Page 3

7. If activity-based costing is implemented in an organization without any other changes

being effected, total overhead costs will
a. be reduced because of the elimination of non-value-added activities.
b. be reduced because organizational costs will not be assigned to products or services.
c. be increased because of the need for additional people to gather information on cost
drivers and cost pools.
d. remain constant and simply be spread over products differently.

11. Edil Company produces and sells a single product. The costs and selling prices on a per-unit
basis are as follows:
Selling Price P120
Materials 35
Labor 15
Variable overhead 10
Fixed overhead 10
Variable selling and administrative 20
Fixed selling and administrative 5

The above per-unit figures are computed based on the company’s normal capacity of
20,000 units.

The company’s expected margin of safety is

a. 7,500 units. c. 62.5%.
b. P2,400,000. d. P12,500.

Page 4

13. Assume that the company’s management learned that a new technology that will increase
the quality of its product is available. If implemented, its projections for next year will be
changed:
1. The selling price of the product will increase to P75 per unit.
2. Fixed manufacturing costs will increase by 20%.
3. Additional advertising costs will be incurred to promote the higher-quality
product. This will increase fixed non-manufacturing cost by 10%.
4. The improved product will require a new material that will increase direct
materials cost by P4.50

If the new technology is adapted, how much sales should the company make to earn a pre-
tax profit of 10% on sales?
a. P366,130 c. P253,324
b. P358,875 d. P353,897
14. As projected net income increases the
a. degree of operating leverage declines. c. break-even point goes down.
b. margin of safety stays constant. d. contribution margin ratio goes up.

Page 5

STANDARD COSTS AND VARIANCE ANALYSIS

16. The materials mix variance for a product is P450 unfavorable and the materials yield
variance is P150 unfavorable. This means that
a. the materials price variance is P600 unfavorable.
b. the materials quantity variance is P600 unfavorable
c. the total materials cost variance is definitely P600 unfavorable.
d. the materials price variance is also unfavorable, but the amount cannot be
determined from the given information.
 Page 7
PRODUCT COSTING

25. A basic tenet of variable costing is that period costs should be currently expensed. What is
the rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the
amounts to specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate
these costs to production and defer a current cost of doing business.

26. The following information regarding fixed production costs from a manufacturing firm is
available for the current year:

Fixed costs in the beginning inventory P16,000

Fixed costs incurred this period 100,000

Which of the following statements is not true?

a. The maximum amount of fixed production costs that this firm could deduct using
absorption costs in the current year is P116,000.
b. The maximum difference between this firm's the current year income based on
absorption costing and its income based on variable costing is P16,000.
c. Using variable costing, this firm will deduct no more than P16,000 for fixed
production costs.
d. If this firm produced substantially more units than it sold in the current year,
variable costing will probably yield a lower income than absorption costing.

27. If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in
a. higher income and assets. c. lower income but higher assets.
b. higher income but lower assets. d. lower income and assets.
 Page 8

ITEMS 28 TO 30 ARE BASED ON THE FOLLOWING:

The following information is available for X Co. for its first year of operations:
Sales in units 5,000
Production in units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40

28. What would X Co. have reported as its income before income taxes if it had used variable
costing?
a. P30,000 c. P67,500
b. (P7,500) d. can’t be determined from the given
information
29. What was the total amount of SG&A expense incurred by X Co.?
a. P30,000 c. P6,000
b. P62,500 d. can’t be determined from the given
information
30. Based on variable costing, what would X Co. show as the value of its ending inventory?
a. P120,000 c. P27,000
b. P 64,500 d. P24,000

31. Which of the following is an advantage of using variable costing?

a. Variable costing complies with Generally Accepted Accounting Principles.
b. Variable costing complies with the National Internal Revenue Code.
c. Variable costing is most relevant to long-run pricing strategies.
d. Variable costing makes cost-volume-profit relationships more easily apparent.

32. In its first year of operations, Nasty Company had the following costs when it produced
100,000 units and sold 80,000 units of its only product:
Manufacturing costs:
Fixed P180,000
Variable 160,000
Selling and administrative costs:
Fixed 90,000
Variable 40,000

How much higher would Nasty’s net income be if it used full absorption costing instead of
variable costing?
a. P94,000 c. P36,000
b. P68,000 d. P54,000
 Page 9

36. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.

