,000 + $387,600 + $70,479 = $208,079


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61. Answer: b. Income before taxes $240,000 Normalizing adjustments: Son’s salary $35,000 Note 1 Personal costs $10,000 Note 2 Maintainable earnings $285,000 Taxes (40%) $114,000 Note 3 After-tax, sustainable income $171,000 Earnings multiple (10x) Capitalized earnings/business value $1,710,000 Note 1 – The son’s salary is not at fair market value. The total salary is $35,000 in excess of its fair value. Because the son will no longer be involved in the business after a sale, the excess salary will be avoidable and therefore should be added back. Note 2 – The personal administrative costs are discretionary, and are not required to generate the maintainable business income. Therefore, those costs are added back as a normalizing adjustment. Note 3 – Maintainable earnings must be net of taxes. Choice a) Ignores the son’s earnings. After-tax, sustainable income = $150,000 Choice c) Ignores all adjustments. After-tax, sustainable income = $144,000 Choice d) Ignores the discretionary, personal costs of $10,000. After-tax, sustainable

income = $165,000 Choice e) Does not reduce maintainable earnings for the taxes. After-tax, sustainable

income = $285,000 62. Answer: c.

After-tax cost of debt = 6% x (1 - .4) = 3.6% Cost of preferred shares = 7% Cost of common equity = [($2 x 1.03)/$25] + .03 = 11.24% Total long-term debt plus equity = $500,000 + $300,000 + $600,000 = $1,400,000 Weighted average cost of capital (WACC) = [3.6% x (500/1,400)] + [7% x (300/1,400)] + [11.24% x (600/1,400)] = 1.29% + 1.5% + 4.82% = 7.61% = 7.6% rounded Choice a) Includes current liabilities as part of debt = [3.6% x (750/1,650)] + [7% x (300/1,650)] + [11.24% x (600/1,650)] = 1.64% + 1.27% + 4.09% = 7.0% Choice b) Uses cost of debt before tax = [6% x (500/1,400)] + [7% x (300/1,400)] + [11.24% x (600/1,400)] = 2.14% + 1.5% + 4.82% = 8.46% = 8.5% rounded Choice d) Uses bond payment versus yield = [(8% x [1 - .4]) x (500/1,400)] + [7% x (300/1,400)] + [11.24% x

(600/1,400)] = 1.71% + 1.5% + 4.82% = 8.03% = 8.0% rounded Choice e) Does not adjust for dividend growth rate = [3.6% x (500/1,400)] + [7% x (300/1,400)] + [8% x (600/1,400)] = 1.29% + 1.5% + 3.43% = 6.22% = 6.2% rounded


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63. Answer: b.

UCC $100,000 Disposition ($110,000) (lower of original cost or proceeds) Balance ($ 10,000) = Recapture of $10,000 Choice a) Uses original cost to calculate ($100K - $140K = $40K) Choice c) Uses original cost less selling fees ($100K - $140K - $5K = $45K) Choice d) Uses proceeds less selling fees ($100K - ($110K - $5K) = $5K) Choice e) Calculates as a terminal loss ($140K - $110 = $30K)

64. Answer: d.

The ability to repurchase shares should not have an impact on the dividend policy. Dividends are paid annually/quarterly, whereas repurchases are less frequent and at irregular time intervals. Choice a) The firm’s reinvestment opportunities for retained earnings as compared

with the reinvestment opportunities for the shareholders of the firm is important to dividend policy. If the shareholders have reinvestment opportunities with higher rates of return, then paying a dividend will maximize shareholder wealth. Conversely, a firm with reinvestment opportunities that have rates of return in excess of what a shareholder can obtain elsewhere should not pay a dividend; rather, they should retain the cash and reinvest it internally.

Choice b) The shareholder’s need and desire for immediate income in the form of cash dividends is an important factor used to determine a firm’s dividend policy. A firm whose shareholders require firm immediate cash will be more inclined to have a higher dividend payout ratio. Conversely, a firm whose shareholders do not require income will be more inclined to have a lower dividend payout ratio.

Choice c) The shareholder’s tax rate on dividends versus capital gains is also an important factor. A lower marginal tax rate on dividends versus capital gains will provide incentives to the payment of dividends versus retaining the cash to appreciate the value of the shares.

Choice e) The firm’s cash position, both current and projected, is important to a firm’s decision to pay dividends because dividends are paid in cash. Therefore, a company’s dividend payout ratio will be much lower if the company projects a negative cash position in the current or future periods. Conversely, a company’s dividend payout ratio will be much higher if the company projects and has large amounts of cash available.


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65. Answer: b. The price of the bond when it was issued is not relevant to the current market price. The current market value is equal to the present value of the future cash flows, using 14 periods at 4%: = ($60,000 x .577) + ($1,800 x 10.563) = $34,620 + $19,013 = $53,633 Choice a) Uses purchase price to calculate selling price = ($56,000 x .577) + ($1,800 x 10.563) = $51,325 Choice c) Uses 6% to calculate present value = ($60,000 x .661) + ($1,800 x 11.296) = $39,660 + $20,333 = $59,993 Choice d) Uses full 10-year time frame = ($60,000 x .456) + ($1,800 x 13.590) = $27,360 + $24,462 = $51,822 Choice e) Uses 6% and purchase price = ($56,000 x .661) + ($1,800 x 11.296) = $37,016 + $20,333 = $57,349

66. Answer: c.

Accounting income for Year 10 $200,000 Add back: Amortization expense 40,000 Non-deductible portion of entertainment ($30,000 x .5) 15,000 Deduct: CCA (50,000) Net income for tax purposes $205,000 Choice a) Deducts dividends paid: $205,000 - $20,000 = $185,000 Choice b) Adds back charitable donations: $205,000 + $10,000 = $215,000 Choice d) Adds back full entertainment expense: $205,000 + $30,000 = $235,000 Choice e) Deducts dividends and adds back donations: $205K - $20K + $10K =

