ACC 211 Exam 4
What is the formula for Economic Value Added (EVA)?
After Tax Operating Income - (Actual % Cost of Capital x Total Capital Employed)
Having a risky investment doesn't change the desired payback period. A) True B) False
B) False
Division A had ROI of 15% last year. The manager of Division A is considering an additional investment for the coming year. What step will the manager likely choose to take? A) accept the investment as long as it provides positive operating income B) accept the investment as long as its ROI is positive C) reject the investment if it returns more than 15% ROI D) reject the investment if it returns less than 15% ROI E) reject the investment if it returns an ROI equal to 15%
D) reject the investment if it returns less than 15% ROI
Following is the financial information of Aquazire Enterprises for the last financial year: Margin 10% Turnover 1.90 Sales $492,000 Average operating assets $346,000 Calculate its return on investment (ROI). a.19.00% b.18.00% c.16.00% d.17.00%
a.19.00% (ROI = Margin x Turnover)
Which of the following formulas is used to calculate the debt ratio? a.Debt Ratio = Total Liabilities / Total Assets b.Debt Ratio = Total Assets / Total Liabilities c.Debt Ratio = Non-Current Liabilities + Total Stockholders' Equity / Total Assets d.Debt Ratio = Current Liabilities + Total Stockholders' Equity / Total Assets
a.Debt Ratio = Total Liabilities / Total Assets
Which of the following statements is true if a company has positive residual income? a.The company has a higher return on investment than its hurdle rate. b.The minimum return on operating assets is greater than operating income of the company. c.The profits of the company before tax is less than the residual income. d.The company has a lower return on investment than its hurdle rate.
a.The company has a higher return on investment than its hurdle rate.
The _____ perspective of the Balanced Scorecard management system defines and selects the market segments in which the company chooses to compete. a.customer b.financial c.internal d.learning and growth
a.customer
A company makes a $260,000 investment with net income of $102,000, $81,000, and $90,000 for the next three years. The accounting rate of return for this investment is: a.17%. b.35%. c.27%. d.24%.
b.35%.
A(n) _____ is a responsibility center where the manager is responsible for both revenues and costs. a.revenue center b.cost center c.investment center d.profit center
d. profit center
Which of the following processes of a process value chain represents the long-wave of value creation? a.The operation process b.The post-sales service process c.The development process d.The innovation process
d.The innovation process
Economic Value Added is Residual Income with the Cost of Capital equal to the firm's: A) budgeted cost of capital B) average cost of capital C) standard cost of capital D) actual cost of capital
D) actual cost of capital
An investment is expected to produce annual cash flows $8,000 every year for 5 years. Assuming a discount rate of 8%, the present value of this series of cash flows is _____. (Round your answer to two decimal places.) a.$32,857.53 b.$31,941.68 c.$39,852.23 d.$29,866.67
b.$31,941.68
Wilson Company is considering a new capital acquisition to support capacity expansion. Relevant information includes: New equipment cost is $260,000; Incremental revenues are $161,000; Incremental operating expenses are $73,000; Incremental working capital is $26,000. The incremental working capital will be recovered at the end of the project's life. Based on this information, NPV for years 1 through 3 is: a.$260,000 inflow discounted using the present value annuity factor for the required rate of return. b.$88,000 inflow discounted using the present value annuity factor for the required rate of return. c.$260,000 inflow discounted using the future value annuity factor for the required rate of return. d.$88,000 inflow discounted using the future value annuity factor for the required rate of return.
b.$88,000 inflow discounted using the present value annuity factor for the required rate of return.
Demeter Company's balance sheet shows total liabilities of $270,000 and total assets of $970,000. Calculate the debt-to-equity ratio for Demeter Company. (Round your answer to two decimal places.) a.0.28 b.0.39 c.1.13 d.3.59
b.0.39
Which of the following statements is true of a negotiated transfer price? a.A negotiated transfer price is useful in case an in-house division has to incur additional selling and distribution costs than external market participants. b.A negotiated transfer price allows the selling and buying divisions to share any cost savings resulting from avoided costs. c.A negotiated transfer price results from the negotiation between the selling department and the top management. d.A negotiated transfer price results from the negotiation between the buying department and the top management.
b.A negotiated transfer price allows the selling and buying divisions to share any cost savings resulting from avoided costs.
