FMAC exam questions

Question # 00003816 Posted By: neil2103 Updated on: 11/21/2013 12:21 AM Due on: 11/27/2013
Subject Accounting Topic Accounting Tutorials:
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Part A–MULTIPLE CHOICE and TRUE/FALSE (1 mark each x 15 questions = 15 marks). Choose the one alternative that best completes the statement or answers the question.

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

a. Increased corruption and unethical behavior.

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

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

d. All of the above.

e. b and c.

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

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

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

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

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

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

a. Gross Profit

b. Operating Profit

c. Earnings before Taxes

d. Net profit

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

5. Consider the following statements

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

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

a. Only Statement I is true.

b. Only Statement II is true.

c. Both Statements I and II are true.

d. Both Statements I and II are false.

6. How should a company report total comprehensive income?

a. On the face of its income statement.

b. In a separate statement of comprehensive income.

c. In its statement of stockholders' equity.

d. All of the above ways are acceptable.

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

a. public and private donors are demanding accountability

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

c. more nonprofit organizations are competing for limited funds

d. All of the above are correct.

8. The measurement of the objectives for the Balanced Scorecard

a. creates focus for the future.

b. communicates an important message to all employees.

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

d. All of the above are correct.

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

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

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

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

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

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

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

b. simplify the calculations of the activity cost drivers.

c. reduce the cost of unused capacity.

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

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

a. Operations throughout the plant are fairly similar.

b. There are small amounts of overhead costs.

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

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

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

a. Use more discipline in granting discounts and allowances.

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

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

d. Improve margins by lowering costs.

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

a. communicate the company’s strategy.

b. motivate employees to achieve strategic objectives.

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

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

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

15.Budgeting provides all of the following EXCEPT:

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

b. support for the management functions of planning and coordination

c. a means to anticipate problems

d. an ethical framework for decision making

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

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

Date Purchases (units) Purchase Price per Unit

Jan 2 2 $3

Feb. 15 3 $5

March 30 4 $7

July 29 6 $6

October 30 5 $4

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

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

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

Growth Rate

2012 to 2013

Net sales 10.5%

Total accounts receivable 21.3%

Allowance for doubtful accounts 2.6%

2013 2012

Allowance for doubtful accounts as a

percentage of total accounts receivable 3.8% 5.4%

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

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



Net sales






Gross margin



Research and development



Selling, general and administrative



Restructuring, asset impairments and other charges



Income from operations



Interest expense



Income (loss) before income taxes



Provision for income taxes



Net income (loss)



Sales revenue increase, 2012 to 2013


Operating expense increase, 2012 to 2013


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

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

(2) Purchases of equipment were $12 million.

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

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

(5) Depreciation expense was $18 million.

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

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

(8) Accounts payable increased by $8 million.

(9) Inventories decreased by $5 million.

(10) Opening cash balance was $4 million.

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

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

Dept. A Dept. B

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

Manufacturing overhead costs $400,000 $600,000

Direct labor-hours 25,000 60,000

Machine-hours 10,000 12,000

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

Dept. A Dept. B

Direct labor-hours 10 20

Machine-hours 2 15

Direct material cost $100 $200

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

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

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

Direct materials $5,000,000

Direct labor 4,000,000

Variable manufacturing support 500,000

Fixed manufacturing support 200,000

Total manufacturing costs 9,700,000

Profit $2,300,000

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

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

Boots Slippers Runners

Selling price $150 $20 $85

Direct materials 100 8 40

Direct labor ($20 per hour) 20 5 10

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

Fixed costs 8 4 20

Gross profit 12 1 3

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

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

Standard quantity Standard price

Direct materials 10 kilograms $5 per kilogram

Direct labor 0.5 hours $30 per hour

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

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

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

Required: What will happen to profits?

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

Before the change After the change

Total annual sales $600,000 $800,000

Costs as a percentage of sales:

Direct materials 23% 20%

Direct labor 9% 7%

Manufacturing Support costs 18% 13%

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

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

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

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

Problem 1 (14 marks)

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




Current ratio*




Acid-test ratio




Accounts receivable turnover




Inventory turnover




Current liabilities








Gross Profit Ratio




Dividends paid per share**




Dividend yield ratio




Dividend payout ratio




Return on total assets




Return on common stockholders’ equity




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

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

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

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

2. Is the earnings per share increasing or decreasing?

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

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

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

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

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

Problem 2 (16 marks)

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

a. January 2013 forecasted income statement:

Sales $200,000

Cost of goods sold 150,000

Gross profit 50,000

Variable selling expenses $ 10,000

Fixed administrative expenses 20,000 30,000

Forecast net operating income $ 20,000

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

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

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

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

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

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

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

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

Problem 3 (35 marks)

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


Heavy Duty

Units produced



Direct material cost per engine



Direct labour cost per hour



Direct labour hours incurred



Inspections per engine



Inspection time per engine (hrs.)



Engines packed and shipped per batch



Individual engine packing time (hrs.)



Additional preparation time per batch (hrs.)



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

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


Heavy Duty

Machining hours per engine



Set up time per run (hrs.)



Number of production runs




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

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

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

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

Template for Part A

Part A

















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