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OVERVIEW D. Do not vary among alternative courses of action.

Management Advisory Services
1. The following characterize management advisory services except 87. The Auto Division of Fly Insurance employs three claims processors capable of processing
A. involve decision for the future 5,000 claims each. The division currently processes 12,000 claims. The manager has
B. broader in scope and varied in nature recently been approached by two sister divisions. Division A would like the auto division to
C. utilize more junior staff than senior members of the firm process approximately 2,000 claims. Division B would like the auto division to process
D. relate to specific problems where expert help is required approximately 5,000 claims. The Auto Division would be compensated Division A or Division B
for processing these claims. Assume that these are mutually exclusive alternatives. Claims
2. Which of the following is not classifiable as a management advisory service by CPA? processor salary cost is relevant for
A. Systems design. C. Make or buy analysis. A. division A alternative only
B. Project feasibility study. D. Assistance in budget preparation. B. division B alternative only
C. both Division A and Division B alternatives
Managerial Accounting D. neither Division A nor Division B alternatives
3. The following are inherent to either management accounting or financial accounting:
1. External report Sell as is or Process-Further
2. Historical information 88. Ottawa Corporation produces two products from a joint process. Information about
3. Contribution approach income statement the two joint products follows:
4. Generally accepted accounting principles Product X Product Y
5. Prospective financial statements Anticipated production 2,000 lbs 4,000 lbs
Which of the foregoing are related to management accounting and financial Selling price per lb. at split-off P30 P16
accounting, respectively? Additional processing costs/lb after split-off (all variable) P15 P30
Management Accounting Financial Accounting Selling price/lb after further processing P40 P50
A. 1, 2, 5 3, 4 The cost of the joint process is P85,000.
B. 3, 5 1, 2, 4 Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which
C. 2, 3 1, 4, 5 maximizes profit, Ottawa’s profit will increase by
D. 3 1, 2, 4, 5 A. P16,000 C. P50,000
RELEVANT COSTING B. P4,000 D. P10,000
Basic Concepts Obsolete Inventories
85. The potential benefit that may be obtained from following an alternative course of action is 89. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
called price per unit is P50. The company has unused production capacity and has determined that
A. opportunity benefit C. relevant cost units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
B. opportunity cost D. sunk cost additional net income per unit to be gained by finishing the unit?
A. P3 C. P15
86.Opportunity costs: B. P10 D. P12
A. Are treated as period costs under variable costing.
B. Have already been incurred as a result of past action.
C. Are benefits that could have been obtained by following another course of action.
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Profit Maximization In past years, ABC has manufactured all of its required components; however, this year only
90. Fe Company has only 25,000 hours of machine time each month to manufacture its two 30,000 hours of otherwise idle machine time can be devoted to the production of components.
products. Product X has a contribution margin of P50 and Product Y has a contribution margin Accordingly, some of the parts must be purchased from outside suppliers. In producing parts,
of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will
80% of its machine time to the product that will provide the most income, Fe will have a total not be affected by any make-or-buy decision represent 60% of the applied overhead.
monthly contribution margin of The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum
A. P250,000 C. P210,000 potential cost savings. The relevant unit production costs that should be considered in the
B. P240,000 D. P200,000 decision to schedule machine time are:
A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta
91. Geary Manufacturing has assembled the following data pertaining to two popular products. B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta
Blender Electric mixer
Direct materials P 6 P11 Questions 93 & 94 are based on the following information.
Direct labor 4 9 Brynles Manufacturing Company produces two products for which the following data have been
Factory overhead @ P16 per hour 16 32 tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Cost if purchased from an outside 20 38 Per Unit XY-7 BD-4
supplier Selling price P4.00 P3.00
Annual demand (units) 20,000 28,000 Variable manufacturing cost P2.00 P1.50
Past experience has shown that the fixed manufacturing overhead component included in the Fixed manufacturing cost P0.75 P0.20
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it Variable selling cost P1.00 P1.00
means purchasing units from outside suppliers. The sales manager has had a P160,000 increase in the budget allotment for advertising and wants
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal to apply the money to the most profitable product. The products are not substitutes for one another
strategy, it should produce in the eyes of the company’s customers.
A. 25,000 electric mixers, and purchase all other units as needed The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4.
B. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed 93. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased
C. 20,000 blenders and purchase all other units as needed advertising is
D. 28,000 electric mixers and purchase all other units as needed A. B. C. D.
XY-7 P160,000 P640,000 P 80,000 P 80,000
92. ABC Electronics has the following standard costs and other data: BD-4 P320,000 P960,000 P960,000 P320,000
Part Beta Part Zeta
Direct materials P 4.00 P80.00 94. Suppose Brynles has only 100,000 machine hours that can be made available to produce
Direct labor 10.00 47.00 additional units of XY-7 and BD-4. If the potential increase in sales units for either product resulting
Factory overhead 40.00 20.00 from advertising is far in excess of this production capacity, which product should be advertised
Unit standard cost P54.00 P147.00 and what is the estimated increase in contribution margin earned?
Units needed per year 6,000 8,000 A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
Machine hours per unit 4 2 B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
Unit cost if purchased P50 P150.00 C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
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5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing
Special Order process.
95. An opportunity cost commonly associated with a special order is Which of the items above are relevant to the decision that the controller has to make?
A. the contribution margin on lost sales A. 1, 3, and 4 C. 2, 3, 4, and 5
B. the variable costs of the order B. 2, 3, and 4 D. 1, 2, 4, and 5
C. additional fixed related to the increased output
D. any of the above 98. Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
its product a year. The following information pertains to the production costs at capacity:
96. Jap Company’s unit cost of manufacturing and selling a given item at an activity level of Variable costs P 80,000
10,000 units per month are: Fixed costs 120,000
Manufacturing costs Total costs P200,000
Direct materials P39 A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
Direct labor 6 costs. What is the price per unit that makes Buena indifferent between the “Make” and “Buy”
Variable overhead 8 options?
Fixed overhead 9 A. P8 C. P20
Selling expenses B. P12 D. P10
Variable 30
Fixed 11 99. Elly Industries is a multi-product company that currently manufactures 30,000 units of Part
The company desires to seek an order for 5,000 units from a foreign customer. The variable MR24 each month for use in production. The facilities now being used to produce Part MR24
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If
P20,000. Domestic sales will not be affected by the order. Elly were to buy Part MR24 from an outsiDe supplier, the facilities would be idle, but its fixed
The minimum break-even price per unit to be considered on this special sale is costs would continue at 40 percent of their present amount. The variable production costs of
A. P71 C. P69 Part MR24 are P11 per unit.
B. P75 D. P84 If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by
purchasing Part MR24 from an outside supplier only if the supplier’s unit price is less than
Make or Buy A. P14.00 C. P16.00
97. For the past 12 years, the Blue Company has produced the small electric motors that fit into its B. P11.00 D. P13.00
main product line of dental drilling equipment. As material costs have steadily increased, the
controller of the Blue Company is reviewing the decision to continue to make the small motors 100. Below are a company’s monthly unit costs to manufacture and market a particular
and has identified the following facts: product.
1. The equipment used to manufacture the electric motors has a book value of P150,000. Manufacturing Costs:
2. The space now occupied by the electric motor manufacturing department could be used Direct materials P2.00
to eliminate the need for storage space now being rented. Direct labor 2.40
3. Comparable units can be purchased from an outside supplier for P59.75. Variable indirect 1.60
4. Four of the persons who work in the electric motor manufacturing department would be Fixed indirect 1.00
terminated and given eight weeks’ severance pay. Marketing Costs:
Variable 3.00
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Fixed 1.50 Keep or Drop

