CMA PART 1 MOCK TEST 3

CMA PART 1 MOCK TEST 3

ARMAGHAN AHMED

FINANCE MANAGER CUM TRAINER CPA MBA PGD B.COM Phone: 00971-50-3060762 E-mail: [email protected] BLOG education4all-arman.blogspot.com

education4all

Part 1 : MOCK TEST 3 Question 1 - CMA 692 3.9 - Planning and Budgeting Concepts The preparation of a comprehensive master budget culminates with the preparation of the A. Cash management and working capital budget. B. Capital investment budget. C. Strategic budget. D. Production budget.

Question 2 - HOCK CMA P3A H1 - Business Process Improvement An organization is said to have a "competitive advantage" over its industry rivals when: A. It spends more money on advertising than its competitors do. B. Its distribution channels are wider than others in its industry. C. The profitability of the company is greater than that of the average profitability for all other organizations in its industry. D. It can distribute its product more quickly than other industry competitors.

Question 2 - HOCK CMA P3A H1 - Strategic Planning An organization is said to have a "competitive advantage" over its industry rivals when: A. It spends more money on advertising than its competitors do. B. Its distribution channels are wider than others in its industry. C. The profitability of the company is greater than that of the average profitability for all other organizations in its industry. D. It can distribute its product more quickly than other industry competitors.

Question 3 - 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 Accounts receivable, net. 150,000 Inventory 315,000 Property, plant and equipment 1,000,000 Total assets $1,517,000 Liabilities and Equity Accounts payable $ 175,000 Common stock 900,000 Retained earnings 442,000 Total liabilities and shareholders equity $1,517,000

(c) HOCK international, page 1

Part 1 : MOCK TEST 3 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. $536,000 B. $134,000 C. $104,000 D. $416,000

Question 4 - CIA 590 IV.12 - Budget Methodologies A firm desires a finished goods ending inventory equal to 25% of the following month's budgeted sales. January sales are budgeted at 10,000 units and February at 12,000 units. Each unit requires 2 pounds of Material X, which costs $4 per pound. The company has a just-in-time system and materials are delivered daily just prior to use, so no raw materials inventories are maintained. Materials are paid for in the month following purchase. The January 1 finished goods inventory is 2,500 units. In February, what amount should the company expect to pay as a cash outflow for raw materials? A. $42,000 B. $84,000 C. $21,000 D. $40,000

Question 5 - CMA 697 3.11 - Planning and Budgeting Concepts When developing a budget, an external factor to consider in the planning process is A. A change to a decentralized management system. B. The implementation of a new bonus program. C. New product development. D. The merger of two competitors.

Question 6 - CMA 689 5.30 - Risk, Uncertainty and Expected Value Refer to the profit payoff table below. Demand in Units 0 2 4 6 Probability of Demand 0.4 0.2 Supply in Units 0.1 0.3 0 $ 0 $ 0 $ 0 $ 0 (c) HOCK international, page 2

Part 1 : MOCK TEST 3 2 4 6

(80) 40 (160) (40) (240) (120)

40 40 80 80 0 120

The price one is willing to pay for perfect information is A. $40. B. $48. C. $104. D. $68.

Question 7 - ICMA 10.P1.081 - Budget Methodologies Health Foods Inc. has decided to start a cash budgeting program to improve overall cash management. Information gathered from the past year reveals the following cash collection trends. 40% of sales are on credit 50% of credit sales are collected in month of sale 30% of credit sales are collected first month after sale 15% of credit sales are collected second month after sale 5% of credit sales result in bad debts Gross sales for the last five months were as follows. January $220,000 February 240,000 March 250,000 April 230,000 May 260,000 Sales for June are projected to be $255,000. Based on this information, the expected cash receipts for March would be A. $242,000. B. $237,400. C. $243,200. D. $230,000.

Question 8 - ICMA 08.P2.041 - Budget Methodologies Tyler Company produces one product and budgeted 220,000 units for the month of August with the following budgeted manufacturing costs. Total Costs Cost Per Unit Variable costs $1,408,000 $ 6.40 Batch set-up cost 880,000 4.00 1,210,000 5.50 Fixed costs Total $3,498,000 $15.90 The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to 300,000 units per month. The total for the batch set-up cost in any month depends on the number of production batches that Tyler runs. A normal batch consists of 50,000 units unless production requires less volume. In the prior year, Tyler experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and 50,000 units. Tyler consistently plans

(c) HOCK international, page 3

Part 1 : MOCK TEST 3 production each month in order to minimize the number of batches. For the month of September, Tyler plans to manufacture 260,000 units. What will be Tyler's total budgeted production costs for September? A. $4,134,000 B. $3,930,000 C. $3,974,000 D. $3,754,000.

Question 9 - CMA 695 H6 - Budget Methodologies Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month's sales are in the finished goods inventory. Rokat also purchases sufficient raw materials to ensure that raw materials inventory is 60% of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as follows: July 2,300 August 2,500 September 2,100 Rokat's ending inventories in units for June 30 are Finished goods 1,900 Raw materials (legs) 4,000 Assume the required production for August and September is 1,600 and 1,800 units, respectively, and the July 31 raw materials inventory is 4,200 units. The number of table legs to be purchased in August is A. 6,400 legs. B. 2,200 legs. C. 9,400 legs. D. 6,520 legs.

Question 10 - CMA 688 5.25 - Probability A computer store sells four computer models designated as P104, X104, A104 and S104. The store manager has made random number assignments to represent customer choices based on past sales data. The assignments are: ModelRandom Numbers P104 0-1 X104 2-6 A104 7-8 S104 9 The probability that a customer will select model P104 is A. 10 percent. B. Some probability other than those given. C. 20 percent. D. 50 percent. (c) HOCK international, page 4

Part 1 : MOCK TEST 3

Question 11 - CMA 697 4.22 - Risk, Uncertainty and Expected Value Philip Enterprises, distributor of compact disks (CDs), is developing its budgeted cost of goods sold for 2013. Philip has developed the following range of sales estimates and associated probabilities for the year: Sales Estimated Probability $60,000 25% 85,000 40% 100,000 35% Philip's cost of goods sold averages 80% of sales. What is the expected value of Philip's 2013 budgeted cost of goods sold? A. $67,200 B. $68,000 C. $85,000 D. $84,000

Question 12 - CMA 693 3.29 - Performance Measures Which one of the following firms is likely to experience dysfunctional motivation on the part of its managers due to its allocation methods? A. Rainier Industrial does not allow its service departments to pass on their cost overruns to the production departments. B. To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses predetermined amounts calculated on the basis of the long-term average use of the services provided. C. Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performances. D. Tashkent Auto's MIS is operated out of headquarters and serves its various divisions. Tashkent's allocation of the MIS-related costs to its divisions is limited to costs the divisions will incur if they were to outsource their MIS needs.

Question 13 - CMA 1292 3.22 - Responsibility Centers and Reporting Segments When using a contribution margin format for internal reporting purposes, the major distinction between segment manager performance and segment performance is A. Direct variable costs of producing the product. B. Unallocated fixed cost. C. Direct fixed cost controllable by others. D. Direct fixed cost controllable by the segment manager.

Question 14 - ICMA 10.P1.101 - Manufacturing Input Variances -- Materials and Labor A company has a direct labor price variance that is favorable. Of the following the most serious concern the company may have about this variance is that (c) HOCK international, page 5

Part 1 : MOCK TEST 3 A. the cause of the favorable variance may result in other larger unfavorable variances in the value chain. B. actual production is less than budgeted production. C. the circumstances giving rise to the favorable variance will not continue in the future. D. the production manager may not be using human resources as efficiently as possible.

Question 15 - ICMA 10.P1.129 - Responsibility Centers and Reporting Segments Kern Manufacturing has several divisions and evaluates performance using segment income. Since sales include transfers to other divisions, Kern has established a price for internal sales as cost plus 10%. Red Division has requested 10,000 units of Green Division’s product. Green Division is selling its product externally at a 60% markup over cost. The corporate policy will encourage the Green Division to A. transfer the product to the Red Division because all costs are being covered and the division will earn a 10% profit. B. accept the sale to the Red Division if it is operating at full capacity and the sale will contribute to fixed costs. C. reject the sale to the Red Division because it does not provide the same markup as external sales. D. transfer the product to the Red Division if it does not require the Green Division to give up any external sales.

Question 16 - ICMA 10.P1.124 - Responsibility Centers and Reporting Segments Manhattan Corporation has several divisions that operate as decentralized profit centers. At the present time, the Fabrication Division has excess capacity of 5,000 units with respect to the UT-371 circuit board, a popular item in many digital applications. Information about the circuit board follows. Market price $48 Variable selling/distribution costs on external sales 5 Variable manufacturing cost 21 Fixed manufacturing cost 10 Manhattan’s Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or else use a similar board in the marketplace that sells for $46. The Electronic Assembly Division’s management feels that if the first alternative is pursued, a price concession is justified, given that both divisions are part of the same firm. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for the circuit board is to A. establish the price by top management. B. establish the price by an arbitration committee. C. establish the price through negotiations between the Fabrication's and Electronic Assembly's Division management. D. set the price equal to the price that would be charged if the Fabrication Department had no excess capacity.