Which of the following statements is true about a postaudit? a.A postaudit analyzes the project using the accounting rate of return model. b.A postaudit compares the actual benefits with the estimated benefits of a project. c.A postaudit provide useful information for making capital budgeting decisions regarding a new project. d.A postaudit is cheap compared to other analyses.
b.A postaudit compares the actual benefits with the estimated benefits of a project.
Which of the following ratios provides insights into the capital structure used by a company to finance its assets? a.Return on stockholders' equity b.Debt-to-equity ratio c.Acid-test ratio d.Return on total assets
b.Debt-to-equity ratio
Which of the following is an example of common-size analysis? a.Operating expenses are expressed as a percentage of industry average b.Depreciation expense is expressed as a percentage of sales c.Quick ratio is calculated for the company's different divisions d.Current ratio is compared to industry average
b.Depreciation expense is expressed as a percentage of sales
_____ indicates the minimum return on investment (ROI) necessary to accept an investment. a.Internal rate of return b.Hurdle rate c.Average rate of return d.Profitability index
b.Hurdle rate
Lisa's Dress Company had Cost of Goods Sold of $180,000 last year. The Beginning Inventory Balance was $13,000 and the Ending Inventory Balance was $18,000. The company's Average Inventory Turnover in Days was closest to:
365/11.613 = 31.4 days
A good investment will earn: A) Back its original investment B) Back its original investment and a reasonable return C) A reasonable return
B) Back its original investment and a reasonable return
The Quick Ratio differs from the Current Ratio in that it: A) excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible default on payment B) is a stricter test of a company's ability to pay its current debts as they are due C) represents the amount of cash on hand instead of the amount of working capital
B) is a stricter test of a company's ability to pay its current debts as they are due
What is the formula for Manufacturing Cycle Efficiency (MCE)?
MCE = Processing Time / (Processing Time + Move Time + Inspection Time + Waiting Time)
What is the formula for Net Present Value?
NPV = [(Cash Revenues - Cash Expenses) x PV Factor] - Investment
Which of the following formulas is used to calculate the debt-to-equity ratio? a.Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity b.Debt-to-Equity Ratio = Total Stockholders' Equity/ Non-Current Liabilities c.Debt-to-Equity Ratio = Non-Current Liabilities / Total Stockholders' Equity d.Debt-to-Equity Ratio = Total Stockholders' Equity / Total Liabilities
a.Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity
Which of the following is true of centralized decision making? a.Decisions are made at the very top level of management. b.Managers at the lower level are allowed to make and implement key decisions. c.Decision-making authority for a responsibility center is delegated to its lower level managers. d.Managers at the lower level are not allowed to implement the decisions made.
a.Decisions are made at the very top level of management.
Which of the following is a benefit of decentralization? a.Decisions are more likely to be made by managers who have specific local knowledge. b.Overall profit margins can mask inefficiencies within the various subdivisions. c.Decisions are made by high-level managers who do not have specific local knowledge. d.Top management can look into the day-to-day operating conditions.
a.Decisions are more likely to be made by managers who have specific local knowledge.
Which of the following core measures is a financial measure of the customer perspective of the Balanced Scorecard management system? a.Increase customer profitability b.Increase customer satisfaction c.Increase customer acquisition d.Increase customer retention
a.Increase customer profitability
Which of the following current assets is excluded while computing the quick ratio of a company? a.Inventory b.Cash c.Marketable securities d.Accounts receivable
a.Inventory
Which of the following is a distinguishing characteristic of the accounting rate of return (ARR) method? a.It ensures that a new investment does not adversely affect debt covenants. b.It makes sure that the time value of money is considered while considering cash inflows. c.It evaluates the impact of an investment on liquidity. d.It measures the minimum rate of return of a project.
a.It ensures that a new investment does not adversely affect debt covenants.
Assume that 'P' is present value of cash inflows and 'I' is present value of cash outflows of a project. Which of the following equations is used to calculate the net present value (NPV) of an investment? a.NPV = P - I b.NPV = P + I c.NPV = (P × I) - I d.NPV = (P - I) / I
a.NPV = P - I
Due to which of the following reasons is the net present value (NPV) method preferred over the internal rate of return (IRR) method when choosing among mutually exclusive alternatives? a.The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR. b.The NPV method measures profitability in relative terms, whereas the IRR method measures it in absolute terms. c.The NPV method measures the return in terms of income, whereas the IRR method measures the return in terms of a project's cash flows. d.The NPV method considers the time value of money while making a capital investment decision, whereas the IRR method considers the accounting rate of return while making a capital investment decision.
a.The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR.
