CAA CAA Financial Management & Ethics 2 — Questions and Answers
Question 1: Under the Sarbanes-Oxley Act (SOX) Section 404, management must:
- File quarterly tax returns
- Assess and report on the effectiveness of internal controls over financial reporting (Correct answer)
- Obtain a second audit opinion
- Disclose all related-party transactions publicly
Correct answer: Assess and report on the effectiveness of internal controls over financial reporting
SOX Section 404 requires management to assess the effectiveness of internal controls over financial reporting and have auditors attest to that assessment.
Question 2: The concept of 'independence in appearance' for an accountant means:
- The accountant must avoid any financial interest in the client
- Third parties must perceive the accountant as unbiased and objective (Correct answer)
- The accountant must be physically separate from the client
- The accountant should dress professionally
Correct answer: Third parties must perceive the accountant as unbiased and objective
Independence in appearance requires that a reasonable, informed observer would conclude that the accountant is free from any bias or conflict of interest.
Question 3: Which working capital management strategy typically reduces cash conversion cycle the most?
- Extending accounts payable payment terms
- Shortening inventory holding period
- Accelerating accounts receivable collection
- All of the above combined (Correct answer)
Correct answer: All of the above combined
The cash conversion cycle = Days in inventory + Days receivable outstanding − Days payable outstanding; reducing all three components has the greatest combined impact.
Question 4: A company has a debt-to-equity ratio of 2:1. This means:
- Equity is twice as large as debt
- The company has $2 of debt for every $1 of equity (Correct answer)
- The company uses no equity financing
- The company's assets equal its liabilities
Correct answer: The company has $2 of debt for every $1 of equity
A debt-to-equity ratio of 2:1 means the company has two dollars of debt for every one dollar of equity in its capital structure.
Question 5: Which ethical framework focuses on maximizing overall welfare or 'the greatest good for the greatest number'?
- Deontological ethics
- Virtue ethics
- Utilitarian ethics (Correct answer)
- Rights-based ethics
Correct answer: Utilitarian ethics
Utilitarian ethics judges actions by their outcomes, seeking to maximize total well-being across all affected parties.
Question 6: Net present value (NPV) is considered superior to payback period because NPV:
- Is simpler to calculate
- Considers the time value of money and all project cash flows (Correct answer)
- Ignores cash flows after the payback point
- Relies on accounting income rather than cash flows
Correct answer: Considers the time value of money and all project cash flows
NPV accounts for the time value of money by discounting all future cash flows, making it a more theoretically sound investment criterion than payback period.
CAA CAA Financial Management & Ethics 2
Under the Sarbanes-Oxley Act (SOX) Section 404, management must: