You are on page 1of 44

CMA PART 1

MOCK TEST 2

ARMAGHAN AHMED

FINANCE MANAGER CUM TRAINER


CPA MBA PGD B.COM
Phone: 00971-50-3060762
E-mail: MYCOMPANION30@HOTMAIL.COM
BLOG education4all-arman.blogspot.com

education4all

Part 1 : 02/11/15 08:14:19


Question 1 - ICMA 10.P1.049 - Budget Methodologies
Streeter Company produces microwave turntables. Sales for the next year are expected to be 65,000 units in the first
quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth quarter.
Streeter maintains a finished goods inventory at the end of each quarter equal to one half of the units expected to be
sold in the next quarter. How many units should Streeter produce in the second quarter?
A. 72,000 units
B. 75,000 units
C. 78,000 units
D. 84,000 units

Question 2 - CMA 1294 3.19 - Budget Methodologies


Superior Industries' sales budget shows quarterly sales for the next year as follows:
Quarter Units
1
10,000
2
8,000
3
12,000
4
14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's
sales. Budgeted production for the second quarter of the next year would be:
A. 7,200 units.
B. 8,800 units.
C. 8,000 units.
D. 8,400 units.

Question 3 - HOCK CMA P3A H49 - Strategic Planning


Michael Porter of Harvard University has set forth three generic strategies for companies. Which of the following is not
one of those strategies?
A. Innovation.
B. Cost leadership.
C. Focus, or competitive scope.
D. Differentiation.

Question 4 - CMA 1294 3.9 - Budget Methodologies


Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement of
Financial Position for the year ended November 30, is as follows:
Super Drive
Statement of Financial Position
November 30
Assets
Cash
$ 52,000
(c) HOCK international, page 1

Part 1 : 02/11/15 08:14:19


Accounts receivable, net.
Inventory
Property, plant and equipment
Total assets
Liabilities and Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders equity

150,000
315,000
1,000,000
$1,517,000
$ 175,000
900,000
442,000
$1,517,000

Additional information regarding Super Drive's operations include the following:


Sales are budgeted at $520,000 for December and $500,000 for January of the next year.
Collections are expected to be 60% in the month of sale and 40% in the month following the sale.
80% of the disk drive components are purchased in the month prior to the month of sale, and 20% are
purchased in the month of sale. Purchased components are 40% of the cost of goods sold.
Payment for the components is made in the month following the purchase.
Cost of goods sold is 80% of sales.
The projected gross profit for the month ending December 31 is
A. $104,000
B. $536,000
C. $416,000
D. $134,000

Question 5 - ICMA 10.P1.026 - Learning Curves


In competing as a subcontractor on a military contract, Aerosub Inc. has developed a new product for spacecraft that
includes the manufacturing of a complex part. Management believes there is a good opportunity for its technical force
to learn and improve as they become accustomed to the production process. Accordingly, management estimates an
80% learning curve would apply to this unit. The overall contract will call for supplying eight units. Production of the
first unit requires 10,000 direct labor hours. The estimated total direct labor hours required to produce the seven
additional units would be
A. 70,000 hours.
B. 40,960 hours.
C. 30,960 hours.
D. 56,000 hours.

Question 6 - ICMA 10.P1.063 - Budget Methodologies


Maker Distributors has a policy of maintaining inventory at 15% of the next month's forecasted sales. The cost of
Maker's merchandise averages 60% of the selling price. The inventory balance as of May 31 is $63,000, and the
forecasted dollar sales for the last seven months of the year are as follows:
June
$700,000
July
600,000
August
650,000
September 800,000
October
850,000
November 900,000
(c) HOCK international, page 2

Part 1 : 02/11/15 08:14:19


December 840,000
What is the budgeted dollar amount of Maker's purchases for July?
A. $364,500.
B. $399,000.
C. $355,500.
D. $360,000.

Question 7 - ICMA 10.P1.039 - Budget Methodologies


All of the following are criticisms of the traditional budgeting process except that it
A. makes across-the-board cuts when early budget iterations show that planned expenses are too high.
B. incorporates non-financial measures as well as financial measures into its output.
C. is not used until the end of the budget period to evaluate performance.
D. overemphasizes a fixed time horizon such as one year.

Question 8 - HOCK CMA P3A H37 - Strategic Planning


One of the steps in the the strategic planning process is analyzing external factors in order to identify the
organization's opportunities and threats. Which of the following is not a part of external analysis?
A. Analysis of the national environment in which the company operates.
B. Analysis of the macroenvironment.
C. Identification of the company's strengths and weaknesses.
D. Examination of the industry in which the company operates.

Question 9 - CIA 1190 IV.20 - Responsibility Centers and Reporting Segments


A limitation of transfer prices based on actual cost is that they
A. Charge inefficiencies to the department that is transferring the goods.
B. Lack clarity and administrative convenience.
C. Can lead to suboptimal decisions for the company as a whole.
D. Must be adjusted by some markup.

Question 10 - CIA 1192 IV.22 - Responsibility Centers and Reporting Segments


An organization employs a system of internal reporting that furnishes departmental managers with revenue and cost
information on only those items that are subject to their control. Items not subject to the manager's control are not
included in the performance reports. This method of accounting is known as
A. Responsibility accounting.
B. Segment reporting.
C. Absorption cost accounting.
(c) HOCK international, page 3

Part 1 : 02/11/15 08:14:19


D. Contribution margin reporting.

Question 11 - ICMA 10.P1.139 - Performance Measures


Performance results for four geographic divisions of a manufacturing company are shown below.
Actual Return Return on
Target Return
on Investment Sales
Division on Investment
A
18%
18.1%
8%
B
16%
20.0%
8%
C
14%
15.8%
6%
D
12%
11.0%
9%
The division with the best performance is
A. Division B.
B. Division A.
C. Division D.
D. Division C.

Question 12 - CMA 697 3.30 - Performance Measures


James Webb is the general manager of the Industrial Product Division, and his performance is measured using the
residual income method. Webb is reviewing the following forecasted information for his division for next year:
Amount
Category
(thousands)
Working capital
$1,800
Revenue
30,000
Plant and equipment
17,200
If the imputed interest charge is 15% and Webb wants to achieve a residual income target of $2,000,000, what will
costs have to be in order to achieve the target?
A. $25,690,000
B. $10,800,000
C. $25,150,000
D. $9,000,000

Question 13 - ICMA 10.P1.112 - Manufacturing Input Variances -- Overhead


Harper Company's performance report indicated the following information for the past month.
Actual total overhead
$1,600,000
Budgeted fixed overhead
1,500,000
Applied fixed overhead at $3 per labor hour
1,200,000
Applied variable overhead at $0.50 per labor hour
200,000
Actual labor hours

430,000

(c) HOCK international, page 4

Part 1 : 02/11/15 08:14:19


Harper's total overhead spending variance for the month was
A. $185,000 unfavorable.
B. $200,000 unfavorable.
C. $100,000 favorable.
D. $115,000 favorable

Question 14 - CMA 1292 3.17 - Manufacturing Input Variances -- Overhead


Nanjones Company manufactures a line of products distributed nationally through wholesalers. Presented below are
planned manufacturing data for the year and actual data for November of the current year. The company applies
overhead based on planned machine hours using a predetermined annual rate.
Planning Data
Annual November
Fixed manufacturing overhead
$1,200,000 $100,000
Variable manufacturing overhead
2,400,000 220,000
Direct labor hours
48,000
4,000
Machine hours
240,000
22,000
Data for November
Direct labor hours (actual)
4,200
Direct labor hours (plan based on output)
4,000
Machine hours (actual)
21,600
Machine hours (plan based on output)
21,000
Fixed manufacturing overhead
$101,200
Variable manufacturing overhead
$214,000
The amount of over or underapplied variable manufacturing overhead for November was
A. $2,000 overapplied.
B. $6,000 overapplied.
C. $6,000 underapplied.
D. $4,000 underapplied.

Question 15 - CIA 1196 3.87 - Joint Products and Byproducts


A manufacturing company properly classifies and accounts for one product as a by-product rather than as a main
product because it:
A. Has no sales value to the manufacturing company.
B. Has low physical volume when compared to the other main products.
C. Has low sales value when compared to the main products.
D. Can never be developed into a main product by this or any other manufacturer.

Question 16 - CMA 690 4.3 - Overhead Allocation


Alex Company had the following inventories at the beginning and end of the month of January:
January 1January 31
Finished goods $125,000 $117,000
(c) HOCK international, page 5

Part 1 : 02/11/15 08:14:19


Work-in-process
Direct materials

235,000
134,000

251,000
124,000

The following additional manufacturing data were available for the month of January:
Direct materials purchased
$189,000
Purchase returns and allowances
1,000
Transportation-in
3,000
Direct labor
300,000
Actual factory overhead
175,000
Alex Company applies factory overhead at a rate of 60% of direct labor cost, and any overapplied or underapplied
factory overhead is deferred until the end of the year, December 31.
Alex Company's cost of goods manufactured for January was:
A. $681,000.
B. $673,000.
C. $665,000.
D. $657,000.

Question 17 - CMA 691 3.16 - Shared Service Cost Allocation


The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments such as
Quality Control and Maintenance to the production departments. To aid them in this discussion, the controller has
provided the following information:
Quality
MaintenanceMachiningAssembly Total
Control
Budgeted overhead costs before allocation$350,000
$200,000 $400,000 $300,000$1,250,000
Budgeted machine hours
50,000
50,000
Budgeted direct labor hours
25,000
25,000
Budgeted hours of service:
Quality control
7,000
21,000
7,000
35,000
Maintenance
10,000
18,000
12,000
40,000
If Rochester Manufacturing uses the direct method of allocating service department costs, the total service costs
allocated to the assembly department would be:
A. $80,000.
B. $120,000.
C. $167,500.
D. $87,500.