$195,000 67. Answer: b

Financial leverage is % change in EPS / % change in EBIT [(1.74-1.52)/1.52] / [(175,000-160,000) / 160,000] = 0.1447/ 0.09375 = 1.54 Choice a) Calculates for Year 7: [(2.22-1.74)/1.74] / [(210,000-175,000)/175,000] =

1.38 Choice c) Calculates combined leverage: 0.145 / [(615,000-540,000)/540,000]=1.04 Choice d) Calculates using % change in net income: [(87,000-76,000)/76,000] /

0.9375 = 0.15 Choice e) Calculates operating leverage: 0.9375 / [(615,000-540,000)/540,000] = 6.75

68. Answer: d

Combined leverage is % change in EPS / % change in sales [(2.22-1.74)/1.74] / [(695,000-615,000)/615,000] = 0.2759 / 0.1301 = 2.12 Choice a) Calculates financial leverage. [(2.22-1.74)/1.74] / [210,000-

175,000)/175,000] Choice b) Calculates for year 6: [(1.74-1.52)/1.52] / [(615,000-540,000)/540,000] =

1.04 Choice c) Calculates using net income: 0.2759 / [(111,000-87,000)/87,000] = 1.00 Choice e) Calculates operating leverage: [(210,000-175,000)/175,000] / 0.1301 = 1.54


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69. Answer: d. For example, assume the following: Debt - $100; Equity - $50; Net income - $10 The debt-to-equity ratio would be 2:1 and the ROE 20%. A transaction that repays $50 of debt through the issuance of equity will result in the following: Debt - $50; Equity - $100; Net income - $10 The resulting ratio will be 0.5:1, and the return on equity will be 10%. Therefore, the debt-to-equity ratio will decrease and the return on equity will decrease. Choice a) There will be no impact on the debt-to-equity ratio or return on equity.

Incorrect as it does not factor in the impact of the transaction on the debt or equity.

Choice b) The debt-to-equity ratio will increase and the return on equity will decrease. Incorrectly calculates the impact of the transaction on the debt-to-equity. Correctly calculates the impact on the ROE.

Choice c) The debt-to-equity will decrease and the return on equity will increase. Incorrectly calculates the impact the transaction has on the ROE and the DE ratio.

Choice e) Both the debt-to-equity ratio and return on equity will increase. Incorrectly calculates the impact of the transaction on the ROE. Correctly calculates the impact on the debt-to-equity.

70. Answer: a.

Amount per share: $500 Underwriting costs: ($12) $20 x (1 – 40%) Net proceeds: $488 Dividend per share: $35 Cost per share: $35/$488 = 7.17% Choice b) Takes tax off dividends and ignores underwriting costs. $21/$500 = 4.20% Choice c) Ignores the underwriting costs. $35/$500 = 7.00% Choice d) Ignores tax impact on underwriting costs. $35/$480 = 7.29% Choice e) Takes tax off dividends. $21/$488 = 4.30%


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71. Answer: d. The maximum amount that Large Ltd. should be willing to pay is the present value of the incremental cash flows using a discount rate of 12%. Year 1 to 3 – present value of operating after-tax cash flows = $200,000 x (1 - 30%) x 2.402 = $336,280 Year 4 and beyond – present value of operating after-tax cash flows = [$220,000 x (1 - 30%)] / 0.12 x 0.712 = $913,733 Net present value = $336,280 + $913,733 = $1,250,013 = $1,250,000 (rounded) Choice a) Uses before-tax figures = $200,000 x 2.402 = $480,400 = ($220,000 / 0.12) x 0.712 = $1,305,333 NPV = $1,785,733 = $1,786,000 (rounded) Choice b) Does not present value ii) NPV = $336,280 + ($220,000 / 0.12) = $2,169,613 = $2,170,000 (rounded) Choice c) Uses before-tax figure for ii) NPV = $336,280 + $1,305,333 = $1,641,613 = $1,642,000 (rounded) Choice e) Uses before-tax figure for i) NPV = $480,400 + $913,733 = $1,394,133 = $1,394,000

72. Answer: a.

Net income = $200,000 - $10,000 (deferred revenue for Year 6) + $5,000 (prepaid insurance for Year 6) = $195,000 Choice b) Deducts dividends which are an after-tax item. ($195K - $20K = $235K) Choice c) Ignores prepaid insurance. ($195K - $5K = $190K) Choice d) Ignores the deferred revenue. ($195K +$10K = $205K) Choice e) Assumes all transactions are acceptable.

73. Answer: c.

This would be included within MD&A which is a requirement but is not a part of disclosure notes nor considered part of audited statements. Choice a) This would recognize transactions by related parties which is a part of

disclosure notes. Choice b) This would provide information on the company’s accounting policy which is

a part of disclosure notes. Choice d) This would explain a recognized item in the statements which is a part of

disclosure notes. Choice e) This would provide information on the company’s accounting policy which is

a part of disclosure notes.


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74. Answer: b. A gain or loss resulting from a change in fair value on an available-for-sale financial asset shall be recognized in other comprehensive income. Choice a) This would be the method for an asset classified as fair value through profit

or loss. Choice c) This would be the method for a significant influence investment. Choice d) Fair value method but assumed only half of the change in value because

the investment was held for only 6 months. Choice e) Equity method but assumed half of the change in value because the

investment was held for only 6 months. 75. Answer: a

Carrying Value $171,000 Recoverable Amount is higher of: Value-in-use ($34,000 (PVIFA 6%,5)) $143,208 Fair value less selling costs $150,000

Since Carrying Value > Recoverable Value there is an impairment of $171,000 - $150,000 = $21,000. Choice b) – ignores PV for value-in-use ($34,000 x 5) = 170,000 Choice c) – uses value-in-use figure = 171,000-143,208 = 27,792 Choice d) and e) – incorrect since there is an impairment loss.

76. Answer: d.

Provisions for warranty repairs are not deductible for tax purposes. Only costs actually incurred for warranty repairs during the year are deductible. Therefore, a provision for future repair costs will create a timing difference whereby non-deductible expenses in one year will be deductible in a future year when the actual expenditure is incurred. Choices a), b) and c) represent permanent differences.