The company must decide to continue making the product or buy it from an outside supplier. 103.Indicate which of the following costs would be avoided if a segment is eliminated.
The supplier has offered to make the product at the same level of quality that the company can 1. variable manufacturing costs
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be 2. direct fixed costs
reduced by 30% if the company were to accept the proposal. What is the maximum amount 3. common fixed costs
per unit that the company can pay the supplier without decreasing its operating income? 4. variable selling costs
A. P8.50 C. P7.75 5. direct fixed selling costs
B. P6.75 D. P6.90 6. common fixed selling costs
A. 2, 3, 5, 6 C.
101.Cable Company produces 1,000 units of Part W per month. The total manufacturing costs of B. 1, 2, 4, 5* D. 1, 2, 3, 4, 54, 5, 6
the part are as follows:
Direct materials P10,000 104.BEA Industries produces two products. Information about the products is as follows:
Direct labor 5,000 Item 38B Item 40F
Variable overhead 5,000 Units produced and sold 1,000 4,000
Fixed overhead 30,000 Selling price per unit P 25 P 20
Total manufacturing costs P50,000 Variable expenses per unit P 15 P 12
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of The company’s fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
the fixed overhead assigned to Part W will no longer be incurred if the company purchases the dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is
part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the A. P3,200 C. P(2,000)
outside supplier per month, then its monthly operating income will B. P7,000 D. P10,000
A. decrease by P4,000 C. decrease by P20,000
B. increase by P1,000 D. increase by P20,000 Shut Down Point
105.Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a
102.The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total small electrical relay used in the automotive industry as a component part in various products.
manufacturing costs of the part are as follows: The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead
Direct materials P10,000 costs total P150,000 per month, and fixed selling costs total P30,000 per month.
Direct labor 5,000 Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Variable overhead 5,000 Bulusan Company’s sales to temporarily drop to only 9,000 units per month. Bulusan
Fixed overhead 30,000 Company estimates that the strikes will last for about two months, after which time sales of
Total manufacturing cost P50,000 E14 should return to normal. Due to the current low level of sales, however, Bulusan
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of Company is thinking about closing down its own plant during the two months that the strikes
the fixed overhead assigned to Part M will no longer be incurred if the company purchases the are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing
part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the overhead costs can be reduced to P105,000 per month and that fixed selling costs can be
outside supplier per month, then its monthly operating income will reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since
A. decrease by P4,000 C. decrease by P20,000 Bulusan Company uses just-in-time production method, no inventories are on hand.
B. increase by P1,000 D. increase by P20,000 At what level of unit sales for the two-month period should Bulusan Company be indifferent
between closing the plant or keeping it open?
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A. 11,000 C. 10,000 A. P300,000 C. P660,000

