IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 591:

  Assume that the old equipment must be sold in order to purchase the new equipment. Given a constant effective corporate income tax rate and straight-line depreciation on both disposed and newly purchased pieces of equipment, the depreciation tax shield dung the later years of a capital project, assuming the old equipment was not yet full depreciated when it was disposed of, is general?

  A. Greater than that during the earlier years.
  B. Less than that during the earlier years
  C. The same as that during the earli or years.
  D. Not determinable from the information given.
  A. Greater than that during the earlier years.

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  Explanation

  Older equipment that is being disposed of is reaching the end of its productive he. Thus, in the early years of the project, the depreciation expense on the new equipment only provides an incremental tax benefit since there was some depreciation expense still being recognized on the old equipment. Once the time of the old equipment's useful life has passed, all the depreciation tax shield is being provided by the (higher) expense being recognized on the new equipment.

• Question 592:

  Managers must make decisions in many different situations. A manager must make a subjective decision when the environment is one in which

  A. Uncertainty exists.
  B. Risk exists.
  C. Certainty may be achieved.
  D. Probabilities can be calculated.
  A. Uncertainty exists.

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  Explanation

  Uncertainly exists when the results of possible outcomes cannot even be estimated using the tools of statistical probability'. This environment is the most difficult for decision making because objective mathematical analyses cannot be made. Hence, creativity' is required in the decision-making process, and reliance on the educated guess rather than the probabilistically calculated estimate is necessary.

• Question 593:

  On January 1. Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end of 4 years. The new asset - Qualifies as 3-year property under the Modified Accelerated Cost

  Recovery System (MACRS).

  Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000.

  Will continue to generate the same operating revenues as the old asset ($200 .000 per year). However, savings in operating costs will be experienced as follows: a total of $ 120.000 in each of the first 3 years and $90,000 in the fourth year.

  Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze

  projects using the following factors and rates:

  

  The present value of the depreciation tax shield for the fourth year MACRS depreciation of Crane Company's new asset is?

  A. $0.
  B. $6,112.
  C. $6,608.
  D. $16,520.
  C. $6,608.

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  Explanation

  The firm will be able to deduct 7% of the asset's cost during the fourth year of the asset's life. The deduction is $28,000 ($400,000 x 7%), and the tax savings is $11,200 ($28,000 x 40%). The present value of this amount is $6,608 ($11,200 x .59 PV of $1 at 14% for four periods).

• Question 594:

  Which costs are relevant to the decision to further process a product beyond its current state?

  A. Joint costs.
  B. Incremental costs.
  C. Absorption costs.
  D. Fixed factory overhead.
  B. Incremental costs.

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  Explanation

  Incremental costs are the additional costs incurred by choosing one option rather than another. Questions involving incremental costing (sometimes called differential costing) decisions are based upon a direct (variable) costing analysis. The typical problem for which incremental cost analysis can be used involves two or more options. Incremental costing is applicable to decisions concerning special orders, making or buying a component, and adding or dropping product lines. Caution must always be used in applying incremental cost analysis because of the many non quantitative factors that must be considered. Management accountants are frequently asked to analyze various decision situations, including the following:

  I. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. Ill. Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.

  IV.

  The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

  V.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

• Question 595:

  Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1 .800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-dayyear, which one of the following proposals is optimal for Newman?

  A. A $0.50 fee per check.
  B. Flatfeet of $125,000 per year.
  C. A fee of 0.03% of the amount collected.
  D. A compensating balance of $1,750,000.
  D. A compensating balance of $1,750,000.

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  Explanation

  Multiplying 700 checks times 360 days results in a total of 252,000 checks per year. Accordingly, under (A). Total annual cost is $126,000 (252,000 x $50), which is less desirable than the $125,000 flat fee in (B). Given that the annual collections equal $453,600,000 (700 checks x $1 .800 x 360 days), (C) is also less desirable because the annual fee would be $136,080 ($453,600,000 x .03%). The best option is therefore to maintain a compensating balance of $1 .750,000 when the cost of funds is 7%, resulting in a total cost of $122,500 ($1,750,000 x.07).

• Question 596:

  An optimal portfolio of investments is

  A. Efficient because it offers the highest expected return.
  B. Any portfolio chosen from the efficient set of portfolios
  C. Any portfolio chosen from the feasible set of portfolios
  D. Tangent to the investor's highest indifference curve.
  D. Tangent to the investor's highest indifference curve.

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  Explanation

  An investor wants to maximize expected return and minimize risk when choosing a portfolio. A feasible portfolio that offers the highest expected return for a given risk or the least risk for a given expected return is an efficient portfolio. A portfolio that is selected from the efficient set of portfolios because it is tangent to the investor's highest indifference curve is the optimal portfolio.

• Question 597:

  All of the following are tools used to evaluate solutions except

  A. Value analysis.
  B. Simulation.
  C. Linear programming.
  D. Decision theory.
  A. Value analysis.

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  Explanation

  The analysis of facts and the development of solutions have been improved through the adoption of mathematical techniques. Although they will not provide useful solutions for poorly formulated problems, they will provide valuable results for well-defined quantitative problems. Some of these tools include simulation, linear programming, and decision theory. Value analysis is a technique utilized to identifj alternative courses of action, not for evaluation of problem solutions.

• Question 598:

  A company had 150,000 shares outstanding on January 1. On March 1,75,000 additional shares were issued through a stock dividend. Then on November 1, the company issued 60,000 shares for cash. The number of shares to be used in the denominator of the EPS calculation for the year is

  A. 222,500 shares.
  B. 225,000 shares.
  C. 235,000 shares.
  D. 285,000 shares
  C. 235,000 shares.

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  Explanation

  The weighted-average of shares outstanding during the year is used in the EPS denominator. Shares issued in a stock dividend are assumed to have been outstanding as of the beginning of the earliest accounting period presented. Thus, the 75,000 shares issued on March 1 are deemed to have been outstanding on January 1. The EPS denominator equals 235,000 shares {[150,000 x (12 months ?12 months)] + [75,000 x (12 months ?12 months)) + [60,000 x (2 months ?12 months)]}

• Question 599:

  Quo Co. rented a building to Hava Fast Food. Each month Quo receives a fixed rental amount plus a variable rental amount based on Hava's sales for that month. As sales increase, so does the variable rental amount but at a reduced rate. Which of the following curves reflects the monthly rentals under the agreement?

  

  A. I
  B. II
  C. III
  D. IV
  A. I

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  Explanation

  Fixed cost remains unchanged within the relevant range for a given period despite fluctuations in activity, but variable costs vary directly with the activity. Because a portion of the rental revenue is a fixed cost, it will never be zero regardless of sales. Because the total variable cost increases at a reduced rate as sales increase, the per-unit variable cost is not fixed. Furthermore, as sales increase overtime1 the rental revenue increases at a diminishing amount as represented by Curve I.

• Question 600:

  A market follower is a firm that does not choose to challenge the market leader. This firm must have its own strategy for maintaining its share of the market. When the firm improves products that are already on the market and operates in different markets, it is a (n).

  A. Counterfeiter.
  B. Cloner.
  C. Imitator.
  D. Adapter.
  D. Adapter.

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  Explanation

  An adapter improves products and may operate in different markets or evolve into a market challenger