77. Answer: c.

An operating segment must only satisfy one of the following quantitative thresholds to be considered a reportable segment.

(a) its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments; (b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of:

(i) the combined reported profit of all operating segments that did not report a loss; or (ii) the combined reported loss of all operating segments that did report a loss; and

(c) its assets are 10 percent or more of the combined assets of all operating segments.

S and T have revenues greater than 10% of combined revenues. U has assets greater than 10% of combined assets. Liabilities have no impact on quantitative thresholds. Therefore, S, T and U should report separately.


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78. Answer: e. Annual depreciation = the cost of the asset plus PV of the asset retirement obligation + revision to estimate in 2005 is the result of a change in circumstances and is applied prospectively. = [($1,000,000 + $300,000PV10,4%) ÷ 10 years] + [($100,000PV5,4%) ÷ 5 years] = ($1,000,000 + 202,800)/10 + 82,200/5 = 120,280 + 16,440 = $136,720 Choice a) Ignores the ARO. [$1,000,000 ÷ 10 years] Choice b) Misses the first 5 years of depreciation and does not PV the ARO.

[($1,000,000 + 300,000 + 100,000) ÷ 10 years] Choice c) Misses the increase in ARO. [($1,000,000 + $300,000PV10,4%) ÷

10 years] Choice d) Missed PV for the ARO amounts. [($1,000,000 + 300,000) ÷ 10 years] +

[$100,000 ÷ 5 years) 79. Answer: a.

According to Section 1651 of the Accounting Standards for Private Enterprise, at each balance sheet date, monetary items denominated in a foreign currency should be adjusted to reflect the exchange rate in effect at the balance sheet date. Also, an exchange gain or loss arising from the transaction of a monetary item should be included in the determination of net income for the current period. Therefore, in Year 1, an exchange gain recognized by GF is: = $500,000Cdn – ($500,000 / 1.25)Cdn = $100,000 gain Choice b) Incorrectly assumes a loss. Choice c) Amortizes the gain over 4 years. Choice d) Amortizes the gain over 4 years and incorrectly assumes a loss. Choice e) Incorrectly assumes gains are deferred.


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80. Answer: b. Restricted contributions – Match revenues to expenses for the period; revenues to be used against expenses for future periods should be deferred. Therefore, recognize $20,000 of restricted contributions in the first year. The entire $50,000 of unrestricted grants is recognized in the first year. The endowment contribution is not recognized as revenue on the statement of operations; instead, it is recognized as a direct increase to net assets. Unrestricted interest income from endowments is recognized as revenue in the period that the interest is earned. Therefore, revenue = $20,000 + $50,000 + $4,000 = $74,000. Choice a) Does not recognize interest earned. = $20K + $50K = $70,000 Choice c) Recognizes all $100,000 of restricted grants. = $100K + $50K + $4K =

$154,000 Choice d) Recognizes only expenses. $20K + $35K = $55,000 Choice e) Recognizes expenses and interest. $20K + $35K + $4K = $59,000

81. Answer: d.

In Year 3, the contract is [$5 / ($5 + $10)] = 33.33% complete. In Year 4, the contract is [$12 / ($12 + $5)] = 70.59% complete. The additional 37.26% completed in Year 4 x the total contract price of $20M = $7,452,000 revenue to recognize in Year 4. Choice a) Uses Year 3. 33.33% x $20M = $6.666M Choice b) Uses full 70.59% completion. 70.59% x $20M = $14.118M Choice c) Uses billings to date. Choice e) Uses collections for Year 4.

82. Answer: b.

A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Choice a) While this sounds reasonable it is not the important distinguishing factor

since a change in estimate must be supported by more than opinion. Choice c) A change in estimate could affect more than one period but this could also

be true of an error. Therefore this is not a distinguishing factor. Choice d) The frequency of occurrence is not a determining factor in classification. Choice e) See notes above.


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83. Answer: c. Net income available for common shareholders = $8,000,000 - (5.75% x $20,000,000) = $6,850,000 Basic EPS = Net income available for common shareholder ÷ Weighted average common shares outstanding = $6,850,000 / 10,000,000 = $0.685 (rounded to $0.69) Choice a) Includes retained earnings. ($8M + $5.5M) / 10M = $1.35 Choice b) Deducts taxes from preferred dividends. [$8M - (5.75% x $20M x .6)] / 10M = $7.310M / 10M = $0.731 Choice d) Does not deduct preferred dividends. $8M / 10M = $0.80 Choice e) Uses fully diluted number of shares. 10,000,000 + ($18M / $1,000 x 200) = 13.6M shares; EPS = $8M / 13.6M = $0.588

84. Answer: e.

When an exchange involves partial monetary consideration, the carrying amount of the asset given up is adjusted by the fair value of the monetary consideration. The entity paying the monetary consideration measures the non-monetary asset received at the carrying amount of the asset given up plus the fair value of the monetary consideration paid. The entity receiving the monetary consideration measures the non-monetary asset received at the carrying amount of the non-monetary asset given up less the fair value of the monetary consideration received, unless the monetary consideration exceeds the carrying amount, in which case, a gain is recognized for the amount of such excess. Choice a) The $25,000 payment is misinterpreted as a loss. Choices b), c) Because there is no commercial substance the fair value is not

relevant. Choice d) Mistakes the $25,000 as a decrease.

85. Answer: b.

Premium = (PV of $750,000 + PV of semi-annual interest of $22,500) - $750,000 compounded semi-annually at N = 8 periods remaining and i = 2% = [($750,000 x 0.853) + ($22,500 x 7.325)] - $750,000 = $639,750 + $164,812 - $750,000 = $54,562 = $54,600 (rounded) Choice a) Uses 4% for PV calculations. = [($750,000 x 0.731) + ($22,500 x 6.733)] - $750,000 = $258 Choice c) Uses 6% for PV calculations. = [($750,000 x 0.627) + ($22,500 x 6.210)] - $750,000 = $90,025 Choice d) Neglects to take semi-annual payments. = [($750,000 x 0.853) + ($45,000 x 7.325)] - $750,000 = $269,375 Choice e) Uses n = 10. = [($750,000 x 0.820) + ($22,500 x 8.983)] - $750,000 = $117,117


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86. Answer: b. Decreasing the payables turnover will result in a longer days in payable, which would reduce the required investment in working capital. Choice a) Decreasing the inventory turnover will require a larger investment in

inventory to finance the larger balance, therefore working capital would increase.