B. 24,125 D. 8,000 B. P550,000 D. P792,000

CAPITAL BUDGETING 110. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a five-
Basic Concepts year project at the beginning of the year. GMF estimates that the annual cash savings from
106.If Sol Company expects to get a one-year loan to help cover the initial financing of capital this project will amount to P65,000. Tax and book depreciation on the project will be P40,000
project, the analysis of the project should per year for five years. On investments of this type, GMF’s desired rate of return is 12%.
A. offset the loan against any investment in inventory or receivable required by the project Information on present value factors is as follows:
B. show the loan as an increase in the investment At 12% At 14% At 16%
C. show the loan as a cash outflow in the second year of the project’s life Present value of P1 for 5 periods 0.57 0.52 0.48
D. ignore the loan Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3
For the project’s first year, GMF’s accounting rate of return, based on the project’s average
107.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment book value would be
of cash flows, NPV is better than IRR. What are the reinvestment rate for each method? A. 14.4% C. 12.5%
Net Present Value method Internal Rate of Return method B. 13.9% D. 12.0%
A. Discount Rate Discount Rate
B. Discount Rate IRR Payback Period
C. IRR IRR 111. The payback method assumes that all cash inflows are reinvested to yield a return equal to
D. IRR Discount Rate A. zero C. the Time-Adjusted-Rate-of-Return
B. the Discount Rate D. the Cost-of-Capital
Accounting Rate of Return
108.Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the Bailout Period
expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were 112. A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would and salvage value:
be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12 Year Net cash inflow Salvage value
percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value 1 500,000 800,000
of 1 due in 10 periods at 12 percent is 0.322. 2 500,000 600,000
The average accrual accounting rate of return during the first year of asset’s use is 3 600,000 500,000
A. 20.0 percent C. 10.0 percent 4 800,000 400,000
B. 10.5 percent D. 40.0 percent 5 700,000 300,000

