CPA Business Environment and Concepts (BEC) : Financial Management Process
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Example Questions
Example Question #1 : Financial Management Process
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
Weighted average
Moving average
FIFO
LIFO
FIFO
Using the FIFO method during a period of rising prices would account for the inventory that is the least expensive from the warehouse, thus maximizing profit.
Example Question #2 : Financial Management Process
Under US GAAP, during periods of inflation, a perpetual system would result in the same dollar amount of ending inventory as a periodic system under which of the following valuation methods?
FIFO
Neither
LIFO and FIFO
LIFO
FIFO
Only under FIFO would the use of a perpetual system result in the same dollar amount of ending inventory as a periodic system.
Example Question #1 : Financial Management Process
A corporation issues quarterly interim financial statements and uses the lower cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?
Inventory losses generally should be recognized in the interim statements
Temporary market declines should be recognized in the interim statements
Only the cost method of valuation should be used
Gains from valuations in previous interim periods should be fully recognized
Inventory losses generally should be recognized in the interim statements
Using the IFRS lower of cost or market process would entail recognizing inventory losses during interim periods.
Example Question #4 : Financial Management Process
What is the cost of ending inventory given the following factors? Beginning Inventory = $5,000 Total Production Costs = $60,000 Cost of Goods Sold = $55,000 Direct Labor = $40,000.
$45,000
$5,000
$50,000
$10,000
$10,000
$5,000 + $60,000 - $55,000 = $10,000
Example Question #5 : Financial Management Process
What was ABC company's cost of goods manufactured if cost of goods sold is $43,000, ending finished goods inventory is $21,000, beginning finished goods inventory is $16,000 and net income is $19,000.
$38,000
$50,000
$48,000
$37,000
$48,000
COGM = $43,000 + $21,000 - $16,000 = $48,000
Example Question #6 : Periodic Vs Perpetual Inventory Systems
The moving average method requires ____, while the weighted average method requires ______.
Perpetual, periodic
LIFO, FIFO
FIFO, LIFO
Periodic, perpetual
Perpetual, periodic
Both the weighted average method and moving average methods are alternatives to LIFO and FIFO.
Example Question #1 : Supply Chain/Reorder Point
The amount of inventory that a company would tend to hold in safety stock would increase as the:
Variability of sales decreases
Cost of carrying inventory decreases
Length of time that goods are in transit decreases
Costs of running out of stock decreases
Cost of carrying inventory decreases
The amount of inventory that a company would tend to hold in stock would increase as the cost of carrying inventory decreases.
Example Question #2 : Financial Management Process
When selecting suppliers before implementing a just-in-time (JIT) purchasing system, a company must take extreme care because a JIT purchasing system:
Relies on suppliers to deliver products when needed
Shifts responsibility for order taking and fulfillment to the supplier
Depends on a great number of highly motivated suppliers
Relies on competent suppliers, which eliminates the need for backflush costing
Relies on suppliers to deliver products when needed
JIT does not entail keeping a significant amount of inventory on hand. So, suppliers must be ready to provide products as soon as there is need.
Example Question #3 : Financial Management Process
Which of the following characteristics is a primary benefit of a just-in-time inventory system for raw materials?
Increases total number of suppliers to ensure competitive bidding
Eliminated non-value-added operations
Decreases deliveries required to maintain production
Increases standard delivery quantity
Eliminated non-value-added operations
JIT is designed to minimize the amount of time inventory is kept on hand before it is utilized. Thus, it eliminates non value added operations.
Example Question #2 : Supply Chain/Reorder Point
What amount of annual sales must a company achieve to break even if the following information is given: Fixed Costs per month $2,500, Unit Selling Price $100, Variable cost as a percentage of sales 60%
$75,000
$30,000
$100,000
$50,000
$75,000
$2,500 * 12 months = $30,000. 100% - 60% = 40% CM of sales. $30,000/40% = $75,000
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