Question 17 - CIA 1189 IV.17 - Manufacturing Input Variances -- Materials and Labor One of the items produced by a manufacturer of lawn and garden tools is a chain saw. The direct labor standard for assembling and testing a chain saw is 2.5 hours at $8 per hour. Budgeted production for October was 1,200 units. Actual production during the month was 1,000 units, and direct labor cost was $27,840 for 3,200 hours. What was the direct labor price (rate) variance for October? A. $2,240 unfavorable. B. $5,600 unfavorable. C. $2,240 favorable. (c) HOCK international, page 6

Part 1 : MOCK TEST 3 D. $3,840 favorable.

Question 18 - ICMA 10.P1.222 - Shared Service Cost Allocation Render Inc. has four support departments (maintenance, power, human resources, and legal) and three operating departments. The support departments provide services to the operating departments as well as to the other support departments. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support departments to other support departments is the A. dual-rate allocation method. B. direct allocation method. C. step-down allocation method. D. reciprocal allocation method.

Question 19 - HOCK CMA P3A H22 - Business Process Improvement One of the key sources of competitive advantage is: A. Responsiveness to customer needs. B. Maintaining average quality. C. Taking advantage of, and being a follower in, competitors' product innovation. D. Slow adoption of more efficient business practices.

Question 19 - HOCK CMA P3A H22 - Strategic Planning One of the key sources of competitive advantage is: A. Responsiveness to customer needs. B. Maintaining average quality. C. Taking advantage of, and being a follower in, competitors' product innovation. D. Slow adoption of more efficient business practices.

Question 20 - CIA 1185 IV.11 - Joint Products and Byproducts A company manufactures products X and Y using a joint process. The joint processing costs are $10,000. Products X and Y can be sold at split-off for $12,000 and $8,000, respectively. After split-off, product X is processed further at a cost of $5,000 and sold for $21,000, whereas product Y is sold without further processing. The joint cost allocated to X is: A. $6,667. B. $5,000. C. $10,000. D. $6,000.

(c) HOCK international, page 7

Part 1 : MOCK TEST 3

Question 21 - CMA 1295 3.23 - Overhead Allocation Madtack Company's beginning and ending inventories for the month of November are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November: Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70% of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's net charge to factory overhead control for the month of November is A. $8,000 debit, overapplied. B. $8,000 credit, underapplied. C. $8,000 debit, underapplied. D. $8,000 credit, overapplied.

Question 22 - ICMA 10.P1.217 - Shared Service Cost Allocation The management of ROX Company wishes to encourage all other departments to use the legal department, as circumstances warrant. To accomplish this, legal department costs should be A. allocated to users on the basis of the budgeted cost of actual hours used. B. allocated to users on the basis of the actual cost of hours used. C. absorbed as a corporate expense. D. allocated to users on the basis of standard cost for the type of service provided.

Question 23 - ICMA 10.P1.161 - Overhead Allocation From the following budgeted data, calculate the budgeted indirect cost rate that would be used in a normal costing system. Total direct labor hours 250,000 Direct costs $10,000,000 Total indirect labor hours 50,000 Total indirect labor-related costs $ 5,000,000 Total indirect non-labor-related costs$ 7,000,000 A. $28. B. $40. C. $20. D. $48.

(c) HOCK international, page 8

Part 1 : MOCK TEST 3

Question 24 - CMA 689 4.13 - Classifications of Costs Hitchcock Industries has developed two new products but has only enough plant capacity to introduce one of these products this year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Hitchcock's fixed overhead includes proportional rent and utilities, machinery depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Cost per unit: Power DrillPower Saw Raw materials $22.00 $18.00 Machining at $12/hr. 9.00 7.50 Assembly at $10/hr. 15.00 5.00 Variable O/H at $8/hr. 18.00 9.00 Fixed O/H at $4/hr. 9.00 4.50 Total unit cost: $73.00 $44.00 Suggested selling price $88.98 $49.95 Actual research and development costs $180,000 $95,000 Proposed advertising and promotion costs $300,000 $250,000 The costs included in Hitchcock's fixed overhead are A. Prime costs. B. Sunk costs. C. Committed costs. D. Discretionary costs.

Question 25 - ICMA 10.P1.157 - Classifications of Costs Lar Company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning Lar’s electricity cost is incorrect? A. The variable electricity cost per unit of production will remain constant as production volume increases. B. The total electricity cost will increase as production volume increases. C. The fixed electricity cost per unit of production will decline as production volume increases. D. The total electricity cost per unit of production will increase as production volume increases.

Question 26 - CMA 1295 3.27 - Classifications of Costs A cost that bears an observable and known relationship to a quantifiable activity base is a(n) A. Indirect cost. B. Sunk cost. C. Target cost. D. Engineered cost.

(c) HOCK international, page 9

Part 1 : MOCK TEST 3 Question 27 - CMA 1288 3.25 - Internal Controls The primary responsibility for establishing and maintaining internal control rests with A. The controller. B. The treasurer. C. Management. D. The internal auditor.

Question 28 - CMA 1288 3.21 - Internal Controls Which one of the following would be considered an accounting control rather than an administrative control? A. Maintenance of statistical production analyses. B. Maintenance of control over unused checks. C. Marketing analysis of sales generated by advertising projects. D. Timely reporting and review of quality control results.

Question 29 - CIA 1196 II.11 - Internal Auditing According to the relevant Standards, reported audit findings emerge by a process of of comparing "what should be" with "what is." In determining "what should be" during an audit of a company's treasury function, which of the following would be the least desirable criteria against which to judge current operations? A. Company policies and procedures delegating authority and assigning responsibilities. B. Finance textbook illustrations of generally accepted good treasury function practices. C. Codification of best practices of the treasury function in relevant industries. D. The operations of the treasury function as documented during the last engagement.

Question 30 - CIA 592 I.40 - Internal Auditing One objective of an audit of the purchasing function is to determine the cost of late payment of invoices containing sales discounts. The appropriate population from which a sample would be drawn is the file of A. Receiving reports. B. Canceled checks. C. Paid vendor invoices. D. Purchase orders.

Question 31 - CIA 1194 3.22 - Systems Controls and Security Measures Many organizations are critically dependent on information systems to support daily business operations. Consequently, an organization may incur significant loss of revenues or incur significant expenses if a disaster such as a hurricane or power outage causes information systems processing to be delayed or interrupted. A bank, for example, may incur significant penalties as a result of missed payments.

(c) HOCK international, page 10

Part 1 : MOCK TEST 3 Which of the following management activities is essential to ensure continuity of operations in the event a disaster or catastrophe impairs information systems processing? A. Review of insurance coverage. B. Electronic vaulting. C. Contingency planning. D. Change control procedures.

Question 32 - CMA 680 5.15 - Systems Controls and Security Measures Omen Company is a manufacturer of men's shirts. It distributes weekly sales reports to each sales manager. The quantity 2R5 appeared in the quantity sold column for one of the items on the weekly sales report for one of the sales managers. The most likely explanation for what has occurred is that A. The computer has malfunctioned during execution. B. The output quantity has been stated in hexadecimal numbers. C. The printer has malfunctioned and the "R" should have been a decimal point. D. The program did not contain a data checking routine for input data.

Question 33 - CIA 1196 1.36 - Systems Controls and Security Measures The automated system contains a table of pay rates which is matched to the employee job classifications. The best control to ensure that the table is updated correctly for only valid pay changes would be to: A. Limit access to the data table to management and line supervisors who have the authority to determine pay rates. B. Require that all pay changes be signed by the employee to verify that the change goes to a bona fide employee. C. Require a supervisor in the department, who does not have the ability to change the table, to compare the changes to a signed management authorization. D. Ensure that adequate edit and reasonableness checks are built into the automated system.

Question 34 - CIA 589 II.7 - Internal Controls Which of the following controls could be used to detect bank deposits that are recorded but never made? A. Establishing accountability for receipts at the earliest possible time. B. Linking receipts to other internal accountabilities (i.e., collections to either accounts receivable or sales). C. Having bank reconciliations performed by a third party. D. Consolidating cash receiving points.

Question 35 - CIA 1196 III.40 - Systems Controls and Security Measures Which of the following is an indication that a computer virus is present? A. Unexplainable losses of or changes to data. B. Numerous copyright violations due to unauthorized use of purchased software. C. Inadequate backup, recovery, and contingency plans. (c) HOCK international, page 11

Part 1 : MOCK TEST 3 D. Frequent power surges that harm computer equipment.