Page 10
ITEMS 37 TO 40 ARE BASED ON THE FOLLOWING:

Schundel Hair Care Company produces shampoo with conditioner. This is the company’s
only product, which it sells under the name “Shamcon.”

The manufacturing cost data for Shamcon are as follows:

Quantity required Current market price
Materials: per 1,000-ml bottle per ml
Chem 1 4 ml P0.54
Chem 2 3 ml 0.36
Chem 3 2 ml 0.20

Direct labor: 2 hours per bottle @ P3 per hour

Factory overhead:
Variable overhead – P2.00 per direct labor hour
Fixed overhead – 4.00 per direct labor hour

Clever Company, owner and operator of a chain of hotels, asked Schundel Hair Care
Company to submit a bid for 500 boxes of Shamcon. Each box will contain 24 bottles. Per
Clever’s specifications, its order should be different in chemical composition from the regular
Shamcon. According to Schundel Company’s production manager, Clever’s specifications
can be met if an additional chemical, Chem 4 would be used. Schundel Company has
60,000 ml of this chemical. Chem 4 was used by the company in one of its brands that it
decided to eliminate. The remaining inventory of Chem 4 was not sold or discarded
because it does not deteriorate and the company has adequate space for its storage.
Schundel Company can sell Chem 4 at the prevailing market price of P0.40 per ml less
P0.10/ml selling and handling costs. Clever’s order would require 5 ml of Chem 4 per
bottle.

The company has a stock of Chem 5. This was used by Schundel Hair Care for its
manufacture of another product that is no longer being produced. Chem. 5, which cannot
be used in Shamcon, can be substituted for Chem 1 on a one-for-one basis without
affecting the quality of the Clever order. There is no problem about the supply of Chem 1.
 At present, the company has 20,000 ml of Chem 5 in its inventory, which has a salvage
value of P6,000.

The production of the Clever’s order would require the same direct labor hours per bottle as
in the regular Shamcon. However, at present, the company has only 20,000 direct labor
hours available. The Clever order can be produced if the workers would work overtime,
although an overtime premium of 30% of the regular rate should be paid.

Schundel Hair Care Company’s policy is to price new products at 130% of full manufacturing
cost.

37. If Schundel Company bids this month for the special one-time order of 500 boxes of the
product, the special order’s total direct materials cost will be
a. P73,944. c. P68,880.
b. P61,680. d. P56,880.

38. If Schundel Hair Care Company bids this month for the special one-time order of 500 boxes
of the product, the special order’s total relevant conversion cost will be
a. P123,600. c. P120,000.
b. P219,600. d. P216,000.

39. If the company’s policy is to price new products at 130% of full manufacturing cost, what is
the bid price per unit for this one-time special order of Clever Company?
a. P19.55 c. P29.95
b. P 6.91 d. P23.80

40. What will be the total variable manufacturing costs for the subsequent, recurring 500-box
orders?
a. P180,480 c. P287,280
b. P373,464 d. P191,280

Page 11

43. Spikey Company produces two products: Pat and Chin. The projected income for the coming
year, segmented by product line, follow:
Pat Chin Total
Sales P300,000 P2,500,000 P2,800,000
Less variable expenses 100,000 500,000 600,000
Contribution margin P200,000 P2,000,000 P2,200,000
Less direct fixed expenses 28,000 1,500,000 1,528,000
Product margin P172,000 P 500,000 P 672,000
Less common fixed cost 100,000
Operating income P 572,000

The selling prices are P30 for Pat and P50 for Chin.

Spikey company can increase the sales of Pat with increased advertising. The extra
advertising would cost an additional P245,000, and some of the potential purchasers of Chin
would switch to Pat. In total, sales of Pat would increase by 25,000 units, and sales of Chin
would decrease by 5,000 units. This strategy would
a. increase Spikey’s total sales by P750,000.
b. decrease Spikey’s total contribution margin by P300,000.
c. increase Spikey’s total income by P55,000.
d. not affect Spikey’s total fixed costs.
 Page 12

47. Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more
than the stock’s par value. The company incurred underwriting fees of P10 per share. The
stocks will earn annual dividends of P12 per share. If the tax rate is 30%, the cost of
capital (preferred stocks) is
a. 10% c. 7.42%
b. 12% d. 10.91%

