ACCT 202 - UNL - SmartBook Unit 4
Shortcomings of the payback period include it ______.
-ignores cash flows that occur after the payback period -does not consider the time value of money
The two types of capital investment decisions are ______ and ______ decisions.
-screening -preference
When evaluating sustainability projects ______.
-the basic capital budgeting techniques still apply -different discount rates may be applied based on perceived risk
Net present value is ______.
-the difference between the present value of cash inflows and present value of cash outflows for a project -used to determine if a project is an acceptable capital investment
True or false: A balanced scorecard includes leading indicators but NOT lagging indicators.
False
True or false: An advantage of the accounting rate of return (ARR) is that it uses net income to evaluate capital investments.
False
True or false: Assume the net present value of $1,000 to be received in four years is $645. If you have the choice of receiving $645 now or $1,000 in four years, the best option is to take the $1,000 in four years.
False
True or false: Cost centers have no impact on revenue.
False
True or false: Residual income can be broken down into profit margin and investment turnover.
False
True or false: Sensitivity analysis should only be used when evaluating mutually exclusive capital investment decisions.
False
True or false: When the discount rate increases a project is more likely to be acceptable because its net present value will also increase.
False
True or false: When two projects are mutually exclusive, investing in one does not eliminate the other one from consideration.
False
True or false: For capital budgeting purposes, capital assets includes item research and development projects.
True
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
True
True or false: Preference decisions are made to prioritize and select from capital budgeting alternatives.
True
When making a capital budgeting decision, it is most useful to calculate the payback period ______.
as part of the screening process
According to the ______ managers should only be held accountable for what they are actually in charge of.
controllability principle
If the interest rate earned increases, net present value will ______.
decrease
To convert net income to net cash flow, add back ___ expense.
depreciation
When evaluating sustainability projects, ______.
economic, environmental, and societal benefits should be quantified as much as possible
Vertical analysis ______.
identifies the relative contribution made by each financial statement line item
As the cost of capital (discount rate) decreases, the net present value of a project will ______.
increase
The balanced scorecard perspective that focuses on all activities from product design and development until the time it is in the hands of the customer is ___.
internal business processes
Return on investment (ROI) is a measure used to evaluate managers of ______ centers.
investment
Financial statement analysis is useful for ______.
evaluating a company's success in meeting challenges
ROI is a method used to evaluate ______.
investment centers, but not cost or profit centers
When choosing among independent projects, ______.
investment resources must be prioritized
Sales revenue divided by average invested assets equals ___.
investment turnover
If a project has a profitability index that is greater than 1, it ______.
is an acceptable project
Given the choice it ______.
is better to receive money today instead of a year from today
The internal rate of return ______.
is the discount rate that makes NPV equal zero for a project
Evaluating how the company will sustain the ability to change and improve is part of the ______ perspective of the balanced scorecard.
learning and growth
A project's payback period is the ______.
length of time it takes for the project to recover its initial cost from the net cash inflows generated
The transfer pricing method that generally provides the most benefit to the seller is the ______ method.
market-price
Managers of cost centers are expected to ______.
minimize costs and maximize cost-effectiveness
Some of the cash flows received over the life of a project are generally ignored when using the ___ method.
payback
The time that it takes for a project to recoup its original investment is the ___ period.
payback
Sales quotas are often given to ___ center managers.
profit
In order to fully evaluate ROI, managers should compute both ___ and ___ turnover.
profit margin; investment
The manager of a(n) ___ center has control over both costs and revenues, but not over the use of ___ funds.
profit; investment
The ratio of a project's benefits (measured by the present value of future cash flows) to its required investment is the ___.
profitability index
When investment funds are limited, the amount of economic value (represented by the present value of future cash flows) that is generated per unit of scarce resource (investment cash) is measured by the ___.
profitability index
Unlike other capital investments, the decision framework for ___ projects should evaluate benefits that go beyond economics.
sustainability
When cash flows are uneven, ______.
the cash flow for each year must be multiplied by the appropriate discount factor
Transfer prices are not particularly important when managers are evaluated on ______.
total firm value
The amount that one division charges when it sells goods or services to another division of the same company is called a(n) ___.
transfer price
A profitability index of less than 1 indicates that a project is ______.
unacceptable
The minimum acceptable transfer price using the cost-based method is ______.
variable cost
Calculating the proportion of each individual asset balance sheet to total assets is an example of ______ analysis.
vertical
The cost of capital is the ______.
weighted average after tax cost of debt and cost of equity
Which of the following statements regarding the balanced scorecard are true?
