MC_FINAL EXAM SET 5

1. A Management Advisory Services engagement generally involves the following activities

1. Post engagement follow-up
2. Implementing the recommendation
3. Conducting the engagement
4. Negotiating the engagement
5. Preparing for and starting the engagement
6. Evaluating the engagement
7. Preparing and presenting the report and recommendation
The proper order in which the above should be undertaken is
A. 4, 3, 5, 7, 2, 6 and 1
B. 3, 4, 5, 6, 7, 1 and 2
C. 7, 6, 5, 4, 3, 2 and 1
D. 4, 5, 3, 7, 2, 6 and 1

2. Solution development phase of the problem-solving process involves the following

1. Detailed development of the selected solutions
2. Choice of the preferred solution alternative
3. Evaluation of solution alternative
4. Generation of solution alternative
In what order should the above-listed activities be performed
A. 1, 2, 3, 4
B. 4, 3, 2, 1
C. 2, 1, 3, 4
D. 4, 3, 1, 2

3. Major sections of formal written report except:

A.Executive summary
B. Fees details
C. Project Background
D. Objectives and scope

4. Factors to be considered by the consultant in choosing the method of presenting the results of the
engagement except
A. Purpose of the engagement
B. Objective and scope
C. Contractual requirements or other commitments the consultant may have made regarding reports, briefings,
demonstrations
D. Time the consultant has available to prepare
5. All of the following could justify abandonment of some clients except
A. Overly specialized
B. Beneath the growing fee structure
C. Unchallenging
D. A competitor of the client has urged the consultant to drop the fomer client in exchange for an engagement
involving a much higher fee

6. The following are ways through which the consultant can establish an attitude of helpfulness towards the
client staff except
A. Maintain an "open-door"policy
B. Welcoming questions and communication with anyone at any time
C. Arrange meetings for discussion of the problem and provide written summaries of the meetings
D. Require employees to submit to him a written memo on matters they want to be clarified about

7. Sahara Distributors has a policy of maintaining inventory at 15% of the next month’s forecasted sales. The cost
of Sahara’s merchandise averages 60% of the selling price. The inventory balance as of May 31 is P63,000, and
the forecasted dollar sales for the last seven months of the year are as
follows.
June P700,000
July 600,000
August 680,000
September 800,000
October 850,000
November 900,000
December 840,000
What is the budgeted dollar amount of Sahara’s purchases for July?
a. P355,500.
b. P367,200.
c. P364,500.
d. P399,000.

8. Newman Products has received proposals from several banks to establish a lockbox system to speed up
receipts. Newman receives an average of 700 checks per day averaging P1,800 each, and its cost of short-term
funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using 360-day
year. Which one of the following proposals is optimal for Newman
A. A P.50 fee per check
B. A flat fee of P125,000 per year
C. A fee of 0.03% of the amount collected
D. A compensating balance of P1,750,000
9. A firm averages P4,000 in sales per day and is paid, on an average, within 30 days of the sale. After they
receive their invoice, 55% of the customers pay by check, while remaining 45% pay by credit card. Approximately
how much would the company show in accounts receivable on its statement of financial position on any given
date?
A. P4,000
B. P120,000
C. P48,000
D. P54,000
10. An Increase in sales resulting from an increased cash discount for promt payment would be expected to
cause
A. An increase in the operating cycle
B. An increase in the average collecting period
C. A decrease in the cash coversion cycle
D. A decrease in purchase discounts taken

11. A company is analyzing the opportunity to expand into a new market. The expansion would require an initial
investment of P261,600. Cash flows for the new market expansion are forecasted to be P120,000 for each of the
next 3 years. The company has a cost of capital of 8%. The discounted payback period for the new market
expansion would be
A. 2.0 years.
B. 2.2 years.
C. 2.5 years.
D. 2.8 years.
12. When a company offers credit terms of 3/10, net 30, the annual interest cost, based on a 360-day year is
A. 24 %
B. 24.5%
C. 35.3%
D. 55.7%