109.The Fields Company is planning to purchase a new machine which it will depreciate, for book What is the bailout period for the project?
purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s A. 3.25 yrs. C. 2.73 yrs
depreciation taken in the year of acquisition. The new machine is expected to produce cash B. 2.5 yrs D. 2.4 yrs.
flow from operations, net of income taxes, of P66,000 a year in each of the next ten years.
The accounting (book value) rate of return on the initial investment is expected to be 12%. Net Present Value
How much will the new machine cost?
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113. Panama Insurance Company’s management is considering an advertising program that would A. Increase of P9,750 C. Decrease of P24,376
require an initial expenditure of P165,500 and bring in additional sales over the next five years. B. Decrease of P9,750 D. Increase of P24,376
The cost of advertising is immediately recognized as expense. The projected additional sales
revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales Profitability Index
revenue and expenses from the advertising program are projected to increase by 10 percent 115. A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are
each year. Panama Insurance Company’s tax rate is 40 percent. P20,505 on an investment of P50,000. the profitability index for this project is
The present value of 1 at 10 percent, end of each period: A. 1.367 C. 2.438
Periods Present value Factory B. 3.333 D. 1.300
1 0.90909
2 0.82645 Internal Rate of Return
3 0.75131 116. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate
4 0.68301 of return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and
5 0.62092 for three years is .751. The cash flow, net of income taxes, will be P30,000 for the first year
The net present value of the advertising program would be (present value of P27,270) and P36,000 for the second year (present value of P29,736).
A. P37,064 C. P(37,064) Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for
B. P29,136 D. P(29,136) the third year?
A. P17,268 C. P22,994
114. For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of B. P22,000 D. P30, 618
five years with no salvage value. The machine is expected to produce cash flow from
operations, net of 40 percent income taxes, as follows: 117. Care Products Company is considering a new product that will sell for P100 and have a
First year P160,000 variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
Second year 140,000 having a five-year useful life and no salvage value is needed, and will be depreciated using the
Third year 180,000 straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in
Fourth year 120,000 the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end
Fifth year 100,000 of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows: Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling
First year P150,000 price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?
Second year 120,000 A. P81.00 C. P70.00
Third year 90,000 B. P85.00 D. P90.00
Fourth year 60,000
Fifth year 30,000 118. Payback Company is considering the purchase of a copier machine for P42,825. The
The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 copier machine will be expected to be economically productive for 4 years. The salvage value at
percent at end of each period are: the end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of
End of: Period 1 – 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552, return. The company is subject to 40 percent income tax rate.
Period 5 - 0.56743 The present value of an ordinary annuity of 1 for 4 periods is 2.85498.
Had Roxas used straight-line method of depreciation, what is the difference in net present In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to
value provided by the machine at a discount rate of 12 percent? be provided by the machine?
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A. P17,860 C. P25,000 A. The NPV method does not assume reinvestment of cash flows while the IRR method
B. P15,000 D. P35,700 assumes the cash flows will be reinvested at the internal rate of return.
B. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR
Equipment Replacement method assumes a reinvestment rate equal to the internal rate of return.*
119. A company is considering replacing a machine with one that will save P40,000 per year in C. The IRR method does not assume reinvestment of the cash flows while the NPV assumes
cash operating costs and have P10,000 more depreciation expenses per year than the the reinvestment rate is equal to the discount rate.
existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while
flows of the company by the IRR method assumes a reinvestment rate equal to the discount rate.
A. P28,000 C. P18,0000
B. P24,000 D. P6,000 124.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:
120.Maxwell Company has an opportunity to acquire a new machine to replace one of its present Project 1 Project 2 Project 3 Project 4
machines. The new machine would cost P90,000, have a five-year life, and no estimated Initial cash outlay P200,000 P298,000 P248,000 P272,000
salvage value. Variable operating costs would be P100,000 per year. The present machine Annual net cash inflows
has a book value of P50,000 and a remaining life of five years. Its disposal value now is Year 1 P 65,000 P100,000 P 80,000 P 95,000
P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per Year 2 70,000 135,000 95,000 125,000
year. Ignore present value calculations and income taxes. Year 3 80,000 90,000 90,000 90,000
Considering the five years in total, what would be the difference in profit before income taxes Year 4 40,000 65,000 80,000 60,000
by acquiring the new machine as opposed to retaining the present one? Net present value ( 3,798) 4,276 14,064 14,662
A. P10,000 decrease C. P35,000 increase Profitability index 98% 101% 106% 105%
B. P15,000 decrease D. P40,000 increase Internal rate of return 11% 13% 14% 15%
Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
Investment Decision amount of funds?
121.The NPV and IRR methods give No Budget Restriction P600,000Available Funds P300,000Available Funds
A. the same decision (accept or reject) for any single investment
A. Projects 2,3, & 4 Projects 3 & 4 Project 3
B. the same choice from among mutually exclusive investments
B. Projects 1, 2, & 3 Projects 2, 3 & 4 Projects 3 & 4
C. different rankings of projects with unequal lives
C. Projects 1, 3, & 4 Projects 2 & 3 Project 2
D. the same rankings of projects with different required investments
D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
122. In choosing from among mutually exclusive investments the manager should normally
select the one with the highest Comprehensive
A. NPV C. payback reciprocal 125.Which of the following combinations is possible?
B. IRR D. book rate of return Profitability Index NPV IRR
A. greater than 1 positive equals cost of capital
123.Why do the NPV method and the IRR method sometimes produce different rankings of B. greater than 1 negative less than cost of capital
mutually exclusive investment projects? C. less than 1 negative less than cost of capital*
D. less than 1 positive less than cost of capital

