FREE Certified Management Accountant MCQ Question and Answers
Which financial instrument forecasts the rate of a short-term investment's value decline?
Value at Risk: Under typical market conditions, Value at Risk calculates the amount an investment or portfolio is expected to lose over a brief period of time. It is calculated based on the length of time the investment will be held as well as a confidence level established by past volatility and price movements. Hedging is a strategy for lowering risk brought on by changes in commodity prices. According to the theory of diversification, risk can be reduced if a portfolio includes a variety of assets, including both high-risk and low-return options as well as investments with a middle ground between the two. The rate of return, which measures profitability, is the profit or loss made on an investment.
Which of the following variables could influence return rates?
Interest that is compounded over time: A rate return is a gain or loss on an investment over a given time frame. The rate of return compares an investment's profits or losses to the initial sum that was invested at a specific period and will eventually generate cash flow. The cash flow may come from capital gains earned upon selling the investment, dividends received while the investment is kept, or both. A one-year holding period is typically used to base the rate of return on a percentage. If the investment is kept for more than a year, compound interest may be taken into consideration while calculating the rate. Due to fluctuating exchange rates on the global market, the time value of money is also taken into consideration. Another element that lowers the value of the money invested is inflation.
Multinational firms defend themselves from vulnerability to currency conversion risk by:
Creating consolidated financial statements: The risk that exchange rate conversions will impact the value of assets, liabilities, equity, or income is known as foreign currency translation exposure. By utilizing consolidation strategies for its financial accounts, a multinational firm can lower the risk. Consolidated financial statements are financial statements that combine the accounting records of the corporation's subsidiaries with the accounting records of the parent company to produce a single, thorough financial statement. Recording an exchange rate gain or loss in financial accounts is another way to reduce the risks associated with currency translation.
What kind of trade organization employs a standard unit of account for its members?
Economic union: An economic union is a group of countries that use the same currency. An organization of countries known as a customs union imposes a standard tariff on non-members while eliminating customs restrictions among its members. A common market is a group of nations established to promote commerce and lower regulatory standards and trade barriers among members. Free trade is international business conducted without protective tariffs.
Which of the following is not a modification of accounting principles?
Discontinued operations: When a company modifies the way it records financial data, it changes an accounting principle. Converting from cash accounting to accrual accounting, changing the depreciation technique, or switching inventory procedures from LIFO to FIFO are a few examples of changes in accounting principles. The financial statements for the year in which the modification took place reflect this change. The cumulative effect of a change in accounting principle is the name of the financial account on the income statement where this modification is noted. Additionally, a justification for the adjustment must be provided in the notes to the financial statement.
Which profit margin calculation best represents prospective earnings?
Gross Profit Margin: The portion of sales proceeds that are not used for expenses is known as the gross profit margin. By dividing gross income by net sales, it is calculated. Since a rise in profits may not always be followed by an increase in profit margin, the gross profit margin is thought to be a more accurate predictor of future earnings than merely looking at earnings alone. A higher gross profit margin means that there is more money available for a company to pay its expenses, which in turn shows that this company has superior cost control. The gross profit margin will decrease if an organization's costs have risen faster than its revenues. Return on sales, another name for operating profit margin, is a metric for gauging operational effectiveness. The percentage of revenue left over after covering variable production expenses is known as the net profit margin.
What does the return's standard deviation represent?
Investment risk: Standard deviation of return measures volatility and risk by examining the annual rate of return on investment. Historical volatility is another name for it. A stock is deemed to be more volatile the higher the standard deviation. Expected gain measures the likelihood of a gain or loss on an investment, weighted by the likelihood that the gain or loss will actually materialize. The degree of risk associated with an investment with respect to the financial markets is determined by the coefficient of variation.