Questions #26-50 26 Luisana runs a clothing boutique that sells designer clothes. In order to expand the clothing collection in the boutique, Luisana wants to buy some clothes from a fashion designer. After examining Luisana’s audited financial statements, the fashion designer concludes that she is assured a collection from Luisana. Which of the following statements will weaken the argument? A. Luisana has owned the boutique for only three years and has no prior experience of running a business. B. Luisana’s liquid assets are just enough to meet her current liabilities. C. Luisana’s boutique faces increased competition from other designer boutiques. D. The fashion designer makes her collections within two months of sale. 27 Omega Corp. released the unaudited financial statement prepared by its accountants. According to the statement, the profit margin of the company has increased. The sales of its electronic appliances have also increased. Based on the unaudited financial statement, buying Omega Corp. shares would be a good investment. Which of the following, if true, casts the most doubt on the conclusion? A The earnings reported in the audited financial statement for Omega Corp. are lower than that reported in the unaudited financial statement. B. The sales of other products of Omega Corp. have not shown the increase that the sales of electronic appliances have shown. C. The fixed expenses of the company have increased significantly. D. Omega Corp. does not maintain more than a month’s supply of inventory. 28 Reinek Company sold a fixed asset for $25,000. The asset was originally purchased at a cost of $64,000. On the date of sale, the accumulated depreciation was $53,000. Calculate the gain or loss on the sale of the asset. A. Loss of $39,000 B. Gain of $14,000 C. Loss of $36,000 D. Gain of $25,000 29 Gharial LLC is a company that manufactures and leases cars. To increase its production capacity, the CEO of Gharial LLC has decided to build a new manufacturing plant. The company requires a loan from a bank, and submits its financial statements to the bank. The CEO believes that the loan will be approved because of the company’s liquidity. Which of the following strengthens the CEO’s argument? A. Gharial LLC’s financial statements show a positive working capital. B. Gharial LLC’s earnings per share are equal to that of other similar companies. C. The manufacturing plant will be amortized over the next thirty years. D. The cost of building the manufacturing plant will be offset by the profit Gharial LLC earns. 30 Calculate the cash flows from financing activities based on the information given below. Depreciation Purchase of machinery Increase in fixed asset Payment of dividend Issuance of short-term debt Repayment of long-term debt Increase in bank borrowings A. B. C. D. $ 770 4,000 900 600 1,500 5,700 6,200 4,130 1,400 2,000 630 31 The management team at Cryser Electronics Inc., manufacturer of electrical generators, aims to increase the company’s market share by 20% by the end of 2017. To achieve this target, Marcus, the marketing manager, assigns specific sales targets to individual salespeople and retailers. In this scenario, the sales target is a(n) __________. A. task goal B. objective goal C. project goal D. behavioral goal 32 In an apparel store, one individual is assigned the task of recording the cash received from customers. Another individual is responsible for the creation and handing over of credit memos to customers. These measures are taken to avoid the risk of fraud. Which of the following principles of internal control activities does this scenario best illustrate? A. Documentation procedures B. Segregation of duties C. Physical controls D. Independent internal verification 33 WarmLiquid Corp., a manufacturer of water heaters, produces 30 water heaters per week. Past records indicate that 10% of total water heaters produced in a week are likely to be defective. Suppose a quality check was conducted on a sample of six water heaters. What is the probability that four out of six water heaters will be defective? A. 0.46 B. 0.76 C. 0.08 D. 0.56 34 A company declared a cash dividend of $8,560 on December 5, 2015. The company made a cash dividend payment on January 8, 2016. What is the cumulative effect of the declaration and payment of the cash dividend on the company's financial statements? A. Total liabilities will remain the same, and total assets will increase by $8,560. B. Stockholders' equity will increase by $8,560, and total assets will remain the same. C. Total assets and liabilities will increase by $8,560. D. Stockholders' equity and total assets will decrease by $8,560. 35 A company issues 100,000 shares at $50 per share. It has a debt-equity ratio of 2:1. If the company announces a 3-for-1 stock split, what will be the result? A. The total stockholders’ equity and the debt-equity ratio will remain unchanged. B. The total stockholder’s equity will increase and the debt-equity ratio will decrease. C. The total stockholder’s equity will decrease and the debt-equity ratio will remain unchanged. D. The total stockholder’s equity and the debt-equity ratio will decrease. 