Page 13

48. At the beginning of the year, Djorn Corporation purchased a new equipment for P360,000. The
machine has an estimated useful life of four (4) years with no salvage value. It is expected to produce
cash flows from operations, net of income taxes of 32%, as follows:
Year 1 P128,000
2 112,000
3 144,000
4 96,000
5 80,000

Djorn Corporation uses the sum-of-the-years-digits method (SYD) in computing depreciation of its
depreciable assets. Using SYD, the new equipment will be depreciated as follows:
Year 1 (P360,000 x 4/10) P144,000
2 (P360,000 x 3/10) 108,000
3 (P360,000 x 2/10) 72,000
4 (P360,000 x 1/10) 36,000

The company’s cost of capital is 10%. The present value factors at 10% are as follows:
End of Year 1 0.909
2 0.826
3 0.751
4 0.683
Total, 4 years 3.170

If Djorn Corporation used the straight-line method of depreciation instead of the SYD method, the net
present value provided by the equipment would increase (decrease) by:
a. P13,464 c. (P4,308.48)
b. (P13,464) d. P4,308.48

49.
 Page 14

53. Ideally, the number of units that should be produced in a just-in-time manufacturing system
is equal to
a. the maximum productive capacity for the current period.
b. actual customer demand for the current period.
c. budgeted customer demand for the current period.
d. budgeted customer demand for the following period

Page 15
ITEMS 57 to 61 ARE BASED ON THE FOLLOWING INFORMATION:
The cost of goods sold section of Dale Corporation’s operating budget for 2015 is presented below:

Materials: Inventory, January 1 (16,000 units) P 960,000

Purchases 9,120,000
Available for use P10,080,000
Inventory, December 31 (18,500 units) 1,184,000 P 8,896,000
Labor 784,000
Factory overhead: Variable P 2,009,600
Fixed 1,120,000 3,129,600
Cost of goods manufactured (140,000 units) P12,809,600
Add finished goods inventory, January 1 (9,300 units) 744,000
Cost of goods available for sale P13,553,600
Less finished goods inventory, December 31 (3,300 units) 301,600
Budgeted cost of goods sold P13,255,000

The actual results for the first quarter of 2015 require the following changes in the budget
assumptions:
 The budgeted production for the year is expected to increase by 5,000 units.
During the first quarter, the company has already produced 25,000 units. The
balance of production will be scheduled in equal segments over the last 3 quarters
of the budget year.
 The expected finished goods inventory on January 1 dropped to only 9,000 units,
but its total value will not be revised anymore. The ending inventory value is
computed using the average manufacturing cost for the year.
 A new Labor Bill passed by Congress is expected to be signed into a law by the
President. The new law will take effect beginning the last quarter of the budget
year, including a provision for an increase of 8% in wage rates.
 The company uses the FIFO method in valuing its materials inventory. During the
first quarter, the company purchased 27,500 units of direct materials for P1,760,000.
The remaining direct materials requirement will be purchased evenly for the last 9
 months of the budget year. Effective July 1, 2015, the beginning of the third
quarter, direct materials cost is expected to increase by 5%. The assumptions
regarding the quantity of materials inventories at the beginning and end of the year
will remain unchanged.
 The variable factory overhead of P2,009,600 includes indirect materials and factory
supplies amounting to P889,600. It is computed at 10% of the cost of materials
used. The balance of the variable factory overhead varies directly with production.
 There will be no change in the budgeted fixed factory overhead cost.

Based on actual data for the first quarter, as well as the changes in assumptions and
estimates in the budgeted data for the year, the company’s accountant prepared a revised
budgeted cost of goods sold statement. This revised statement should show:

57. budgeted materials purchases of

a. P9,696,000. c. P9,280,000.
b. P9,120,000. d. P9,440,000.

58. budgeted cost of materials inventory at December 31, 2015 of

a. P1,024,000. c. P1,184,000.
b. P1,243,200. d. P1,216,100.

59. the budgeted direct labor cost of

a. P846,720. c. P876,960.
b. P784,000. d. P829,920.

60. the budgeted cost of goods manufactured of

a. P12,809,600. c. P14,208,000.
b. P13,464,000. d. P12,344,000.

61. the budgeted cost of goods sold of

a. P13,901,578. c. P13,553,600.
b. P13,252,000. d. P14,208,000.