Question 18 - CMA 691 3.48d - Job-Order and Operation Costing


Gregg Industries manufactures molded chairs. The three models of molded chairs, which are all variations of the
same design, are Standard (can be stacked), Deluxe (with arms), and Executive (with arms and padding). The
company uses batch manufacturing and has an operation costing system.
Gregg has an extrusion operation and subsequent operations to form, trim, and finish the chairs. Plastic sheets are
produced by the extrusion operation, some of which are sold directly to other manufacturers. During the forming
(c) HOCK international, page 6

Part 1 : 02/11/15 08:14:19


operation, the remaining plastic sheets are molded into chair seats and the legs are added; the standard model is sold
after this operation. During the trim operation, the arms are added to the deluxe and executive models and the chair
edges are smoothed. Only the executive model enters the finish operation where the padding is added. All of the units
produced are subject to the same steps within each operation, and no units are in process at the end of the period.
The units of production and direct materials costs were as follows:
Units Extrusion Form
Trim
Finish
Produced Materials Materials Materials Materials
Plastic sheets
5,000 $ 60,000
Standard model
6,000 72,000 $24,000
Deluxe model
3,000 36,000 12,000 $9,000
8,000
6,000 $12,000
Executive model
2,000 24,000
16,000$192,000 $44,000 $15,000 $12,000
Manufacturing costs applied during the month were:
Extrusion Form
Trim
Finish
Operation Operation Operation Operation
Direct labor
$152,000 $60,000 $30,000 $18,000
Factory overhead 240,000 72,000 39,000 24,000
Assume that 1,000 units of the deluxe model remained in work-in-process at the end of the period and that these units
were 100% complete as to materials and 60% complete as to trim operation conversion. What is the balance of
work-in-process?
A. $64,500
B. $42,000
C. $69,300
D. $69,000

Question 19 - CMA 1286 4.15 - Process Costing


Levittown Company employs a process cost system for its manufacturing operations. All direct materials are added at
the beginning of the process and conversion costs are added proportionately. Levittown's production quantity
schedule for November is reproduced as follows.
Units
Work-in-process on November 1
(60% complete as to conversion costs)
1,000
Units started during November
5,000
Total units to account for
6,000
Units completed and transferred out from BI 1,000
Units started and completed during November3,000
Work-in-process on November 30
(20% complete as to conversion costs)
2,000
Total units accounted for
6,000
Using the FIFO method, the equivalent units for conversion costs for November are
A. 3,400 units.
B. 4,000 units.
C. 3,800 units.
D. 4,400 units.

(c) HOCK international, page 7

Part 1 : 02/11/15 08:14:19


Question 20 - CIA 1196 III.88 - Process Costing
A company employs a process costing system for its two-department manufacturing operation using the first-in,
first-out (FIFO) inventory method. When units are completed in Department 1, they are transferred to Department 2 for
completion. Inspection takes place in Department 2 immediately before the direct materials are added, when the
process is 70% complete with respect to conversion. The specific identification method is used to account for lost units.
The number of defective units (that is, those failing inspection) is usually below the normal tolerance limit of 4% of
units inspected. Defective units have minimal value, and the company sells them without any further processing for
whatever it can. Generally, the amount collected equals, or slightly exceeds, the transportation cost. A summary of the
manufacturing activity for Department 2, in units for the current month, is presented below.
Physical Flow
(output units)
Beginning inventory (60% complete with respect to conversion)
20,000
Units transferred in from Department 1
180,000
Total units to account for
200,000
Units completed in Department 2 during the month
170,000
Units found to be defective at inspection
5,000
Ending inventory (80% complete with respect to conversion)
25,000
Total units accounted for
200,000
Beginning work-in-process inventory was valued at $78,000, consisting of $23,000 of transferred-in costs and $55,000
of conversion costs. Transferred-in costs for units transferred in during the month were $360,000. Costs added to
production during the month were $156,000 in direct materials added and $326,700 in conversion costs added.
Total cost transferred out at the end of the month was
A. $814,700
B. $810,765
C. $736,700
D. $812,581

Question 21 - ICMA 10.P1.195 - Process Costing


Oster Manufacturing uses a weighted-average process costing system and has the following costs and activity during
October.
Materials
$ 40,000
Conversion cost
32,500
Total beginning work-in-process inventory $ 72,500
Materials
Conversion cost
Total production costs - October
Production completed
Work-in-process, October 31

$ 700,000
617,500
$1,317,500
60,000 units
20,000 units

All materials are introduced at the start of the manufacturing process, and conversion cost is incurred uniformly
throughout production. Conversations with plant personnel reveal that, on average, month-end in-process inventory is
25% complete. Assuming no spoilage, how should Oster's October manufacturing cost be assigned?
A. $1,283,077 to completed production; $106,923 to work-in-process.
B. $1,155,000 to completed production; $235,000 to work-in-process.
(c) HOCK international, page 8

Part 1 : 02/11/15 08:14:19


C. $1,095,000 to completed production; $222,500 to work-in-process.
D. $1,042,500 to completed production; $347,500 to work-in-process.

Question 22 - CMA 695 3.4 - Process Costing


Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The
following information pertains to operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31 24,000
The beginning inventory was 60% complete for materials and 20% complete for conversion costs. The ending
inventory was 90% complete for materials and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are materials, $54,560; direct labor, $20,320; and factory overhead, $15,240.
Costs incurred during May are materials used, $468,000; direct labor, $182,880; and factory overhead,
$391,160.
Using the FIFO method, the cost per equivalent unit for conversion costs for May is
A. $6.00
B. $5.65
C. $5.83
D. $6.20

Question 23 - CMA 678 4.6 - Classifications of Costs


Conversion costs are
A. All costs associated with manufacturing other than direct labor costs and raw material costs.
B. Manufacturing costs incurred to produce units of output.
C. The sum of raw materials costs and direct labor costs.
D. The sum of direct labor costs and all factory overhead costs.

Question 24 - ICMA 10.P1.183 - Joint Products and Byproducts


Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000 gallon drums for
$2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of
Mini. The selling price is $9 per gallon for Big and $4 per gallon for Mini. If the sales value at splitoff method is used to
allocate joint costs to the final products, the per gallon cost (rounded to the nearest cent) of producing Big is
A. $5.00 per gallon.
B. $4.50 per gallon.
C. $5.63 per gallon.
D. $3.38 per gallon.
(c) HOCK international, page 9

Part 1 : 02/11/15 08:14:19

Question 25 - CMA 690 4.6 - Joint Products and Byproducts


Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are
mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs
joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit,
and each CBL sells for $4 per unit.
Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to commercial
building lumber (CBL) on a physical quantity allocation basis would be
A. $180,000.
B. $225,000.
C. $75,000.
D. $120,000.

Question 26 - CMA 693 3.4 - Classifications of Costs


A fixed cost that would be considered a direct cost is
A. The rental cost of a warehouse to store inventory when the cost object is the Purchasing Department.
B. Board of directors' fees when the cost object is the Marketing Department.
C. A cost accountant's salary when the cost object is a unit of product.
D. A production supervisor's salary when the cost object is the Production Department.

Question 27 - CIA 1196 III.84 - Process Costing


A manufacturing company has a continuous flow cycle that employs simplified activities in a short manufacturing
cycle. The company produces a single product with a minimal defect rate. The product costing system that this
company would most likely use for its manufacturing operations is:
A. Job-order costing.
B. Activity-based costing.
C. Operation costing.
D. Process costing.

Question 28 - CIA 1187 IV.9 - Variable and Absorption Costing


Which of the following is an argument against the use of direct (variable) costing?
A. Fixed factory overhead is necessary for the production of a product.
B. Fixed factory overhead is difficult to allocate properly.
C. Variable factory overhead is a period cost.
D. Absorption costing overstates the balance sheet value of inventories.

(c) HOCK international, page 10

Part 1 : 02/11/15 08:14:19

Question 29 - ICMA 10.P1.199 - Process Costing


Jones Corporation uses a first-in, first-out (FIFO) process costing system. Jones has the following unit information for
the month of August.
Units
Beginning work-in-process inventory, 100% complete
for materials, 75% complete for conversion cost
10,000
Units completed and transferred out
90,000
Ending work-in-process inventory, 100% complete
for materials, 60% complete for conversion costs
8,000
The number of equivalent units of production for conversion costs for the month of August is
A. 92,700.
B. 92,300.
C. 87,300.
D. 88,000.

Question 30 - CIA 594 III.77 - Shared Service Cost Allocation


A company has two service departments, Power and Maintenance, and two production departments, Machining and
Assembly. All costs are regarded as strictly variable. For September the following information is available:
Service Departments Production Departments
Power Maintenance Machining Assembly
Direct costs
$62,500
$40,000
$25,000
$15,000
Actual activity:
Kilowatt hrs.
50,000
150,000
50,000
Maintenance hours
250
1,125
1,125
Assume the company uses the sequential or step method for allocating service department costs to production
departments. The company begins with the service department that receives the least service from other service
departments. What dollar amount of Power Department costs will be allocated to the Maintenance Department for
September?
A. $8,000
B. $12,500
C. $6,250
D. $0

Question 31 - CIA 1188 IV.5 - Job-Order and Operation Costing


A shipbuilding company, employing 30 workers, constructs custom built yachts. Which of the following is an
appropriate product-costing method for this operation?
A. Step-down allocation of costs.
B. Job-order costing.
C. Variable cost transfer pricing.
D. Process costing.

(c) HOCK international, page 11

Part 1 : 02/11/15 08:14:19

Question 32 - CMA 1283 3.15 - Internal Auditing


For an internal audit department to be considered as a relevant internal control by the external auditor, the internal
auditor must
A. Perform operational audits.
B. Be independent of the accounting function.
C. Be cost effective.
D. Use statistical sampling procedures.

Question 33 - CIA 1192 I.3 - Internal Auditing


In the performance of an internal audit, audit risk is best defined as the risk that an auditor
A. Might not select documents that are in error as part of the examination.
B. May not be able to properly evaluate an activity because of its poor internal accounting controls.
C. May fail to detect a significant error or weakness during an examination.
D. May not have the expertise to adequately audit a specific activity.

Question 34 - CMA 685 5.25 - Systems Controls and Security Measures


Which one of the following is the best reason for developing a computer security plan?
A. All possible threats associated with the data processing equipment are identified.
B. Recovery from the damage associated with any identified threats can be assured.
C. The user departments can be assured that control policies are in place and their data files are secure.
D. A company can select the set of control policies and procedures that optimize computer security relative to cost.

Question 35 - CIA 594 II.50 - Internal Auditing


An internal auditor is conducting interviews of three employees who had access to a valuable asset that has
disappeared. In conducting the interviews the internal auditor should
A. Respond to non-cooperation by threatening adverse consequences of such behavior.
B. Not indicate that management will forgo prosecution if restitution is made.
C. Conduct the interviews in a group.
D. Allow a suspect to return to work after the interview so as not to arouse suspicions.

Question 36 - CIA 596 I.57 - Systems Controls and Security Measures


Which one of the following input controls or edit checks would catch certain types of errors within the payment amount
field of a transaction?
A. Limit check.
(c) HOCK international, page 12

Part 1 : 02/11/15 08:14:19


B. Record count.
C. Echo check.
D. Check digit.

Question 37 - CIA 588 II.15 - Internal Auditing


The effectiveness of an audit assignment is related to the findings and the action taken on those findings. Which of the
following activities contributes to assignment effectiveness?
A. Adhering to a time budget.
B. Having budget revisions approved by the project supervisor.
C. Conducting an exit interview with auditees.
D. Preparing weekly time reports.

Question 38 - CIA 598 3.49 - Systems Controls and Security Measures


Minimizing the likelihood of unauthorized editing of production programs, job control language, and operating system
software can best be accomplished by
A. Effective network security software.
B. Database access reviews.
C. Compliance reviews.
D. Good change-control procedures.

Question 39 - ICMA 10.P1.242 - Internal Controls


When assessing a companys internal control structure policies and procedures, the primary consideration is whether
they
A. prevent management override.
B. reflect managements philosophy and operating style.
C. affect the financial statement assertions.
D. relate to the control environment.