13. Jasper Company has a payback goal of 3 years of new equipment acquisitions. A new sorter is being
evaluated that costs P450,000 and has a 5 year life.
Straight-line depreciation will be used. No salvage is anticipated. Jasper is subject to a 40% income tax rate to
meet the companys payback goal, the sorter must generate reductions in annual cash operating cost of
A. P60,000
B. P100,000
C. P150,000
D.P190,000

14. The ordering costs associated with inventory management include

A. Insurance costs, purchasing costs, shipping costs and spoilage
B. Obsolescense, set-up costs, quantity discounts lost and storage costs
C. Puchasing costs, shipping costs, setup costs and quantity discounts lost
D. Shipping costs, obsolescence, set-up costs and capital invested
15. Two mutually exclusive capital expenditure projects have the following characteristics.
Project A Project B
Investment P100,000 P150,000
Net cash inflow - Year 1 40,000 80,000
Year 2 50,000 70,000
Year 3 60,000 60,000
All cash flows are received at the end of the year. Based on this information, which one of the
following statements is not correct?
a. The net present value of Project A at a cost of capital of 10% is P22,720.
b. The net present value of Project B at a cost of capital of 12% is P19,950.
c. The internal rate of return of Project B is greater than the internal rate of return of Project A.
d. The payback years for Project A is greater than the payback years for Project B.

16. Southern Company's budgeted Sales and budgeted cost of sales for the coming year are P144,000,000 and
P90,000,000 respectively. Short-term interest rates are expected to average 10%. If Southern can increase
inventory turnover from it's present level of nine times per year to a level of 12 times per year, its cost savings in
the coming year would be expected to be
A. P450,000
B. P400,000
C. P600,000
D. P250,000

17. Quint Company uses the payback method as part of its analysis of capital investments. One of its projects
requires a P140,000 investment and has the following projected before-tax cash flows.
Year 1 P60,000
Year 2 60,000
Year 3 60,000
Year 4 80,000
Year 5 80,000
Quint has an effective 40% tax rate. Based on these data, the after-tax payback period is
A. 1.5.
B. 2.3.
C. 3.4.
D. 3.7.

18. When managing cash and short-term investments, a corporation treasurer is primarily concerned with
A. Maximizing rate of return
B. Maximizing Taxes
C. Investing in Treasury bonds since they have no default risk
D. Liquidity and safety
19. The capital budgeting model that is generally considered the best model for long-range decision making is
the
A. Payback model
B. Accounting rate of return model
C. Unadjusted rate of return model
D. Discounted cash flow model

20. Capital Budgeting can be defined as the process of :

A. Planning and evaluating proposals for investment in plant assets
B. Determining the amounts of capital that will be needed for plant operations
C. Preparing the cash budgets for the year
D. Limiting monthly cash expenditures to the amount of monthly cash receipts

21. The Synergy Inc. is planning to spend P600,000 for a machine that it will depreciate on a straight-line basis
over a ten year period with no terminal disposal price. The machine will generate cash flow from operations of
P120,000 year. Ignoring incomes taxes, what is the accounting rate of return oon the net initial investment
A. 5%
B. 12%
C. 10%
D. 15%

22. Dedham Corporation has decided to include certain financial ratios in its year-end annual report to
shareholders. Selected information relating to its most recent fiscal year is provided below.
• Cash P10,000
• Accounts receivable 32,000
• Prepaid expenses 8,000
• Inventory 30,000
• Accounts payable 15,000
• Notes payable (due in 90 days) 25,000
• Bonds payable (due in 10 years)35,000
Dedham’s quick (acid-test) ratio at year end is
A. 2.00 to 1
B. 1.925 to 1
C. 1.80 to 1
D. 1.05 to 1

23. Davis Retail Inc. has current assets of P7,500,000 and a current ratio of 2.3 times before purchasing P750,000
of merchandise on credit for resale. After this purchase, the current ratio will
A. remain at 2.3 times.
B. be higher than 2.3 times.
C. be lower than 2.3 times.
D. be exactly 2.53 times.
24. A company has the following account balances.
Cash P160,000
Equipment 50,000
Inventory 35,000
Accounts receivable 25,000
Accrued wages 10,000
Long-term debt 30,000
Accounts payable 5,000
What is the company’s net working capital?
A. P180,000.
B. P205,000.
C. P220,000.
D. P225,000