Choice c) Increasing the days in receivable will require a larger investment in A/R to finance the larger balance, therefore working capital would increase.

Choice d) Decreasing the days in payable will increase the cash required to pay the payables, and therefore increase the working capital requirement.

Choice e) Decreasing the receivable turnover will increase the days required to collect A/R, which will require a larger investment in A/R to finance the larger balance, therefore working capital would increase.

87. Answer: e.

An intangible asset arising from development (or from the development phase of an internal project) is recognized if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale;

(b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) the availability of adequate technical, financial and other resources to complete

the development and to use or sell the intangible asset; (e) its ability to measure reliably the expenditure attributable to the intangible asset

during its development; and (f) how the intangible asset will generate probable future economic benefits.

Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

Therefore e) is the correct solution. 88. Answer: d.

These investments are carried at fair value and this is the only type of investment that results in OCI. Choice a) Equity method is used and income is part of net income. Choice b) Fair value is used and gains and losses are included in net income. Choice c) These investments are accounted for at cost. Choice e) This is not correct as noted above.

89. Answer: a.

Quick ratio = (Cash + Marketable securities + Receivables)/Current liabilities = ($48 + $254 + $315)/$555 = 1.11. Choice b) Excludes accounts receivable: ($48 + $254)/$555 = 0.54 Choice c) Current ratio: ($48 + $254 + $315 + $660)/$555 = 2.30 Choice d) Uses total assets and total liabilities: $2,096/$976 = 2.15 Choice e) Uses total assets in numerator: $2,096/$555 = 3.78


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90. Answer: d.

Accounts receivable turnover in days = 365/[Net credit sales/Average net accounts receivable] or Average net accounts receivable/Net credit sales x 365 days = 365/{($6,262 x 75%)/[($315 + $286)/2]} = 23.4 days. Choice a) Uses total sales instead of credit sales: 365/{$6,262/[($315 + $286)/2]}

= 17.5 days. Choice b) Uses gross margin and year-end accounts receivable: 365/[($6,262 -

$4,320)/$315] = 59.2 days. Choice c) Uses Year 1 accounts receivable: 365/[($6,262 x 75%)/$286] = 22.2 days. Choice e) Neglects to convert to days: ($6,262 x 75%)/[($315 + $286)/2] = 15.6 days.

91. Answer: a.

Times interest earned = Income before interest & taxes ÷ Interest = ($577 + $265 + $75)/$75 = 12.2 times Choice b) Deducts dividends: ($577 + $265 + $75 - $300)/$75 = 8.2 times Choice c) Does not add back interest: ($577 + $265)/$75 = 11.2 times Choice d) Uses net income: $577/$75 = 7.7 times Choice e) Use net income before interest but after taxes: ($577 + $75)/$75

= 8.7 times 92. Answer: d.

Since there is a bargain purchase price, this is a finance/capital lease. Under IAS17: the value recorded is equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. Under HB3065: the asset value is the present value of the minimum lease payments and the maximum value recorded for the asset may not exceed the leased asset's fair value. PV of lease payments: $15,000 + $15,000PV6,4% = 15,000 + 15,000(5.242) = $93,630 PV of lease payments < fair value of equipment. Therefore, the lease is recorded as a $93,630 asset. Choice a) Incorrectly uses the fair value. Choice b) Incorrectly calculates PV at the end of each year. $15,000PV7,4%

= $90,030. Choice c) Incorrectly includes purchase price in equation. $93,630 + $7,000PV7,4%

= $98,950. Choice e) Since there is a bargain purchase price, this is a finance lease.


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93. Answer: a. When assets are purchased as a group for a single lump sum price, the practice is to allocate the total cost among the assets based on their relative fair values. The assumption is that costs will vary in direct proportion to their relative values. Choice b) The relative book value (of the previous business) is not relevant to the new

business that acquires the assets. Choice c) The amortized cost (book value) is also not relevant to the new business

that acquires the assets. Choice d) The Historical Cost (or unamortized cost) is also not relevant to the new

business that acquires the assets. Choice e) The UCC (like amortized cost) is also not relevant to the new business that

acquires the assets. 94. Answer: a.

Pension expense = Service cost + Interest cost - Expected return + Amortization of actuarial losses = $150,000 + (6% x $1,100,000) - $70,000 + $25,000 = $171,000. Choice b) Excludes amortization of actuarial losses: $171,000 - $25,000 = $146,000 Choice c) Includes benefits paid to retirees: $171,000 + $80,000 = $251,000 Choice d) Deducts benefits paid: $171,000 - $80,000 = $91,000 Choice e) Uses contributions instead of service costs: $80,000 + $66,000 - $70,000 -

$25,000 = $51,000 95. Answer: c.

Since Vast Corporation has significant influence over YHG Ltd., the investment must be accounted for using the Equity Method. The investment is initially recorded at the cost of the acquired shares; subsequently, its carrying amount is adjusted each period for the investor’s proportionate share of the changes in the net assets of the investee. When cash is received from the investment (dividend), the Investment account is credited. Income from the investment is recognized as the investee earns income. = $1,000,000 – 200,000 x 0.20 + 35% x $350,000 = $1,082,500 Choice a) Fails to reduce the investment by the dividends received. $1,000,000 + 35% x ($350,000) = $1,122,500 Choice b) Fails to recognize net income attributable to Vast. $1,000,000 – 200,000 x 0.20 = $960,000 Choice d) Mistakenly adds dividends. $1,000,000 + 200,000 x 0.20 + 35% ($350,000) = $1,162,500 Choice e) Uses the new share price. $6.50 x 200,000 = $1,300,000