Question 40 - ICMA 10.P2.096 - Financial Statements


Barber Company has recorded the following payments for the current period.
Interest paid on bank loan
$300,000
Dividends paid to Barber shareholders 200,000
Repurchase of Barber Company stock 400,000
The amount to be shown in the Financing Activities section of Barber's Cash Flow Statement should be
A. $500,000
B. $300,000
(c) HOCK international, page 13

Part 1 : 02/11/15 08:14:19


C. $600,000
D. $900,000

Question 41 - CMA1287 P2 Q17 - Accounts Receivable and Inventory


Nasus Company began the month of November with 150 units of Model-XL brass hinges on hand at a cost of $2.00
each. These hinges sell for $3.50 each. The following schedule presents the additional activity in this inventory item
during November.
Quantity
November ReceivedUnit PriceUnits Sold
4
100
6
200
$2.10
8
150
10
200
2.20
16
220
21
250
2.40
28
100
If Nasus uses perpetual moving average inventory pricing, the sale of 220 items on November 16 would be recorded
at a unit cost of:
A. $2.16
B. $2.08
C. $2.10
D. $2.20

Question 42 - CMA 1293 2.3 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
An investment in trading securities is valued on the Statement of Financial Position at the
A. Lower of cost or market.
B. Fair value.
C. Cost to acquire the asset.
D. Accumulated income minus accumulated dividends since acquisition.

Question 43 - HOCK 2005 H4 - Owners' Equity


When cash dividends are paid, which account is affected?
A. Additional paid-in capital.
B. Retained earnings.
C. Dividends receivable.
D. Common shares.

Question 44 - CMA 1295 P2 Q4 - Financial Statements


(c) HOCK international, page 14

Part 1 : 02/11/15 08:14:19


Royce Company had the following transactions during the fiscal year ended December 31, 20X1:
Accounts receivable decreased from $115,000 on December 31, 20X0 to $100,000 on December 31, 20X1.
Royce's board of directors declared dividends on December 31, 20X1 of $0.05 per share on the 2.8 million
shares outstanding, payable to shareholders of record on January 31, 20X2. The company did not declare or
pay dividends for fiscal 20X0.
Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
The cash balance was $106,000 on December 31, 20X0 and $284,000 on December 31, 20X1.
The total of cash provided/used by operating activities plus cash provided/used by investing activities plus cash
provided/used by financing activities is
A. cash used of $582,000.
B. cash provided of $178,000.
C. cash provided of $284,000.
D. equal to net income reported for fiscal year ended December 31, 20X1.

Question 45 - CMA 1293 2.4 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
An investment in available-for-sale securities is valued on the Statement of Financial Position at the
A. Par or stated value of the securities.
B. Fair value.
C. Cost to acquire the asset.
D. Accumulated income less accumulated dividends since acquisition.

Question 46 - CMA 696 P2 Q9 - Liabilities and Taxes


Which one of the following temporary differences will result in a deferred tax asset?
A. Use of the straight-line depreciation method for financial statement purposes and the Modified Accelerated Cost
Recovery System (MACRS) for income tax purposes.
B. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for
tax purposes.
C. Investment gains accounted for under the equity method for financial statement purposes and under the fair value
method for income tax purposes.
D. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for
income tax purposes.

Question 47 - CIA 1190 IV.32 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
MKT Corporation's assets on December 31, Year 1, include the following:
I. U.S. Treasury Bills, acquired on October 15, Year 1, which mature on April 15, Year 2. MKT plans to hold the
Treasury Bills until they mature because the company has no need for the cash earlier than the maturity date.
II. Shares of PF Company. PF has been very profitable and MKT Corporation plans to increase its ownership in PF as
(c) HOCK international, page 15

Part 1 : 02/11/15 08:14:19


it believes PF has strong growth potential.
III. Bonds of ABC Corporation that mature in 3 years. These bonds will be sold, as needed, to meet MKT's current
financing needs.
Which of the above should be classified as available-for-sale securities?
A. III only.
B. II and III only.
C. I, II, and III.
D. I and II only.

Question 48 - CIA 594 P4 Q29 - Accounts Receivable and Inventory


Which of the following is true regarding the assignment (pledging as collateral) of accounts receivable and factoring of
accounts receivable for a manufacturing firm?
A. The factoring of accounts receivable involves the invoice from the manufacturing firm to its customer being
stamped with a notification that payment is to be made directly to the other party, whereas the assignment of accounts
receivable does not.
B. The factoring of accounts receivable provides collateral for the manufacturing firm, whereas the assignment of
receivables provides direct financing.
C. The lender has recourse to the manufacturing firm under factoring but not under the assignment of accounts
receivable.
D. The assignment of accounts receivable involves the invoice from the manufacturing firm to its customer being
stamped with a notification that payment is to be made directly to the other party, whereas the factoring of accounts
receivable does not.

Question 49 - CMA 1291 P2 Q28 - Liabilities and Taxes


Beginning January 1, Year 1, Center Company offered a 3-year warranty from date of sale on any of its products sold
after January 1, Year 1. The warranty offer was part of a program to increase sales. Meeting the terms of the warranty
was expected to cost Center 4% of sales. Sales made under warranty in Year 1 totaled $9,000,000, and one-fifth of
the units sold were returned. These units were repaired or replaced at a cost of $65,000. The amount of warranty
expense that should appear on Center's Year 1 income statement is
A. $71,000
B. $137,000
C. $360,000
D. $65,000

Question 50 - CMA 695 P1 Q13 - Owners' Equity


The equity section of Smith Corporation's statement of financial position is presented below.
Preferred stock, $100 par
$12,000,000
Common stock, $5 par
10,000,000
Paid-in capital in excess of par 18,000,000
Retained earnings
9,000,000

(c) HOCK international, page 16

Part 1 : 02/11/15 08:14:19


Net worth

$49,000,000

The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000
additional shares of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common
stock must be given the option to buy
A. 4,000 additional shares.
B. 3,333 additional shares.
C. 3,774 additional shares.
D. 1,000 additional shares.

(c) HOCK international, page 17

Part 1 : 02/11/15 08:14:19

Question 1 - ICMA 10.P1.049 - Budget Methodologies


A. This is the sales for the second quarter. Beginning and ending inventory need to be taken into consideration. See
correct answer for full calculation.
B. This is the number of units Streeter should produce in the third quarter.
C.
The second quarter's beginning inventory will be 50% of the 72,000 units to be sold during the second
quarter, or 36,000 units.
The second quarter's ending inventory will be 50% of the 84,000 units to be sold during the third quarter, or
42,000 units.
Units to be sold during the second quarter are given as 72,000.
The inventory equation is:
Beginning Inventory + Goods Manufactured Goods Sold = Ending Inventory
Let X represent Goods Manufactured:
36,000 + X 72,000 = 42,000
X = 78,000
D. This is the total sales budgeted for the third quarter. See correct answer for full calculation.

Question 2 - CMA 1294 3.19 - Budget Methodologies


A.
This answer results from using the formula for the physical flow of inventory incorrectly.The correct formula is
Beginning Inventory + Units Produced Units Sold = Ending Inventory
To get this answer, units sold are added and units produced are subtracted. Instead, the number of units produced
(the unknown) should be added to beginning inventory and the number of units sold should be subtracted.
B.
To solve this question, we use the formula for the physical flow of goods:
Beginning Inventory + Units Produced Units Sold = Ending Inventory
Beginning inventory for the second quarter is 20% of the second quarter sales, or 1,600 units (8,000 0.20).
The ending inventory for the second quarter is 20% of the third quarter sales, or 2,400 units (12,000 0.20).
Plugging numbers into the formula we will get the following:
1,600 + Units Produced 8,000 = 2,400
Solving for Units Produced, we get Units Produced = 8,800.

(c) HOCK international, page 18

Part 1 : 02/11/15 08:14:19


C. This is the sales level for the second quarter. It does not take into consideration the beginning and ending
inventories. See the correct answer for a complete explanation.
D.
This answer results from calculating the beginning inventory as 2,000 units. The beginning inventory is budgeted as
20% of sales of 8,000 units, which is 1,600 units.

Question 3 - P3A H49 - Strategic Planning


A.
Superior innovation is not one of Michael Porter's three generic strategies. Superior innovation is one of the
four components of competitive advantage. Product innovations give the innovator something that is unique,
and this uniqueness provides differentiation which in turn allows the company to charge a premium price for
its product. Process innovation can reduce unit costs below those of the competition. So although innovation
is necessary in order to pursue the generic strategies of cost leadership and differentiation, it is not itself a
generic strategy.
B. Cost leadership, or being the low-cost producer within a particular industry for a given level of quality, is one of
Michael Porter's three generic strategies.
C. Focusing, or concentrating on a particular marketing niche or narrow segment of the market for the purpose of
achieving either cost leadership or differentiation is one of Michael Porter's three generic strategies.
D. Differentiation, or development of a product or service with unique attributes that customers perceive to be better or
different from competitive offering, is one of Michael Porter's three
1 generic strategies.

Question 4 - CMA 1294 3.9 - Budget Methodologies


A. Gross profit (gross margin) is equal to sales minus cost of goods sold. December sales are projected to be
$520,000. Cost of goods sold is 80% of sales. Thus, the projected gross profit is 20% of sales, or $104,000.
B. Gross profit (gross margin) is equal to sales minus cost of goods sold. Thus, gross profit cannot be greater than the
amount of sales, and sales are budgeted at $520,000 for December. See the correct answer for a complete
explanation.
C. This is the cost of goods sold for December. Gross profit (gross margin) is equal to sales minus cost of goods sold.
D.
This is not the correct answer. Please see the correct answer for a complete explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.

(c) HOCK international, page 19

Part 1 : 02/11/15 08:14:19

Question 5 - ICMA 10.P1.026 - Learning Curves


A. This is the number of direct labor hours required for the first unit multiplied by 7. This would be correct only if no
learning had taken place. Since learning did take place, the number of direct labor hours required for the additional
seven units must be less than the number of hours for the first unit multiplied by 7.
B. This is the total number of direct labor hours required for all eight units. The number of direct labor hours required
for the additional seven units (units 2 through 8) will be this number minus the number of direct labor hours required
for the first unit.
C.
To find the number of direct labor hours required for the additional seven units, first find the total direct labor
hours required for all eight units. Then, to find the number of hours required for the seven additional units,
subtract the 10,000 hours required for the first unit from the total number of hours required for all eight units.
The learning curve rate is given as 80%. Therefore, the formula to calculate the total direct labor hours
required for 8 units (3 doublings) is: 10,000 (2 0.8) (2 0.8) (2 0.8), or 10,000 (2 0.8)3, which is equal to
40,960. The first unit required 10,000 direct labor hours, so we subtract the 10,000 hours required for the first
unit from the 40,960 hours required for all 8 units. The result, 30,960 hurs, is the number of hours required for
units 2-8, the seven additional units.
D.
This is the number of direct labor hours required for the first unit multiplied by 7 and the product multiplied by 0.80.
This is not the correct way to find the number of direct labor hours required for the additional seven units.
Find the total number of direct labor hours required for all eight units. The number of direct labor hours required for the
additional seven units (units 2 through 8) will be that number minus the number of direct labor hours required for the
first unit.