Which of the following is an example of a capital investment decision by a company? a.To invest in a new project b.To extend discount to new customers c.To repurchase issued shares from stock market d.To renew raw material purchase agreement with suppliers
a.To invest in a new project
A project provides a reasonable return if: a.it covers the opportunity cost of funds invested. b.it provides a return equal to initial cost of the project. c.it receives a cash flow equal to the original investment in the first year of investment. d.it provides return lower than the initial investment in the project.
a.it covers the opportunity cost of funds invested.
While making a capital investment decision using the net present value method (NPV), a project is selected if _____. a.its NPV is greater than zero b.its NPV is less than the amount invested c.its NPV is greater than the company's previous year's income d.its NPV is less than the company's current year's budgeted income
a.its NPV is greater than zero
Adopting a new pricing strategy is an example of the _____ objective of the financial perspective of the Balanced Scorecard management system. a.revenue growth b.motivation c.asset utilization d.post-sales service
a.revenue growth
Which of the following is a disadvantage of the return on investment (ROI) measure? a.It encourages managers to focus on the overall profitability of the firm at the expense of divisional profitability. b.It encourages managers to focus on the short run at the expense of the long run. c.It encourages top management to evaluate local managers' capabilities based on their profit targets. d.It encourages managers to mask inefficiencies within the various subdivisions with the overall profit margins.
b.It encourages managers to focus on the short run at the expense of the long run.
In which of the following ways does a postaudit help to improve managerial decision making? a.It assists management in deciding whether a project should be selected or not. b.It supplies feedback to managers to improve future decision making. c.It provides information that helps management in choosing among various mutually exclusive projects. d.It corrects the estimated benefits and costs of a project.
b.It supplies feedback to managers to improve future decision making.
_____ is the ratio of operating income to sales. a.Turnover b.Margin c.Hurdle rate d.Return on income (ROI)
b.Margin
Teakwood Log Division is the selling division and Tables Division is the buying division of Top Shine Furniture Enterprises. Teakwood logs can be sold to outside buyers at $2,000 per log. Which of the following is the best transfer price for both the divisions of the company? a.Negotiated transfer price b.Market price c.Resale price d.Cost-based transfer price
b.Market price
Which of the following statements is true of operating income? a.Operating income is calculated as average operating assets divided by sales. b.Operating income refers to earnings before interest and taxes. c.Operating income refers to sales divided by average operating assets. d.Operating income refers to earnings after interest and taxes.
b.Operating income refers to earnings before interest and taxes.
Which of the following equations is used to calculate the present value of future amounts? (P= Present value of a future outlay; F = Future value; i = Interest rate; n = Period of investment) a.P = F (1 × i)n b.P = F / (1 + i)n c.P = F (1 - i2)n d.P = F / (1 - i)n
b.P = F / (1 + i)n
Which of the following ratios compares the market price per share of stock to the earnings generated per share of common stock? a.Dividend payout ratio b.Price-earnings ratio c.Dividend yield ratio d.Earnings per share
b.Price-earnings ratio
Which of the following ratios measures the earning ability of a company? a.The current ratio b.The price-earnings ratio c.The acid-test ratio d.The times-interest-earned ratio
b.The price-earnings ratio
The ratio that measures the degree of protection afforded to creditors in case of insolvency is the: a.current ratio. b.debt ratio. c.inventory turnover ratio. d.times-interest-earned ratio.
b.debt ratio.
The practice of delegating decision-making authority to the lower levels of management in a company is called _____. a.performance measurement b.decentralization c.decision evaluation d.centralization
b.decentralization
When a current period amount is expressed as a percentage of a prior period amount, it is referred to as: a.leverage analysis. b.horizontal analysis. c.vertical analysis. d.ratio analysis
b.horizontal analysis.
The ratio that provides a measure of the degree of protection provided to a company's creditors is known as the: a.solvency ratio. b.leverage ratio. c.profitability ratio. d.performance ratio.
b.leverage ratio.