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Interest expense 250,000

FINANCIAL STATEMENT ANALYSIS Preferred dividends 200,000
Horizontal Analysis Payout ratio 40 percent
130.Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0 Shares outstanding throughout 2003
million. Using year 1 as the base year, the respective percentage increase in sales in year 2 Preferred 20,000
and 3 are Common 25,000
A. 115% and 125% C. 115% and 130% Income tax rate 40 percent
B. 115% and 109% D. 87% and 80% Price earnings ratio 5 times
The dividend yield ratio is
Solvency Ratio A. 0.50 C. 0.12
131.A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the B. 0.40 D. 0.08
following sets of ratios characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity Integrated Ratios
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity 136.Selected data from Maui Company’s year-end financial statements are presented below. The
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity difference between average and ending inventory is immaterial.
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity* Current ratio 2.0
Quick ratio 1.5
132.The ratio that measures a firm’s ability to generate earnings is Current liabilities P120,000
A. times interest earned. C. days’ sales in receivables. Inventory turnover (based on cost of sales) 8 times
B. sales to working capital. D. operating asset turnover. Gross profit margin 40%
Maui’s net sales for the year were
Other Ratio A. P800,000 C. P672,000
133.Taylor company paid out one-half of its 2002 earnings in dividends. Taylor’s earnings B. P480,000 D. P1,200,000
increased by 20%, and the amount of its dividends increased by 15% in 2003. Taylor’s
dividend payout ratio for 2003 was 137.Assume you are given the following relationships for the Bryan Company:
A. 75.0% C. 47.9% Sales/total assets 1.5X
B. 52.3% D. 41.7% Return on assets (ROA) 3%
Return on equity (ROE) 5%
134.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The The Bryan Company’s debt ratio is
dividend payout rate is 60%. Beginning stockholders’ equity was P850,000 and current A. 40% C. 60%
liabilities are projected to be P300,000 at the end of 2002. B. 35% D. 65%
What are the total equities available if the ratio of long-term debt to stockholders’ equity is 60%? 138. The following data were obtained from the records of Trend, Inc.:
A. P1,788,000 C. P2,046,000 Current ratio (at year end) 1.5 to 1
B. P1,980,000 D. P858,000 Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold and ending inventory 10.5 times
135.The following were reflected from the records of War Freak Company: Gross margin for 2002 P315,000
Earnings before interest and taxes P1,250,000 What was Trend, Inc.’s December 31, 2002 balance in the Inventory account?
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A. P138,000 C. P140,000 C. Is a “what-if” technique that asks how a given outcome will change if the original estimates
B. P 70,000 D. P135,000 of the capital budgeting model are changed.
D. Is a technique used to rank capital expenditure requests.
139.The board of directors of Contemporary Company was unhappy with the current return on
common equity. Though the return on sales (profit margin) was impressively good at 12.5 95. If Sol Company expects to get a one-year loan to help cover the initial financing of capital
percent, the asset turnover was only 0.75. The present debt ratio is 0.40. project, the analysis of the project should
Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows: A. offset the loan against any investment in inventory or receivable required by the project
 Profit margin should be raised to 15 percent. B. show the loan as an increase in the investment
 The new capital structure will be revised by raising debt component. C. show the loan as a cash outflow in the second year of the project’s life
 The asset turnover will be maintained at 0.75. D. ignore the loan
The proposed adjustment is estimated to raise return on equity by 50 percent.
What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150 96. Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one
percent of the present level? costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over
A. 0.52 C. 0.61 15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new
B. 0.68 D. 0.72 equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value.
Assuming a 40% marginal tax rate, Royal’s net cash investment at the time of purchase is the
Capital Budgeting old grinder is sold and the new one purchased is
A. P19,000 C. P17,400
92. Which of the following would decrease the net present value of a project? B. P15,000 D. P25,000
A. A decrease in the income tax rate
B. A decrease in the initial investment 97. Flow Industries is analyzing a capital investment proposal for new machinery to produce a new
C. An increase in the useful life of the project product over the next 10 years. At the end of the 10 years, the machinery must be disposed of
D. An increase in the discount rate with a net zero book value but with a scrap salvage value of P20,000. It will require some
P30,0000 to remove the machinery. The applicable tax rate is 35%. The appropriate “end of
93. A weakness of the internal rate of return method for screening investment projects is that it: life” cash flow based on the foregoing information is
A. does not consider the time value of money A. inflow of P30,000 C. outflow of P10,000
B. implicitly assumes that the company is able to reinvest cash flows from the project at the B. outflow of P6,500 D. outflow of P17,000
company’s discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the 98. Sarah Company is planning to purchase a new machine for P600,000.
internal rate of return Depreciation for tax purposes will be P100,000 annually for six years. The
D. fails to consider the timing of cash flows new machine is expected to produce cash flow from operations, net of income
taxes, of P150,000 a year in each of the next six years. The accounting (book
94. Sensitivity analysis, if used with capital projects, value) rate of return on the initial investment is expected to be
A. Is used extensively when cash flows are known with certainty
B. Measures the change in the discounted cash flows when using the discounted payback A. 8.3% C. 16.7%
method rather than the net present value method. B. 12.0% D. 25.0%