Question 6 - ICMA 10.P1.063 - Budget Methodologies


A.
The ending inventory each month is to be 15% of the next month's forecasted sales. The cost of the inventory
sold (cost of goods sold) averages 60% of the selling price. Therefore, July's ending inventory is forecasted to
be $650,000 (August sales) 0.60 0.15, or $58,500. July's beginning inventory, which is the same as June's
ending inventory, is forecasted to be $600,000 (July sales) 0.60 0.15, or $54,000. The cost of the inventory
sold during July is forecasted to be $600,000 (July sales) 0.60, or $360,000.
The basic inventory formula is Beginning Inventory + Purchases/Production Sold/Used = Ending Inventory.
Thus, the formula to find Purchases for July is the following, letting P stand for Purchases:
$54,000 + P $360,000 = $58,500.
Solving for P, we get P = $364,500.
B.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let

(c) HOCK international, page 20

Part 1 : 02/11/15 08:14:19


us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
C. This answer results from reversing the beginning and ending inventory balances in calculating the purchases.
D. This is 60% of the July forecasted sales. This does not take into accounrt the change in the inventory level from the
beginning of July to the end of July.

Question 7 - ICMA 10.P1.039 - Budget Methodologies


A. This is a criticism of traditional budgeting. The traditional budgeting process may lead to across-the-board cuts
when early budget iterations show that planned expenses are too high. However, budgeting should not necessarily
require across the board cuts, even when expenses are higher than desired. Cost cutting should be based on what is
best for the organization. Frequently cuts based on what is best for the organization will not be equally distributed.
B. This is not a criticism of the traditional budgeting process, because it is not a feature of any budgeting
process, traditional or non-traditional. A budget is quantitative and does not include non-financial measures
in its output at all.
C. This is a criticism of traditional budgeting, because this can occur. Actual performance for a period is measured
against budgeted performance for that period. While it is necessary to wait until the end of a period to measure the
budgetary variance for the whole period, the budget period can be broken into smaller timeframes. A 12 month budget
can, and often will, be divided into monthly amounts to allow for current month and year-to-date budget variance
reporting throughout the year, so that operational adjustments can be made as necessary.
D.
This is a criticism of traditional budgeting. Those who criticize it question why a budget needs to have a fixed time
horizon such as one year. They say that different segments of the same company have different needs for planning.
The purpose of a forecast should be to recognize issues that need to be planned for in time to plan for them, and this
will be different for every area of the company. So different forecasting horizons are needed for different areas, and
they need to be monitored individually. One size does not fit all in an organization today.

Question 8 - HOCK CMA P3A H37 - Strategic Planning


A. Analysis of the national environment in which the company operates is a part of external analysis. Analyzing the
national environment includes assessing domestic and international political risk and the impact of globalization on
competition within the industry.
B. Analysis of the macroenvironment is analysis of the wider environment in which the company operates. This is a
part of external analysis. Analysis of the macroenvironment includes macroeconomic factors such as inflation and the
labor market, social factors such as environmental issues, and government, legal, international and technological
factors that affect the industry and the company.
C. Identification of the company's strengths and weaknesses is a part of internal analysis, not external
analysis. Strengths lead to superior performance and weaknesses lead to inferior performance in efficiency,
quality, innovation, and customer responsiveness.
D. Examination of the industry in which the company operates is a part of external analysis. The industry analysis
(c) HOCK international, page 21

Part 1 : 02/11/15 08:14:19


involves assessing the company's industry, the companys competitive position in the industry, and the competitive
positions of its major rivals. The nature of the industry, the stage the industry is in, the dynamics and the history are all
part of this analysis.

Question 9 - CIA 1190 IV.20 - Responsibility Centers and Reporting Segments


A. Inefficiencies are charged to the department that is receiving, not transferring, the goods.
B. Cost-based transfer price provide clarity and administrative convenience.
C. The basic issue of transfer prices is how much should one unit of a company charge another unit of the
same company for its goods or services. The goal in setting a transfer price is that the method used will
stimulate the department managers to do what will provide the greatest benefit to the company as a whole,
rather than to act in their own interest. A transfer price based on actual cost does not motivate managers to
use resources more efficiently, which can lead to suboptimal decisions for the company as a whole.
D. In cost-based transfer pricing, costs do not need to be adjusted by any markup.

Question 10 - CIA 1192 IV.22 - Responsibility Centers and Reporting Segments


A. Responsibility accounting is a system in which cost and revenue data is reported based on who (manager
or division) is able to control them or is responsible for them. This is the system described in the question.
B. Segment reporting is the reporting of results by segment: product line, geography or some other distinguishing
characteristic. This is not descriptive of the method used by this company.
C. Absorption cost accounting relates to the allocation of fixed costs. This is not descriptive of the method used by this
company.
D. Contribution margin reporting breaks costs down into fixed and variable costs. While this may be used in
conjunction with responsibility accounting, this by itself is not describing the method used by the company.

Question 11 - ICMA 10.P1.139 - Performance Measures


A. Division B's actual return on investment exceeded its target return on investment by the greatest amount,
among the divisions that did exceed their targets. In addition, among the divisions that exceeded their
targets, Division B had one of the highest returns on sales. Therefore, it is the division with the best overall
performance.
B. Division A's actual return on investment exceeded its target return on investment and among the divisions that did
exceed their targets, it had one of the highest returns on sales. However, it did not exceed its target return on
investment by as much as some other divisions did. Therefore, it cannot qualify as the division with the best
performance.
C. Division D's actual return on investment was below its target return on investment. Its return on sales was the
highest of all the divisions, but since it did not meet its target return on investment, it cannot qualify as the division with
the best performance.
D. Division C's actual return on investment exceeded its target return on investment, but not by as much as some
(c) HOCK international, page 22

Part 1 : 02/11/15 08:14:19


other divisions. Furthermore, its return on sales was not as great as that of some other divisions. Therefore, it cannot
qualify as the division with the best performance.

Question 12 - CMA 697 3.30 - Performance Measures


A. See the correct answer for a complete explanation.
B. See the correct answer for a complete explanation.
C. Residual income is equal to net income before taxes minus target return in dollars (a % of assets or
invested capital). Invested capital is equal to the sum of working capital and plant and equipment or
$19,000,000 ($1,800,000 + $17,200,000). Hence, the imputed interest charge is equal to $2,850,000 ($19,000,000
15%). Net income needs to be equal to the sum of the imputed interest charge and the amount of residual
income, or $4,850,000 ($2,850,000 + $2,000,000). Thus, costs are equal to the revenue minus net income or
$25,150,000 (30,000,000 $4,850,000).
D. See the correct answer for a complete explanation.

Question 13 - ICMA 10.P1.112 - Manufacturing Input Variances -- Overhead


A. This is actual total overhead minus applied fixed overhead minus (Standard Variable OH Rate Actual Application
Base). The fixed overhead amount subtracted should be the budgeted fixed overhead, not the applied fixed overhead.
B. This is actual total overhead minus applied total overhead (fixed and variable). It correctly indicates an unfavorable
variance, but the calculation is missing the budgeted element. See correct answer for a full explanation.
C. This is the actual total overhead minus budgeted fixed overhead. It is incorrect for two reasons. First, if the
calculation were correct, the variance would be an unfavorable one, not a favorable one, because the actual was
higher than the budgeted amount and this is a cost variance. And second, variable overhead is included in the total
actual overhead amount but is not included in the amount that is subtracted from total actual overhead.
D. The total overhead spending variance is the total of the fixed overhead spending variance + the variable
overhead spending variance.
The fixed overhead spending variance is:
Actual Fixed Overhead Incurred Minus Budgeted Fixed Overhead.
The variable overhead spending variance is:
Actual Variable Overhead Incurred Minus Budgeted Variable Overhead Based on Inputs Actually Used
(standard rate actual usage of application base).
Therefore, the total overhead spending variance (fixed and variable) is calculated as follows:
Actual Total Overhead Incurred
Minus: Budgeted Fixed Overhead
Minus: Budgeted Variable Overhead (Rate Actual Application Base)

(c) HOCK international, page 23

Part 1 : 02/11/15 08:14:19

Equals: Total Overhead Spending Variance


Actual Total Overhead = $1,600,000
Budgeted Fixed Overhead = $1,500,000
Budgeted Variable OH (Rate Actual Application Base) = $0.50 430,000 = $215,000
Therefore, the total overhead spending variance = $1,600,000 $1,500,000 $215,000 = $(115,000). Since
overhead is a cost, a negative variance is a favorable variance.

Question 14 - CMA 1292 3.17 - Manufacturing Input Variances -- Overhead


A.
This answer results from applying the variable overhead using normal costing, which is incorrect. The problem says
that overhead is applied based on planned machine hours, which means standard costing is being used.
Under standard costing, overhead to be applied is calculated by multiplying the predetermined rate by the amount of
(in this case) machine hours that should have been used for the amount actually produced.
Under normal costing, overhead to be applied is calculated by multiplying the predetermined rate by the amount of the
allocation base that was actually used for the amount actually produced.
B.
This answer results from calculating the amount of variable overhead applied by multiplying the predetermined rate by
the amount of machine hours planned to be used for the planned output. However, under standard costing -- which
is being used here because the problem tells us that overhead is applied based on planned machine hours -overhead to be applied is calculated by multiplying the predetermined rate by the amount of (in this case) machine
hours that should have been used for the amount actually produced.
C.
This answer results from two errors:
(1) Calculating the amount of variable overhead applied by multiplying the predetermined rate by the amount of
machine hours planned to be used for the planned output. However, under standard costing -- which is being used
here because the problem tells us that overhead is applied based on planned machine hours -- overhead to be
applied is calculated by multiplying the predetermined rate by the amount of (in this case) machine hours that should
have been used for the amount actually produced.
(2) Reversing or misinterpreting the calculation of the variance amount. The variance is the actual variable overhead
incurred minus the variable overhead applied. Because overhead is a cost, a positive result is an unfavorable
variance, and the variable overhead was underapplied (less was applied than was incurred). A negative result is a
favorable variance, and the variable overhead was overapplied (more was applied than was incurred).
D.
Nanjones applies overhead based on planned machine hours using a predetermined annual rate. The amount
of planned variable manufacturing overhead was $2,400,000 and amount of planned machine hours were
240,000. Thus, the application rate for variable manufacturing overhead was $10 per hour ($2,400,000 /

(c) HOCK international, page 24

Part 1 : 02/11/15 08:14:19


240,000).
Under standard costing -- which is being used here because the problem tells us that overhead is applied
based on planned machine hours -- overhead to be applied is calculated by multiplying the predetermined
rate by the amount of (in this case) machine hours that should have been used for the amount actually
produced. The problem tells us that the planned machine hours based on output was 21,000, and therefore,
the amount of variable overhead applied was $10 21,000, or $210,000. The actual variable overhead incurred
was $214,000. Therefore, variable manufacturing overhead was underapplied by $4,000.

