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IIA CIA Exam
Certified Internal Auditor Exam (Page 59 )

Updated On: 12-Jan-2026
Page 59 of 342
PDF with 1702 Questions

A project is expected to result in the following adjustments over the next year:
· Cash sales increase by US $400, 000.
· Expensesexcept depreciation) increase by US $180, 000 · Depreciation increases by US $80, 000.
Assume the corporate tax rate is 34%. The total relevant net cash flows during that year are

  1. US $92, 400
  2. US $140, 000
  3. US $172, 400
  4. US $220, 000

Answer(s): C

Explanation:

The increase in pre-tax profit is US $140, 000$400, 000 cash sales increase - $180, 000 nondepreciation expenses increase - $80, 000 depreciation). Thus, taxes will increase by US $47, 600$140, 000 x 34%), and the increase in net cash inflows will be US $172, 400$400, 000 - $180, 000 - $47, 600).



If Bandit Co. uses the <List A> approach to estimate bad debt expense, the estimated bad debt expense will be <List Be.

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

Answer(s): C

Explanation:

Using the income statement approach, the bad debt expense is determined using a percentage of total credit sales. Thus, bad debt expense is US $20, 000$400, 000 credit sales x 5% estimated bad debt rate).



On January 31. Year 3, a company prepaid the US $72, 000 rental fee for a parking lot it leases. The rental fee covered a 3-year period beginning February 1. Year 3. What is the effect of this transaction on the December 31 Year 3, financial statements for each of the following?

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

Answer(s): B

Explanation:

The US $72, 000 rental fee should be recognized as expense evenly over the 36-month
duration of the lease. In Year 3, US $22, 000 should be deferred to current expenses [(US $72, 000 36 months) x 11 months], and US $50, 000 should be deferred as prepaid expense. On January 1. a new landscaping firm. Bandit Co. acquired a fleet of vehicles, all the necessary tools and equipment. and a parking and storage facility. It began operations immediately. It is now the end of the first year of operations, and the first set of year-end financial statements are being prepared decisions have to be made regarding the appropriate accounting and reporting practices for this company. Relevant information for several of these items is described in the following list of transactions and events:
At year-end the parking and storage facility that was purchased for US $150.000 has a fair value of US $250.000 The physical flow of inventory is first in, first out, and the cost of materials has risen steadily over the year. To promote sales for the coming year, maintenance contracts were sold in December at very reasonable prices, provided that the customers paid cash. On April 1, the company arranged a US $100, 000 10% bank loan. Interest payments of US $5, 000 are due on October 1 and April 1 of each year during the 5-year term of the loan. During the first year of operations, the company experienced a 5% bad debt rate on credit sales None of the bad debts are expected to be recovered, given that 5% i s the industry average level of bad debts. Total credit sales for the year were U $400, 000. The year-end balance of accounts receivable includes uncollected overdue accounts of US $100, 000. Half of the uncollected overdue amounts are estimated to be uncollectible.



On December 1. Year 1, a company using the installment sales method sold goods that cost US $1.000 for US $1.500. The buyer paid US $100 down. Monthly payments start January 1. Year 2. Interest accrues at 1% per month on the unpaid balance. To the nearest dollar, the effect on profit for Year 1 is

  1. US $33 increase.
  2. US $47 increase.
  3. US $67 increase.
  4. US $114 increase.

Answer(s): B

Explanation:

The gross profit margin is 33-1/3% [(US $1.500 - $1.000) $1, 500], so the amount of profit from the US $100 down payment recognizable in Year 1 is US $33rounded). Interest accrued on the US $1.400$1, 500 - $100) balance for 1 month is US $14. Consequently the effect on profit is US $47$33 $14).



Assume that the enterprise reports cost of goods sold of US $200, 000 and interest expense of US $10, 000 for the current period. Also assume a 50% tax rate on corporate earnings. The final closing entry required to ensure that current earnings are incorporated into year-end retained earnings is

  1. Income summary US $140, 000
    Retained earnings US $140.000
  2. Retained earnings US $280, 000
    Income summary US $280.000
  3. Income summary US $240, 000
    Retained earnings US $240.000
  4. Retained earnings US $240, 000
    Income summary US $240.000

Answer(s): A

Explanation:

Current period pretax net income equals US $280, 000$750, 000 sales ­ $200, 000 CGS - $60, 000 depreciation - $10, 000 interest - $200, 000 administrative expenses. Thus, after- tax net income credited to retained earnings equals US $140.000 [(10 - .5) x $280, 000.



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