25. The national government budget deficit is the

A. Total accumulation of the government's surpluses and deficits
B. Excess local and national spending over their revenues
C. The amount by which the national government's expenditures exceed its revenues in a given period
D. Amount by which liabilities exceed assets on the governments's balance sheet

26. Under the income approach, gross national product (GNP) is measure as
A. Depreciation charges and indirect business taxes + Wages + Rents + Interest + Profits - Net income earned
abroad
B.Wages + Rents + Interest + Profits
C. Depreciation charges and indirect business taxes + Wages + Rents - Interest + Profits
D. Wages + Rents + Interest - Profits + Net income earned abroad

27. The financial transactions for a country with values stated in billions of pesos appear in the next column
Gross national product (GNP) P4,000
Transfer payments 500
Corporate incomes taxes 50
Social Security contributions 200
Indirect business taxes 210
Personal Taxes 250
Undistributed corporate profits 25
Depreciation 500
Net income earned abroad for the country 0
A. P3,500
B. 3,450
C. 3,290
D. 3,475
28. Under the expenditure approach, what is not included in gross national product (GNP)
A. Net export
B. Investment
C. Government expenditure
D. Intermediate goods

29. Given the following data, what is the marginal propensity to consume
Level
Disposable Income Consumption
P40,000 P38,000
48,000 44,000
A. 1.33
B. 1.26
C. 0.95
D. 0.75

30. The movement along the demand curve from one price-quantity combination to another is call
A. Change in demand
B. Shift in the demand curve
C. Change in the quantity demanded
D. Increase in demand

31. Most definitions of consultancy would include such services related to the following except
A. Information Technolgy
B. Corporate Strategy
C. Legal Advisory
D. System & Operations Management

32. All of the following are complementary goods except

A. Margarine and butter
B. Cameras and rolls of film
C. VCRs and video cassettes
D. Razors and razor blades

33. Which Statement is False:

a. CPA's have historically been business consultants to their client
b. Management consultants are licensed and regulated by Laws
c. The primary purpose of Management consultancy is to improve the firm's use of its capabilities and resources
to achieve objectives
d. Management consultancy services are provided not only to big business enterprises but also to medium-size
and small companies
34. Which one of the firm's sources of new capital usually has the lowest after-tax cost?
A. Retained earnings
B. Bonds
C. Preferred stock
D. Common stock

35. The type of probles faces by an entity that involves conditions that have worsened and demands urgent
action is known as
A. Progressive problem
B. Opportunistic problem
C. Corrective problem
D. Unsolvable problem

36 . A preffered stock is sold for P101 per share, has a face value of P100 per share, underwriting fees of P5 per
share and annual dividends of P10 per share. If the tax rate is 40%, the cost of funds (capital) for the preferred
stock is
A. 4.2 %
B. 6.25%
C. 10%
D.10.4%
37. The basic Analytical process applied in consulting engagments include
1. Definition of problem
2. Implementation of the recommended solution to the problem
3. Development of the solution
4. Identification of objectives
5. Fact-finding and analysis
The order in which the above-mentioned steps are generally applied are
A. 1, 2, 3, 4, 5
B. 4, 1, 5, 3, 2
C. 4, 5, 1, 3, 2
D. 4, 1, 3, 5, 2

38. Hi-tech Inc. has determined that it can minimize its weighted average cost of capital (WACC) by using a debt-
equity ratio of 2/3. If the firm's cost of debt is 9% before taxes, the cost of equity is estimated to be 9% before
taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm's WACC
A. 6.48%
B. 7.92%
C. 9.36%
D. 10.80%
39. The MAS engagement that involves providing assitance to management in relation to planning, controlling
and decision making is
A. Financial Management
B. Magement Accounting
C. Taxation
D. Financial Accounting

40. Maylar Corporation has sold P50 million of P1,000 par value, 12% coupon bonds. The bonds were sold at a
discount and the corporation received P985 per bond. If the corporate tax rate is 40% , the after-tax cost of
these bonds for the first year
A. 7.31%
B. 4.87%
C. 12%
D. 7.09%

41. A personal attributie of a consultant that refers to his/her ability to view situations in perspective and take
action needed on a calm and controlled basis without being diverted from a sound, logical and ethical course by
outside pressure
A. Psychological maturity
B. Courage
C. Physiological equilibrium
D. Judgement

42. A company has P100,000 of sales, P60,000 of variable costs, and P30,000 of fixed costs. The
degree of operating leverage is
A. 0.1.
B. 0.3.
C. 0.4.
D. 4.0.