Question 15 - CIA 1196 3.87 - Joint Products and Byproducts


A. This alternative is incorrect because it describes scrap, whereas a by-product provides sales value to the
manufacturer.
B. This alternative is incorrect because the physical volume of the by-product may be significant.
C. This is the correct reason for treating a product generated from a joint process as a by-product.
D. A by-product may be developed into a main product. Some manufacturers choose not to develop a by-product into
a main product due to the lack of facilities, cost, lack of fit with other main products, etc. However, this does not
preclude others from taking the by-product and developing it into a salable finished product (for example, sawdust and
wood chips manufactured into particle board).

Question 16 - CMA 690 4.3 - Overhead Allocation


A. This is the total cost of manufacturing. Cost of goods manufactured is total manufacturing costs adjusted for the
change in work-in-process inventory.
B. This is the cost of goods sold. Cost of goods sold is beginning finished goods inventory + cost of goods
manufactured ending finished goods inventory. The question asks only for the cost of goods manufactured.
C.
Cost of goods manufactured is total manufacturing costs adjusted for the change in work-in-process
inventory. Total manufacturing costs are total prime costs (direct materials used + direct labor used) +
manufacturing overhead applied. We are told that the direct labor was $300,000 but will need to calculate the
direct materials used and the manufacturing overhead applied for January.
The beginning direct materials inventory was $134,000. During the period, they purchased $189,000 of direct
materials and also incurred $3,000 in transportation in costs. However, they also returned $1,000 of direct
materials during the period. Adding these together we can calculate the total direct materials available during
January as $325,000. Since there was an ending inventory of $124,000, they must have used $201,000 of direct
materials during the period.
Overhead is applied as 60% of direct labor, which totals $180,000 ($300,000 60%). Adding the prime costs
(direct materials and direct labor) plus the overhead, we get $681,000 of total manufacturing costs.
Work-in-process inventory increased during the period by $16,000. This means that $16,000 of the work
performed during the period was in ending work-in-process inventory and not finished goods inventory, so
this amount needs to be subtracted from the total manufacturing cost to calculate the cost of goods
manufactured. The cost of goods manufactured is $681,000 $16,000, or $665,000.

(c) HOCK international, page 25

Part 1 : 02/11/15 08:14:19


Another way to calculate the cost of goods manufactured is to use the beginning and ending WIP inventory
balances instead of the amount of change. Beginning WIP inventory was $235,000. Cost of manufacturing
was $681,000. Ending WIP Inventory was $251,000. Cost of goods manufactured is beginning WIP inventory of
$235,000 plus cost of manufacturing of $681,000 minus ending WIP Inventory of $251,000, which is $665,000.
D.
The question asks for cost of goods manufactured. This answer results from an incorrect calculation of cost of goods
sold. Cost of goods manufactured is one component in the calculation of cost of goods sold.
Cost of goods sold is beginning finished goods inventory + cost of goods manufactured ending finished goods
inventory. This answer results from turning around beginning and ending finished goods inventory in the calculation of
cost of goods sold. This is ending finished goods inventory + cost of goods manufactured beginning finished goods
inventory. The question asks only for cost of goods manufactured.

Question 17 - CMA 691 3.16 - Shared Service Cost Allocation


A. This is the amount of maintenance costs allocated to the assembly department, not the total service costs allocated
to the assembly department.
B.
This is not the correct answer. Please see the correct answer for a complete explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
C. Under the direct method the service department costs are not allocated to other service departments. As
such, we need to make certain that when we determine the ratio to allocate the costs to the production
departments, we do not include the usage by the other service departments. In order to allocate the costs of
the quality control department to assembly, we need to determine what percentage of the quality control time
that was used by the production departments was used by assembly. Assembly used QC 7,000 hours and
machining used QC 21,000. Thus, assembly will get 25% (7,000 28,000), or $87,500 of the QC costs.
Assembly used the maintenance department a total of 12,000 hours and machining used maintenance for
18,000 hours. Thus, assembly will get 40% (12,000 30,000) of the maintenance costs, or $80,000. In total,
therefore, the assembly department received $167,500 in costs allocated from the service departments.
D. This is the amount of quality control costs allocated to the assembly department, not the total service costs
allocated to the assembly department.

Question 18 - CMA 691 3.48d - Job-Order and Operation Costing


A.
The 3,000 Deluxe units are 100% complete as to materials, 100% complete as to Extrusion Operation costs,
and 100% complete as to Form Operation costs. However, 1,000 of the 3,000 units are only 60% complete as
to Trim Operation costs.

(c) HOCK international, page 26

Part 1 : 02/11/15 08:14:19


The costs per unit for the Deluxe model are as follows:
Materials (all units are 100% complete as to materials):
Extrusion materials: Total costs $36,000 3,000 units produced = $12 per unit
Form materials: Total costs $12,000 3,000 units produced = $4 per unit
Trim materials: Total costs $9,000 3,000 units produced = $3 per unit
Conversion costs:
In calculating conversion costs per unit, we must use the total costs of each operation (for all models) and
the total number of units of all models that went through each operation, because we do not have the costs
broken down by model.
Extrusion operation: Total costs $392,000 to produce 16,000 units = $24.50 per unit
Forming operation: Total costs $132,000 to produce 11,000 units = $12.00 per unit
Trim operation: Total costs $69,000 to produce 4,600 units (calculated as follows: 2,000 complete Executive
units + 2,000 complete Deluxe units + 600 Deluxe equivalent units [60% of 1,000 partially complete Deluxe
units]) = $69,000 4,600 units = $15.00 per equivalent unit.
Total costs in EWIP inventory for 1,000 Deluxe units that are 100% complete as to materials, 100% complete
as to extrusion and form operations, and 60% complete as to trim operation are:
Materials: ($12 + $4 + $3) 1,000 units = $19,000
Conversion costs: ($24.50 1,000) + ($12.00 1,000) + ($15.00 600) = $45,500
Materials costs of $19,000 + Conversion costs of $45,500 = Total cost of $64,500.
B. This is the total conversion cost of the finish operation.
C. This answer results from calculating the per unit conversion cost in the Trim operation by dividing the total costs of
$69,000 by the 5,000 units of Deluxe chairs worked on and then multiplying the per unit conversion cost by the 1,000
units in ending WIP inventory. However, the 1,000 units in ending WIP inventory were only 60% complete as to Trim
operations. Therefore, the number of units in the divisor for the calculation of per unit cost is incorrect, and it is
incorrect to multiply that per unit Trim operations cost by 1,000 units to calculate the ending WIP inventory.
D. This is the total conversion cost of the trim operation.

Question 19 - CMA 1286 4.15 - Process Costing


A. This is the number of equivalent units started and completed plus the number of equivalent units in ending
work-in-process inventory for conversion costs. The numbe of equivalent units that were completed during the month
from the incomplete units in beginning work-in-process inventory should be included in the total equivalent units for
the month, also.
B. This answer does not treat beginning WIP properly and ignores ending WIP. The number of equivalent units
completed during the month from the units in beginning WIP inventory should be 100% of the number of physical units
in BWIP minus the percentage complete that the beginning WIP inventory was for conversion costs at the beginning of
the month. The number of equivalent units in ending WIP inventory for conversion costs should be the percentage
complete that the ending inventory was for conversion costs multiplied by the number of physical units in ending WIP
inventory.
C.
There are three calculations that we need to make under FIFO in order to calculate the EUP for conversion

(c) HOCK international, page 27

Part 1 : 02/11/15 08:14:19


costs: (1) Calculate the EUP to finish BWIP, (2) determine the number of units that were started and
completed, and (3) calculate the number of EUP to start EWIP.
Conversion
Costs
Completion of BWIP
400
Started & Completed
3,000
Starting of EWIP
400
Total EUP-FIFO
3,800
In order to finish BWIP, 400 EUP were required (40% of 1,000, because BWIP consisted of 1,000 units that
were already 60% complete). A total of 3,000 units were started and completed (this is given in the question).
There were 400 EUP to start EWIP (20% of 2,000 units). 400 + 3,000 + 400 = 3,800 EUP of conversion costs
under FIFO.
D. This is the total equivalent units for conversion costs using the Weighted Average cost flow assumption. The
problem asks for the equivalent units for conversion costs using FIFO.

Question 20 - CIA 1196 III.88 - Process Costing


A. This answer results from allocating all of the cost of the spoiled units to the units completed and transferred out.
The units in ending WIP were 80% complete as to conversion activities, and inspection takes place when the units are
70% cmplete. Since the units in ending WIP have gone through the inspection, a portion of the spoilage must be
allocated to the units in ending WIP.
B.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
C.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
D.
The spoilage is all normal spoilage. The number of units considered normal spoilage is 4% of units inspected.
The total number of units inspected during the month was all of the units in beginning work-in-process
inventory (20,000) plus all of the units transferred in during the month (180,000), or 200,000. 4% of 200,000 is
8,000 units, and since only 5,000 units were spoiled, all of those units are normal spoilage.
The 25,000 units in EWIP were 80% complete as to conversion activities. Inspection takes place when the
(c) HOCK international, page 28

Part 1 : 02/11/15 08:14:19


units are 70% complete, before the direct materials are added. Therefore, a portion of the normal spoilage
must be allocated to the good units transferred out, and a portion of it must be allocated to the good units in
ending work-in-proocess inventory. The allocation of the normal spoilage is as follows:
Good units transferred out 170,000 87%
Good units in EWIP
25,000 13%
Total good units
195,000
The allocation of the normally spoiled units between completed units and EWIP is as follows:
Good, completed units transferred out: 87% of 5,000 = 4,350 EUP
Good units in ending WIP: 13% of 5,000 = 650 EUP
Calculation of Equivalent Units of Production:
Transferred-In Direct Materials Conversion Costs
Units
Added
Added
Completion of BWIP
01
20,000 5
8,000 9
2
6
Started & Completed
150,000
150,000 10
150,000
Starting of EWIP
25,000 7
20,000 11
25,000 3
4
8
Normal Spoilage-completed units
0
3,045 12
4,350
4
8
Normal Spoilage-EWIP
650
0
455 12
Total EUP - FIFO
180,000
195,000
181,500

Calculation of cost per EUP for the allocation of costs added:


Transferred- Direct Conversion
in
Materials
Costs
Costs added
$360,000 $156,000 $326,700
Total EUP-FIFO
180,000 195,000
181,500
13
14
Cost per EUP
$2.00
$0.80
$1.8015

Costs allocated to good, completed units transferred out:


TransferredDirect
Conversion
Total
In
Materials
Costs
Costs in BWIP (100% to completed units)
$ 23,000
$
0
$55,000
Costs added, allocated to completed units) 308,70016 136,00017
289,88118
Total Costs
$331,700
$136,000
$344,881 $812,581
1

The units in BWIP were received last period, and the work done on them when received was 100% complete.
Therefore, completion of BWIP for transferred-in units is zero.