-The learning and growth perspective typically contains leading indicators of future performance. -Objectives and measures in each category should be linked so that performance in one area leads to performance in another.
Decision-making authority lies mostly with higher-level managers in strongly ______ organizations.
centralized
One of the most important concepts in responsibility accounting is the ___ which states that managers should only be held responsible for what they are in charge of.
controllability; principle
A(n) ___ income statement is broken down by product line, region, or other area of a business.
segment
Sales revenue minus all costs that are directly attributable to a particular product line or region of a business is called the ___.
segment margin
The most common method of evaluating a profit center manager is based on the ______.
segmented income statement
The most common method used to evaluate profit center managers is based on ______.
segmented income statements
There are many variances of ROI, including return on ______.
-equity -assets -capital employed
Responsibility centers can be based on ___ regions, ___ lines, ___ characteristics, or some combination of the three.
geographical; product; functional
Methods commonly used for transfer pricing are ______.
negotiation, cost-based, market-price
Business transactions between units or divisions of the same company are called ___-___ transactions.
related party
Business transactions between units or divisions are commonly known as ______.
related-party transactions
How can a company increase its return on investment (ROI)?
-Increase sales -Reduce operating expenses
Typical capital budgeting decisions include ______.
-research and development projects -lease or buy decisions -equipment selection decisions
A performance evaluation system can create ___ or a conflict of interest between what is best for a division and best for the company as a whole.
goal incongruence
The required rate of return is also known as the ___ rate.
hurdle
A transfer price developed using the ___ method should fall somewhere between the variable cost and the wholesale price.
negotiation
Inside information about the other division's costs, capacity, and demand will impact setting a transfer price using the ______ method.
negotiation
When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on ___.
residual income
Which of the following statements are true?
-A profit manager is accountable for direct fixed costs. -A direct fixed cost supports a specific business segment. -Common fixed costs are commonly incurred at higher levels of an organization.
Which of the following statements regarding decentralized organizations are correct?
-Decentralization helps lower-level managers develop better management skills. -Decentralization often allows decisions to be made faster, since not as many layers of management are needed for approval. -Managers in decentralized operations may make decisions that are good for their department, but not for the organization as a whole. -Decentralized organizations often use responsibility accounting systems to evaluate lower level-managers.
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?
-The department manager may not want to accept the project because it will lower the overall ROI for the department. -The project should be accepted by the company because it increases overall residual income.
Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are true?
-The manager may decide to reject the project because it will lower the current ROI earned by his division. -The project is acceptable because it exceeds the company's required rate of return. -The project will generate positive residual income.
The required rate of return ______.
-considers the risk of an investment -considers financing costs
When calculating Return on Investment (ROI), net operating income ______.
-includes income from normal operations -does not include interest expense
Responsibilities of a profit center manager may include ______.
-involvement in strategic initiatives related to product success -controlling division costs -contract negotiations
A screening decision ______.
-is used to determine if a project is a candidate for further consideration -relates to whether a proposed project meets some minimum criteria
Financial performance measures ______.
-may cause managers to make decisions that won't be optimal in the long run -focus on past, not future performance
ROI can be calculated as ______.
-profit margin multiplied by investment turnover -net operating income divided by average invested assets
When it comes to setting transfer prices, ______.
-the price set can have an impact on individual manager performance -managers of different departments may have very different goals
Macey, Inc.'s investment center had invested assets at the beginning of the year of $300,000. Ending invested assets totaled $400,000. Total revenue for the year was $1,050,000, and net operating income was $70,000. Return on investment was ______.
20%
Given beginning operating assets of $140,000, ending operating assets of $180,000, net operating income of $40,000, and tax expense of $8,000, return on investment is equal to ___%.
25
Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average invested assets of $400,000. Based on this, Valley's investment turnover is ___, its profit margin is ___%, and its return on investment is ___%.
2; 5; 10
Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average invested assets of $200,000 and a net operating income of $24,000. The department's residual income is $___.
4000
Which of the following statements is correct?
A manager might reject a proposal using ROI that the manager would accept using residual income.
Which of the following methods is not commonly used to set transfer prices?
Arbitration-cost
Which of the following statements regarding the balanced scorecard is incorrect?