Question 36 - CIA 1196 I.8 - Internal Auditing A certified internal auditor (CIA) is the chief audit executive (CAE) for a large city and is planning the engagement work schedule for the next year. The city has a number of different funds, some that are restricted in use by government grants and some that require compliance reports to the government. One of the programs for which the city has received a grant is job retraining and placement. The grant specifies certain conditions a participant in the program must meet to be eligible for the funding. The CAE plans an engagement to verify that the job retraining program complies with applicable grant provisions. One of the provisions is that the city adopt a budget for the program and subsequently follow procedures to ensure that the budget is adhered to and that only allowable costs are charged to the program. In performing an engagement concerning compliance with this provision, the internal auditors should perform all of the following procedures except A. Determine that the budget was reviewed and approved by supervisory personnel within the granting agency. B. Compare actual results with budgeted results and determine the reason for deviations. Determine if such deviations have been approved by appropriate officials. C. Select a sample of expenditures to determine that the expenditures are (1) properly classified as to type, (2) appropriate to the program, and (3) designed to meet the program's objectives. D. Determine that the budget was reviewed and approved by supervisory personnel within the city.

Question 37 - CIA 1195 I.67 - Internal Controls Internal auditors regularly evaluate controls and control procedures. Which of the following best describes the concept of control as recognized by internal auditors? A. Control represents specific procedures that accountants and auditors design to ensure the correctness of processing. B. Control procedures should be designed from the "bottom up" to ensure attention to detail. C. Management takes action to enhance the likelihood that established goals and objectives will be achieved. D. Management regularly discharges personnel who do not perform up to expectations.

Question 38 - CMA 686 3.20 - Internal Controls The procedure that would best discourage the resubmission of vendor invoices after they have been paid is A. A requirement for double endorsement of checks. B. The cancellation of vouchers by treasurer personnel. C. The mailing of payments directly to payees by accounting personnel. D. The cancellation of vouchers by accounting personnel.

Question 39 - CMA 1290 P2 Q6 - Accounts Receivable and Inventory Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year end, November 30. The proportion of uncollectible accounts is estimated based on past (c) HOCK international, page 12

Part 1 : MOCK TEST 3 experience, which indicates 1.5% of net credit sales will be uncollectible. Total sales for the year were $2,000,000 of which $200,000 were cash transactions. Madison has determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and will write off this account before year-end adjustments are made. Listed below are Madison's account balances at November 30 prior to any adjustments and the $10,000 write-off. Sales $2,000,000 Accounts receivable 750,000 Sales discounts (125,000) Allowance for doubtful accounts (16,500) Sales returns and allowances (175,000) Bad debt expense 0 After a suggestion from the company's external auditors, Madison wishes to value its accounts receivable using the balance sheet approach instead. The chart below presents the aging of the accounts receivable subsidiary ledger accounts at November 30, not including the account to be written off. Balance 120 Due days days days days Account Arcadia $ 50,000 $ 50,000 Dawson 128,000 90,000 $ 38,000 Gracelon 327,000 250,000 77,000 Prentiss $25,000 25,000 Strauss 210,000 210,000 Total $740,000$390,000$115,000$210,000 $25,000 % uncollectible 1% 5% 15% 40% The final entry to the related accounts is A. Credit accounts receivable for $34,650 and debit bad debt expense for $34,650. B. Debit allowance for doubtful accounts for $44,650 and credit bad debt expense for $44,650. C. Debit allowance for doubtful accounts for $34,650 and credit sales for $34,650. D. Credit allowance for doubtful accounts for $44,650 and debit bad debt expense for $44,650.

Question 40 - CMA 695 P2 Q10 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets A steel press machine is purchased for $50,000 cash and a $100,000 interest bearing note payable. The cost to be recorded as an asset (in addition to the $150,000 purchase price) should include all of the following except A. Freight and handling charges. B. Insurance while in transit. C. Assembly and installation costs. D. Interest on the note payable.

Question 41 - CMA 1285 P4 Q12 - Revenue Recognition Genova Corporation sold equipment for $200,000 on November 11. The book value of the equipment on the date of sale was $80,000. The buyer paid $20,000 to Genova on the date of sale and the balance was due in three equal annual installments beginning on December 1. The buyer made the scheduled payment to Genova on December 1. Genova uses the calendar year for reporting purposes. If Genova uses the installment sales method for internal reporting purposes, the gross profit that Genova would realize (c) HOCK international, page 13

Part 1 : MOCK TEST 3 in the current year on the sale of the equipment is: A. $120,000. B. $80,000. C. $48,000. D. $0.

Question 42 - CIA 0592 P4 Q34 - Revenue Recognition On December 1, 20X3, a company using the installment sales method sold goods that cost $1,000 for $1,500. The buyer paid $100 down. Monthly payments start January 1, 20X4. Interest accrues at 1% per month on the unpaid balance. To the nearest dollar, the effect on profit for 20X3 is A. $47 increase. B. $67 increase. C. $14 increase. D. $33 increase.

Question 43 - CIA 0596 P4 Q3 - Revenue Recognition A company sells goods on an installment basis. The table below includes information about the level of installment sales, the cost of the goods sold on installment, and the cash receipts on installment sales for year 1 through year 3. All cash receipt amounts shown are net of any interest charges. Year 1 Year 2 Year 3 Installment sales $10,000$5,000$20,000 Cost of installment sales 6,000 4,000 10,000 Cash receipts on year 1 sales $2,000$4,000 $4,000 Cash receipts on year 2 sales 1,000 2,000 Cash receipts on year 3 sales 4,000 The company's gross profit amount from year 3 sales to be deferred to future years would be: A. $8,000 B. $3,000 C. $10,000 D. $2,000

Question 44 - CMA 691 P2 Q2 - Accounts Receivable and Inventory Sawyer Corporation is a wholesaler of industrial air compressor parts. The activity for Part Number C-588 during May is as follows. Unit Total MayTransactionUnits Cost Cost 1 Inventory 1,400$2.45$3,430 7 Purchase 1,800 2.75 4,950 16 Sales 2,000 20 Purchase 1,500 2.90 4,350 28 Sales 1,400 (c) HOCK international, page 14

Part 1 : MOCK TEST 3 If Sawyer uses a first-in, first-out perpetual inventory system, the total cost of the inventory for Part Number C-588 at May 31 is A. $3,230 B. $3,575 C. $3,510 D. $3,770

Question 45 - CMA 696 P2 Q5 - Accounts Receivable and Inventory All sales and purchases for the year at Ross Corporation are credit transactions. Ross uses a perpetual inventory system and shipped goods that were correctly excluded from ending inventory. However, in error, the sale was not recorded. Which one of the following statements is correct? A. Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was understated. B. Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated. C. Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated. D. Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected.

Question 46 - CMA 691 P2 Q3 - Accounts Receivable and Inventory Sawyer Corporation is a wholesaler of industrial air compressor parts. The activity for Part Number C-588 during May is as follows. May 1 7 16 20 28

Transaction Inventory Purchase Sales Purchase Sales

Units 1,400 1,800 2,000 1,500 1,400

Unit Cost $2.45 2.75

Total Cost $3,430 4,950

2.90 4,350

If Sawyer uses a last-in, first-out perpetual inventory system, the total cost of the inventory for Part Number C-588 at May 31 is A. $3,575 B. $3,185 C. $3,230 D. $3,521

Question 47 - CMA 0687 3.12 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets On January 1, Boggs, Inc. paid $700,000 for 100,000 shares of Mattly Corporation representing 30% of Mattly's outstanding common stock. The following computation was made by Boggs. (c) HOCK international, page 15

Part 1 : MOCK TEST 3 Purchase price: $700,000 30% equity in book value of Mattly's net assets: $500,000 Excess cost over book value: $200,000 The excess cost over book value was attributed to goodwill. Mattly reported net income for the year ended December 31 of $300,000. Mattly Corporation had paid cash dividends of $100,000 on July 1. If Boggs, Inc. did not exercise significant influence over Mattly Corporation and properly accounted for the long-term investment under the fair value method, the amount of net investment revenue Boggs should report from its investment in Mattly would be A. $90,000 B. $60,000 C. $20,000 D. $30,000

Question 48 - CMA 688 4.22 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets When preparing consolidated financial statements, the entity being accounted for is the A. Minority interest. B. Legal entity. C. Economic entity. D. Parent.

