Q&A Hero

Q: Discuss the primary advantage of XBRL over traditional HTML as a means of on-line reporting of financial information to users.

Q: Exhibit 27.2Reese Brothers Publishers Inc (RBP) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.Refer to Exhibit 27.2. What would be the incremental bad losses if the change were made?a. $315,000b. $260,500c. -$260,500 (bad debt losses would decline)d. -$315,000 (Bad debt losses would decline)e. $0 (no change would occur)

Q: List and explain the six basic files in the general ledger database.

Q: Which of the following statements is most correct?a. It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.b. A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.c. Firms use seasonal dating primarily to decrease their DSO.d. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.e. If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.

Q: Compare and contrast the relative advantages and disadvantages of sequential, block, group, alphabetic and mnemonic codes.

Q: A firm's credit policy consists of which of the following items? a. Credit period, cash discounts, credit standards, collection policy. b. Credit period, cash discounts, receivables monitoring, collection policy. c. Cash discounts, credit standards, receivables monitoring, collection policy. d. Credit period, receivables monitoring, credit standards, collection policy. e. Credit period, cash discounts, credit standards, receivables monitoring.

Q: What are the reasons companies use coding schemes in their accounting information systems?

Q: Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days? a. The quarterly uncollected balances schedule will be the same in each quarter. b. The level of accounts receivable will be constant from month to month. c. The ratio of accounts receivable to sales will vary from month to month. d. The level of accounts receivable at the end of each quarter will be the same. e. DSO will vary from month to month.

Q: How is backup of database files accomplished?

Q: Which of the following is not correct? a. A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales. b. Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased. c. Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account. d. A lax collection policy will frequently lead to an increase in accounts receivable. e. Collection policy is how a firm goes about collecting past-due accounts.

Q: The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.a. Trueb. False

Q: What information is provided by a record layout diagram?

Q: What are the key distinguishing features of legacy systems?

Q: The percentage aging schedule of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales. a. True b. False

Q: If sales are seasonal, the days sales outstanding will fluctuate from month to month, even if the amount of time customers take to pay remains unchanged. a. True b. False

Q: How are computer system flowcharts and program flowcharts related?

Q: Why might an auditor use a program flowchart?

Q: DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales. a. True b. False

Q: If an organization processes large numbers of transactions that use common data records, what type of system would work best (all else being equal)?

Q: The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly. a. True b. False

Q: How may batch processing be used to improve operational efficiency?

Q: When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount. a. True b. False

Q: Is a flowchart an effective documentation technique for identifying who or what performs a particular task? Explain.

Q: Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms. a. True b. False

Q: Is a DFD an effective documentation technique for identifying who or what performs a particular task? Explain.

Q: The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses. a. True b. False

Q: The collection process, although sometimes difficult, is a fairly inexpensive component of doing business. a. True b. False

Q: With regard to an entity relationship diagram, what is an entity?

Q: For what purpose are ER diagrams used?

Q: Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit. a. True b. False

Q: Give an example of how cardinality relates to business policy.

Q: The credit period is the amount of time it takes to do a credit search on a potential customer. a. True b. False

Q: Give a brief description of each of the following documentation techniques: systems flowchart, and program flowchart.

Q: Steppingstone IncorporatedThe Z-90 project being considered by Steppingstone Incorporated (SI) has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, Z-45, becomes an industry standard. There is a 50% chance that the Z-45 will become the industry standard, in which case the Z-90's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the Z−45 will not become the industry standard, in which case the Z-90's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.Refer to data for Steppingstone Incorporated (SI). Now assume that one year from now SI will know if the Z-45 has become the industry standard. Also assume that after receiving the cash flows at t = 1, SI has the option to abandon the project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?a. $0b. $2,075c. $4,067d. $8,945e. $10,745

Q: The revenue cycle has two subsystems. What are they and what occurs within each?

Q: Steppingstone IncorporatedThe Z−90 project being considered by Steppingstone Incorporated (SI) has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, Z-45, becomes an industry standard. There is a 50% chance that the Z-45 will become the industry standard, in which case the Z-90's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the Z−45 will not become the industry standard, in which case the Z-90's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z-90's expected net present value?a. -$6,678b. -$3,251c. $15,303d. $20,004e. $45,965

Q: Time lag is one characteristic used to distinguish between batch and real-time systems. Explain. Give an example of when each is a realistic choice.

Q: Garner-Wagner IncorporatedThe executives of Garner-Wagner Inc. are considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project's cost of capital is 10%.Refer to the data for Garner-Wagner Incorporated. If Garner-Wagner goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a net present value of −$6 million at t = 5. Garner-Wagner does not have to decide today whether it wants to pursue the additional opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project, after consideration of the potential future opportunity?a. -$1,104,607b. -$875,203c. $199,328d. $561,947e. $898,205

Q: What does an entity-relationship diagram represent? Why do accountants need to understand them?

Q: Garner-Wagner IncorporatedThe executives of Garner-Wagner Inc. are considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project's cost of capital is 10%.Refer tothe data for Garner-Wagner Incorporated.Based on the above data, what is the project's net present value?a. -$1,312,456b. -$1,104,607c. -$875,203d. $105,999e. $321,788

Q: Nationwide Pharmaceutical CorporationA project with an up-front cost at t = 0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved.NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t = 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7).Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Calculate the effect of waiting on the project's risk, using the same data. By how much will delaying reduce the project's coefficient of variation? (Hint: Use the expected NPV.)a. 2.23b. 2.46c. 2.70d. 2.97e. 3.27

Q: Categorize each of the following activities into the expenditure, conversion or revenue cycles and identify the applicable subsystem. a. Preparing the weekly payroll for manufacturing personnel. b. Releasing raw materials for use in the manufacturing cycle. c. Recording the receipt of payment for goods sold. d. Recording the order placed by a customer. e. Ordering raw materials. f. Determining the amount of raw materials to order.