180,000 units transferred in minus 25,000 units in EWIP minus 5,000 spoiled units. The units started and
completed were 100% complete as to the work done on them in the previous departments.

The 25,000 transferred-in physical units in EWIP at the end of the period were 100% complete as to the work
done on them in the previous departments.

The normally spoiled transferred-in units were 100% complete as to the work done on them in the previous
departments. 87% of the spoilage is allocated to the good units, or 5,000 0.87 = 4,350.

Direct materials are added when the units are 70% complete as to conversion costs. The units in BWIP were
only 60% complete. Therefore, 100% of the direct materials were added to those units during the current
(c) HOCK international, page 29

Part 1 : 02/11/15 08:14:19


period.
6

180,000 units transferred in minus 25,000 units in EWIP minus 5,000 spoiled units. The units started and
completed were 100% complete as to the materials added to them in this department in the current period.

The 25,000 units remaining in EWIP at the end of the period were 80% complete as to conversion activities.
Direct materials are added when the units are 70% complete. Therefore, 100% of the direct materials had been
added to the units in ending WIP inventory.

Inspection takes place immediately before the direct materials are added. Therefore, there can be no spoiled
direct materials in the units in ending WIP inventory.

The 20,000 units in BWIP were 60% complete as to conversion costs. Therefore, 40% of the conversion costs
needed to be added to those units during the current period. 20,000 0.40 = 8,000 EUP.

10

180,000 units transferred in minus 25,000 units in EWIP minus 5,000 spoiled units. The units started and
completed were 100% complete as to conversion costs added to them in this department in the current period.

11

The 25,000 units remaining in EWIP at the end of the period were 80% complete as to conversion costs.
25,000 0.80 = 20,000 EUP.

12

Units are inspected when they are 70% complete with respect to conversion. 5,000 units were found to be
defective, and at that point, they had had 70% of their conversion costs added. 5,000 0.70 = 3,500 EUP of
normally spoiled conversion costs. This 3,500 is pro-rated between completed units and EWIP: 87% to
completed units and 13% to EWIP. 3,500 0.87 = 3,045 and 3,500 0.13 = 455.

13

$360,000 180,000 EUP

14

$156,000 195,000 EUP

15

$326,700 181,500 EUP

16

(150,000 + 4,350) $2.00 = $308,700.

17

(20,000 + 150,000) $0.80 = $136,000.

18

(8,000 + 150,000 + 3,045) $1.80 = $289,881.

Question 21 - ICMA 10.P1.195 - Process Costing


A. This was calculated using 65,000 as the total equivalent units of production for both direct materials and conversion
costs. That is the total of the number of units completed plus the number of equivalent units for conversion costs in
ending work-in-process inventory based on 25% completion. The number of equivalent units for direct materials in
ending work-in-process inventory is different, because the materials are added at the start of the process.
B.
Total materials cost to be allocated under the weighted average method is $40,000 in beginning WIP +
$700,000 added during the month = $740,000.
Total conversion cost to be allocated under the weighted average method is $32,500 in beginning WIP +
$617,500 added during the month = $650,000.

(c) HOCK international, page 30

Part 1 : 02/11/15 08:14:19


For direct materials, the total number of equivalent units using the weighted average method was 60,000 units
completed plus the 20,000 (100% complete) units in ending WIP inventory, for a total of 80,000 equivalent
units. The units in ending WIP inventory are 100% complete as to direct materials because all materials are
introduced at the start of the manufacturing process.
For conversion costs, the total number of equivalent units under the weighted average method was 60,000
units completed plus the 5,000 equivalent units (20,000 units, 25% complete) to start ending work-in-process
inventory, for a total of 65,000 equivalent units.
The costs per equivalent unit are:
Direct materials: $740,000 80,000 EUP = $9.25.
Conversion costs: $650,000 65,000 EUP = $10.00.
The costs of the completed units are:
Direct materials: $9.25 60,000 = $555,000
Conversion costs: $10.00 60,000 = $600,000
Total costs of completed units: $555,000 + $600,000 = $1,155,000
The costs in ending work-in-process inventory are:
Direct materials: $9.25 20,000 = $185,000
Conversion costs: $10.00 5,000 = $50,000
Total costs of units in ending work-in-process inventory: $185,000 + $50,000 = $235,000
C. This is an allocation of only the costs added during the month. It does not include the costs in beginning
work-in-process inventory.
D. This was calculated using 80,000 as the total equivalent units of production for both direct materials and conversion
costs, which is the total of the number of units completed plus the number of units in ending work-in-process
inventory. This does not take into consideration the state of completion of the ending work-in-process inventory.

Question 22 - CMA 695 3.4 - Process Costing


A. This is the cost per equivalent unit using the weighted average method.
B. This answer results from dividing the conversion costs incurred during the period by the total equivalent units of
production calculated using the weighted average method instead of FIFO.
C.
Under the FIFO method of process costing we need to make three calculations to determine the equivalent
units of production. These are: calculate (1) how many EUP were required to finish BWIP, (2) how many units
were started and completed and (3) how many EUP were needed to start the EWIP. There were 16,000 units in
BWIP and they were 20% complete for conversion costs, meaning that they needed to do 80%, or 12,800 EUP
to finish BWIP. There were a total of 76,000 units started and completed during the period (92,000 completed
minus the 16,000 in BWIP). There were 24,000 units in EWIP that were 40% complete for conversion costs,
meaning that 9,600 EUP of conversion costs had been done on the EWIP. Adding these three numbers
together, we get 98,400 units.
Conversion
Costs
Completion of BWIP
12,800
Started & Completed
76,000
(c) HOCK international, page 31

Part 1 : 02/11/15 08:14:19


Starting of EWIP
TOTAL EUP-FIFO

9,600
98,400

The conversion costs added during the period were $182,880 in direct labor costs and $391,160 in overhead
costs, for a total of $574,040. The conversion costs of $574,040 divided by the equivalent units of production
for conversion costs of 98,400 equals the equivalent unit conversion cost of $5.83.
D. This is the total conversion costs in both beginning work-in-process inventory and those incurred during the period,
divided by the number of equivalent units under FIFO. When FIFO costing is used, the costs in beginning WIP
inventory are allocated 100% to completed units, so those costs are not included in the calculation of the cost per
equivalent unit that is used to allocate the costs incurred during the period between completed units and units in
ending WIP inventory.

Question 23 - CMA 678 4.6 - Classifications of Costs


A. This is the definition of overhead, and conversion costs include more than just overhead.
B. Manufacturing costs include direct materials, which are not included in conversion costs.
C. This is the definition of prime costs.
D. By definition, conversion costs are the costs of direct labor and factory overhead. It is the cost of
converting the raw materials to the finished goods.

Question 24 - ICMA 10.P1.183 - Joint Products and Byproducts


A. This answer results from using the physical unit method to allocate the total cost instead of the sales value at
splitoff method.
B. This answer results from dividing the cost to be allocated to Big by the total number of gallons produced of both Big
and Mini to calculate the cost per gallon. The cost to be allocated to Big should be divided by the number of gallons of
Big produced only to calculate the cost of Big per gallon.
C. The joint cost to be allocated is $2,000 to purchase the direct materials and $3,000 to process it, for a total
of $5,000. Using the sales values at splitoff, the sales values are:
Big: $9 800 gal. = $7,200
Mini: $4 200 gal. = $800
Total sales value: $7,200 + $800 = $8,000
Bigs proportionate share of the cost is $7,200 $8,000, or 90%
Minis proportionate share of the cost is $800 $8,000, or 10%
Total costs allocated to Big:
$5,000 total cost 0.90 = $4,500 for 800 gallons.
The cost per gallon for Big is $4,500 800 gallons, which is $5.625 per gallon, or $5.63 rounded to the nearest
cent.
D. This answer results from allocating only the processing cost of $3,000. The total cost, including the purchase cost
and the processing cost, should be allocated.
(c) HOCK international, page 32

Part 1 : 02/11/15 08:14:19

Question 25 - CMA 690 4.6 - Joint Products and Byproducts


A. In order to allocate the costs using the physical quantity method, we need to know the total physical
quantity. There are 60,000 units of MSB and 90,000 units of CBL. There are 150,000 total units and CBL
represents 60% of the total units. The joint costs are $300,000 and CBL should be allocated 60%, or $180,000,
of the joint costs.
B. This is how much would be allocated to CBL if the allocation was done using the sales value of the products.
C. This is how much would be allocated to MSB if the allocation were done using the sales value of the products.
D. This is how much should be allocated to MSB using the physical units as the basis of allocation.

Question 26 - CMA 693 3.4 - Classifications of Costs


A. A direct cost is a cost that can be specifically attributed to the cost object. The rent for a warehouse is not directly
traceable to the purchasing department because other departments (for example, the production departments) also
have control over how much inventory is held.
B. A direct cost is a cost that can be specifically attributed to the cost object. The board of directors fees are not
directly traceable to the Marketing Department so they are not a direct cost of the Marketing Department.
C. A direct cost is a cost that can be specifically attributed to the cost object. The accountant is not a direct cost when
the cost object is a unit of product.
D. The supervisor's salary would be a fixed cost and when looking at the production department, this is a
direct cost since the cost can be associated with the cost object (the production department).

Question 27 - CIA 1196 III.84 - Process Costing


A. Because only a single product is produced, there is no need to use job-order costing.
B. Because only a single product is produced, there is no need to use activity-based costing.
C. Because only a single product is produced, there is no need to use operation costing, which is a combination of
process costing and job-order costing. In this method of costing, a company applies the basic operation of process
costing to a production process that produces batches of items. These different batches all follow a similar process,
but the direct materials that are input to each batch are different. If the company produces only one product, every
batch use the same direct materials.
D. Process costing is used in a mass production process.

Question 28 - CIA 1187 IV.9 - Variable and Absorption Costing


A. Because fixed manufacturing costs are a necessary part of production, one can argue that they should be
(c) HOCK international, page 33

Part 1 : 02/11/15 08:14:19


included in the cost of a unit produced.
B. Fixed factory overhead is expensed under direct (or variable) costing and is not allocated.
C. Variable factory overhead is a product cost, not a period cost, under direct (or variable) costing.
D. The fact that absorption costing overstates inventory is an argument in favor of direct (or variable) costing.