CMA Canada Page 69

96. Answer: d. The percentage-of-sales approach matches costs with revenues because it relates the charge to the period in which the sale is recorded. When a specific account is determined to be uncollectible, its balance is removed from the accounts receivable and the allowance for uncollectible accounts is reduced. Allowance for uncollectible accounts = $10,000 beginning balance - $16,500 bad debt written off in Year 4 + $4,100 collection of Year 3 bad debt + (1% x $1,500,000) allowance for Year 4 sales = $12,600. Choice a) Neglects to add back the Year 3 written-off receivable that was collected in

Year 4: $10,000 - $16,500 + (1% x $1,500,000) = $8,500. Choice b) Assumed the allowance equals only the allowance related to Year 4 sales:

1% x $1,500,000 = $15,000. Choice c) Uses total sales rather than credit sales: $10,000 - $16,500 + $4,100 +

$20,000 = $17,600. Choice e) Neglects to deduct the bad debts written off in Year 4 and to add back the

write-off collected: $10,000 + $15,000 = $25,000. 97. Answer: c.

It is possible that there is no related expenditure, e.g. an asset may be donated. Choice a) A future event may affect an asset but in order for the asset to be

recognized there must be a past event. Choice b) A contribution to future cash flow must be expected – the capacity for the

impact must be present. Choice d) Control, although not legal control, is required. Choice e) All of the listed items are required except c).

98. Answer: d.

The amounts would be reported under Operating Activities on the Cash Flow Statement.

Net income earned $100,000 Add amortization $ 20,000 Add decrease in inventory $ 20,000 Deduct decrease in accounts payable $ (15,000)Increase (decrease) in cash from operating activities $125,000

Choice a) Excludes amortization. $125,000 - $20,000 = $105 000 Choice b) Incorrectly includes all transactions as operating activities. $125K - $60K + $100K - $15K - $10K = $140,000 Choice c) Incorrectly deducts inventory and adds AP. $100K + $20 - $20 + $15 = $115,000 Choice e) Incorrectly deducts dividends declared. $125K - $15K = $110,000


Page 70 CMA Canada

99. Answer: d. Calculate the market value of the net identifiable assets: = [$1,746K - 50K + 125K – 8K] – [124,500 + 300K + 274,500] = $1,114,000 Goodwill = Purchase price – Net identifiable assets = $1.2M - $1,114,000 = $86,000 Choice a) Uses long-term assets and liabilities only: = (400,500 + 800,000) – (124,500 + 300K + 274,500) = $501,500 Goodwill = $1.2M - $501,500 = $698,500 Choice b) Uses common shares as goodwill: = $700,000 Choice c) Uses net identifiable assets at book value: = $1,746K – (124,500 + 300K + 274,500) = $1,047,000 Goodwill = $1.2M - $1.047M = $153,000 Choice e) Uses retained earnings as goodwill: = $347,000

100. Answer: b.

Vertical integration is when a company takes over a function previously performed by a supplier or distributor. Choice a) An alliance is a collaborative partnership with a supplier or marketing ally to

enhance the company’s own competitiveness. This would not be an alliance.

Choice c) A merger is when two companies exchange shares, but only one company survives.

Choice d) A joint venture is when two parties work cooperatively on a particular project.

Choice e) Horizontal integration occurs when a firm in the same industry and in the same stage of production is being taken over or merged with/by another firm which is in the same industry and in the same stage of production as the merged firm.

101. Answer: a.

WACC = (250/1,200)x12% + (650/1,200)x8% + (300/1,200)x5% = 8.08% Choice b) Average out the three percentages evenly. (8%+5%+12%)/3 = 8.33% Choice c) Assumes 12% required return. Choice d) Ignores retained earning portion. (650/950)x8% + (300/950)x5% = 7.05% Choice e) Excludes loan portion. (250/900)x12% + (650/900)x8% =9.11%


CMA Canada Page 71

Supplement of Formulae and Tables

Formulae 1. CAPITAL STRUCTURE

a) After-Tax Marginal Cost of Debt:

( )k k T or T I

Fb = −−

11( )

where k = interest rate T = corporate tax rate I = annual interest payment on debt F = face value of debt

b) Cost of Preferred Shares:

kDNPp

p

p=

where Dp = stated annual dividend payment on shares NPp = net proceeds on preferred share issue

c) Cost of Common Equity:

i) Cost of Common Shares (Capitalization of Dividends with Constant Growth Rate): k

DNP

gee

= +1

where D1 = dividend expected for period 1 NPe = net proceeds on common share issue g = annual long-term dividend growth rate

ii) Cost of Retained Earnings: k r

DP

gre ee

= = +1

where Pe = market price of a share re = expected return on common equity

iii) Capital Asset Pricing Model: ( )R R R Rj f j m f= + −β

where Rj = expected rate of return on security j Rf = risk-free rate Rm = expected return for the market portfolio

βj = beta coefficient for security j (measure of systematic risk)


Page 72 CMA Canada

d) Weighted Average Cost of Capital:

k BV

k PV

k EV

kb p e= ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

+ ⎛⎝⎜

⎞⎠⎟

where B = amount of debt outstanding P = amount of preferred shares outstanding E = amount of common equity outstanding V = B + P + E = total value of firm

2. PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS

a) Present Value of Total Tax Shield from CCA for a New Asset

Present Value = ( ) ( ) ( ) ⎟⎠⎞

⎜⎝⎛

++

+=⎟⎟

⎠

⎞⎜⎜⎝

⎛++

+ k10.5k1

kdCdT

k12k2

kdCtd

b) Present Value of Total Tax Shield from CCA for an Asset that is Not Newly

Acquired

Present Value = ⎟⎠⎞

⎜⎝⎛

+ kddTUCC

c) Present Value of Total Tax Shield Lost From Salvage

Present Value = ( ) ( ) ,⎟⎠⎞

⎜⎝⎛

++⎟⎠⎞

⎜⎝⎛

++ − kddT

k1kddT

k1S

1nn

nn Sor depending on cash

flow assumptions

Notation for above formulae: C = net initial investment UCC = undepreciated capital cost of asset Sn = salvage value of asset realized at end of year n T = corporate tax rate k = discount rate or time value of money d = maximum rate of capital cost allowance n = total life of investment