Q: Describe the key activities in the revenue, conversion, and expenditure cycles.

Q: Nationwide Pharmaceutical CorporationA project with an up-front cost at t = 0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved.NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t = 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7).Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?a. $77.23b. $85.81c. $95.34d. $105.94e. $116.53

Q: Why is the audit trail necessary?

Q: Refer to the data for Drilling Experts. Calculate the project's coefficient of variation. (Hint: Use the expected NPV.)a. 5.87b. 6.52c. 7.25d. 7.97e. 8.77

Q: What are the major exposures in the general ledger/financial reporting system?

Q: Drilling Experts, Inc.Drilling Experts, Inc. (DEI) finds and develops oil properties and then sells the successful ones to major oil refining companies. DEI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars.t = 0. A $400 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project.t = 1. If the feasibility study indicates good potential, the firm would spend $1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned.t = 2. If the exploratory wells test positive, DEI would go ahead and spend $10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned.t = 3. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then only receiving a $10,000 inflow.Refer to the data for Drilling Experts, Incorporated. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars?a. $336.15b. $373.50c. $415.00d. $461.11e. $507.22

Q: Ashgate Enterprises uses the NPV method for selecting projects, and it does a reasonably good job of estimating projects' sales and costs. However, it never considers real options that might be associated with projects. Which of the following statements is most likely to describe its situation?a. Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options.b. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget.c. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget.d. Real options should not have any effect on the size of the optimal capital budget.e. Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account.

Q: Why do many firms no longer use a general journal? What has taken its place?

Q: What is XML?

Q: Which one of the following is an example of a "flexibility" option? a. A company has an option to close down an operation if it turns out to be unprofitable. b. A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change. c. A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date. d. A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial. e. A company has an option to invest in a project today or to wait a year.

Q: Which of the following is most CORRECT? a. Real options change the risk, but not the size, of projects' expected cash flows. b. Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows. c. Very few projects actually have real options. d. Real options are less valuable when there is a lot of uncertainty about the true values future sales and costs. e. Real options change the size, but not the risk, of projects' expected cash flows.

Q: Explain the purpose and contents of the general ledger master file.

Q: Which of the following will NOT increase the value of a real option? a. An increase in the volatility of the underlying source of risk. b. An increase in the risk-free rate. c. An increase in the cost of obtaining the real option. d. A decrease in the probability that a competitor will enter the market of the project in question. e. Lengthening the time in which a real option must be exercised.

Q: List two duties that the general ledger clerk should not perform.

Q: Whether to invest in a project today or to postpone the decision until next year is a decision facing the CEO of the Aaron Co. The project has a positive expected NPV, but its cash flows could be less than expected, in which case the NPV could be negative. No competitors are likely to invest in a similar project if Aaron decides to wait. Which of the following statements best describes the issues that Aaron faces when considering this investment timing option? a. The more uncertainty about the future cash flows, the more logical it is for Aaron to go ahead with this project today. b. Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if it chooses to wait a year. c. Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV. d. Waiting would probably reduce the project's risk. e. The investment timing option does not affect the cash flows and will therefore have no impact on the project's risk.

Q: List, in order, the steps in the Financial Accounting Process. 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11)

Q: Which of the following is NOT a real option? a. The option to buy shares of stock if its price goes up. b. The option to expand into a new geographic region. c. The option to abandon a project. d. The option to switch the type of fuel used in an industrial furnace. e. The option to expand production if the product is successful.

Q: What is destructive update?

Q: Real options affect the size, but not the risk, of a project's expected cash flows.a. Trueb. False

Q: In one sentence, what does updating a master file record involve?

Q: Real options are most valuable when the underlying source of risk is very low. a. True b. False

Q: Which documentation technique depicts data relationship in databases?

Q: The option to abandon a project is a real option, but a call option on a stock is not a real option. a. True b. False

Q: Only four symbols are used in data flow diagrams. What are they?

Q: Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds. a. True b. False

Q: Why is the audit trail important?

Q: Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project's cash flows. a. True b. False

Q: Name four documentation techniques.

Q: What are the subsystems of the expenditure cycle?

Q: Which of the following statements is CORRECT? a. Richard Roll has argued that it is possible to test the CAPM to see if it is correct. b. Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM. c. Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. d. The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller. e. Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Q: What are the subsystems of the revenue cycle?

Q: Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation. a. True b. False

Q: Explain when it is appropriate to use special journals.

Q: The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk. a. True b. False

Q: Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of −0.73% with a standard deviation of 20%, and a correlation with the market of −0.67. The standard deviation of rM is 12%.a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)b. What are the beta coefficients of A and B? Calculations are necessary.c. If the risk-free rate is 6%, what is the value of rM?

Q: Give a specific example of a turn-around document.

Q: Assume an economy in which there are three securities: Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?a. The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%.b. The expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (SD) that is between 10% and 20%.c. The investor's risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.d. Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.e. The expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%.

Q: ______________________________________ are the two data processing approaches used in modern systems.