Question 29 - ICMA 10.P1.199 - Process Costing


A.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
B. This is the number of equivalent units for conversion costs in BWIP at the beginning of the month, plus the number
started and completed, plus the number of equivalent units in ending work-in-process inventory at month end. The
number of equivalent units in BWIP is not included in the total equivalent units when FIFO is used; however, the
number of equivalent units in BWIP that were completed during the month is included. That number was 25% of the
number of physical units, since the units in beginning work-in-process inventory were 75% complete for conversion
costs at the beginning of the month.
C. The equivalent units of production for conversion costs using the first-in, first-out (FIFO) method are:
Conversion
Costs
Completion of BWIP
2,500
Started & Completed
80,000
4,800
Starting of EWIP
Total EUP - FIFO
87,300
When FIFO is being used, the units in beginning work-in-process inventory are not included in the total
equivalent units used to allocate the added costs between units completed and units in ending
work-in-process inventory. That is because the costs in beginning work-in-process inventory are allocated
100% to completed units. Only the costs added during the period are allocated between completed units and
EWIP according to equivalent units during the period.
The 10,000 units in BWIP were 75% complete as to conversion costs, so 25% of the work or 2,500 EUP
remained to be done in the current period. The number of units started and completed is equal to the number
of units completed (90,000, given in the problem) minus the number of physical units in BWIP (10,000, also
given in the problem), or 80,000 EUP. The number of EUP in EWIP is 60% of the 8,000 units in EWIP, or 4,800
EUP. Therefore, total equivalent units of production under FIFO are 2,500 + 80,000 + 4,800 = 87,300.
D.
This is the number of units started and completed plus the number of physical units in ending work-in-process
inventory. It is also the total number of units started during the month.
The number of equivalent units of production for conversion costs is the number of equivalent units in BWIP that were
(c) HOCK international, page 34

Part 1 : 02/11/15 08:14:19


completed during the month, plus the number started and completed, plus the number of equivalent units in ending
work-in-process inventory.
The number of equivalent units of production in beginning work-in-process inventory that were completed during the
month is 25% of the number of physical units, since those units were 75% complete for conversion costs at the
beginning of the month. The number of equivalent units in ending work-in-process inventory is 60% of the number of
physical units in ending work-in-process inventory, since those units were 60% complete for conversion costs at the
end of the month.

Question 30 - CIA 594 III.77 - Shared Service Cost Allocation


A. The question asks for the amount of Power Department costs that will be allocated to the Maintenance Department.
This answer is an allocation of the Maintenance Department's costs, based on the number of kilowatt hours of power
used by the Maintenance Department as a percentage of the total kilowatt hours of power used. The correct answer is
an allocation of the Power Department's costs, based on the number of kilowatt hours of power used by the
Maintenance Department as a percentage of the total kilowatt hours of power used.
B.
Under the step method the costs of the service departments are allocated one by one. The costs of a service
department will be allocated to the production department and to any service department whose costs have
not yet been allocated. We are told that the service department that receives the least services from the other
service department will be allocated first.
The Power Department uses 250 of the total 2,500 maintenance hours provided (250 hours used by Power +
1,125 hours used by Machining + 1,125 hours used by Assembly), so Power uses 10% of the total hours of
service provided by Maintenance.
The Maintenance Department uses 50,000 of the total 250,000 kilowatt hours provided (50,000 kilowatt hours
used by Maintenance + 150,000 kilowatt hours used by Machining + 50,000 kilowatt hours used by Assembly),
so Maintenance uses 20% of the total kilowatt hours provided by the Power Department.
Therefore, we need to allocate the Power Department's costs first since it uses only 10% of the Maintenance
Department work, whereas the Maintenance Department uses 20% of the power. So, the costs of the Power
Department need to be allocated to the Maintenance Department and the production departments. In total, the
Power Department provided 250,000 kilowatt hours and the Maintenance Department used 50,000, or 20% of
those hours. The Maintenance Department will then receive 20%, or $12,500 of the Power Department's costs
of $62,500.
C. This answer results from allocating the Power Department's costs to the Maintenance Department on the basis of
the percentage of total maintenance hours used by the Power Department. The Power Department's costs should be
allocated to the Maintenance Department on the basis of the number of kilowatt hours of power used by the
Maintenance Department as a percenetage of the total kilowatt hours of power used.
D. Under the step method some service department costs are allocated to the other service departments. Since the
Power Department receives less 'service' from the Maintenance Department than it provides to the Maintenance
Department, the Power Department's costs are allocated first. Some of the Power Department costs will be allocated
to the Maintenance Department.

Question 31 - CIA 1188 IV.5 - Job-Order and Operation Costing

(c) HOCK international, page 35

Part 1 : 02/11/15 08:14:19


A. The step-down allocation of costs is the process of allocating service department costs. It is not a full
product-costing method.
B. Job order costing is used when the items produced are unique from each other, as in the case of anything
hand-made.
C. Variable cost transfer pricing is used when transferring the product between different parts of the same company. It
is not used as a product-costing method.
D. Process costing is used when the units produced are similar.

Question 32 - CMA 1283 3.15 - Internal Auditing


A. Whether or not an internal audit department performs operational audits has nothing to do with its relevancy as an
internal control.
B. For an external auditor to consider an internal audit department to be a relevant internal control, it must be
independent of the accounting function. The chief internal auditor function should report to the board of
directors or to a member of senior management outside of the accounting function.
C. Cost effectiveness has nothing to do with relevancy as an internal control.
D. Statistical sampling procedures are one type of procedure performed by an auditor. They have nothing to do with
whether an external auditor would consider the internal audit department as a relevant internal control.

Question 33 - CIA 1192 I.3 - Internal Auditing


A. If an auditor did not select documents that were in error and therefore concluded that the population was accurate,
when in fact there were numerous errors in it, that would be a "Type II error," or "beta risk," because the population
has been accepted incorrectly. This is not audit risk.
B. If an auditor were not able to properly evaluate an activity because of its poor internal accounting controls, control
risk would be assessed as very high. This would increase audit risk, since audit risk is the product of inherent risk,
control risk, and detection risk. However, this is not, by itself, audit risk.
C. Audit risk is the risk that an auditor will give an unqualified (everything is fine) opinion, when in reality
there is one or more than one material misstatement.
D. The risk that an auditor may not have the expertise to adequately audit a specific activity is not audit risk.

Question 34 - CMA 685 5.25 - Systems Controls and Security Measures


A. It is not possible to identify all possible threats associated with data processing equipment.
B. It is not possible to have complete assurance of recovery from damage associated with any identified threats.
C. Just because a computer security plan has been developed, that does not mean it has been implemented or that
user departments can be assured of anything.

(c) HOCK international, page 36

Part 1 : 02/11/15 08:14:19


D. Developing a computer security plan gives management the opportunity to select the set of control policies
and procedures that will safeguard physical facilities and provide for the safety, privacy, and integrity of the
data while balancing the costs against the benefits.

Question 35 - CIA 594 II.50 - Internal Auditing


A. Threats are not productive. An attitude of seeking the truth is appropriate.
B. An internal auditor should not indicate that management will forgo prosecution if restitution is made.
C. People should be interviewed individually in order to obtain their independent statements.
D. An internal auditor should not allow a suspect to return to work, because doing so could give the suspect an
opportunity to destroy evidence. A suspect should be suspended pending further investigation.

Question 36 - CIA 596 I.57 - Systems Controls and Security Measures


A. A limit and range check is simply a maximum or minimum number for a record. For example, the number of
days worked in a week cannot exceed 7.
B. A record count counts the number of records processed.
C. Echo check is the process of sending the received data back to the sending computer to compare with what was
actually sent to make sure that it is the same. For example, a CPU will send a signal to the printer, and the printer,
prior to printing, will send a signal back to the CPU stating that the proper print position has been activated.
D. A check digit is used for determining whether a number has been input properly. A check digit is a digit (for
example, the last digit in a series of numbers) that is a function of the other digits within the set of numbers. If a
typographical error is made in input, the check digit should recognize that something has been input incorrectly
because the check digit won't "check." This would only work with numbers that can be known in advance, however,
such as part numbers or account numbers, so that the check digit checking process could be properly programmed
and the numbers could be assigned correctly. Payment amounts can be any amount at all, and there would be no way
to use a check digit with that because there would be nothing to check against.

Question 37 - CIA 588 II.15 - Internal Auditing


A. Adhering to a time budget is important for audit efficiency and economy, but it does not contribute to assignment
effectiveness.
B. Having budget revisions approved by the project supervisor is important for audit efficiency, but it does not
contribute to assignment effectiveness.
C. It is a courtesy to review the report with the person or department being audited, so the auditee knows
what is being sent to his or her supervisors and will not be surprised by the report. This review may also
allow the auditee to identify any inaccuracies in the report. The internal auditor and the auditee are present at
this meeting, and one effect of the meeting should be to generate commitment from the auditee for
appropriate corrective action.
D. Preparing weekly time reports is important for audit efficiency, but it does not contribute to assignment
(c) HOCK international, page 37

Part 1 : 02/11/15 08:14:19


effectiveness.

Question 38 - CIA 598 3.49 - Systems Controls and Security Measures


A. The purpose of network security software is to provide logical controls over the network.
B. Frequently, the purpose of database reviews is to determine if: (1) users have gained access to database areas for
which they have no authorization, and (2) authorized users can access the database using programs that provide
them with unauthorized privileges to view and/or change information.
C. The purpose of compliance reviews is to determine whether an organization has complied with applicable internal
and external procedures and regulations.
D.
Change control is the process of strictly controlling changes to a system or program. All changes should
require authorization by the appropriate personnel, and when a system or program is changed, the changes
should not be made to the copy of the program that is being used, but rather to a copy. And any changes
must also be properly reflected in all of the related documentation to ensure that changes have a minimal
impact on processing and results in minimal risk to the system.
Program change control comprises: (1) maintaining records of change authorizations, code changes, and test
results; (2) adhering to a systems development methodology (including documentation); (3) authorizing
changeovers of subsidiary and headquarters' interfaces; and (4) restricting access to authorized source and
executable codes.

Question 39 - ICMA 10.P1.242 - Internal Controls


A. Section 404 of the Sarbanes-Oxley Act requires each annual report filed with the SEC to contain an assessment by
management of the adequacy of the companys internal control over financial reporting. The internal control report
must (1) state the responsibility of management for establishing and maintaining an adequate internal control structure
and procedures for financial reporting; and (2) contain an assessment of the effectiveness of the internal control
structure and procedures of the company for financial reporting as of the end of its most recent fiscal year.
The primary consideration of management in this assessment is how well the companys internal control policies and
procedures provide adequate internal control over financial reporting.
B. Section 404 of the Sarbanes-Oxley Act requires each annual report filed with the SEC to contain an assessment by
management of the adequacy of the companys internal control over financial reporting. The internal control report
must (1) state the responsibility of management for establishing and maintaining an adequate internal control structure
and procedures for financial reporting; and (2) contain an assessment of the effectiveness of the internal control
structure and procedures of the company for financial reporting as of the end of its most recent fiscal year.
Management's philosophy and operating style is one component of the control environment; it is not the primary
consideeration of management in its assessment of the adequacy of the company's internal over financial reporting.
The primary consideration of management in this assessment is how well the companys internal control policies and
procedures provide adequate internal control over financial reporting.
C. Section 404 of the Sarbanes-Oxley Act requires each annual report filed with the SEC to contain an
assessment by management of the adequacy of the companys internal control over financial reporting. The
internal control report must (1) state the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting; and (2) contain an assessment of
(c) HOCK international, page 38

Part 1 : 02/11/15 08:14:19


the effectiveness of the internal control structure and procedures of the company for financial reporting as of
the end of its most recent fiscal year.
The primary consideration of management in this assessment is how well the companys internal control
policies and procedures provide adequate internal control over financial reporting.
D. Section 404 of the Sarbanes-Oxley Act requires each annual report filed with the SEC to contain an assessment by
management of the adequacy of the companys internal control over financial reporting. The internal control report
must (1) state the responsibility of management for establishing and maintaining an adequate internal control structure
and procedures for financial reporting; and (2) contain an assessment of the effectiveness of the internal control
structure and procedures of the company for financial reporting as of the end of its most recent fiscal year.
The primary consideration of management in this assessment is how well the companys internal control policies and
procedures provide adequate internal control over financial reporting.