43. To attain the highest standards of professionalism, highest levels of performance and meet public interest
requirement, a CPA who provides management consultancy services that should meet the following basic
requirements except
A. Credibility
B. Professionalism
C. Confidence
D. top- of - the- line and world class facilities

44. A degree of operating leverage of 3 at 5,000 units means that a

a. 3% change in earnings before interest and taxes will cause a 3% change in sales.
b. 3% change in sales will cause a 3% change in earnings before interest and taxes.
c. 1% change in sales will cause a 3% change in earnings before interest and taxes.
d. 1% change in earnings before interest and taxes will cause a 3% change in sales
45. Which of the following statements is true
A. In Management services engagement, the independet CPA renders technical advise
B. A CPA in a management services engagement may take position that would impair its independence if the
client is not his audit client at the same time
C. Strict adherence to generally accepted accounting principles in MAS is required
D. A non-CPA is prohibited under the revised accountance law to engage in professional management advisory
services practice
46. A summary of the Income Statement of Sahara Company is shown below.
Sales P15,000,000
Cost of sales 9,000,000
Operating expenses 3,000,000
Interest expense 800,000
Taxes 880,000
Net income P 1,320,000
Based on the above information, Sahara’s degree of financial leverage is
A. 0.96.
B. 1.36.
C. 1.61.
D. 2.27.

47. In performing management advisory services, a practioner must act with

A. Integrity
B. Objectivity
C. Independence
D. All of the above

48. The use of debt in the capital structure of a firm

A. increases its financial leverage.
B. increases its operating leverage.
C. decreases its financial leverage.
D. decreases its operating leverage

49. Before undertaking as engagement, a practioner is to inform the client of all significant matters related to
the engagement such as
A. The engagement's objective
B. Scope and approach
C. Role of all personnel
D. All of the above
50. Which of the following bonds offers the most security to the bondholder
A. Junior mortgage bond
B. Senior mortgage bonds
C. Debenture bond
D. Income bond

51. Due professional care in the performance of the management advisory services engagement implies the
following except
A. Diligence and appropriate attention in carrying out the assignment
B. Systematic critical review of the work done and judgment excercised
C. Infallibility
D. None of the above

52. Which of the following is not an advantage of debt

A. Debt is paid back in cheaper pesos during inflationary periods
B. Bond holders have no control over the actions management
C. Cost of debt can lower the weighted overall cost of capital
D. All are advantages

53. Cox Company has sold 1,000 shares of P100 par, 8% preferred stock at an issue price of P92 per share. Stock
issue costs were P5 per share. Cox pays taxes at the rate of 40%. What is Cox’s cost of preferred stock capital?
A. 8.00%.
B. 8.25%.
C. 8.70%.
D. 9.20%.

54. Long-term financing leases currently

A. Show up on the balance sheet
B. Appear in the footnotes to the annual report
C. Appear on the company's income statement
D. Do not appear on any financial statement

55. The document that outlines the covenants and duties existing between bondholders and the issuing
corporation is called
A. An indenture
B. A debenture
C. Secured debt
D. Protective covenants
56. Warrants are
A. long-term options to sell shares of the issuing firm's stock
B. Fairly stable. Low risk investment
C. Investments whose value is directly related to the price of the underlying stock
D. Structured to sell for precisely their intrinsic value

57. Which of the following are advantages of leasing?

A. A lease obligation may be substantially less restrictive than the provisions of a bond indenture
B. There may be no down payment as in a purchase
C. The negative effects of obsolescence may be eliminated
D. All of the above

58. In a project feasibility study, which of the following is true

A. The study is not affected by any significant change in actual business conditions as compared to the
assumptions used in the making the forecast
B. The study is based on available information and opinions of the party involved in the preparation of the study
C. A and B
D. None of the above