The ratios that allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently are known as: a.solvency ratios. b.profitability ratios. c.leverage ratios. d.performance ratios.
b.profitability ratios.
A(n) _____ is a responsibility center where the manager is responsible only for sales. a.investment center b.revenue center c.cost center d.profit center
b.revenue center
A(n) _____ is the price charged for a component by the selling division to the buying division of the same company. a.economic value b.transfer price c.sacrifice value d.list price
b.transfer price
Which of the following is considered a signal of success for a just-in-time (JIT) manufacturing company? a.A high current ratio b.Low quality costs c.A high inventory turnover ratio d.A low quick ratio
c.A high inventory turnover ratio
Which of the following is a difference between economic value added (EVA) and residual income? a.Economic value added (EVA) lays emphasis on before-tax operating profit and the actual cost of capital, whereas residual income uses minimum expected rate of return. b.Economic value added (EVA) lays emphasis on minimum expected rate of return, whereas residual income uses after-tax operating profit and the actual cost of capital. c.Economic value added (EVA) lays emphasis on after-tax operating profit and the actual cost of capital, whereas residual income uses minimum expected rate of return. d.Economic value added (EVA) lays emphasis on minimum expected rate of return, whereas residual income uses before-tax operating profit and the actual cost of capital.
c.Economic value added (EVA) lays emphasis on after-tax operating profit and the actual cost of capital, whereas residual income uses minimum expected rate of return.
Which of the following statements is true about the internal rate of return (IRR)? a.If the IRR is less than the required rate of return, the project is deemed acceptable. b.If the IRR is less than the required rate of return, the firm is indifferent between accepting or rejecting the investment proposal. c.If the IRR is greater than the required rate, the project is deemed acceptable. d.If the IRR is greater than the required rate of return, the firm is indifferent between accepting or rejecting the investment proposal.
c.If the IRR is greater than the required rate, the project is deemed acceptable.
Which of the following is an advantage of the return on investment (ROI) measure? a.It is easy to manipulate the results using different inputs for computing ROI. b.It is the best measure to compare the financial results of companies with similar capital structures. c.It encourages managers to focus on operating asset efficiency. d.It encourages focus on divisional profitability at the expense of profitability for the overall firm.
c.It encourages managers to focus on operating asset efficiency.
Which of the following is true of a double-loop feedback? a.It emphasizes only the effectiveness of implementation of a strategy. b.It questions only the validity of assumptions underlying a strategy. c.It occurs when managers receive information about both the effectiveness of strategy and validity of assumptions underlying the strategy. d.It is typically provided only in a functional-based responsibility accounting system.
c.It occurs when managers receive information about both the effectiveness of strategy and validity of assumptions underlying the strategy.
Assume that the cash flows of a project are an equal amount each period. Which of the following formulas computes the payback period of the project? a.Payback Period = Annual Cash Flows / Original Investment b.Payback Period = Net Income / Annual Cash Flows c.Payback Period = Original Investment / Annual Cash Flows d.Payback Period = Initial Investment / Average Income
c.Payback Period = Original Investment / Annual Cash Flows
Which of the following ratios compares the market price per share of stock to the earnings generated per share of common stock? a.Dividend yield ratio b.Earnings per share c.Price-earnings ratio d.Dividend payout ratio
c.Price-earnings ratio
Which of the following formulas is used to calculate the return on total assets? a.Return on Total Assets = (Net Income + Preference Dividend + Depreciation) / Average Total Assets b.Return on Total Assets = Sales / Average Total Assets c.Return on Total Assets = {Net Income + [Interest Expense (1 - Tax Rate)]} / Average Total Assets d.Return on Total Assets = Sales - Net Income / Average Total Assets
c.Return on Total Assets = {Net Income + [Interest Expense (1 - Tax Rate)]} / Average Total Assets
Which of the following ratios assess the short-term debt-paying ability of a company? a.The times-interest-earned ratio b.The return on total assets ratio c.The acid-test ratio d.The debt ratio
c.The acid-test ratio
The Handle Division of Crockery Inc. produces and transfers components to the Pan Division at a transfer price that is equal to the market price of $25. Which of the following statements is true for the given scenario? a.The income of the company as a whole decreases. b.The return on investment of Pan Division increases. c.The divisional managers' actions will optimize divisional profits and firmwide profits. d.The cost incurred by the Handle Division is equal to the revenue generated by the Pan Division due to the transfer.
c.The divisional managers' actions will optimize divisional profits and firmwide profits.
