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IIA CIA Exam
Certified Internal Auditor Exam (Page 44 )

Updated On: 12-Jan-2026
Page 44 of 342
PDF with 1702 Questions

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

  1. Inflation has no impact on financial ratio analysis.
  2. Inflation affects financial ratio analysis for one entity over time but not comparative analysis of entities of different ages.
  3. Inflation affects financial ratio analysis for one entity over time, as well as comparative analysis of entities of different ages.
  4. Inflation affects comparative analysis of entities of different ages but not financial ratio analysis for one entity over time.

Answer(s): C

Explanation:

Inflation is the diminution over time of the purchasing power of money. Because balance sheet amounts are expressed in terms of money, historical cost amounts for different periods are measured in units representing different levels of purchasing power. Profit or loss is also distorted because of inflation's impact on depreciation expense and inventory costs. Inflation therefore impairs the comparability of financial statement items, whether for the same entity overtime or for entities of differing ages. Presented below are partial veer-end financial statement data for entities A and B.



In May. Raymar will be required to

  1. Repay US $20, 000 principal and pay US $1, 000 interest
  2. Repay US $90, 000 principal and pay US $100 interest
  3. Pay US $900 interest
  4. Borrow an additional US $20, 000 and pay US $1, 000 interest.

Answer(s): D

Explanation:

The company will have to borrow US $100, 000 in April. which means that interest will have to be paid in May at the rate of 1% per month 12% annual rate). Consequently, interest expense is US $1, 000 $100, 000 x1%) May sales x 50%) + $50, 000 April sales x 50%)]. Disbursements in May $4rt, nrtr! [ 740, 000 May payables x 75%) + $40, 000 April payables 25%)]. In addition to the May accounts payable disbursements, payroll and other disbursements are US $60, 000, bringing total disbursements to US $101, 000 $60, 000 + $40, 000 + $1, 000 Thus, disbursements exceed receipts by US $26, 000 $101 , 06u - $75, 000). However, cash has a beginning surplus balance of US $7, 500 $100, 000 April loan - $92, 500 negative cash flow for April). As a result, the company needs to borrow an additional US $18, 500 to eliminate its cash deficit. Given the requirement that loans be in US $10, 000 increments, the May loan must be for US $20, 000. The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a US Collections. 50% of the current month's sales budget and 50% of the previous month's sales budget. $200, 000 line of credit with its bank at a 12% annual rate of Accounts Payable Disbursements. 75% of the current month's interest on which borrowings for cash deficits must be made in US$. increments. There is no outstanding balance on the accounts payable budget and 25% of the previous month's accounts payable budget. line of credit loan on April 1. Principal repayments are to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there are no outstanding balances on the loans. Raymar will invest any cash in excess of its desired end-of-month cash balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of US All other disbursements occur in the month in which they ar budgeted.



Ordinary shareholders with preemptive rights are entitled to

  1. Vote first at annual meetings.
  2. Purchase any additional bonds sold by the entity.
  3. Purchase any additional shares sold by the entity.
  4. Gain control of the entity in a proxy fight.

Answer(s): C

Explanation:

Preemptive rights protect ordinary shareholders, proportional ownership interests from dilution in value. A secondary purpose is to maintain the shareholders' control of the entity. Accordingly, the preemptive right, whether granted by statute or by the corporate charter, grants ordinary shareholders the power to acquire on a pro rata basis any additional ordinary shares sold by the entity. Preemptive rights also apply to debt convertible into ordinary shares.



P Co. purchased term bonds at a premium on the open market. These bonds represented 20% of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies is

  1. Included as a decrease in retained earnings.
  2. Included as an increase in retained earnings.
  3. Reported as a deferred debit to be amortized over the remaining life of the bonds.
  4. Reported as a deferred credit to be amortized over the remaining life of the bonds.

Answer(s): A

Explanation:

Because a consolidated financial statement should include both P and S as a singleconsolidated) reporting entity, the purchase of the outstanding bonds of S by Pat a premium was in substance a retirement of debt for more than the debt's carrying amount. This transaction should be reflected in the consolidated income statement for the year of the purchase as a constructive loss from the retirement of debt. Hence, the effect on the balance sheet is to decrease retained earnings by an amount equal to the premium plus the unamortized discount before the tax effect.



On January 1. a company has no opening inventory balance_ The following purchases are made during the year:

There are 10.000 units in invo ntory on December 31. If the company uses the first in. first outFIFO) method of inventory valuation, the ending inventory balance will be

  1. US $77, 500
  2. US $85, 000
  3. US $86, 250
  4. US $95, 000

Answer(s): A

Explanation:

Under first-in, first-outFIFO) inventory valuation, the 10, 000 units in ending inventory are assumed to have been the most recent items purchased. The cost of the most recent 10, 000 units purchased is:5, 000 units x US $7.50) +5, 000 units x $8) e US $77, 500.



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