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

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

• Question 461:

  Which one of the following is most relevant to a manufacturing equipment replacement decision?

  A. Original cost of the old equipment.
  B. Disposal price of the old equipment.
  C. Gain or loss on the disposal of the old equipment.
  D. A lump-sum write-off amount from the disposal of the old equipment.
  B. Disposal price of the old equipment.

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  Rule: Relevant costs are only those costs that will differ among many alternatives.

  Choice "b" is correct. The disposal price of the old equipment is most relevant because it is an expected future inflow that will differ among alternatives. If this old equipment is replaced, there will be a cash inflow from the sale of the old

  equipment. If the old equipment is kept, there will be no cash inflow from the sale of the old equipment.

  Choice "a" is incorrect. The original cost of the old equipment is a sunk cost and, therefore, not relevant.

  Choice "c" is incorrect. The gain or loss on the disposal of the old equipment is not relevant. The gain or loss is an accounting computation that combines the book value, which is always not relevant, and the disposal value, which is relevant.

  The result is meaningless to future decisions and, therefore, is not relevant.

  Choice "d" is incorrect. The book value is not relevant to future decisions because the undepreciated sunk cost of an asset will only reduce net income in the future as either depreciation expense or as a loss on disposal.

• Question 462:

  Tennis rackets and tennis balls are:

  A. Substitute goods.
  B. Independent goods.
  C. Inferior goods.
  D. Complementary goods.
  D. Complementary goods.

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  Choice "d" is correct. Complementary goods are ones whose demand fluctuates together. If Good A and Good B are complements, then if the demand for Good A increases, the demand for Good B will also increase, tennis rackets and tennis

  balls are complements.

  Choice "a" is incorrect. For substitutive goods, as the price of one of the goods increases, the other good experiences an increase in demand as it is substituted for the first good. An example of substitute goods is apple and orange juice.

  Choice "b" is incorrect. Independent goods have demand functions that are not interrelated. An example would be bread and vacuum cleaners. Choice "c" is incorrect. Inferior goods experience a decrease in demand when income levels rise.

  An example is hamburger, which experiences decrease in demand as incomes rise and buyers switch to higher priced meats.

• Question 463:

  Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?

  A. Assignment.
  B. Novation.
  C. Delegation.
  D. Accord and satisfaction.
  B. Novation.

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  Choice "b" is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations. Choice "a" is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability. Choice "c" is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability. Choice "d" is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.

• Question 464:

  Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of Amicable's customers take the 2% discount and pay on day 10. The remainder of Amicable's customers pay on day 30. How many days' sales are in Amicable's accounts receivable?

  A. 6
  B. 12
  C. 18
  D. 20
  C. 18

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  Choice "c" is correct. Days' sales in accounts receivable is normally calculated as Days' sales = Ending accounts receivable / Average daily sales. However, that formula will not work in this case because the necessary information is not provided. However, enough information about payments is provided so that the total days' sales can be determined on a weighted average basis. In this question, nobody pays before the 10th day and 60% of the customers pay on the 10th day, so there are 10 x .60, or 6 day's sales there. The other 40% of the customers pay on the 30th day so there are 30 x .40, or 12 day's sales there. The total is 18 days sales.

  Choice "a" is incorrect. This answer is apparently calculated from just the 60% of the customers who pay on the 10th day. The others have to be included also. Choice "b" is incorrect. This answer is apparently calculated from just the 40% of the customers who pay on the 30th day. The others have to be included also. Choice "d" is incorrect. This answer is apparently calculated by as the difference between the 30th day and the 10th day. The answer does not take into account how many customers pay when.

• Question 465:

  Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?

  A. Employees.
  B. Former partners.
  C. Inactive partners.
  D. Transferees of partners' interests.
  C. Inactive partners.

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  Choice "c" is correct. Every partner in a partnership - whether active or inactive - has the right to inspect the partnership's books and records. Choice "a" is incorrect. Only a partner has a right to inspect the partnership's books and records; an employee of the partnership has no such right. Choice "b" is incorrect. Only current partners have a right to inspect the partnership's books and records; former partners do not have such a right. Choice "d" is incorrect. Only partners have a right to inspect a partnership's books and records. A transferee of a partner's interest has only the partner's right to distributions.