Page 16
WORKING CAPITAL MANAGEMENT & FS ANALYSIS

62. At the end of 2017, Gabbuat Company’s total assets was P500,000. In 2018, it earned net
income of P30,000 and paid dividends of P10,000. What is the company’s internal growth
rate?
a. 1% c. 5%
b. 4% d. 9%

63. A division of Lockman Corporation reported a return on investment of 20% for a recent
period. If the division's asset turnover was 5, its profit margin must have been
a. 100% c. 4%
b. 25% d. 2%

64. As of the end of 2017, Ice Company had total assets of P375,000 and equity of P206,250.
For 2018, its budget for capital investment projects is P62,500. To finance a portion of the
capital budget, the company may borrow from a bank which set a condition that the loan
would be approved, provided that the 2018 debt-to-equity ratio should be the same as the
debt-to-equity ratio in 2017.
How much debt should be incurred to satisfy the bank’s condition?
a. P28,125 c. P34,375
b. P62,500 d. P51,138

65. The management of Seymour Corporation asks you to prepare an analysis of the gross
profit variance based on their comparative income statements for 2015 and 2016:
2018 2017 Variance
Sales P990,000 P800,000 P190,000 F
Cost of goods sold 760,000 640,000 120,000 U
Gross profit P230,000 P160,000 P 70,000 F

The only known information given to you is that volume increased from 2017 to 2018 by
10%.

The variance in gross profit due to the change in volume is

 a. P80,000 favorable. c. P16,000 favorable.
b. P64,000 unfavorable. d. P70,000 favorable.

66. Last year’s asset turnover of Johvic Company was 3.0. This year, the company’s sales
increased by 25% and average total assets decreased by 5%. What is this year’s asset
turnover?
a. 3.9 c. 3.4
b. 3.6 d. 3.1

67. During the year, Tindugan Company earned net income of P60,000. For next year, it has a
capital budget of P80,000. If the company’s plowback ratio is 30%, how much external
funding is needed for the capital investment project?
a. P80,000 c. P56,000
b. P62,000 d. P98,000

68.Belle Corporation provided the following data are for the year ended Dec. 31, 2017:
Net credit sales P576,000
Average materials inventory 8,000
Average finished goods inventory 12,000
Average accounts receivable 80,000
Average accounts payable 5,000
Net credit purchases 120,000
Raw materials used 96,000
Gross profit rate 25%
Number of days in a year 360 days

What is the average number of days in the company’s operating cash conversion cycle?

a. 50 days c. 105 days

b. 75 days d. 45 days

Page 17

69.Using the data presented below, calculate the cost of goods sold for the Alpha Corporation for the year
just ended.
Current ratio 3.5
Acid test ratio 3.0
Current liabilities at year-end P600,000
Beginning inventory P500,000
Inventory turnover 8.0

a. P1,600,000 c. P3,200,000
b. P2,400,000 d. P6,400,000

DECENTRALIZATION & PERFORMANCE EVALUATION

70. Which of the following is necessary for any valid performance measurement?
a. It must be part of the financial accounting system in use.
b. It must be quantifiable.
c. Goal congruence must be promoted by its use.
d. It must be financial in nature.

71. Productivity is measured by the

a. total quantity of output generated from a limited amount of input during a time
period.
b. quantity of good output generated from a specific amount of input during a time
period.
c. quantity of good output generated from the quantity of good input used during a
time period.
d. total quantity of input used to generate total quantity of output for a time period.
73. A small manufacturing company recently stated its sales goal for a period was P100,000. At
this level of activity, its budgeted expenses were P80,000. Its actual sales were P100,000,
but its actual expenses were P85,000. This company operated
a. effectively and efficiently. c. effectively but not efficiently.
b. neither effectively nor efficiently. d. efficiently but not effectively.

Page 18

74. Computer Solutions Corporation manufactures and sells various high-tech office automation
products. Two divisions of Computer Solutions Corporation are the Computer Chip Division
and the Computer Division. The Computer Chip Division manufactures one product, a "super
chip," that can be used by both the Computer Division and other external customers. The
following information is available on this month's operations in the Computer Chip Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but
instead pays P45 to an external supplier for the 4,000 chips it needs each month.