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99. Barf is considering a 10-year capital investment project with forecasted Future amount of an annuity
revenues of P40,000 per year and forecasted cash operating expenses of P29,000 of P1 at 10% 1.000 2.100 3.310 4.641 6.105
per year. The initial cost of the equipment of the project is P23,000 and Barfield How much will the machine cost?
expects to sell the equipment for P9,000 at the end of the tenth year. The
equipment will be depreciated over 7 years. The project requires a working A. P32,220 C. P75,820
capital investment of P7,000 at its inception and another P5,000 at the end of year B. P62,100 D. P122,100
5. Using a 40% marginal tax rate, the expected net cash flow from the project in
the tenth year is 102. Janet Company has a payback goal of 3 years on new equipment
A. P32,000 C. P20,000 acquisitions. A new sorter is being evaluated that costs P450,000 and has a 5-
B. P24,000 D. P11,000 year life. Straight-line depreciation will be used; no salvage value is
anticipated. Janet is subject to a 40% income tax rate. To meet the company’s
100.Brand is considering, an investment in a new cheese-cutting machine to replace its existing payback goal, the sorter must generate reductions in annual cash operating
cheese cutter. Information on the existing machine and the replacement machine follow: costs of
Cost of the new machine P40,000
Net annual savings in operating costs 9,000 A. P60,000 C. P150,000
Salvage value now of the old machine 6,000 B. P100,000 D. P190,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000 103.Moorman Products Company is considering a new product that will sell for P100 and have a
Estimated life of the new machine 8 years variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
having a five-year useful life and no salvage value is needed, and will be depreciated using the
What is the expected payback period for the new machine?
straight-line method. The machine has cash operating costs of P20,000 per year. The firm is
in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1,
A. 4.44 years C. 8.50 years end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
B. 2.67 years D. 3.78 years How many units per year the firm must sell for the investment to earn 12