(c) HOCK international, page 16

Part 1 : MOCK TEST 3

Question 1 - CMA 692 3.9 - Planning and Budgeting Concepts A. The cash management and working capital budgets are the last budgets prepared. This is because they are dependent upon all of the other budgets since the production budget, advertising budget, overhead budget, and so on all have a cash component that is reflected in the cash budget and the working capital budget. The cash budget and working capital budgets are therefore prepared last, because all of the other budgets contribute to them. B. The capital investment budget is a long-term budget that is outside of the normal, annual budgeting process. The effect of budgeted current period expenditures for capital assets will need to be taken into account in the development of the master budget, since they will affect the balance sheet, income statement, and cash flows. However, the capital invesstment budget is not the final budget prepared in preparation of the comprehensive master budget. C. The master budget is an annual budget. The quantitative effect of strategic plans, which are long-term plans for periods of more than five years, must be integrated into the annual budgeting process, as well as into the capital budgeting process. As such, strategic planning precedes the development of the annual budget. D. The production budget is a part of the operating budget. The operating budget is part of the master budget. The master budget is a comprehensive expression of management's operating and financial plans for a future time period (usually a year) that is summarized in a set of budgeted financial statements. It embraces the impact of both operating and financing decisions.

Question 2 - HOCK CMA P3A H1 - Business Process Improvement A. The amount of money spent on advertising is not directly related to competitive advantage. B. Distribution channels are not directly related to competitive advantage. C. A company is said to have competitive advantage when it is more profitable than the average company in its industry. Profitability does not create competitive advantage, though. It is the other way around. Competitive advantage is required in order to have high profitability. Thus, in order to increase profitability and sustain profit growth, managers need to formulate strategies that will give their company a competitive advantage. D. While it may be important for the company to quickly distribute its product, this is not directly related to competitive advantage.

Question 2 - HOCK CMA P3A H1 - Strategic Planning A. The amount of money spent on advertising is not directly related to competitive advantage. B. Distribution channels are not directly related to competitive advantage. C. A company is said to have competitive advantage when it is more profitable than the average company in its industry. Profitability does not create competitive advantage, though. It is the other way around. Competitive advantage is required in order to have high profitability. Thus, in order to increase profitability and sustain profit growth, managers need to formulate strategies that will give their company a competitive advantage. D. While it may be important for the company to quickly distribute its product, this is not directly related to competitive advantage. (c) HOCK international, page 17

Part 1 : MOCK TEST 3

Question 3 - CMA 1294 3.9 - Budget Methodologies A. 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. 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 [email protected]. 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. 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. D. This is the cost of goods sold for December. Gross profit (gross margin) is equal to sales minus cost of goods sold.

Question 4 - CIA 590 IV.12 - Budget Methodologies A. This answer does not consider the fact that 2 pounds of raw materials are needed to produce one unit of finished product. See the correct answer for a complete explanation. B. Since no materials inventory is kept on hand, the amount of materials purchased each month is equal to the production requirements. Thus, the first thing we need to determine is the finished goods production in January by using the formula of the physical flow of goods: Beginning Inventory + Units Produced − Units Sold = Ending Inventory. Finished goods inventory is equal to 25% of the following month's budgeted sales. January sales are budgeted at 10,000 units. Thus, the ending finished goods inventory for December, which is the same as the beginning inventory for January, will be 25% of 10,000, or 2,500 units. February sales are budgeted at 12,000 units, so the ending inventory for January will be 25% of 12,000, or 3,000 units. Plugging the numbers for finished goods into the formula we get: 2,500 + Units Produced − 10,000 = 3,000. Solving for Units Produced, we get Units Produced = 10,500. Since the company makes payment the month after the purchase, January raw material purchases will be paid in February. Now we can determine the cash outlay for raw materials in February: 10,500 units × 2 lb. × $4.00 = $84,000. C. This is the number of raw material purchases in January in pounds. See the correct answer for a complete explanation. D. This is the 10,000 units to be sold during January multiplied by $4 per pound of raw materials. This is incorrect for two reasons: (1) It does not consider beginning and ending inventories of finished goods, which will affect the number (c) HOCK international, page 18

Part 1 : MOCK TEST 3 of units to be produced during the month; and (2) It does not consider that 2 pounds of raw materials are required to produce each unit of finished goods.

Question 5 - CMA 697 3.11 - Planning and Budgeting Concepts A. A change to a decentralized management system is an internal factor. B. The implementation of a new bonus program is an internal factor. C. New product development is an internal factor. D. In developing a budget, internal and external factors are considered and assumptions about those factors are made. Internal factors are the factors that take place inside the organization, external factors are those outside of company's direct control. Some of the external factors are: state of economy, government regulations, labor market, competitor's activities including mergers and acquisitions. Thus, the merger of two competitors is an external factor that should be considered in the development of a budget.

Question 6 - CMA 689 5.30 - Risk, Uncertainty and Expected Value A. To determine the price that a company would pay for perfect information, we compare the maximum expected profit that the company could achieve with perfect information with the best expected profit that could be achieved if they had to choose one level when demand is not known. With perfect information the company would be able to choose the correct level of supply for each of the levels of demand. Therefore, given that for each level of demand the company will choose the best supply alternative, the expected value is $68 [($0 × 0.1) + ($40 × 0.3) + ($80 × 0.4) + ($120 × 0.2)]. Without having perfect information, if the company provided a supply of 0 units, its expected profit would be 0. If it supplied 2 units, the expected profit would be $28 [(−$80 × 0.1) + ($40 × 0.9)]. If it supplied 4 units, the expected profit would be $20 [(−$160 × 0.1) + (−$40 × 0.3) + ($80 × 0.6)]. If it supplied 6 units, the expected profit would actually be a loss of $36 [(−$240 × 0.1) + (−$120 × 0.3) + ($120 × 0.2)]. So, without perfect information the best that the company can do is an expected profit of $28. Since perfect information would provide an expected profit of $68 and the best the company can do without perfect information is $28, the company would pay $40 (the difference) for the perfect information. B. This is the expected profit with perfect information minus the expected profit from supplying 4 units, the demand level with the highest probability of occurring. See the correct answer for a complete explanation. C. This is the difference between the expected profit with perfect information and the expected loss at the supply level of 6 units, the lowest expected payoff without perfect information. See the correct answer for a complete explanation. D. This is the amount of expected profit with perfect information. This is not the price one is willing to pay for the perfect information. See the correct answer for a complete explanation.

Question 7 - ICMA 10.P1.081 - Budget Methodologies (c) HOCK international, page 19

Part 1 : MOCK TEST 3 A. Collections will be as follows during March: March cash sales - $250,000 × 0.60 $150,000 Collected from March credit sales - $250,000 × 0.40 × 0.50 50,000 Collected from February credit sales - $240,000 × 0.40 × .030 28,800 13,200 Collected from January credit sales - $220,000 × 0.40 × 0.15 Total receipts for March $242,000 B. This answer results from reducing the credit sale collections by 5% of credit sales before calculating the percentage of credit sales collected. (For example, 50% of March credit sales collected in March is calculated incorrectly as $250,000 × 0.40 × 0.95 × 0.050.) This is incorrect because the problem gives the total percentage of credit sales that will ultimately be collected, and that percentage is 95% (50% + 30% + 15%). The 5% that will be uncollectible has already been removed from the amounts that will be collectible. Therefore, reducing each individual collected amount by 5% is a duplication. For example, 50% of March credit sales collected in March should be calculated as $250,000 × 0.40 × 0.50. 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 [email protected]. 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. This is total March sales multiplied by the percentage of March credit sales collected during March plus total February sales multiplied by the percentage of February credit sales collected during March plus total January sales multiplied by the percentage of January credit sales collected during March. This answer neglects two things: (1) Sales made on credit each month are only 40% of the total sales. Therefore, each month's sales should be multiplied by 0.40 before multiplying it by the percentage of the month's receivables to be collected during March. (2) 60% (100% − 40% credit sales) of each month's sales are cash sales, so 60% of the total sales for March will be received during March.

Question 8 - ICMA 08.P2.041 - Budget Methodologies A. This answer results from multiplying the total budgeted cost per unit for August ($15.90) by the 260,000 units to be produced in September. Because the fixed costs will be constant for both months (fixed for the range of 200,000 to 300,000 units), the total fixed cost in September should be the same as the total fixed cost in August. Also, the cost of the batch setups will differ on a per unit basis, because it is not possible to set up a fraction of a batch at a fraction of the batch setup cost. The batch setup cost is the same per batch regardless of how many units are in the batch, which will cause a slight variation in the per unit cost from one month month to the next. See the correct answer for a full explanation. B.