• Question 466:

  Which of the following is not consistent with full employment?

  A. An unemployment rate greater than zero.
  B. Structural unemployment.
  C. Cyclical unemployment.
  D. Frictional unemployment.
  C. Cyclical unemployment.

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  Choice "c" is correct. When the economy is operating at full employment, there is no cyclical unemployment. When the economy is operating at full employment, there is still some unemployment known as the natural rate of unemployment,

  which does not include cyclical unemployment.

  Choice "a" is incorrect. There is still some unemployment (frictional, structural, and seasonal) when the economy is operating at full employment.

  Choice "b" is incorrect, per the above Explanation.

  Choice "d" is incorrect, per the above Explanation.

• Question 467:

  The selection of the denominator in the return on investment (ROI) formula is critical to the measure's effectiveness. Which denominator is criticized because it combines the effects of operating decisions made at one level of the organization with financing decisions made at another organization level?

  A. Total assets available.
  B. Total assets employed.
  C. Working capital plus other assets.
  D. Shareholder's equity.
  D. Shareholder's equity.

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  Choice "d" is correct. Shareholders' equity is the ROI denominator that has been criticized because it combines the effects of operating decisions made at another organization level. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 468:

  Which of the following actions is the acknowledged preventive measure for a period of deflation?

  A. Increasing interest rates.
  B. Increasing the money supply.
  C. Decreasing interest rates.
  D. Decreasing the money supply.
  B. Increasing the money supply.

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  Choice "b" is correct. Deflation is a general decline in the overall price level (i.e., when the inflation rate is negative). Increasing the money supply causes the overall price level to rise. As a result, it helps eliminate deflation. Choice "a" is incorrect. Increasing interest rates causes aggregate demand to shift left. As a result, the aggregate price level will fall even further. This will exasperate deflation. Choice "c" is not wrong but it is not as good an answer as "b". A decrease in interest rates causes the aggregate demand curve to shift right. As a result, the aggregate price level will rise. This helps eliminate deflation. However, there are times when interest rates are already so low that lowering interest rates is not an option. Thus, the preferred or "acknowledged" preventative measure for deflation is increasing the money supply. Choice "d" is incorrect. Decreasing the money supply causes the overall price level to fall. This would obviously exasperate deflation.

• Question 469:

  A disadvantage of the net present value method of capital expenditure evaluation is that it:

  A. Is calculated using sensitivity analysis.
  B. Does not provide the true rate of return on investment.
  C. Is difficult to apply because it uses a trial and error approach.
  D. Is difficult to adapt for risk.
  B. Does not provide the true rate of return on investment.

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  Choice "b" is correct. The net present value (NPV) method of capital expenditure evaluation does not provide the true rate of return on investment. The NPV indicates whether or not an investment will earn the "hurdle rate" used in the NPV

  calculation. If the NPV is positive, the return on investment will exceed the hurdle rate. If the NPV is negative, the return on investment will be less than the hurdle rate. If the NPV is zero, the return on investment will be exactly equal to the

  hurdle rate.

  Choice "a" is incorrect. Sensitivity analysis is a "what if" technique that asks how a given organization will change if the original estimates used in the capital budgeting model are changed.

  Choice "c" is incorrect. NPV calculations do not use a trial and error approach.

  Choice "d" is incorrect. NPV method is not difficult to adapt for risk. To adapt for increased risk, a higher hurdle rate is used. To adapt for less risk, a lower hurdle rate is used.

• Question 470:

  Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?

  A. The entity may avoid taxation.
  B. The entity may have any number of owners.
  C. The owner may participate in management while limiting personal liability.
  D. The entity may make disproportionate allocations and distributions to members.
  C. The owner may participate in management while limiting personal liability.

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  Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage. Choice "a" is incorrect. Generally, both entities'

  profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects.

  Choice "b" is incorrect. Both entities may have any number of owners.

  Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.