101. Cause Company is planning to invest in a machine with a useful percent internal rate of return?
life of five years and no salvage value. The machine is expected to produce
cash flow from operations, net of income taxes, of P20,000 in each of the five
A. 12,838 C. 8,225
years. Cause’s expected rate of return is 10%. Information on present value B. 10,403 D. 7,625
and future amount factors is as follows:
1 2 3 4 5 104.Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life.
Present value of P1 at 10% .909 .826 .751 .683 .621 Managers at Highpoint have estimated the cash flows associated with the tangible costs and
Present value of an annuity of benefits of automation, but have been unable to estimate the cash flows associated with the
P1 at 10% .909 1.736 2.487 3.170 3.791 intangible benefits. Using the company’s 10% discount rate, the net present value of the cash
Future amount of P1 at 10% 1.100 1.210 1.33 1.464 1.611 flows associated with just the tangible costs and benefits is a negative P184,350. How large

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would the annual net cash inflows from the intangible benefits have to be to make this a 18% - 2,474
financially acceptable investment?
A. P18,435 C. P35,000 108.Logo’s accounting rate of return on its initial investment in this machine is expected to be
B. P30,000 D. P37,236 A. 30% C. 12%
B. 15% D. 10%
Questions 105 thru 107 are based on the following information.
A firm must choose between leasing a new asset of purchasing it with funds from a term loan. 109.Logo’s expected payback period for its investment in this machine is
Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6% A. 2.0 years C. 3.3 years
interest on the unpaid balance. Principal and interest are due at the end of each year for five B. 3.0 years D. 5.0 years
years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400
with payments due at the beginning of each year. The corporate tax rate is 35% and the 110.Logo’s expected IRR on its investment in this machine is
appropriate after tax cost of capital is 12%. A. 3.3% C. 12.0%
B. 10.0% D. 15.3%
105. Which of the following is closest to the PV of the after-tax interest payment?
A. P360 C. P640 111.Lawton Co. is expanding its manufacturing plant, which requires an
B. P453 D. P726 investment of P4,000,000 in new equipment and plant modifications. Lawton’s
sales are expected to increase by P3,000,000 per year as a result of the expansion.
106.Which of the following is closes to the present value of cost if leasing the asset? Cash investment in current assets averages 30% of sales; accounts payable and
A. P3,694 C. P3,849 other current liabilities are 10% sales. What is the estimated total investment for
B. P3,779 D. P3,992
this expansion?
107. Which of the following is closest to the PV of cost of purchasing A. P3,400,000 C. P4,600,000
the new asset with a term loan? B. P4,300,000 D. P4,000,000
A. P3,777 C. P4,058 112.Par Co. is reviewing the following data relating to an energy saving investment proposal:
B. P3,952 D. P4,153 Investment P50,000
Residual value at the end of 5 years 10,000
Questions 108 through 110 are based on the following information: Present value of an annuity of 1 at 12% for 5 years 3.60
Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes, Present value of 1 due in 5 years at 12% 0.57
this machine will be depreciated P8,000 each year for five years. Logo estimates that this machine What would be the annual savings needed to make the investment realize a
will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. Logo’s desired
rate of return on its investments is 12%. At the following discount rates, the NPVs of the
investment in this machine are: 12% yield?
Discount rate NPV
12% +P3,258 A. P8,189 C. P12,306
14% + 1,197 B. P11,111 D. P13,889
16% - 708