59. Lucky Products, Inc. has the follow in balance sheet:

Current assets P 5,000 Accounts Payable P1,000
Net fixed assets 5,000 Notes Payable 1,000
Long term debt 4,000
Common equity 4,000
Total Assets P10,000 Total claims 10,000
Business has been slow, therefore, fixed assets are vastly underutilized. Management believes it can double sales
next year with the introduction
of a new product. No new fixed assets will be required, and management expects that there will be no earnings
retained next year.
What is next year's additional funding requirement?
A. 0
B. P4,000
C. P6,000
D. P13,000
60. Ace Manufacturing plans to produce two products, Product C and Product F, during the next year,
with the following characteristics.
Product C Product F
Selling price per unit P10 P15
Variable cost per unit 8 10
Expected sales (units) 20,000 5,000
Total projected fixed costs for the company are P30,000. Assume that the product mix would be the same at the
breakeven point as at the expected level of sales of both products. What is the projected number of units
(rounded) of Product C to be sold at the breakeven point?
A. 2,308 units.
B. 9,231 units.
C. 11,538 units.
D. 15,000 units.

61. A company uses cost-volume-profit analysis to evaluate a new product. The total fixed costs of production
per year are P160,000. The unit variable cost is P50. Which one of the following combinations of unit selling
price and breakeven number of units sold per year is correct?
A. P50 selling price and 3,200 breakeven number of units.
B. P100 selling price and 1,600 breakeven number of units.
C. P25 selling price and 6,400 breakeven number of units.
D. P70 selling price and 8,000 breakeven number of units.

62. Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units for the
next 5 years and then be discontinued. New equipment will be purchased for P1,200,000 and cost P300,000 to
install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes
and 3 years for tax purposes. At the end of the fifth year, it will cost P100,000 to remove the equipment, which
can be sold for P300,000. Additional working capital of P400,000 will be required immediately and needed for
the life of the product. The product will sell for P80, with direct labor and material costs of P65 per unit. Annual
indirect costs will increase by P500,000. Kell’s effective tax rate is 40%.
In a capital budgeting analysis, what is the cash outflow at time 0 (initial investment) that Kell should use to
compute the net present value?
A. P1,300,000
B. P1,500,000
C. P1,700,000
D. P1,900,000
63. Mintz Corporation is considering the acquisition of a new technologically efficient packaging machine at a
cost of P300,000. The equipment requires an immediate, fully recoverable, investment in working capital of
P40,000. Mintz plans to use the machine for five years, is subject to a 40%
income tax rate, and uses a 12% hurdle rate when analyzing capital investments. The company
employs the net present value method (NPV) to analyze projects.
The overall impact of the working capital investment on Mintz’s NPV analysis is
A. P(10,392).
B. P(13,040).
C. P(17,320).
D. P(40,000).
64. Hobart Corporation evaluates capital projects using a variety of performance screens; including a hurdle rate
of 16%, payback period of 3 years or less, and an accounting rate of return of 20% or more. Management is
completing review of a project on the basis of the following projections.
• Capital investment P200,000
• Annual cash flows P74,000
• Straight-line depreciation 5 years
• Terminal value P20,000
The projected internal rate of return is 20%. Which one of the following alternatives reflects the appropriate
conclusions for the indicated evaluative measures?
Internal Rate of Return Payback
A. Accept Reject.
B. Reject Reject.
c. Accept Accept.
d. Reject Accept.
65. Diane Harper, Vice President of Finance for BGN Industries, is reviewing material prepared by her staff prior
to the board of directors meeting at which she must recommend one of four mutually exclusive options for a
new product line. The summary information below indicates the initial
investment required, the present value of cash inflows (excluding the initial investment) at BGN’s
hurdle rate of 16%, and the internal rate of return (IRR) for each of the four options.
Present Value of
Option Investment Cash Inflows at 16% IRR
X P3,950,000 P3,800,000 15.5%
Y 3,000,000 3,750,000 19.0%
Z 2,000,000 2,825,000 17.5%
W 800,000 1,100,000 18.0%
If there are no capital rationing constraints, which option should Harper recommend?
A. Option X
B. Option Y
C. Option Z
D. Option W