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IIA CIA Exam
Certified Internal Auditor Exam (Page 28 )

Updated On: 12-Jan-2026
Page 28 of 342
PDF with 1702 Questions

Which one of the following is the best characteristic concerning the capital budget? The capital budget is a n)

  1. Plan to ensure that there are sufficient funds available for the operating needs of the company.
  2. Exercise that sets the long-range goals of the company including the consideration of external influences caused by others in the market.
  3. Plan that results in the cash requirements during the operating cycle.
  4. Plan that assesses the long-term needs of the company for plant and equipment purchases.

Answer(s): D

Explanation:

Capital budgeting is the process of planning expenditures for long-lived assets. It involves choosing among investment proposals using a ranking procedure. Evaluations are based on various measures involving rate of return on investment.



Everything else being equal, the internal rate of return IRR) of an investment project will be lower if

  1. The investment cost is lower.
  2. Cash inflows are received later in the life of the project
  3. Cash inflows are larger.
  4. The project has a shorter payback period.

Answer(s): B

Explanation:

The IRR is the discount rate at which the net present value is zero. Because the present value of a dollar is higher the sooner it is received, projects with later cash flows will
have lower net present values for any given discount rate than will projects with earlier cash flows, if other factors are constant. Hence. projects with later cash flows will have a lower IRR A company that annually reviews its investment opportunities and selects appropriate capital expenditures for the coming year is presented with two projects, called Project A and Project B. Best estimates indicate that the investment outlay for Project A is US and for Project B. is LI: $ 1 million. The projects are considered to be equally risky. Project A is expected to general cash inflows of US $40, O10 at the end of each year for 2 years. Project B. is expected to generate cash inflows of US $700, 000 at the end of the first year and US $500, 000 at the end of the second year. The company has a cost of capital of 8%.



If the net present value NPV) of Project A is known to be higher than the NPV of Project

  1. it can be concluded that
  2. The internal rate of return [IRR) of Project A will definitely be higher than the IRR of Project B
  3. The IRR of Project A will definitely be lower than the IRR of Project B
  4. The ranking of IRRs is indeterminate based on the information provided
  5. The payback period for Project A is definitely shorter than the payback period for Project B.

Answer(s): C

Explanation:

The IRR is the discount rate at which the net present value is zero. The NPV is the present value of future cash flows minus the present value of the investment. Because of a possible difference in the scale of the projects and other factors, a higher NPV does not necessarily result in a higher IRR. A company that annually reviews its investment opportunities and selects appropriate capital expenditures for the coming year is presented with two projects, called Project A and Project BBest estimates indicate that the investment outlay for Project A is US $30, 000 and for Project B. is US $1 million. The projects are considered to be equally risky. Project A is expected to generate r, 7eIi inflows of US $40.000 at the end of each year for 2 years. Project B. is expected to generate cash inflows of US, $71.-.10 rH.-F.1 at the end of the first year and US $500.000 at the end of the second year. The company has a cost of capital of 8%.



When sales volume is seasonal in nature, certain items in the budget must be coordinated. The three most significant items to coordinate in budgeting seasonal sales volume are

  1. Production volume, finished goods inventory, and sales volume.
  2. Direct labor hours, work-in-process inventory, and sales volume.
  3. Raw material inventory, direct labor hours, and manufacturing overhead costs.
  4. Raw material inventory, work-in-process inventory, and production volume.

Answer(s): A

Explanation:

The most difficult items to coordinate in any budget, particularly for a seasonal business. are production volume, finished goods inventory, and sales. Budgets usually begin with sales volume and proceed to production volume, but the reverse is sometimes used when production is more of an issue than generation of sales. Inventory levels are also important because sales cannot occur without inventory. and the maintenance of high inventory levels is costly. The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a US $200, 000 line of credit with its bank at a 12% annual rate of interest on which borrowings for cash deficits must be made in US$. increments. There is no outstanding balance on the line of credit loan on April 1 Collections. 50% of the current month's sales budget and 50% of the Principal repayments are to be made in any month in which previous month's sales budget. there is a surplus of cash. Interest is to be paid monthly. If· Accounts Payable Disbursements. 75% of the current month's there are no outstanding balances on the loans. Raymarwill invest any cash in excess of its desired end-of-month cash accounts payable budget and 25% of the previous month's accounts payable budget. balance in
U.S Treasury bills. Raymar intends to maintain a All other disbursements occur in the month in which they are budgeted. minimum balance of US $100, 000 at the end of each month by either borrowing for deficits below the minimum balance or investing any excess cash. Expected monthly collection and disbursement patterns are shown in the columns to the right.



Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that provides the necessary input data for the direct labor budget is the

  1. Sales forecast
  2. Raw materials purchases budget.
  3. Schedule of cash receipts and disbursements.
  4. Production budget.

Answer(s): D

Explanation:

A master budget typically begins with the preparation of a sales budget. The next step is to prepare a production budget. Once the production budget has been completed, the next step is to prepare the direct labor, raw material, and overhead budgets. Thus, the production budget provides the input necessary for the completion of the direct labor budget.



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