36 Secaucuss Co. has been in the business of manufacturing office supplies for the last five years. Recently, the company issued more shares to the public to raise capital for its expansion. Expanding its operations into office maintenance helped it generate additional cash inflows. Since the company expanded and issued more shares, the stockholders’ equity should also have increased. However, the stockholders’ equity went down this year. Which of the following statements best explains why the stockholders’ equity went down? A. The company purchased some new machines to speed up its manufacturing process. B. The company collected revenue from services provided on an accrual basis. C. The company employed a predatory pricing strategy to increase its market share. D. The company declared a 2-for-1 stock split during the current year. 37 BrightLife, a leading insurance company, provides incentives to salespeople based on the number of prospective customers they meet in a day. The salespeople, however, often spend time with their friends and then claim to have met the prospective customers. They are paid incentives based on their claims. The company’s CEO realizes that the number of customers the company has is significantly less compared to the number of prospective customers that the salespeople claim to have met. To rectify the unethical behavior of the salespeople, the company now pays incentives based on the number of sales each person makes. Which of the following could be a cause for the salespeople’s unethical behavior? A. Motivated blindness B. Overvaluing outcomes C. Ill-conceived goals D. Indirect blindness 38 Vonik Solvers Inc. receives $40,000 in cash by issuing 15,000 shares of common stock at the par value of $2 per share. Which of the following is the correct journal entry to record this transaction? A. Common Stock 80,000 Cash 30,000 Additional Paid-in Capital 50,000 B. Cash Common Stock Additional Paid-in Capital C. Cash 80,000 30,000 50,000 40,000 Common Stock Additional Paid-in Capital D. Common Stock Cash Additional Paid-in Capital 30,000 10,000 40,000 30,000 10,000 39 Cardice Services Inc. employs more than 5,000 telephone operators globally to address customer complaints. To improve the response time for addressing these complaints, the management decides to automate the responses to all the frequently asked queries. The management predicts that at least 60% of the customer queries will be resolved without the need for human intervention. If the company implements the process, at least 2,500 telephone operators will lose their jobs. To oppose the management’s decision all the employees threaten go on an indefinite strike. Which of the following contingency approaches is commonly used to overcome resistance in such situations? A. Participation and involvement B. Explicit coercion C. Facilitation and support D. Negotiation and agreement 40 The management team at Cryser Inc., manufacturer of wind turbines, aims to increase the company’s market share by 20% by the end of 2017. The respective functional heads in the company inform their teams that they will get a substantial bonus if they are able to achieve this target. Which of the following stages of the goal-setting process is the company in? A. Providing support and feedback B. Promoting goal commitment C. Setting goals D. Creating action plans 41 Elena Corporation owes Volmare Inc., an advertising agency, a sum of $42,000 for services rendered. When Elena Corporation goes public, it offers the agency 7,000 shares of its common stock in exchange for the payable service cost. The agency accepts the offer. The stock trades at $6 per share and the par value of the stock is $1. Which of the following is the correct journal entry to record this transaction in the books of Elena Corporation? A. Service Expense Common Stock Paid-in Capital in Excess of Par—Common Stock B. Cash Common Stock C. Service Expense 42,000 7,000 35,000 42,000 42,000 42,000 Paid-in Capital in Excess of Par—Common Stock D. Service Expense Common Stock 42,000 42,000 42,000 42 Maertge Airlines purchases an aircraft for $84,000,000 on January 1, 2016. The residual value of the aircraft is estimated at $7,500,000, and its useful life is estimated at 25 years. Applying the doubledeclining-balance method of depreciation, the depreciation expense recognized for the year ended December 31, 2018 will be __________. A. $3,096,576 B. $6,182,400 C. $6,720,000 D. $5,687,808 43 Rilm Corporation has been recording investment income as revenue for the past year with the aim of making the financial condition of the company appear better than it actually is. Jon, one of the company’s employees, becomes aware of this fraudulent activity and immediately reports it to the appropriate authorities. After conducting several investigations, the authorities book the company under the Sarbanes-Oxley Act. Which of the following statements best explains why Jon did not hesitate to alert the authorities about the company’s fraudulent activity? A. The Sarbanes-Oxley Act provides for the reinstatement of whistleblowers in cases of improper termination. B. The Sarbanes-Oxley Act requires accounting firms to separate their auditing and consulting functions. C. Under the Sarbanes-Oxley Act, whistleblowers who suffer retaliation are allowed to recover criminal damages but not civil damages. D. There are no limitations to the protections offered by the Sarbanes-Oxley Act to whistleblowers. 