(c) HOCK international, page 20

Part 1 : MOCK TEST 3 The normal batch size is 50,000 units, and the company plans production to minimize the total number of batches. Therefore, in budgeting we will use 50,000 units per batch, not the lower amounts the company has historically produced in some months. For September, 260,000 units are scheduled to be produced, which will require six batches (260,000 ÷ 50,000 = 5.2). It is not possible to set up a fraction of a batch, so we round up to 6. To find the budgeted setup cost per batch for September, we use the August amounts given in the problem. 220,000 units were budgeted for August at a total batch setup cost of $880,000. 220,000 ÷ 50,000 units per batch = 4.4 batches. So five batches would have been set up, and the setup cost per batch budgeted in August was $880,000 ÷ 5, or $176,000 per batch. Thus, the total batch setup cost for September will be budgeted at $176,000 × 6 batches, or $1,056,000. Total budgeted costs for September are: Variable cost: 260,000 units × $6.40 = $1,664,000. Fixed cost: given in the problem as $1,210,000 for August when production was budgeted at 220,000 units. The problem says that the fixed costs are unchanged within a production range of 200,000 to 300,000, so the August fixed cost also applies to a production level of 260,000 units for September. Setup cost is $1,056,000, as calculated above. The total budgeted production cost for September is $1,664,000 + $1,210,000 + $1,056,000 = $3,930,000. C. This answer results from two errors: (1) adjusting the fixed costs for the increased level of production and (2) keeping the setup costs constant at $880,000. The problem tells us that fixed costs are unchanged within a production range of 200,000 to 300,000 units per month, so fixed costs for September should remain at $1,210,000 for a volume of 260,000 units. The batch setup cost will increase for September, as the additional units to be produced in September will require an additional setup. Using 50,000 as the number of units per batch, we will need 4.4 batches in August (rounded up to 5 batches) and 5.2 batches in September (rounded up to 6 batches). The September batch setup cost should be calculated by dividing the August setup cost by 5 and multiplying that by the 6 batches required in September. D. The calculation of the variable and fixed costs is correct, but the cost used for setup cost in September is the same as August's setup cost. Because the number of units produced increases from August to September, the number of batches will also increase and therefore the cost of batch setups will increase in total. During August, 220,000 ÷ 50,000, or 4.4 batches were planned. In September, 260,000 ÷ 50,000, or 5.2 batches were planned. Obviously, it is not possible to set up a partial batch for a fraction of the cost of setting up a full batch. Therefore, the budgeted batch setup cost for August would include 5 batch setups while the budgeted batch setup cost for September would include 6 batch setups. The September batch setup cost should be calculated by dividing the August setup cost by 5 and multiplying that by the 6 batches required in September.

Question 9 - CMA 695 H6 - Budget Methodologies A. This is the amount needed for production in August. See the correct answer for a complete explanation. B. This answer does not include the units needed for ending inventory. See the correct answer for a complete explanation. C. This answer results from including 100% of the September production requirement of raw materials in the August ending inventory instead of only 60% of September's production requirement. D.

(c) HOCK international, page 21

Part 1 : MOCK TEST 3 The basic equation for materials inventory is: Beginning Inventory + Units Purchased − Units Used = Ending Inventory. Inventory at the end of each month (and thus the beginning of the next month) needs to be at least 60% of the next month's planned usage. We already know the beginning inventory on August 1, because the July 31 ending inventory is given in the problem as 4,200 units. The ending inventory for August needs to be 60% of September's planned usage of 1,800 tables × 4 legs, which is 4,320. The number of units to be used during the month of August will be the planned production of 1,600 × 4, or 6,400. Therefore, the equation to solve is: 4,200 + P − 6,400 = 4,320. Solving for P, we get P = 4,320 − 4,200 + 6,400 and P = 6,520.

Question 10 - CMA 688 5.25 - Probability A. 10% is the probability that S104 will be selected by a customer. B. The probability that a customer will select a P104 is given. C. In the question 10 random numbers, 0 to 9, are used. 0 and 1 (2 numbers in total) represent customers who choose a P104. There are 10 numbers in total. Therefore, the probability that a customer will select a P104 is 2 out of 10, or 2 ÷ 10, which is 20%. D. 50% is the probability that a customer will select X104.

Question 11 - CMA 697 4.22 - Risk, Uncertainty and Expected Value A. Cost of goods sold averages 80% of sales. In order to determine the expected value of cost of goods sold, we first need to calculate the expected value for sales. Cost of goods sold will be equal to 80% of the sales value. The expected sales can be calculated by multiplying each of the possible outcomes by the probability that it will occur and adding the products together. When we do this, we get $84,000 as the expected sales [($60,000 × 0.25) + ($85,000 × 0.4) + ($100,000 × 0.35)]. The expected value of cost of goods sold is 80% of this, or $67,200. B. $68,000 is the cost of goods sold calculated using the sales estimate with the highest probability level. C. $85,000 is the sales estimate with the highest probability level. The problem asks for the expected value of Philip's budgeted cost of goods sold. D. $84,000 is the expected value for sales in 2013. The problem asks for the expected value of Philip's budgeted cost of goods sold.

Question 12 - CMA 693 3.29 - Performance Measures A. This question asks which of these allocation methods would lead to negative (dysfunctional) behavior on the part of managers. By not allowing cost overruns in the service departments to be passed to other departments, this will motivate the service departments to control their costs. B. This question asks which of these allocation methods would lead to negative (dysfunctional) behavior on the part of managers. The allocation of costs based on usage is a reasonable method for the allocation of these costs. (c) HOCK international, page 22

Part 1 : MOCK TEST 3 C. This question asks which of these allocation methods would lead to negative (dysfunctional) behavior on the part of managers. If a division receives more allocated costs for increased levels of sales, this will serve as a minor demotivator for the manager of the divisions. Also, using ROI to measure divisional performance is probably not the best method since the denominator in ROI will include things that are outside the control of the divisional managers. Furthermore, use of ROI to evaluate divisional performance could lead to managers' rejecting profitable new investments because their ROI is lower than the divisions' historical ROI and could bring down future ROI. D. This question asks which of these allocation methods would lead to negative (dysfunctional) behavior on the part of managers. By allocating costs equal to a market value of the services provided, the management of the divisions will use the services in the necessary manner.

Question 13 - CMA 1292 3.22 - Responsibility Centers and Reporting Segments A. The difference between segment manager performance and segment performance is noncontrollable fixed costs that are traceable. Direct variable costs of production are included in both measures. B. The difference between segment manager performance and segment performance is noncontrollable fixed costs that are traceable. Unallocated fixed costs are not used in either measure. C. The difference between segment manager performance and segment performance is noncontrollable fixed costs that are traceable. These are fixed costs that are controlled by others. D. The difference between segment manager performance and segment performance is noncontrollable fixed costs that are traceable. Direct fixed costs controlled by the segment manager are included in both measures.

Question 14 - ICMA 10.P1.101 - Manufacturing Input Variances -- Materials and Labor A. A company’s "value chain" is its chain of activities for transforming inputs into the outputs that customers value. This process of transformation includes all of the primary activities (business functions) that add value to the product or service, as well as support activities. It involves functions from R&D through production to marketing and sales, and on to customer service, including the activities that play supporting roles such as information systems, materials management, and human resources. When a company has a favorable labor price (rate) variance, it is because the company has paid hourly wage rates that are lower than the standard wage rates. Usually, that occurs when the company has employed workers who are less qualified than the workers they expected to have. Use of less qualified workers can lead to a higher probability that the products produced and sold will be of lower quality and have more defects. Lower quality products and higher defective rates will lead to increased costs for customer service, as the customers who buy the products will have more difficulty with them. It can also lead to higher warranty costs, because more products will need to be repaired or replaced for customers during the warranty period. The amount gained from the favorable labor price variance, and possibly even more, may be lost through greater unfavorable variances further down the value chain. B. A direct labor price variance is not caused by actual production volume being less than budgeted production volume. C. There is no reason to believe that circumstances giving rise to the favorable variance will not continue in th future. (c) HOCK international, page 23

Part 1 : MOCK TEST 3 D. The labor efficiency variance measures whether human resources are being used efficiently. The labor price (rate) variance does not.

Question 15 - ICMA 10.P1.129 - Responsibility Centers and Reporting Segments A. The problem does not say whether the Green Division is operating at capacity or whether it has excess capacity adequate to produce the internal order. This answer choice would be correct only if Green Division has excess capacity. If Green Division does not have excess capacity, we need to include the opportunity cost of lost sales as another cost that needs to be covered by the internal order. Since we don't know the status of Green Division's capacity, we cannot state that the corporate policy would encourage this action from Green. B. If Green Division is operating at full capacity, it will have an opportunity cost for lost sales as another cost that would need to be covered by the internal order. The opportunity cost would be the contribution margin that the lost sales would have provided. Green Division would not accept the sale to Red Division because doing so would cause Green Division's profits to decrease. C. The problem does not say whether the Green Division is operating at capacity or whether it has excess capacity adequate to produce the internal order. This answer choice would be correct only if Green Division is operating at capacity and thus would have an opportunity cost to accept the internal order. Since we don't know the status of Green Division's capacity, we cannot state that the corporate policy would encourage this action from Green. D. If the Green Division does not have to give up any external sales in order to produce the order for Red Division, it will sell the product to the Red Division at the company's internal sales price of cost plus 10%, even though the markup on the sale will not be as great as that of a sale to an external customer would be. Since the Green Division does not have an external customer to use the excess capacity, the internal sale will add to Green Division's operating income. Green Division's operating income will be higher under the circumstances if it accepts the internal sale at the lower profit margin than if it turns it down.