Question 40 - ICMA 10.P2.096 - Financial Statements


A. This answer results from including interest paid on debt and dividends paid to shareholders in the calculation of
cash flows from financing activities. However, interest on debt is classified as a cash flow from operating activities, not
as a cash flow from financing activities. And although it is correct to classify dividends paid to shareholders as a
financing activity, that is not the only financing activity among those given.
B. This answer results from classifying interest paid on debt as the only cash flow from financing activities. However,
interest on debt is classified as a cash flow from operating activities, not as a cash flow from financing activities.
C.
Dividends paid ($200,000) and repurchase of the company's stock as treasury stock ($400,000) are
transactions that should be classified as cash flows from financing activities on the company's cash flow
statement.
Interest on debt is classified as a cash flow from operating activities, not financing activities.
D. This answer results from including all of the cash flows given in the calculation of cash flows from financing
activities. However, interest on debt is classified as a cash flow from operating activities, not as a cash flow from
financing activities.

Question 41 - CMA1287 P2 Q17 - Accounts Receivable and Inventory


A. In order to answer this question, we will have to do all of the calculations for each of the transactions prior
to the sale on November 16. This is because under the perpetual moving average method, a new average cost
needs to be calculated each time inventory is purchased. Nasus starts with 150 units at a cost of $2.00 each.
They then sell 100 of these units on November 4, reducing inventory to 50 units at $2 each, or $100 in total. On
November 6, they purchase 200 units (bringing the total to 250 units) for a total of $420 (bringing the total
value of inventory to $520). Using these new total figures, we get an average cost of $2.08 ($520 250). They
then sell 150 units (total cost of $312, calculated as 150 2.08). This brings their inventory to 100 units with a
total cost of $208. They then purchase 200 more units (bringing the total units to 300) for a cost of $440
(bringing their total cost of inventory to $648). Using these new figures, we can calculate the average cost of
their inventory as $2.16 ($648 300). This is the average cost that will be used for the items that were sold on
November 16.

(c) HOCK international, page 39

Part 1 : 02/11/15 08:14:19


B. This is the average cost of the units sold on November 8. See the correct answer for a complete explanation.
C. This is the cost of the units purchased on November 6. See the correct answer for a complete explanation.
D. This is the cost of the units purchased on November 10. See the correct answer for a complete explanation.

Question 42 - CMA 1293 2.3 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
A. Investments in trading securities are not reported at the lower of cost or market. See the correct answer for a
complete explanation.
B. Investments in trading securities are reported at their fair value.
C. Investments in trading securities are not reported at their historical cost. See the correct answer for a complete
explanation.
D. Investments in trading securities are not reported at a value equal to their accumulated income minus accumulated
dividends since acquisition. See the correct answer for a complete explanation.

Question 43 - HOCK 2005 H4 - Owners' Equity


A. The payment of cash dividends does not affect the additional paid in capital account.
B. When dividends are declared the journal entry is a debit to Retained Earnings and a credit to Dividends
Payable. When the dividend is paid the debit is to Dividends Payable and the credit is to Cash. Of the choices
given, only Retained Earnings is involved in the dividend process.
C. When dividends are declared and paid the account that is credited would be Dividends Payable, not Dividends
Receivable.
D. The payment of a cash dividend does not affect the common share account.

Question 44 - CMA 1295 P2 Q4 - Financial Statements


A.
This is the decrease in accounts receivable (+$15,000) plus the proceeds from the truck sale (+$5,000) minus the
interest paid to bondholders ($780,000) plus the increase in the cash balance (+$178,000).
This is incorrect because:
1. The question asks for the total of cash provided/used by operating activities plus cash provided/used by
investing activities plus cash provided/used by financing activities. All transactions that involved cash will be
classified as either operating, investing or financing activities, so this question is actually just asking what the
change in the cash balance was during the year. In the calculation above, the amount of change in the cash
balance (ending cash balance of $284,000 beginning cash balance of $106,000) is included as one
component of the change in the cash balance, which makes no sense. The beginning and ending cash
balances can be used only to calculate the net cash used or provided during the period. The amount of change
in the cash balance is the number that any statement of cash flows must reconcile to.
(c) HOCK international, page 40

Part 1 : 02/11/15 08:14:19


2. The correct answer cannot be calculated using the amounts given, because not all of the transactions that
affected cash have been given. The amounts given net to a cash outflow of $760,000. Since that does not
reconcile to the amount of change in the cash balance (a net cash inflow of $178,000), we know that not all the
transctions that affected cash are given.
B.
This question is made simple by the fact that the beginning and ending cash balances are given. Since the
beginning cash was $106,000 and the ending balance was $284,000, we know that the cash increased by
$178,000 during the year. All transactions that involved cash will be classified as either operating, investing or
financing activities, so this question is actually just asking what the change in the cash balance was during
the year, which is the ending cash balance minus the beginning cash balance.
The correct answer cannot be calculated using the other amounts given, because not all of the transactions
that affected cash have been given. The amounts given net to a cash outflow of $760,000. Since that does not
reconcile to the amount of change in the cash balance (a net cash inflow of $178,000), we know that not all
the transctions that affected cash are given.
C. This is the ending cash balance.
D. Net income must be adjusted for noncash items in order to determine the net change in the cash position for the
period.

Question 45 - CMA 1293 2.4 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
A. Investments in available-for-sale securities are not reported at their par or stated value. See the correct answer for
a complete explanation.
B. Investments in available-for-sale securities are reported at their fair value.
C. Investments in available-for-sale securities are not reported at their historical cost. See the correct answer for a
complete explanation.
D. Investments in available-for-sale securities are not reported at a value equal to their accumulated income minus
accumulated dividends since acquisition. See the correct answer for a complete explanation.

Question 46 - CMA 696 P2 Q9 - Liabilities and Taxes


A. Though the use of the different depreciation methods will cause a temporary difference, this difference will lead to a
deferred tax liability, not a deferred tax asset.
B. A deferred tax asset arises when there is either: 1) a revenue that is included in taxable income before it is
included in book income, or 2) an expense that is included in book income before it is deductible for tax
purposes. Because these are advance rental receipts, they will not be recognized until the following period
for book purposes, but they will be recognized immediately for tax purposes. This is the first of the two
situations listed that lead to a deferred tax asset.
C. Though the use of the different methods of accounting for investments will cause a temporary difference, this
difference will lead to a deferred tax liability, not a deferred tax asset. This is because the revenue will be recognized
first under equity method, and only later when it is distributed will the income be recognized for tax purposes.
D. Though the use of the different methods of revenue recognition will cause a temporary difference, this difference
(c) HOCK international, page 41

Part 1 : 02/11/15 08:14:19


will lead to a deferred tax liability, not a deferred tax asset. Using these two methods, income will be recognized first
under the accrual basis which is used for book purposes. The recognition of a revenue for book purposes, but not tax
purposes leads to a deferred tax liability.

Question 47 - CIA 1190 IV.32 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets
A. Since the bonds of ABC Corporation will be sold as needed to meet MKT's current financing needs, those bonds
are classified as available-for-sale. However, those are not the only securities that should be classified as
available-for-sale.
B. Common shares are classified as either available-for-sale or trading securities. Since PF has plans to
increase its ownership in PF, the shares of PF Company should be classified as available-for-sale. Since the
bonds of ABC Corporation will be sold as needed to meet MKT's current financing needs, those bonds are
also classified as available-for-sale. The U.S. Treasury Bills should be classified as held-to-maturity
securities, because MKT has both the positive intent and the ability to hold them to their maturity.
C. The U.S. Treasury Bills should not be classified as available-for-sale because MKT has both the positive intent and
the ability to hold them to their maturity.
D. The U.S. Treasury Bills should not be classified as available-for-sale because MKT has both the positive intent and
the ability to hold them to their maturity.

Question 48 - CIA 594 P4 Q29 - Accounts Receivable and Inventory


A. In factoring the payment is made by the customer directly to the factor whereas in assignment, the
payment is made to the original holder of the receivable.
B. This answer is reversed.
C. The lender usually does not have recourse when receivables are factored. The lender usually has recourse when
receivables are assigned.
D. This answer is reversed. See the correct answer for a complete explanation.

Question 49 - CMA 1291 P2 Q28 - Liabilities and Taxes


A.
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
B.

(c) HOCK international, page 42

Part 1 : 02/11/15 08:14:19


This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let
us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an
email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice
-- not its letter, because that can change with every study session created. The Question ID number appears in the
upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study
materials better.
C. The warranty expense is calculated as the amount of sales multiplied by the estimated future warranty
expenses for those sales. Sales were $9,000,000 and the estimated future costs were 4% of sales. This is
$360,000 and this is what should be recorded as the warranty expense. The fact that one-fifth of the sales
were returned is not relevant to this calculation and the $360,000 is what will be recorded.
D. This is the amount of cash paid out for warranty costs. This is not the same as the warranty expense. See the
correct answer for a complete explanation.

Question 50 - CMA 695 P1 Q13 - Owners' Equity


A. Because the shareholder currently owns 1% of the company's shares ($10,000,000 in the common stock
account divided by $5 par value gives 2,000,000 shares), the shareholder is entitled to buy 1% of the newly
issued shares. Since the company is issuing 400,000 new shares, 1% of this is 4,000 shares.
B. Because the shareholder currently owns 1% of the company's shares ($10,000,000 in the common stock account
divided by $5 par value gives 2,000,000 shares), the shareholder is entitled to buy 1% of the newly issued shares.
C. Because the shareholder currently owns 1% of the company's shares ($10,000,000 in the common stock account
divided by $5 par value gives 2,000,000 shares), the shareholder is entitled to buy 1% of the newly issued shares.
D. Because the shareholder currently owns 1% of the company's shares ($10,000,000 in the common stock account
divided by $5 par value gives 2,000,000 shares), the shareholder is entitled to buy 1% of the newly issued shares.

(c) HOCK international, page 43

You might also like