44 CodeGiant Inc. is a startup company that specializes in software development. The government levies a sales tax of 7.5% on the sale of the company’s services. Mathew, the company’s CTO, decides to introduce a new functional structure that will reduce the time taken to develop each software. He believes that this will reduce the company’s costs and compensate for the taxes. When he presents his idea to the company’s investors, they become apprehensive that such changes may lead to internal conflicts. The respective department heads are also apprehensive because they do not know whether they will fit into the new structure. They question the validity of Mathew’s suggestion. Which of the following stages of the group development process does this scenario portray? A. Forming B. Norming C. Adjourning D. Storming 45 The CEO of Wrenn Corporation is convicted of committing accounting fraud. After several in-depth investigations, it is found that although the CEO of the company was not aware of the fraud, he received 1.5 million dollars in the form of bonuses and stock profits during the company’s fraudulent period. The Securities and Exchange Commission orders the company to restate its financial position and furnish the correct financial statements. As per the Sarbanes-Oxley Act, which of the following is a likely consequence that will follow? A. The CEO will be held personally liable for the company’s misconduct during the fraudulent period. B. The company will be asked to merge its auditing and consulting functions. C. The CEO will be asked to return the money that he or she received during the company’s fraudulent period. D. The company will be allowed to grant personal loans to its executives provided that it can prove the creditworthiness of the executives. 46 Calculate the cash flows from investing activities based on the following information. $67,550 Cash received from customers Cash paid to suppliers 24,000 Purchase of equipment 230,000 Income tax paid 2,800 Payment of dividends 115,000 Proceeds from sale of machinery 105,000 Interest paid 1,500 Proceeds from issue of long-term debt 84,000 Purchase of stocks 87,500 Receipts from sale of equity instruments A. B. C. D. 177,300 $125,000 $(31,000) $39,250 $(35,200) 47 Earnings per share (EPS) is an indicator of a company’s profitability and how its stocks are valued. EPS of a company is directly proportional to its net income. The net income of Tolut Inc. for this year has decreased by 10 percent from last year’s figures. Therefore, the company’s EPS would be less than what it was last year. Which of the following statements, if true, strengthens the argument? A. A high EPS indicates that the company has a high potential for growth in the future. B. Earnings per share do not necessarily fall every time there is a rise in the taxes paid by the company. C. Tolut Inc. has issued additional common shares in the current year. D. Tolut Inc.’s stocks were undervalued in the market last year. 48 Calculate the operating profit or (loss) from the information given below. Sales revenue Sales returns Cost of goods sold Selling expense Administrative expense Marketing expense Research and development A. B. C. D. $320,000 11,000 210,000 23,520 46,270 26,880 6,300 ($7,030) $3,970 ($3,970) $7,030 49 Elanke, an owner of a restaurant, has the following financial information for the year ending December 31, 2016. Revenue earned Cash received from customers Expenses incurred in the purchase of ingredients Depreciation incurred during the year Cash paid for miscellaneous expenses incurred in the year 2015 $410,000 300,000 250,000 700 120,000 Based on the accrual basis of accounting, Elanke’s net income for the year is __________. A. $39,300 B. $459,300 C. $159,300 D. $339,300 50 Leadership roles require the display of classic extrovert behavior such as speaking confidently in public, building large social networks, and allowing your successes as well as failures to be scrutinized by your stakeholders. These abilities are so integral to leadership roles that people who step into such roles learn to master extrovert behavior regardless of their actual personalities. Which of the following can be inferred from the given passage? A. Having large social networks helps in the development of public-speaking skills. B. Leaders should learn from both their successes and their failures. C. One can acquire extrovert behavior by becoming a leader. D. People who are extroverted become successful leaders. 
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