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IIA CIA Exam
Certified Internal Auditor Exam (Page 34 )

Updated On: 12-Jan-2026
Page 34 of 342
PDF with 1702 Questions

What would be the effect of a lower tax rate on the ending balance of ordinary shares and on dividends said for the year?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): C

Explanation:

The balance in the ordinary shares account represents share capital i.e. capital contributed by owners, not earnings retained in the business. It is not affected by a change in tax ate. I ./id. ends will increase. not however, because they are a constant percentage of after-tax earnings. An entity reports the following account balances at year-end:

The opening balance of ordinary shares was US $100, 000. The opening balance of ordinary earning was US $82, 500. The entity had 10, 000 ordinary shares outstanding all year. No dividends were paid during the year.



The entity will pay dividends for the year of

  1. US $10, 625
  2. US $21.250
  3. US $23, 125
  4. US $42, 500

Answer(s): A

Explanation:

The entity has a dividend payout ratio of 25% of profit. Profit before taxes is US $85, 000 [$500, 000 sales - $250, 000 CGS - $25, 000 G&A expenses - $400, 000 LT debt x 10% interest rate) - $600, 000 fixed assets - 6 years)]. Hence, after-tax profit is US $42, 500 [$85, 000 x 1.0 - .5)], and the dividend payout is US $10, 625 ($42, 500 25%). During the year ended December 31. an entity had US $500, 000 in sales revenue and purchased US $150, 000 of inventory. The cost of goods sold was US $250, 000 for the year, and the entity incurred US $ 25.000 of general and administrative expenses. The January 1 opening balance sheet was as follows:

The cost of long-term debt financing is 10% per annum, payable in one installment on December 31 of each year. The entity has a 50% tax rate. The entity has a dividend payout ratio of 25%. The fixed assets were 1-year old at the start of the current year were originally estimated to have a 6-year useful life. and are being depreciated on the straight- line basis.



Which of the following is true about the impact of price inflation on financial ratio analysis?

  1. Inflation impacts only those ratios computed from balance sheet accounts.
  2. Inflation impacts financial ratio analysis for one entity over time, but not comparative analysis of entities of different ages.
  3. Inflation impacts financial ratio analysis for one entity overtime, as well as comparative analysis of entities of different ages.
  4. Inflation impacts comparative analysis of entities of different ages, but not financial ratio analysis for one entity over time.

Answer(s): C

Explanation:

Inflation has considerable impact on financial ratio analysis. This impact distorts both analysis of a single entity overtime and comparative analysis of different aged entities. During the year ended December 31. an entity had US $500, 000 in sales revenue and purchased US $150, 000 of inventory. The cost of goods sold was US $250, 000 for the year. and the entity incurred US $ 25.000 of general and administrative expenses. The January 1 opening balance sheet was as follows:

The cost of long-term debt financing is 10% per annum, payable in one installment on December 31 of each year. The entity has a 50% tax rate. The entity has a dividend
payout ratio of 25%. The fixed assets were 1-year old at the start of the current year. were originally estimated to have a 6-year useful life. and are being depreciated on the straight- line basis.



The networking capital is

  1. US $160
  2. US $210
  3. US $350
  4. US $490

Answer(s): B

Explanation:

Net working capital is the difference between current assets and current liabilities. It equals US $210 $100 cash + $200 A/R + $50 inventory- $140 A/P).



A condensed comparative balance sheet for an entity appears below:

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

The current ratio is determined by dividing current assets by current liabilities. The acid- test ratio is determined by dividing quick assets by current liabilities. At December 31. Year 1. The current ratio is 6 to 1 [(US $40, 000 + $120, 000 + $200, 000) - $60, 01101. December 31. Year 2, the current ratio is 4.3 to 1 [(US $30, 000 + $100, 000 + $300, 000) - $100, 000]. Hence, there was a decrease in the current ratio. At December 31, Year 1 , the acid-test ratio is 2.667 to 1 [(US $40, 000 + $120, 000) - $60.000]. At December 31, Year 2, the acid-test ratio is 1.3 to 1 [(US $3:0, 000 + $100, 000) - $100, 000]. Thus, the acid- test ratio also declined. An entity's financial statements for the current year are presented below:



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