Question 16 - ICMA 10.P1.124 - Responsibility Centers and Reporting Segments A. Any transfer price that is imposed on the managers of the two divisions may not be acceptable to one or both managers. B. Any transfer price that is imposed on the managers of the two divisions may not be acceptable to one or both managers. C. The best process for establishing a transfer price between different divisions is for the managers of the respective divisions to negotiate the price. The best price is usually the market price when a market price exists, but that still needs to be acceptable to both division managers. And if the market price is not acceptable to one or both managers for some reason, a different price should be negotiated (without violating any tax laws of the countries and/or other taxing jurisdictions involved. D. Any transfer price that is imposed on the managers of the two divisions may not be acceptable to one or both managers.

Question 17 - CIA 1189 IV.17 - Manufacturing Input Variances -- Materials and Labor (c) HOCK international, page 24

Part 1 : MOCK TEST 3 A. The labor rate variance is calculated as follows: (Actual Rate − Standard Rate) × Actual Hours. The actual labor rate was $8.70 ($27,840 ÷ 3,200). The standard labor rate was $8. The actual hours is 3,200. The labor rate variance is ($8.70 − $8.00) × 3,200 unfavorable. The actual labor rate was greater than the standard labor rate, so the variance is unfavorable. B. This is the direct labor efficiency variance. The question asks for the direct labor rate variance. C. The actual labor rate was greater than the standard labor rate, so the variance is unfavorable. D. This is the difference of actual labor cost of $27,840 and the standard labor cost for the scheduled level of production of $24,000 ($8 × 2.5 hours × 1,200 units). Furthermore, the actual labor rate was greater than the standard labor rate, so the variance is unfavorable.

Question 18 - ICMA 10.P1.222 - Shared Service Cost Allocation A. The dual-rate allocation method can be used with either the direct method, the step-down method, or the reciprocal method of cost allocations. It simply means that fixed costs and variable costs are allocated separately. There is nothing about the dual-rate method that necessarily either recognizes or does not recognize the mutual services rendered by support departments to other support departments. B. The direct allocation method does not recognize the mutual services rendered by support departments to other support departments at all. The reciprocal method is the only service cost allocation method that recognizes all of the services that are provided by the service departments to the other service departments. C. The step-down allocation method recognizes some but not all of the mutual services rendered by support departments to other support departments. The reciprocal method is the only service cost allocation method that recognizes all of the services that are provided by the service departments to the other service departments. D. The reciprocal method is the only service cost allocation method that recognizes all of the services that are provided by the service departments to the other service departments. Therefore, it is the method that best recognizes the mutual services rendered by support departments to other support department.

Question 19 - HOCK CMA P3A H22 - Business Process Improvement A. In analyzing why some companies outperform others, we see that it comes in great part from their pursuit of responsiveness to customers' needs and customer satisfaction. B. This could detract from gaining and sustaining competitive advantage. C. This could detract from gaining and sustaining competitive advantage. D. This could detract from gaining and sustaining competitive advantage.

Question 19 - HOCK CMA P3A H22 - Strategic Planning (c) HOCK international, page 25

Part 1 : MOCK TEST 3 A. In analyzing why some companies outperform others, we see that it comes in great part from their pursuit of responsiveness to customers' needs and customer satisfaction. B. This could detract from gaining and sustaining competitive advantage. C. This could detract from gaining and sustaining competitive advantage. D. This could detract from gaining and sustaining competitive advantage.

Question 20 - CIA 1185 IV.11 - Joint Products and Byproducts A. This answer results from using the sales value after further processing, net of further processing costs, for Product X to allocate the joint cost. However, since Product X can be sold at the splitoff point, its sales value at the splitoff point should be used to allocate the joint cost. Net realizable value of one product and the sales value at splitoff for the other product can be used if the first product has no sales value at splitoff because it cannot be sold at splitoff. But whenever a product can be sold at the splitoff point, that sales value at the splitoff point should be used for allocating the joint cost, even if the product will be processed further. B. This is how much would be allocated if the joint costs were allocated equally. C. This is the total amount of joint costs that need to be allocated. D. The net realizable value method is generally used instead of the sales value at splitoff method only when selling prices for one or more products at splitoff do not exist. Since both products do have sales prices at the splitoff point, we use their relative sales values at the splitoff point in order to allocate the joint costs, even though one product will be processed further. Using the relative sales value method, we will allocate the $10,000 of joint costs to the different products. Since product X has a sales value at splitoff of $12,000 and Y has a sales value at splitoff of $8,000, the total sales value is $20,000. 60% of this is from product X, so product X will receive 60%, or $6,000, of the joint costs.

Question 21 - CMA 1295 3.23 - Overhead Allocation A. Overhead was overapplied, but this would be a credit balance in the account. B. There would be a credit balance in the account, but this would represent an overapplied amount, not an underapplied amount. C. This is incorrect because the account balance would be a credit and this would represent an overapplied amount. D. When the actual costs were incurred, the factory overhead account was debited for $132,000. When the overhead was applied, the account was credited for $140,000 (70% of the $200,000 labor cost). This leaves a credit balance of $8,000 in the account and this represents an overapplied amount since the applied overhead was greater than the actual overhead incurred.

(c) HOCK international, page 26

Part 1 : MOCK TEST 3 Question 22 - ICMA 10.P1.217 - Shared Service Cost Allocation A. The management of ROX Company wishes to encourage all other departments to use the legal department when it is needed and not refrain from calling them because they know they will be charged. Allocating the legal costs on any basis would encourage the user departments to limit their use of the legal department, possibly to the corporation's detriment. B. The management of ROX Company wishes to encourage all other departments to use the legal department when it is needed and not refrain from calling them because they know they will be charged. Allocating the legal costs on any basis would encourage the user departments to limit their use of the legal department, possibly to the corporation's detriment. C. The management of ROX Company wishes to encourage all other departments to use the legal department when it is needed and not refrain from calling them because they know they will be charged. Therefore, management should not charge the user departments anything for their usage of the legal department and should absorb its costs as a corporate expense. Allocating the legal costs on any basis would encourage the user departments to limit their use of the legal department, possibly to the corporation's detriment. D. The management of ROX Company wishes to encourage all other departments to use the legal department when it is needed and not refrain from calling them because they know they will be charged. Allocating the legal costs on any basis would encourage the user departments to limit their use of the legal department, possibly to the corporation's detriment.

Question 23 - ICMA 10.P1.161 - Overhead Allocation A. This is the indirect non-labor related costs divided by the direct labor hours. This is partially correct, as the direct labor hours are the activity base to use for allocation of indirect costs in a normal costing system. However, all of the indirect costs, labor and non-labor, need to be included in the calculation. B. This answer results from either dividing direct costs by direct labor hours or by dividing total indirect costs by total direct and indirect labor hours. The question is asking for an allocation of indirect costs. The number of indirect hours are irrelevant here, as indirect costs are allocated based on an activity base that is directly related to production, such as direct labor hours. In a normal costing system, the activity base used is the actual amount of the allocation base that was used in producing the product. C. This is the indirect labor costs divided by the direct labor hours. This is partially correct, as the direct labor hours are the activity base to use for allocation of indirect costs in a normal costing system. However, all of the indirect costs, labor and non-labor, need to be included in the calculation. D. In a normal costing system, the budgeted indirect cost allocation rate is calculated by dividing the total indirect costs by the budgeted amount of the allocation base to be used in producing the product. As given in this question, that is 250,000 direct labor hours. The indirect costs are $5,000,000 for labor-related costs and $7,000,000 for non-labor-related costs, for total indirect costs of $12,000,000. Dividing $12,000,000 by 250,000 direct labor hours results in an indirect application rate of $48 per direct labor hour. Note that in a normal costing system, costs are applied to production on the basis of the actual usage of the allocation base multiplied by the application rate. This is different from standard costing, where costs are applied to production on the basis of the allowed usage of the allocation base for the actual output multiplied by the application rate.

(c) HOCK international, page 27

Part 1 : MOCK TEST 3 Question 24 - CMA 689 4.13 - Classifications of Costs A. Prime costs are the costs of direct material and direct labor. B. Sunk costs are costs that have already been spent and cannot be changed by current or future decisions. Not all of the fixed overhead costs are sunk costs, though it is possible that some of them are. C. Because the costs for fixed overhead relate to items like rent, these are committed costs. A committed cost is a cost for the company's infrastructure. Committed costs are costs that are required in order to establish and maintain the readiness to do business. Examples are fixed assets such as property, plant and equipment and intangible assets such as the purchase of a franchise. They are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation. D. Discretionary costs are costs that do not need to be incurred in the short-term. Since these are production costs, they do need to be incurred and are not discretionary costs.