CMA Canada Page 73

Table 1

Present Value of One Dollar Due at the End of n Years

( )P

i n=+

1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

01 02 03 04 05

0.990 .980 .971 .961 .951

0.980 .961 .942 .924 .906

0.971 .943 .915 .888 .863

0.962.925 .889 .855 .822

0.952.907 .864 .823 .784

0.943.890 .840 .792 .747

0.935.873 .816 .763 .713

0.926 .857 .794 .735 .681

0.917.842 .772 .708 .650

0.909.826 .751 .683 .621

06 07 08 09 10

.942

.933

.923

.914

.905

.888

.871

.853

.837

.820

.837

.813

.789

.766

.744

.790

.760

.731

.703

.676

.746

.711

.677

.645

.614

.705

.665

.627

.592

.558

.666

.623

.582

.544

.508

.630

.583

.540

.500

.463

.596

.547

.502

.460

.422

.564

.513

.467

.424

.386 11 12 13 14 15

.896

.887

.879

.870

.861

.804

.788

.773

.758

.743

.722

.701

.681

.661

.642

.650

.625

.601

.577

.555

.585

.557

.530

.505

.481

.527

.497

.469

.442

.417

.475

.444

.415

.388

.362

.429

.397

.368

.340

.315

.388

.356

.326

.299

.275

.350

.319

.290

.263

.239 16 17 18 19 20

.853

.844

.836

.828

.820

.728

.714

.700

.686

.673

.623

.605

.587

.570

.554

.534

.513

.494

.475

.456

.458

.436

.416

.396

.377

.394

.371

.350

.331

.312

.339

.317

.296

.277

.258

.292

.270

.250

.232

.215

.252

.231

.212

.194

.178

.218

.198

.180

.164

.149 21 22 23 24 25

.811

.803

.795

.788

.780

.660

.647

.634

.622

.610

.538

.522

.507

.492

.478

.439

.422

.406

.390

.375

.359

.342

.326

.310

.295

.294

.278

.262

.247

.233

.242

.226

.211

.197

.184

.199

.184

.170

.158

.146

.164

.150

.138

.126

.116

.135

.123

.112

.102

.092


Page 74 CMA Canada

Table 1 (cont’d)


( )P

i n=+

1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 01 02 03 04 05

0.901 .812 .731 .659 .593

0.893 .797 .712 .636 .567

0.885 .783 .693 .613 .543

0.877.769 .675 .592 .519

0.870.756 .658 .572 .497

0.862.743 .641 .552 .476

0.855.731 .624 .534 .456

0.847 .718 .609 .516 .437

0.840 .706 .593 .499 .419

0.833.694 .579 .482 .402

06 07 08 09 10

.535

.482

.434

.391

.352

.507

.452

.404

.361

.322

.480

.425

.376

.333

.295

.456

.400

.351

.308

.270

.432

.376

.327

.284

.247

.410

.354

.305

.263

.227

.390

.333

.285

.243

.208

.370

.314

.266

.225

.191

.352

.296

.249

.209

.176

.335

.279

.233

.194

.162 11 12 13 14 15

.317

.286

.258

.232

.209

.287

.257

.229

.205

.183

.261

.231

.204

.181

.160

.237

.208

.182

.160

.140

.215

.187

.163

.141

.123

.195

.168

.145

.125

.108

.178

.152

.130

.111

.095

.162

.137

.116

.099

.084

.148

.124

.104

.088

.074

.135

.112

.093

.078

.065 16 17 18 19 20

.188

.170

.153

.138

.124

.163

.146

.130

.116

.104

.142

.125

.111

.098

.087

.123

.108

.095

.083

.073

.107

.093

.081

.070

.061

.093

.080

.069

.060

.051

.081

.069

.059

.051

.043

.071

.060

.051

.043

.037

.062

.052

.044

.037

.031

.054

.045

.038

.031

.026 21 22 23 24 25

.112

.101

.091

.082

.074

.093

.083

.074

.066

.059

.077

.068

.060

.053

.047

.064

.056

.049

.043

.038

.053

.046

.040

.035

.030

.044

.038

.033

.028

.024

.037

.032

.027

.023

.020

.031

.026

.022

.019

.016

.026

.022

.018

.015

.013

.022

.018

.015

.013

.010


CMA Canada Page 75

Table 1 (cont’d)


( )P

i n=+

1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%

01 02 03 04 05

0.826 .683 .564 .467 .386

0.820 .672 .551 .451 .370

0.813 .661 .537 .437 .355

0.806.650 .524 .423 .341

0.800.640 .512 .410 .328

0.794.630 .500 .397 .315

0.787.620 .488 .384 .303

0.781 .610 .477 .373 .291

0.775 .601 .466 .361 .280

0.769.592 .455 .350 .269

06 07 08 09 10

.319

.263

.218

.180

.149

.303

.249

.204

.167

.137

.289

.235

.191

.155

.126

.275

.222

.179

.144

.116

.262

.210

.168

.134

.107

.250

.198

.157

.125

.099

.238

.188

.148

.116

.092

.227

.178

.139

.108

.085

.217

.168

.130

.101

.078

.207

.159

.123

.094

.073 11 12 13 14 15

.123

.102

.084

.069

.057

.112

.092

.075

.062

.051

.103

.083

.068

.055

.045

.094

.076

.061

.049

.040

.086

.069

.055

.044

.035

.079

.062

.050

.039

.031

.072

.057

.045

.035

.028

.066

.052

.040

.032

.025

.061

.047

.037

.028

.022

.056

.043

.033

.025

.020 16 17 18 19 20

.047

.039

.032

.027

.022

.042

.034

.028

.023

.019

.036

.030

.024

.020

.016

.032

.026

.021

.017

.014

.028

.023

.018

.014

.012

.025

.020

.016

.012

.010

.022

.017

.014

.011

.008

.019

.015

.012

.009

.007

.017

.013

.010

.008

.006

.015

.012

.009

.007

.005 21 22 23 24 25

.018

.015

.012

.010

.009

.015

.013

.010

.008

.007

.013

.011

.009

.007

.006

.011

.009

.007

.006

.005

.009

.007

.006

.005

.004

.008

.006

.005

.004

.003

.007

.005

.004

.003

.003

.006

.004

.003

.003

.002

.005

.004

.003

.002

.002

.004

.003

.002

.002

.001


Page 76 CMA Canada

Table 1 (cont’d)


