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IIA CIA Exam
Certified Internal Auditor Exam (Page 56 )

Updated On: 12-Jan-2026
Page 56 of 342
PDF with 1702 Questions

An entity offers its customers credit terms of a 2% discount if paid within 10 days. or the full balance is due within 30 days2/10, n/30). If some customers take advantage of the cash discount and others do not, which of the following accounts will appear on the income statement if the net method of recording receivables is employed? Sales Discounts
Sales Discounts Forfeited

  1. Yes Yes
  2. Yes No
  3. No No
  4. No Yes

Answer(s): D

Explanation:

The gross method accounts for receivables at their face amount. If a discount is taken. a
sales discount is recorded and classified as an offset to sales in the income statement to yield net sales. The net method records receivables net of the applicable discount. If the payment is not received during the discount period, an interest revenue account, such as sales discounts forfeited. is credited at the end of the discount period or when the payment is received. Accordingly, the application of the net method requires a sales discount forfeited but not a sales discount account.



Based on the Year 2 year-end balance of accounts receivable and the Year 2 income statement, the company had an average collection period for Year 2 of

  1. 49 days.
  2. 52 days
  3. 73 days.
  4. 78 days.

Answer(s): C

Explanation:

The average collection period for Year 2 is 73 days [US $300, 000 accounts receivable$1.500.000 sales - 365 days)].



In Year 2, the entity had cash provided by operations of

  1. US $219, 000
  2. US $244, 000
  3. US $344, 000
  4. US $469, 000

Answer(s): A

Explanation:

Cash provided by operations equals profit, plus depreciation, minus the increase in accounts receivable, minus the decrease in accounts payable. The cash provided is US $219, 000 [$294, 000 + $50, 000 -$300, 000 - $200, 000) -$275, 000 - $250, 000)]. An increase in receivables is a noncash component of profit. A decrease in accounts payable is added when adjusting cost of goods sold to reflect cash paid to suppliers. Thus, it is subtracted when adjusting profit to arrive at cash provided by operations.
An entity has the following statements:



Lawson Ltd. has the opportunity to increase annual sales US $100, 000 by selling to a new, riskier group of customers. Based on sales, the uncollectible expense this increase to be 15%, and collection costs will be 5%. Manufacturing and selling expenses are 70% of sales, and the effective tax rate is 40%. If Lawson accepts this opportunity, the after-tax profit will increase by

  1. US $4, 000
  2. US $6, 000
  3. US $10, 000
  4. US $9, 000

Answer(s): B

Explanation:

Manufacturing and selling costs exclusive of bad debts equal 70% of sales. Hence, the gross profit en the US $100, 000 increase in sales will be US $30, 000$100, 000 x 305:
Assuming US $15, 000 of bad debts and US $5, 000 of collection expense, the increase in pre-tax profit will be
An entity has the following statements:



The entity has current assets of

  1. US $1, 000, 000
  2. US $3, 033, 333
  3. US $3, 333, 333
  4. US $3, 633, 333

Answer(s): B

Explanation:

Return on total assets3%) equals profitUS $100, 000) divided by total assets. Consequently, total assets equal US $3, 333, 333$100, 000 - 03). Current assets must therefore equal US $3, 033, 333$3, 333, 333 total assets - $300, 000 other assets).



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