Assume, for this question only, that the Computer Chip Division is selling all that it can
produce to external buyers for P50 per unit. How would overall corporate profits be affected
if it sells 4,000 units to the Computer Division at P45? (Assume that the Computer Division
can purchase the super chip from an outside supplier for P45.)

a. no effect c. P20,000 decrease

b. P20,000 increase d. P90,000 increase

75. The following information is given for the Alpha Division of Sorority Corporation.
Sales P600,000
Var. cost of goods sold 200,000
Fixed manufacturing costs 50,000
Variable selling 30,000
Fixed admin. (50% allocated) 20,000
Fixed selling (20% allocated) 50,000
Assets at cost 800,000
Accumulated depreciation 200,000
If Sorority Corporation uses ROI to evaluate division managers and uses historical cost as
the investment base, the ROI for Alpha Division is:
a. 31.25% c. 41.67%
b. 33.75% d. 45.00%

76. The following year-end data pertain to Adan Corporation:

Earning before interest and taxes P 800,000
Current assets 800,000
Non-current assets 3,200,000
Current liabilities 400,000
Non-current liabilities 1,000,000
 Adan Corporation pays an income tax rate of 32%. Its weighted-average cost of capital is
10%. What is Adan Corporation’s Economic Value Added (EVA)?
a. P184,000 c. P440,000
b. P144,000 d. P400,000

78. In the two following constraint equations, X and Y represent two products (in units)
produced by the Uncommon Products Corporation.

Constraint 1: 3X + 5Y < 4,200

Constraint 2: 5X + 2Y > 3,000

What is the maximum number of units of Product X that can be produced?

a. 4,200 c. 600
b. 3,000 d. 1,400

79. King Corporation operates its factory 300 days per year. Its annual consumption of Material
Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time
is 12 business days. What is the order point for Material Y?
a. 10,000 gallons c. 48,000 gallons
b. 38,000 gallons d. 58,000 gallons

80. The school canteen can sell either halo-halo or mami (hot noodle soup) on any given day.
The contribution margin that the canteen could earn from halo-halo and mami is affected by
the weather, as follows:

CONTRIBUTION MARGIN
Item sold
Hot Weather Cold Weather
Halo-Halo P15,000 P 6,000
Mami 11,400 12,000

If the probability of hot weather on a given day at this time is 60%, which item(s) should
the company sell?
a. Halo-Halo, because this item is salable when weather is hot.
b. Mami, because it has the higher expected payoff.
c. Halo-Halo and mami, so the canteen could maximize contribution margin.
d. 60% halo-halo and 40% mami.

81.Mr. Javee owns a piece of land that is adjacent to a big area of a vacant lot owned by the
city government. Recently, Mr. Javee heard that the city government has plans about the
vacant lot. He inquired about such plans and he was given the following, including each
plan’s probability of occurrence:
Probability
Plan A – Lease the lot to a businessman who will construct a mall on the lot 60%
B – Construct a theme park on the vacant lot 30%
C – Construct a building that will house some of the city government’s offices 10%

Mr. Javee knows that the value of his land, which he acquired ten years ago at a cost of
only P500 per square meter, will increase depending on which plan would materialize. His
estimates are as follows:
Plan A – P5,000 per square meter
B – 2,000
C – 1,000
What is the expected value of the land?
a. P5,000 c. P2,667
b. P3,000 d. P3,700

Page 20

BASIC MAS CONCEPTS

83. Consulting services differ fundamentally from CPA’s function of attesting to the assertions of
other parties. In a consulting service,
a. the practitioner expresses a conclusion about the reliability of a written assertion
that is the responsibility of the assertor.
b. the work is generally performed only for the use and benefit of the client.
c. the client develops findings, conclusions, and recommendations.
d. the nature and scope of work is determined solely by the consulting services
practitioner.

84. Which of the following statements is correct?

a. MAS is confined only to such areas as financial accounting, auditing, and tax
services.
b. Because the MAS practitioner must be independent, he must not allow the client to
participate in any phase of his engagement.
c. Although MAS extends beyond the traditional accounting services, CPAs in the MS
practice are still bound by the rules of professional ethics in the practice of
accounting in general.
d. CPAs provide management services to go around the ethical constraints as
mandated by the Accountancy Act.

85. Engagements should be adequately planned, supervised, and controlled. Controlling

involves the measurement of progress in attaining the engagement plan and objectives.
At significant engagement points, progress should be measured in terms of
a. time schedule, accomplishments, and quality of work.
b. accomplishments, time schedule, and expenses incurred.
c. quality of work, number of reports prepared, and time schedule.
d. accomplishments, number of personnel who played a role in the engagement, and
attendance of the participants in the engagement.