Question 25 - ICMA 10.P1.157 - Classifications of Costs A. This is a true statement. Variable costs per unit produced do not change as production volume changes. B. This is a true statement. As production volume increases, total electricity cost will increase due to the variable component of total cost. C. This is a true statement. As production increases, fixed costs remain the same within the relevant range. As a result, as production increases, the same amount of the fixed cost component of the electricity will be spread over a greater number of units. That means the fixed component of the electricity cost per unit produced will decline. D. The total electricity cost per unit of production will decrease as production volume increases. The reason for this is in the fixed component of the electricity cost. As production increases, fixed costs remain the same within the relevant range. As a result, the same amount of fixed cost is being spread over a greater number of units as production increases. That means the fixed cost per unit produced will decline. The variable cost per unit will stay the same while the fixed cost per unit declines. Therefore, the total cost per unit will decline.

Question 26 - CMA 1295 3.27 - Classifications of Costs A. An indirect cost is a cost that does not have a clear and observable relationship to an activity base. B. A sunk cost is a cost that has already been spent and cannot be changed by any current or future activity. A sunk cost does not have an observable or direct relationship to an activity base. C. A target cost is the goal that the company will try to produce the product for. This does not have any relationship to an activity base as it is simply management's goal for the cost of production. D. Engineered costs are costs that have a definite physical relationship to the activity base or measure. They result from activities that have well defined cause and effect relationships between inputs and outputs and

(c) HOCK international, page 28

Part 1 : MOCK TEST 3 between costs and benefits. They are called “engineered costs” because engineers can specify precisely how many inputs are required to generate a specific output. The value added by activities associated with engineered costs is fairly clear and easy to measure. Engineered costs are variable costs in their cost behavior. Direct materials and direct labor are engineered costs. Indirect resources that vary with product specifications and production volume are also engineered costs, though the cause and effect relationships are not as precise for indirect resources as they are for direct labor and direct materials. Relationships for indirect resources can be established using statistical techniques such as regression analysis and correlation analysis.

Question 27 - CMA 1288 3.25 - Internal Controls A. The controller does not have the primary responsibility for establishing and maintaining internal control. B. The treasurer does not have the primary responsibility for establishing and maintaining internal control. C. Internal control is a method, or process, that is carried out by an entity's board of directors, management, and other personnel, and designed to provide reasonable assurance that the company's objectives will be achieved. D. Though the internal auditor does a lot of work in respect to the internal control system, the internal auditor is not responsible for establishing and maintaining internal control.

Question 28 - CMA 1288 3.21 - Internal Controls A. Although maintenance of statistical production analyses is a control objective, it is not an accounting control. B. Policies and procedures for maintenance of control over unused checks are accounting controls because they relate to the control objective of safeguarding cash. C. Although the marketing analysis of sales generated by advertising projects is a control objective, it is not an accounting control. D. Although quality control results and their timely reporting and review are a control objective, they are not accounting control.

Question 29 - CIA 1196 II.11 - Internal Auditing A. Organizational policies and procedures delegating authority and assigning responsibilities are a good criterion against which to judge current operations. B. Textbook illustrations of generally accepted good treasury function practices are good criteria against which to judge current operations. C. Codification of best practices of the treasury function in relevant industries is a good criterion against which to judge current operations. D. Since the operations of the treasury function as documented during the last engagement may not have been in compliance with organizational policies and procedures, these operations are not a desirable (c) HOCK international, page 29

Part 1 : MOCK TEST 3 criterion against which to judge current operations.

Question 30 - CIA 592 I.40 - Internal Auditing A. Receiving reports would give the date an item was received and the quantity that was received. They would not show whether the vendor offered a discount or whether payment was made within the discount period. B. Canceled checks would give the date and the amount of payment. They would not indicate whether the vendor offered a discount or whether payment was made within the discount period. C. Paid vendor invoices would show the invoice date, the amount invoiced, any discount offered for prompt payment, amount paid and date paid. D. Purchase orders would give the date an item was ordered, the quantity ordered, and the anticipated price. They would not show whether the vendor offered a discount or whether payment was made within the discount period.

Question 31 - CIA 1194 3.22 - Systems Controls and Security Measures A. Review of insurance coverage is an aspect of risk analysis, and a much narrower concept than contingency planning. B. Electronic vaulting is a technology that may be used to address contingency planning issues. C. Contingency planning is a management activity which is essential to ensure continuity of operations in the event a disaster impairs information systems processing. D. Change control procedures do not ensure continuity of operations.

Question 32 - CMA 680 5.15 - Systems Controls and Security Measures A. It is unlikely the computer malfunctioned during the printing of the quantity. B. R is not a hexadecimal character. Hexadecimal is usually written using the symbols 0-9, and A-F. C. It is not possible that the quantity of shirts sold is 2.5. The quantity has to be a whole number. D. The most likely explanation for the error is that the program did not contain a data checking routine for input data, e.g., field check. A field check would make sure that the input field contains only the correct type of characters, for example only numeric characters for a quantity field, etc.

Question 33 - CIA 1196 1.36 - Systems Controls and Security Measures A. Access to the database (tables) of employee rates should be severely restricted to authorized personnel within the human resources department or payroll personnel. Proper supervisor personnel should approve the rates, but not have access to the tables.

(c) HOCK international, page 30

Part 1 : MOCK TEST 3 B. The concern is not with bona fide employees. The concern is to gain assurance that all changes to the table are properly authorized and input into the system. Further, one pay rate will apply to more than one employee. C. This would be the most appropriate control because it (a) requires supervisory signed approval, (b) limits access to the tables to selected personnel within the payroll department, and (c) provides independent reconciliation of all changes. D. Edit checks will not detect invalid changes.

Question 34 - CIA 589 II.7 - Internal Controls A. Establishing accountability for receipts at the earliest possible time should be done before the deposit is prepared or the entry to reflect the receipt is posted. However, it would not detect bank deposits that are recorded but never made. B. Linking receipts to other internal accountabilities is done before the deposit is prepared or the entry to reflect the receipt is posted. It would not detect bank deposits recorded but never made. C. Since a bank reconciliation compares the bank statement with the company records, a bank reconciliation prepared by a person not involved in preparing the deposit or posting the entry to reflect the receipt would detect whether bank deposits that have been recorded have not been made. D. Consolidation of cash receiving points is done before the deposit is prepared or the entry to reflect the deposit is posted. It would not detect bank deposits recorded but never made.

Question 35 - CIA 1196 III.40 - Systems Controls and Security Measures A. Unexplainable losses of, or changes to data are an indication of computer viruses. B. Numerous copyright violations are compliance problems. C. Inadequate backup, recovery, and contingency plans are weaknesses of operational planning. D. Power surges are primarily caused by power supply problems.

Question 36 - CIA 1196 I.8 - Internal Auditing A. The city's internal auditors are responsible for determining whether the city is in compliance with the grant requirements. Whether the budget was reviewed and approved by supervisory personnel within the granting agency is outside the scope of the audit and therefore should not be performed. B. Comparing actual results with budgeted results, determining deviations and whether such deviations have been approved by appropriate officials should be performed because it can determine whether the city is following procedures to ensure that the budget is adhered to, as required by the grant. C. Examining a sample of expenditures should be performed because it can determine whether the city is following procedures to ensure that only allowable costs are charged to the program, as required by the grant.

(c) HOCK international, page 31

Part 1 : MOCK TEST 3 D. One of the requirements of the grant is that the city adopt a budget for the program. In order to determine whether the city is in compliance with the grant requirements, the internal auditor should verify whether the budget was reviewed and approved by supervisory personnel within the city.

Question 37 - CIA 1195 I.67 - Internal Controls A. Control encompasses much more than controls designed to ensure the correctness of processing. Furthermore, control is designed and instituted by management, not by accountants or auditors. B. While control procedures may be designed from the bottom up, the concept of control flows from the top down. C. A control is any action taken by management to enhance the likelihood that established goals and objectives will be achieved. D. This is not the definition of a control.

Question 38 - CMA 686 3.20 - Internal Controls A. Requiring two signatures on a check would not prevent resubmission and double paying of vendor invoices after they have been paid. B. A voucher is an internal accounting document that is usually created after the company has received an invoice from a vendor or service provider and has successfully matched the invoice to a purchase order. In other words, it is created after the company has determined that this invoice is genuine and should be paid. The voucher communicates the company's intent to make the payment to the vendor or service provider. Among other things, the voucher contains detailed information about the transaction, including the payee, the amount of the payment to be made, and a description of the transaction. Based on the authorization in the voucher, the check is then created to pay the invoice. The accounting system will show that a voucher has been created for the purchase order issued for that transaction and that it has been cancelled; and a second voucher cannot be created. So if a voucher is cancelled after the check has been written and signed, payment cannot be made a second time even if the vendor does submit a duplicate invoice, because there is no active voucher to authorize a second payment. Therefore, the voucher and all supporting documents should be cancelled by personnel in the treasurer's office at the time the check is signed. C. The account payable personnel should not have access to checks after they have been signed. D. Cancellation of vouchers should not take place until the check in payment of the invoice has been signed.