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113.Investor’s Inc. uses a 12% hurdle rate for all capital expenditures and has done the following Questions 114 thru 117 are based on the following information.
analysis for four projects for the upcoming year. In order to increase production capacity, Gunning Industries is considering replacing an existing
Project 1 Project 2 Project 3 Project 4 production machine with a new technologically improved machine effective January 1, 2002. The
Initial cash outlay P200,000 P298,000 P248,000 P272,000 following information is being considered by Gunning Industries:
Annual net cash inflows  The new machine would be purchased for P160,000 in cash. Shipping installation, and testing
Year 1 P 65,000 P100,000 P 80,000 P 95,000 would cost an additional P30,000.
Year 2 70,000 135,000 95,000 125,000  The new machine is expected to increase annual sales by 20,000 units at a sales price of P40
Year 3 80,000 90,000 90,000 90,000 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed
Year 4 40,000 65,000 80,000 60,000 costs of P40,000 per year.
Net present value ( 3,798) 4,276 14,064 14,662  The investment in the new machine will require an immediate increase in working capital of
Profitability index 98% 101% 106% 105% P35,000. This cash outflow will be recovered at the end or year 5.
Internal rate of return 11% 13% 14% 15%  Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
Which project(s) should Investors, Inc. select during the upcoming year under  The new machine has an estimated useful life of 5 years and zero salvage value
 Gunning is subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments and will
each budgeted amount of funds?
employ the following factors and rates:
No Budget Restriction P600,000 Available Funds P300,000Available Funds
A. Projects 2, 3 & 4 Projects 3 & 4 Project 3
B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4 Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10%
C. Projects 1, 3 & 4 Projects 2 & 3 Project 2 1 .909 .909
D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4 2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791

114.Gunning Industries’ net cash outflow in a capital budgeting decision is

A. P190,000 C. P204,525
B. P195,000 D. P225,000

115.Gunning Industries’ discounted annual depreciation tax shield for the year 2002 is
A. P13,817 C. P20,725
B. P16,762 D. P22,800

116.The acquisition of the new production machine by Gunning will

contribute a discounted net-of-tax contribution margin of
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A. P242,624 C. P363,936 Current liabilities P120,000

B. P303,280 D. P454,920 Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
117.The overall discounted cash flow impact of Gunning’s working capital Sheridan’s net sales for the year were
investment for the new production machine would be A. P800,000 C. P1,200,000
B. P480,000 D. P672,000
A. P(7,959) C. P(13,265) 123. Jade Corporation has a practical production capacity of a million units. The current year’s
B. P(10,080) D. P(35,000) master budget was based on the production and sales of 700,000 units during the current year.
Actual production for the current year was 720,000 units, while actual sales amounted to only
Financial Statement Analysis 600,000 units. The units are sold for P20 each and the contribution margin ratio is 30%. The peso
118. Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0. Using amount that best qualifies the Marketing Department’s failure to achieve budgeted performance for
Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectively the current year is:
A. 115% and 125% C. 115% and 130% A. P720,000 unfavorable C. P2,400,000 unfavorable
B. 115% and 109% D. 87% and 80% B. P600,000 unfavorable D. P2,000,000 unfavorable

119. A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the 124. The gross profit of Rea Company for each of the years ended as
beginning of the period was P50,000 and at the end of the period was P70,000. Net income is indicated follow:
P40,000. Inventory turnover is
2001 2000
A. 5 times C. 1.75 times
B. 3.25 times D. 0.67 times Sales P792,000 P800,000
Cost of goods sold 463,000 480,000
120.The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for Gross profit P328,000 P320,000
the year was P20,000 and the company’s tax rate is 40%. The company’s net income is: Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit
A. P22,000 C. P42,000 due to change in the selling price?
B. P54,000 D. P66,000 A. P8,000 C. P79,200
B. P72,000 D. P88,000
121. If the North Division of Alliance Products Company had an
operating asset turnover of 4.2 and an operating income margin of 0.10, the 125.Garfield Company, which sells a single product, provided the following data from its income
statements for the years 2001 and 2000:
return on investment would be
2001 2000
A. 23.8% C. 42.0% Sales (150,000 units in 2001; 180,000 units in 2000) P750,000 P720,000
B. 420.0% D. 4.2% Cost of goods sold 525,000 575,000
Gross profit P225,000 P145,000
122.Selected data from Sheridan Corporation’s year-end financial statements are presented below.
In an analysis of variation in gross profit between the two years, what would
The difference between average and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5 be the effects of changes in sales price and sales volume, respectively?

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A. P150,000 F; P120,000 U C. P180,000 F; P150,000 U

B. P150,000 U; P120,000 F D. P180,000 U; P150,000 F

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