IMANET Certified Management Accountant Exam Practice Test

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Total 1336 questions
Question 1

The chief financial officer of Pauley, Inc has requested an evaluation of a proposed acquisition of a new machine at a purchase price of $60.000 and with installation costs of $10,000. A $3,000 increase in working capital will be required. The machine will have a useful life of four years. after which it can be sold for $10,000. The estimated annual incremental operating revenues and cash operating expenses are $150,000 and $100,000, respectively, for each of the four years. Pauley's effective income tax rate is 40%, and the cost of capital is 12%. Pauley uses straight-line depreciation for both financial reporting and income tax purposes. Pauley's estimated after-tax cash flow in the fourth year, at which time the equipment will be sold, will be?



Answer : D

The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Pauley can be calculated as follows:

Pauley's total after-tax operating cash inflow for each year of the project's life is thus $36,000 ($30,000 + $6,000). Ii the final year of the project, two additional cash flows must be taken into account, the after-tax proceeds from the disposal of the equipment purchased for the project, and the recovery of working capital devoted to the project. These two additional cash flows can be calculated as follows:

Pauley's total after-tax cash inflow for the final year of the project's life is thus $49,000

($36,000 + $13,000).


Question 2

Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, witch will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's tax benefit arising from the disposal of the old equipment is



Answer : D

A firm enjoys a tax benefit upon recognizing a loss on disposal because the loss reduces book income. The old equipments book value is historical cost ($220,000) minus accumulated depreciation ($208,000).

The tax benefit is the accrual-basis loss on the disposal times the effective tax rate.


Question 3

Post-investment audits?



Answer : B

Post-investment audits should be conducted to serve as a control mechanism and to deter managers from proposing unprofitable investments. Actual-to-expected cash flow comparisons should be made, and unfavorable variances should be explained. Individuals who supplied unrealistic estimates should have to explain Differences.


Question 4

The maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative is called?



Answer : A

An opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative. In capital budgeting, the most basic application of this concept is the desire to place the company's limited funds in the most promising capital project(s).


Question 5

Book rate of return is an unsatisfactory guide to selecting capital projects because

I . It uses accrual accounting numbers

II . It compares a single project against the average of capital rejects.

III . It uses cash flows to gauge the desirability of the project.



Answer : B

A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the compas choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number 'may be a hand Full of good projects melding up for a large number of poor investments.


Question 6

Which of the following is not a category of relevant cash flows'?



Answer : C

Relevant cash flows are a much more reliable guide when judging capital projects, since only they provide a true measure of a project's potential to affect shareholder value. The relevant cash flows can be divided into three categories. (1) net initial investment, (2) annual net cash flows, and (3) project termination cash flows. An incremental cash flow is the difference in cash received or disbursed resulting from selecting one option instead of another. It is not a category of relevant cash Bows.


Question 7

What is a challenge that the long-term aspect of capital budgeting presents to the management accountant?



Answer : B

Capital budgeting is the process of planning and controlling investments for long-tern, projects It is this long-term aspect of capital budgeting that presents the management accountant with specific challenges. Most financial and management accounting topics concern tracking and reporting activity for a single accounting or reporting cycle, such as one month or one year, By their nature, capital projects affect multiple accounting periods and will constrain the organization's financial planning well into the future. Once made, capital budgeting deacons tend to be relatively inflexible.


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Total 1336 questions