INFORMATION SYSTEMS/EDP

86. The basic principles of accounting information system include all the following, except
a. flexible structure. c. implementation.
b. cost awareness. d. useful output.

87. Which of the following statements is false?

a. Management accounting is an integral part of the controller’s function in an
organization.
b. The Standard of Ethical Conduct for Management Accountants include concepts
related to competence, confidentiality, integrity, and objectivity.
c. Modern cost accounting plays a role in planning new products, evaluating
operational procedures, and controlling costs.
d. The COO (Chief Operating Officer) is primarily responsible for management
accounting and financial accounting.

88. Management accounting is considered successful when it

a. helps managers improve their decisions. c. is relevant.
b. is in accordance with GAAP. d. is accurate.

89. Electronic Fund Transfer (EFT) is a service provided by financial institutions worldwide that
is based on EDI Technology. EFT transaction costs are lower than for manual systems
because documents and human intervention are eliminated from the transaction process.
However, the EFT system has inherent and unique risks, one of which is
a. unauthorized access and activity.
b. inadequate disaster recovery procedures.
c. insufficient online edit checks.
d. improper change control procedures.

Page 21

90. Which of the following descriptions refers to management accounting information?

 a. It is prepared for shareholders.
b. It is reliable and verifiable.
c. It is prepared in accordance with GAAP.
d. It provides reasonable and timely estimates

91. Which of the following is a not a characteristic of management accounting?

a. Internal focus c. Subjective information may be used
b. Broad-based and multidisciplinary d. Historical orientation

92. Which of the following characteristics distinguishes computer processing from manual
processing?
a. Computer processing virtually eliminates the occurrence of computational error
normally associated with manual processing.
b. Errors or fraud in computer processing will be detected soon after their occurrences.
c. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
d. Most computer systems are designed so that transaction trails useful for audit
purposes do not exist.

93. What type of computer system is characterized by data that are assembled from more than
one location and records that are updated immediately?
a. Microcomputer system c. Batch processing system
b. Minicomputer system d. Online real-time system

94. A major accounting contribution to the managerial decision-making process in evaluating

possible courses of action is to
a. decide which actions the management should consider.
b. determine the amount of money that should be spent on a project.
c. assign responsibility for the decision.
d. provide relevant revenue and cost data about each course of action.

95. Which of the following refers to “systems design”?

a. It is the process of monitoring, evaluating, and modifying a system.
b. It is the process of learning how the current system functions, determining the needs of
users, and developing the logical requirements of a proposed system.
c. It is the process of developing specifications for hardware, software, manpower, data
resources, and information products required to develop a system.
d. It determines the technical, operational, and economic feasibility of a system.

ECONOMICS

96. Gross domestic product (GDP) is the

a. total amount of expenditures for consumer goods and investment for a period of
time.
b. total purchases by consumers, businesses, government, and foreign entities
c. value of all final goods and services produced by the country by both domestic and
foreign-owned sources.
d. value of all goods and services produced by the country by domestic firms, excluding
those produced by foreign-owned companies.

97. As the economy becomes more and more depressed, a company's management decides to
slash spending on research and development. What is the likely effect of this action on net
income? Net income will be
a. higher this period and lower in future periods.
b. higher this period and higher in future periods.
c. lower this period and higher in future periods.
d. lower this period and lower in future periods.

Page 22
98. Inflation can have positive and negative effects on an economy. Positive effects of inflation
include
a. loss in stability in the real value of money and other monetary items over time.
b. uncertainty about future inflation may discourage investment and saving.
c. shortages of goods if consumers begin hoarding in anticipation of price increases in
the future.
d. mitigation of economic recessions and debt relief by reducing the real level of debt.

99. The local video store’s business increased by 12% after the movie theater raised its prices
from P300 to P400. Thus, relative to movie theater admissions, videos are
a. substitute goods c. complementary goods
b. superior goods d. public goods

100. In national income terms, aggregate demand is the

a. demand for money by a community in a period of full employment.
b. total expenditure on capital goods by entrepreneurs during a period of full
employment.
c. demand that is needed if the country’s economy is to operate at optimum level and
the level of investment is to be raised.
d. total expenditures on consumer goods and investment, including government and
foreign expenditures, during a given period.

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