Question 39 - CMA 1290 P2 Q6 - Accounts Receivable and Inventory A. The credit is not recorded to accounts receivable, and this amount fails to include the write-off of the one $10,000 account in the calculation. (c) HOCK international, page 32

Part 1 : MOCK TEST 3 B. The journal entry to record the bad debt expense requires a debit to bad debt expense and a credit to the allowance for doubtful debts account. C. The journal entry to record the bad debt expense requires a debit to bad debt expense and a credit to the allowance for doubtful debts account. D. The journal entry to record the bad debt expense requires a debit to bad debt expense and a credit to the allowance for doubtful debts account. Since the percentage of receivables method is to be used, the amount is calculated by determining what the ending balance in the allowance account should be and then determining what entry is required to bring the balance to that level. Using the information in the aging schedule: [($390,000 × 0.01) + ($115,000 × 0.05) + ($210,000 × 0.15) + ($25,000 × 0.40)] = $51,150, which is the amount that should be in the allowance account at the end of the period. There was already a credit balance of $16,500 in the account. However, this $16,500 was prior to the write off of $10,000 of receivables that will reduce the credit balance in the allowance account to $6,500. To increase a credit balance of $6,500 to a credit balance of $51,150, a credit of $44,650 is needed. The corresponding debit is to bad debt expense.

Question 40 - CMA 695 P2 Q10 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets A. Any cost that is incurred in order to get the asset ready and available for use should be included in the cost of that asset. Freight and handling are costs necessary to get the asset ready and available for use. B. Any cost that is incurred in order to get the asset ready and available for use should be included in the cost of that asset. Insurance while in transit is a cost necessary to get the asset ready and available for use. C. Any cost that is incurred in order to get the asset ready and available for use should be included in the cost of that asset. Assembly and installation are costs necessary to get the asset ready and available for use. D. Any cost that is incurred in order to get the asset ready and available for use should be included in the cost of that asset. Interest that will be incurred on the note payable is a financing decision and is not necessary in order for the asset to be used. This interest will be recognized as interest expense when it is incurred.

Question 41 - CMA 1285 P4 Q12 - Revenue Recognition A. This is the total profit on the sale. Under the installment method, this profit will be recognized only as cash is collected. See the correct answer for a complete explanation. B. This is the amount of cash collected during the period. See the correct answer for a complete explanation. C. This question asks how much profit should be recognized this period, and this is done by multiplying the cash received this period by the profit % on the sale. The cash received this period was $80,000 ($20,000 downpayment and $60,000 from the first of the three equal installments), and the profit % is calculated as the profit from the sale divided by the sales price. This gives a profit percentage of 60% ($120,000 profit ÷ $200,000 sales price). Multiplying this by the cash received during the period gives $48,000 of profit to recognize in the current period. D. There would not be any profit recognized under the cost recovery method, but the question is about the installment (c) HOCK international, page 33

Part 1 : MOCK TEST 3 method. See the correct answer for a complete explanation.

Question 42 - CIA 0592 P4 Q34 - Revenue Recognition A. This question asks how much profit should be recognized this period under the installment method. There will be two sources of profit for the seller. The first is the profit that is recognized on the cash collected. This is done by multiplying the cash received this period by the profit % on the sale. The cash received this period was $100, and the profit % is calculated as the profit from the sale divided by the sales price. This gives a profit percentage of 33% ($500 profit ÷ $1,500 sales price). Multiplying this by the cash received during the period gives $33 of gross profit to recognize in the current period from the collection of cash. The second source of profit is from interest. The interest rate is 1% per month on the unpaid amount. The unpaid balance outstanding for December was $1,400 and 1% of this is $14. In total, the seller recognizes $47 of profit. B. The answer results from using the gross profit percentage as the cost of sales percentage and from omitting the interest income. C. This answer includes only the profit from the interest and does not include the profit that is recognized on the cash collected from the sale. D. This answer includes only the profit from the cash collected on the sale and does not include the profit that is recognized from interest.

Question 43 - CIA 0596 P4 Q3 - Revenue Recognition A. Under the installment method, profit is recognized only as the company receives money from the customer. For each dollar that is received the company will recognize profit that is equal to the gross profit percentage. For this company, the year 3 gross profit percentage is 50%. Since they received $4,000 in cash from the customers, they will recognize $2,000 in gross profit from installment sales in year 3 related to year 3 sales. Since the question is how much profit is deferred, we need to subtract this $2,000 from the total profit on year 3 installment sales. The total gross profit was $10,000, so the amount deferred to future periods is $8,000. B. This is the amount of gross profit to be recognized from year 1 sales ($800), plus year 2 sales ($200), plus year 3 sales ($2,000). So, $800 + $200 + $2,000 = $3,000. The question asks for the gross profit amount from year 3 sales to be deferred to future years. C. This is the total gross profit from year 3 sales. D. This is the amount of gross profit that is recognized in year 3 from year 3 sales.

Question 44 - CMA 691 P2 Q2 - Accounts Receivable and Inventory A. This is the answer for the perpetual LIFO method. See the correct answer for a complete explanation. B. This is not the correct answer. Please see the correct answer for an explanation.

(c) HOCK international, page 34

Part 1 : MOCK TEST 3 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 [email protected]. 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 [email protected]. 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. Under the FIFO method (perpetual or periodic) the ending inventory will consist of the most recently purchased units. In this question, the company had a total of 4,700 units on hand during the period. They sold 3,400, leaving 1,300 units in ending inventory. Under the FIFO method, these 1,300 units will be the most recently purchased units. Therefore, ending inventory will consist of 1,300 of the units that were purchased on May 20, for $2.90 each. This gives an ending inventory of $3,770 (1,300 × $2.90).

Question 45 - CMA 696 P2 Q5 - Accounts Receivable and Inventory A. Cost of goods sold was not understated because the items sold were excluded from ending inventory. B. Accounts receivable was affected because the sale was not recorded. Cost of goods sold was not understated because the items sold were excluded from ending inventory. C. Inventory and cost of goods sold were not overstated because the items sold were excluded from ending inventory. D. Because the goods were not included in ending inventory, inventory is not affected. Also, because the inventory was correctly recorded, cost of goods sold was not affected by the error. However, by failing to record the sale, both accounts receivables and sales were understated.

Question 46 - CMA 691 P2 Q3 - Accounts Receivable and Inventory 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 [email protected]. 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 correct answer under the periodic LIFO method. See the correct answer for a complete explanation.

(c) HOCK international, page 35

Part 1 : MOCK TEST 3 C. Under the perpetual LIFO method, each time that inventory is sold the company makes the determination of which units were the most recently purchased, and which units were therefore sold. In the first sale on the 16th, the units that were sold were all of the units purchased on the 7th as well as 200 of the units that were in beginning inventory. The units that were sold on the 28th were 1,400 of the units that had been purchased on the 20th. This means that in ending inventory were 1,200 units that had been in beginning inventory and 100 of the units purchased on the 20th. Given their respective costs of $2.45 and $2.90, this gives an ending inventory of $3,230 [(1,200 × 2.45) + (100 × $2.90). D. This answer results from assuming the periodic weighted average cost method is being used. The question says to use the perpetual LIFO method.

Question 47 - CMA 0687 3.12 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets A. This would be the correct way to account for the investment income under the equity method,not under the fair value method. See the correct answer for a complete explanation. B. This is 30% of the net income of Mattiy minus 30% of the dividends paid by Mattiy. This is not the correct way to account for investment income under either the fair value method or under the equity method. C. Under the fair value method, investment income is recognized as dividends are received. This is not the amount of dividends received from Mattiy by Boggs. See the correct answer for a complete explanation. D. Under the fair value method, investment income is recognized as dividends are received. Since Boggs owned 30% of Mattly, they would recognize as income 30% of the dividend that Mattly distributed, or $30,000.

Question 48 - CMA 688 4.22 - Investments, PP&E (Fixed Assets), and Intangible and Other Assets A. This answer is incorrect. See the correct answer for a complete explanation. B. This answer is incorrect. See the correct answer for a complete explanation. C. Consolidated financial statements are prepared as though the parent (the investor corporation) and the subsidiary or subsidiaries (the investee[s]) are a single economic entity, not the legal entities that exist. D. This answer is incorrect. See the correct answer for a complete explanation.

(c) HOCK international, page 36