Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Exam Preparation

Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Questions & Answers

• Question 161:

  A sharp rise in the price of oil (a major input), would result in:

  A. Cost (Push) inflation.
  B. Demand (Pull) inflation.
  C. An increase in aggregate demand.
  D. An increase in aggregate supply.
  A. Cost (Push) inflation.

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  Choice "a" is correct. Cost (Push) inflation is inflation caused by a shift left in aggregate supply. An increase in input costs, such as a sharp increase in the price of oil, will cause the aggregate supply curve to shift left and thus increase the

  aggregate price level causing inflation.

  Choice "b" is incorrect. Demand (Pull) inflation is inflation caused by a shift right in aggregate demand.

  Choice "c" is incorrect. An increase in the price of oil causes the aggregate supply curve to shift, not the aggregate demand curve.

  Choice "d" is incorrect. An increase in the price of oil will cause aggregate supply to decrease (shift left), not increase.

• Question 162:

  All of the following are the rates used in net present value analysis, except for the:

  A. Cost of capital.
  B. Hurdle rate.
  C. Discount rate.
  D. Accounting rate of return.
  D. Accounting rate of return.

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  Choice "d" is correct. The accounting rate of return is a capital budgeting technique, not a rate. Choices "a", "b", and "c" are incorrect. All of these are rates used in net present value analysis:

  ?Cost of capital ?Hurdle rate ?Discount rate ?Required rate of return

  Cost of capital is the cost of borrowing. The hurdle rate, the discount rate, and the required rate of return are synonymous terms for an arbitrary rate set by management.

• Question 163:

  A stockholder's right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:

  A. Commence a stockholder's derivative suit.
  B. Obtain stockholder names for a retail mailing list.
  C. Solicit stockholders to vote for a change in the board of directors.
  D. Investigate possible management misconduct.
  B. Obtain stockholder names for a retail mailing list.

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  Choice "b" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder's interest in the corporation. This right will be denied where the purpose is not reasonably

  related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose.

  Choices "a", "c", and "d" are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders:

  A. To commence a stockholder's derivative suit.

  C. To solicit stockholders to vote for a change in the board of directors.

  D. To investigate possible management misconduct.

• Question 164:

  Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawson's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30 percent of sales; accounts payable and other current liabilities are 10 percent of sales. What is the estimated total investment for this expansion?

  A. $3.4 million.
  B. $4.3 million.
  C. $4.6 million.
  D. $4.9 million.
  C. $4.6 million.

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  Rule: The expansion of working capital (WC = CA-CL) is treated as an increase in investment. Choice "c" is correct. $4.6 million estimated total investment for this expansion.

  

  Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 165:

  Which of the following ratios is appropriate for the evaluation of accounts receivable?

  A. Days sales outstanding.
  B. Return on total assets.
  C. Collection to debt ratio.
  D. Current ratio.
  A. Days sales outstanding.

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  Choice "a" is correct. Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are

  outstanding, the longer the receivables are outstanding.

  Choice "b" is incorrect. Return on total assets is not appropriate for the evaluation of accounts receivable.

  It is appropriate for the evaluation of return and of total assets, but not for the evaluation of account receivable specifically.

  Choice "c" is incorrect. The collection to debt ratio has nothing to do with the evaluation of accounts receivable.

  Choice "d" is incorrect. The current ratio is appropriate for the evaluation of liquidity (one of the ways to evaluate liquidity) but has nothing to do with the evaluation of accounts receivable, other than that accounts receivable is in the numerator

  of the current ratio.

• Question 166:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives.

  The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners

  agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000.

  Vick's share of the undistributed losses will be:

  A. $0
  B. $1,000
  C. $9,000
  D. $10,000
  C. $9,000

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  Rule: Where the partnership agreement is silent, losses are shared in the same proportion as profits.

  Choice "c" is correct. Vick was entitled to 30% of the profits and so will be responsible for 30% of the undistributed $30,000 loss, or $9,000.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 167:

  Wyley Inc. purchases an item on credit with terms of 3/10, net 45. Based on a 360-day year, Wyley's annual interest cost of foregoing the cash discount and making payment on the last day of the credit period is:

  A. 24.00%
  B. 30.86%
  C. 31.81%
  D. 37.11%
  C. 31.81%

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  Choice "c" is correct. The formula for computing the cost of credit discounts is:

  

  Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 168:

  At the beginning of year 1, $10,000 is invested at 8% interest, compounded annually. What amount of interest is earned for year 2?

  A. $800.00
  B. $806.40
  C. $864.00
  D. $933.12
  C. $864.00

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  Choice "c" is correct. This question is a compound interest question because the interest is to be determined at the end of the second year. The calculation is as follows and uses different symbols than the SI = PIN formula in the text to show

  candidates the PRT formula as well (the CPA exam often uses different terminology):

  Interest = PRT (for the first year)

  Interest = $1,000 x .08 x 1 = $800 and adding the $800 to the beginning principal

  Interest = PRT (for the second year)

  Interest = $1,800 x .08 x 1 = $864

  It is obvious from the answer that the interest earned in year 2 is interest earned on the original principal ($10,000 x .08 = $800) plus interest on the year 1 interest ($800 x .08 = $64).

  Choice "a" is incorrect. This answer is interest only on the original principal, and not on the year 1 interest.

  Choice "b" is incorrect. This answer has a decimal point error in calculating the year 2 interest on year 1 interest.

  Choice "d" is incorrect. This answer is apparently made up. It is sometimes difficult to come up with 3 decent wrong answers, especially with simple questions.

• Question 169:

  Strategic planning activities normally involve which of the following efforts:

  I. Strategic Positioning.

  II. Value Chain Analysis.

  III.

  Balance Scorecard Development.

  B. I and II.
  C. I and III.
  D. I, II, and III.
  D. I, II, and III.

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  Choice "d" is correct. Strategic planning activities are normally acknowledged to include each of three operations including:

  I. Strategic positioning. Strategic positioning includes the process of identifying mission, identifying overall strategy, identifying factors critical to succeeding given the assumed strategy and identifying internal and external factors that contribute or detract from achieving the strategy.

  II. Value chain analysis. Value chain analysis includes the process of identifying the functional characteristics of an organization and the manner in which each one of those functions adds value to the firm's customers. III. Balanced scorecard development. Development of a balanced scorecard identifies measurements of value that are both financial and non-financial to be used to monitor and evaluate performance.

  Choice "a" is incorrect. All three activities are integral to strategic planning. Choice "b" is incorrect. All three activities are integral to strategic planning. Choice "c" is incorrect. All three activities are integral to strategic planning.

• Question 170:

  The amount of inventory that a company would tend to hold in safety stock would increase as the:

  A. Cost of carrying inventory decreases.
  B. Variability of sales decreases.
  C. Costs of running out of stock decreases.
  D. Length of time that goods are in transit decreases.
  A. Cost of carrying inventory decreases.

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  Choice "a" is correct. As the cost of carrying inventory decreases, safety stock would tend to increase to reduce the risk of stock outs. Choice "b" is incorrect. As sales become more predictable (sales variability decreases), less (not more)

  safety stock would be needed because the risk of stock outs would have decreased.

  Choice "c" is incorrect. If the cost of stock outs decrease, safety stock would decrease.

  Choice "d" is incorrect. If lead-time decreases, safety stock would decrease.