( )P

i n=+

1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 01 02 03 04 05

0.763 .583 .445 .340 .259

0.758 .574 .435 .329 .250

0.752 .565 .425 .320 .240

0.746.557 .416 .310 .231

0.741.549 .406 .301 .223

0.735.541 .398 .292 .215

0.730.533 .389 .284 .207

0.725 .525 .381 .276 .200

0.719 .518 .372 .268 .193

0.714.510 .364 .260 .186

06 07 08 09 10

.198

.151

.115

.088

.067

.189

.143

.108

.082

.062

.181

.136

.102

.077

.058

.173

.129

.096

.072

.054

.165

.122

.091

.067

.050

.158

.116

.085

.063

.046

.151

.110

.081

.059

.043

.145

.105

.076

.055

.040

.139

.100

.072

.052

.037

.133

.095

.068

.048

.035 11 12 13 14 15

.051

.039

.030

.023

.017

.047

.036

.027

.021

.016

.043

.033

.025

.018

.014

.040

.030

.022

.017

.012

.037

.027

.020

.015

.011

.034

.025

.018

.014

.010

.031

.023

.017

.012

.009

.029

.021

.015

.011

.008

.027

.019

.014

.010

.007

.025

.018

.013

.009

.006 16 17 18 19 20

.013

.010

.008

.006

.005

.012

.009

.007

.005

.004

.010

.008

.006

.004

.003

.009

.007

.005

.004

.003

.008

.006

.005

.003

.002

.007

.005

.004

.003

.002

.006

.005

.003

.003

.002

.006

.004

.003

.002

.002

.005

.004

.003

.002

.001

.005

.003

.002

.002

.001 21 22 23 24 25

.003

.003

.002

.002

.001

.003

.002

.002

.001

.001

.003

.002

.001

.001

.001

.002

.002

.001

.001

.001

.002

.001

.001

.001

.001

.002

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001

.001


CMA Canada Page 77

Table 2

Present Value of One Dollar Per Year — n Years at i%

( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 01 02 03 04 05

0.990 1.970 2.941 3.902 4.854

0.980 1.942 2.884 3.808 4.713

0.971 1.914 2.829 3.717 4.580

0.9621.8862.7753.6304.452

0.9521.8592.7233.5474.330

0.9431.8332.6733.4654.212

0.9351.8082.6243.3874.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.9091.7362.4873.1703.791