Which of the following should be focused on by the central management in a decentralized company? a.Day-to-day operations of the organization b.Masking inefficiencies with the help of overall profit margin c.The long-run survival of the organization d.The laying off of high-level managers
c.The long-run survival of the organization
Which of the following capital investment decision-making models is generally preferred by managers over the internal rate of return (IRR) model? a.The payback period b.The accounting rate of return c.The net present value d.The average rate of return
c.The net present value
A _____ is a segment of a business whose manager is accountable for specific activities. a.targeted market segment b.demographic center c.responsibility center d.customer segment
c.responsibility center
The analysis which expresses a line item as a percentage of some other line item for the same period is known as: a.scenario analysis. b.variance analysis. c.vertical analysis. d.horizontal analysis.
c.vertical analysis.
Following is the financial information of Azure Company for the last financial year: Operating Income $84,000 Less: income taxes @35%: $29,400 Net Income $54,600 Total capital employed $380,000 Actual cost of capital 11% Minimum expected rate of return 12% Calculate economic value added (EVA) of Azure. a.$14,300 b.$15,300 c.$16,800 d.$12,800
d.$12,800 $54,600 - (11% x $380,000)
Which of the following statements is true of economic value added (EVA)? a.Economic value added (EVA) uses a minimum expected rate of return as assumed by a company. b.Economic value added (EVA) is expressed as the rate of surplus return desired by a company. c.Economic value added (EVA) lays emphasis on before-tax operating income. d.Economic value added (EVA) with a positive value indicates an increase in the wealth of a company.
d.Economic value added (EVA) with a positive value indicates an increase in the wealth of a company.
Which of the following is true of decentralization? a.In a decentralized firm, divisions are organized only on the basis of geographical lines. b.In a decentralized firm, top-level management carries out the day-to-day operations of the company. c.In a decentralized firm, overall profit margins mask inefficiencies within the various subdivisions. d.In a decentralized firm, top management evaluates local managers' capabilities based on the decisions taken.
d.In a decentralized firm, top management evaluates local managers' capabilities based on the decisions taken.
Which of the following is true of the financial perspective of the Balanced Scorecard management system? a.It is the source of the capabilities that enable the accomplishment of the objectives of the Balance Scorecard system. b.It is the source of the revenue component for financial objectives. c.Customer values, employee capabilities, and innovation process are its strategic themes. d.It establishes long- and short-term financial performance objectives.
d.It establishes long- and short-term financial performance objectives.
Which of the following statements is true of the ceiling of the bargaining range of the transfer price? a.It is the minimum transfer price that would leave the selling division no worse off if the goods were sold to an internal division than if the goods were sold to an external party. b.It is the maximum transfer price set at twice the market price irrespective of the existence of a competitive market for the transferred product. c.It is the minimum transfer price set by the top management in order to make sure that the company as a whole makes no losses. d.It is the maximum transfer price that would leave the buying division no worse off if an input were purchased from an internal division than if the same goods were purchased externally.
d.It is the maximum transfer price that would leave the buying division no worse off if an input were purchased from an internal division than if the same goods were purchased externally.
Which of the following ratios compares the market price per share of stock to the earnings generated per share of common stock? a.Dividend payout ratio b.Earnings per share c.Dividend yield ratio d.Price-earnings ratio
d.Price-earnings ratio
Which of the following ratios measures the earning ability of a company? a.The current ratio b.The times-interest-earned ratio c.The acid-test ratio d.The price-earnings ratio
d.The price-earnings ratio
Investors who prefer regular cash payments instead of returns through price appreciation will want to invest in companies with: a.a low earnings per share. b.a high price-earnings ratio. c.a low dividend yield ratio. d.a high payout ratio
d.a high payout ratio
In vertical analysis, the line items on the balance sheet are expressed as a percentage of: a.cost of goods sold. b.gross margin. c.net sales. d.total assets.
d.total assets.
A project is selected among mutually exclusive projects: a.when the project's payback period is the longest. b.when the project has the lowest internal rate of return. c.when the project has a negative accounting rate of return. d.when the project has the largest net present value.
d.when the project has the largest net present value.