06 07 08 09 10

5.796 6.728 7.652 8.566 9.471

5.601 6.472 7.325 8.162 8.983

5.417 6.230 7.020 7.786 8.530

5.2426.0026.7337.4358.111

5.0765.7866.4637.1087.722

4.9175.5826.2106.8027.360

4.7675.3895.9716.5157.024

4.623 5.206 5.747 6.247 6.710

4.486 5.033 5.535 5.995 6.418

4.3554.8685.3355.7596.145

11 12 13 14 15

10.368 11.255 12.134 13.004 13.865

9.787 10.575 11.348 12.106 12.849

9.253 9.954

10.635 11.296 11.938

8.7609.3859.986

10.56311.118

8.3068.8639.3949.899

10.380

7.8878.3848.8539.2959.712

7.4997.9438.3588.7459.108

7.139 7.536 7.904 8.224 8.560

6.805 7.161 7.487 7.786 8.061

6.4956.8147.1037.3677.606

16 17 18 19 20

14.718 15.562 16.398 17.226 18.046

13.578 14.292 14.992 15.678 16.351

12.561 13.166 13.753 14.324 14.877

11.65212.16612.65913.13413.590

10.83811.27411.69012.08512.462

10.10610.47710.82811.15811.470

9.4479.763

10.05910.33610.594

8.851 9.122 9.372 9.604 9.818

8.313 8.544 8.756 8.950 9.129

7.8248.0228.2018.3658.514

21 22 23 24 25

18.857 19.661 20.456 21.244 22.023

17.011 17.658 18.292 18.914 19.523

15.415 15.937 16.444 16.936 17.413

14.02914.45114.85715.24715.622

12.82113.16313.48913.79914.094

11.76412.04212.30312.55012.783

10.83611.06111.27211.46911.654

10.017 10.201 10.371 10.529 10.675

9.292 9.442 9.580 9.707 9.823

8.6498.7728.8838.9859.077


Page 78 CMA Canada

Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

01 02 03 04 05

0.901 1.713 2.444 3.102 3.696

0.8931.6902.4023.0373.605

0.885 1.668 2.361 2.975 3.517

0.8771.6472.3222.9143.433

0.8701.6262.2832.8553.352

0.8621.6052.2462.7983.274

0.8551.5852.2102.7433.199

0.848 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.107 2.589 2.991

06 07 08 09 10

4.231 4.712 5.146 5.537 5.889

4.1114.5644.9685.3285.650

3.998 4.423 4.799 5.132 5.426

3.8894.2884.6394.9465.216

3.7854.1604.4874.7725.019

3.6854.0394.3444.6074.833

3.5893.9224.2074.4514.659

3.498 3.812 4.078 4.303 4.494

3.410 3.706 3.954 4.163 4.339

3.326 3.605 3.837 4.031 4.193

11 12 13 14 15

6.207 6.492 6.750 6.982 7.191

5.9386.1946.4246.6286.811

5.687 5.918 6.122 6.303 6.462

5.4535.6605.8426.0026.142

5.2345.4215.5835.7255.847

5.0295.1975.3425.4685.576

4.8364.9885.1185.2295.324

4.656 4.793 4.910 5.008 5.092

4.487 4.611 4.715 4.802 4.876

4.327 4.439 4.533 4.611 4.676

16 17 18 19 20

7.379 7.549 7.702 7.839 7.963

6.9747.1207.2507.3667.469

6.604 6.729 6.840 6.938 7.025

6.2656.3736.4676.5506.623

5.9546.0476.1286.1986.259

5.6695.7495.8185.8785.929

5.4055.4755.5345.5855.628

5.162 5.222 5.273 5.316 5.353

4.938 4.990 5.033 5.070 5.101

4.730 4.775 4.812 4.844 4.870

21 22 23 24 25

8.075 8.176 8.266 8.348 8.422

7.5627.6457.7187.7847.843

7.102 7.170 7.230 7.283 7.330

6.6876.7436.7926.8356.873

6.3136.3596.3996.4346.464

5.9736.0116.0446.0736.097

5.6655.6965.7235.7475.766

5.384 5.410 5.432 5.451 5.467

5.127 5.149 5.167 5.182 5.195

4.891 4.909 4.925 4.937 4.948


CMA Canada Page 79

Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 01 02 03 04 05

0.826 1.510 2.074 2.540 2.926

0.8201.4922.0422.4942.864

0.813 1.474 2.011 2.448 2.804

0.8071.4571.9812.4042.745

0.8001.4401.9522.3622.689

0.7941.4241.9232.3202.635

0.7871.4071.8962.2802.583

0.781 1.392 1.868 2.241 2.532

0.775 1.376 1.842 2.203 2.483

0.769 1.361 1.816 2.166 2.436

06 07 08 09 10

3.245 3.508 3.726 3.905 4.054

3.1673.4163.6193.7863.923

3.092 3.327 3.518 3.673 3.799

3.0213.2423.4213.5663.682

2.9513.1613.3293.4633.571

2.8853.0833.2413.3663.465

2.8213.0093.1563.2733.364

2.759 2.937 3.076 3.184 3.269

2.700 2.868 2.999 3.100 3.178

2.643 2.802 2.925 3.019 3.092

11 12 13 14 15

4.177 4.279 4.362 4.432 4.489

4.0354.1274.2034.2654.315

3.902 3.985 4.053 4.108 4.153

3.7763.8513.9123.9624.001

3.6563.7253.7803.8243.859

3.5433.6063.6563.6953.726

3.4373.4933.5383.5733.601

3.335 3.387 3.427 3.459 3.483

3.239 3.286 3.322 3.351 3.373

3.147 3.190 3.223 3.249 3.268

16 17 18 19 20

4.536 4.576 4.608 4.635 4.657

4.3574.3914.4194.4424.460

4.189 4.219 4.243 4.263 4.279

4.0334.0594.0804.0974.110

3.8873.9103.9283.9423.954

3.7513.7713.7863.7993.808

3.6233.6403.6543.6643.673

3.503 3.518 3.529 3.539 3.546

3.390 3.403 3.413 3.421 3.427

3.283 3.295 3.304 3.311 3.316

21 22 23 24 25

4.675 4.690 4.703 4.713 4.721

4.4764.4884.4994.5074.514

4.292 4.302 4.311 4.318 4.323

4.1214.1304.1374.1434.147

3.9633.9713.9763.9813.985

3.8163.8223.8273.8313.834

3.6793.6843.6893.6923.694

3.551 3.556 3.559 3.562 3.564

3.432 3.436 3.438 3.441 3.442

3.320 3.323 3.325 3.327 3.329


Page 80 CMA Canada

Table 2 (cont’d)


( )P

i

in

n

=

−+

⎛

⎝

⎜⎜

⎞

⎠

⎟⎟

1 1

1

n 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%

01 02 03 04 05

0.763 1.346 1.791 2.131 2.390

0.758 1.332 1.766 2.096 2.345

0.752 1.317 1.742 2.062 2.302

0.7461.3031.7192.0292.260

0.7411.2891.6961.9972.220

0.7351.2761.6741.9662.181

0.7301.2631.6521.9362.143

0.725 1.250 1.630 1.906 2.106

0.719 1.237 1.609 1.877 2.070

0.7141.2251.5891.8492.035

06 07 08 09 10

2.588 2.739 2.854 2.942 3.009

2.534 2.678 2.786 2.868 2.930

2.483 2.619 2.721 2.798 2.855

2.4332.5622.6582.7302.784

2.3852.5082.5982.6652.715

2.3392.4552.5402.6032.650

2.2942.4042.4852.5442.587

2.251 2.356 2.432 2.487 2.527

2.209 2.308 2.380 2.432 2.469

2.1682.2632.3312.3792.414

11 12 13 14 15

3.060 3.100 3.129 3.152 3.170

2.978 3.013 3.040 3.061 3.076

2.899 2.931 2.956 2.974 2.988

2.8242.8532.8762.8922.905

2.7522.7792.7992.8142.826

2.6832.7082.7272.7402.750

2.6182.6412.6582.6702.679

2.556 2.576 2.592 2.603 2.611

2.496 2.515 2.529 2.539 2.546

2.4382.4562.4692.4782.484

16 17 18 19 20

3.183 3.193 3.201 3.207 3.211

3.088 3.097 3.104 3.109 3.113

2.999 3.007 3.012 3.017 3.020

2.9142.9212.9262.9302.933

2.8342.8402.8442.8482.850

2.7582.7632.7672.7702.772

2.6852.6902.6932.6962.698

2.616 2.621 2.624 2.626 2.627

2.551 2.555 2.557 2.559 2.561

2.4892.4922.4942.4962.497

21 22 23 24 25

3.215 3.217 3.219 3.221 3.222

3.116 3.118 3.120 3.121 3.122

3.023 3.025 3.026 3.027 3.028

2.9352.9372.9382.9392.939

2.8522.8532.8542.8552.856

2.7732.7752.7752.7762.777

2.6992.7002.7012.7012.702

2.629 2.629 2.630 2.630 2.631

2.562 2.562 2.563 2.563 2.563

2.4982.4992.4992.4992.499

2011 ee sample exam

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