Balanced scorecard objectives are generally broad and generic.
True or false: When considering transfer prices, one factor is the overall company's perspective.
False
Which type of manager(s) have the authority to make purchase decisions regarding company assets?
Investment center managers only
Net operating income ÷ Sales revenue = ______.
Profit margin
Which of the following business segments would not be considered a cost center?
Retail outlet
Revenue center managers are evaluated primarily on their ______.
ability to meet sales goals
Return on investment, residual income, and economic value added ______.
are all lagging measures of performance
A tool to help managers make decisions about investments in major assets such as new facilities, equipment, and products is called ___.
capital budget
Investing in new technology to save on labor costs is an example of a(n) ___ decision.
capital budgeting
Decision-making authority is kept at the very top when an organization is ___.
centralized
When a transfer price is based on cost plus a percentage markup, the method being used is ______.
cost-based
The link between internal business processes and financial results is the ___ perspective of the balanced scorecard.
customer
The four groups of performance measures typically used in the balanced scorecard approach are financial, ______.
customer, internal business processes, and learning and growth
Lower-level management goals that are inconsistent with company goals are a possible disadvantage of ___.
decentralization
An organization in which decision-making authority is spread throughout the organization is ___.
decentralized
Internal transfer prices ______.
determine how revenues and costs are reported between divisions
A(n) ___ fixed cost is under the control of a segment manager and a(n) ___ fixed cost is outside the segment manager's control.
direct; common
Measuring the value provided to shareholders is the ______ perspective of the balanced scorecard.
financial
In order to increase return on investment (ROI), the company must ___ (increase/decrease) sales, and/or ___ (increase/decrease) operating expenses and/or ___ (increase/decrease) average operating assets.
increase; decrease; decrease
When projects are ___ or unrelated to one another, each project can be evaluated on its own merit.
independent
When two projects are ______, investing in one of the projects does not preclude investing in the other.
independent
Net operating income is net income from normal operating activities, before other income, ___, and ___.
interest taxes
The manager of a(n) ___ center has control over costs, revenue, and purchasing long-lived company's assets.
investment
The transfer pricing method that treats the two segments as if they were independent businesses is the ______ method.
market-price
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ___ (more/less) likely to pursue projects that will benefit the entire company.
more
Deciding whether to purchase or lease a vehicle is an example of a(n) ______ project decision.
mutually exclusive
Residual income is equal to ______.
net operating income - (average invested assets × hurdle rate)
When a manager is evaluated on residual income, an investment is acceptable when ______.
net operating income for the investment is above the minimum required return on average operating assets
The formula for return on investment is ______.
net operating income ÷ average invested assets
When a department has limited capacity and is asked to make a sale to another department, the selling manager will ______.
not be likely to set a transfer price less than market price
When performance is evaluated based on ROI, managers may ______.
not make an investment that would be good for the company as a whole
Managers are required to evaluate and compare more than one capital investment alternative when making a(n) ___ decision.
preference
The two types of capital investment decisions are ___ decisions ___ and decisions.
preference screening
The net operating income that an investment center earns above the amount required to earn the minimum required rate of return is ______.
residual income
The net operating income that an investment center earns above the minimum amount needed to meet the required rate of return is its ___.
residual income
An area of business that a manager has control over and is accountable for is called a(n) ___ center.
responsibility
Investment turnover × profit margin = ______.
return on investment
Net operating income ÷ average invested assets = ______.
return on investment
Narrowing down a set of projects for further consideration is a(n) ___ decision.
screening
In decentralized organizations, decision-making authority is ______.
spread throughout the organization
When a department has enough idle capacity to supply a part to another division within the company without interrupting current sales, ______.
the department is likely to accept a relatively low transfer price
The price charged when one segment of a company provides goods or services to another segment of the same company is the ______ price.
transfer
The minimum required rate of return is also known as the ___ rate.
hurdle
Ace Electric's income statement reports Net Sales Revenue of $100,000; Cost of Goods Sold of $46,000; Operating Expenses of $34,000; Interest Expense of $15,000; Income Tax Expense of $2,000; and Net Income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by ______.
$100,000
A company's sales for the year total $218,000. Cash expenses for the year were $92,000 and depreciation expense was $23,000. The company's net cash flow for the year is ______.
$126,000
A company's net operating income for the year is $118,000. Depreciation expense for the year equals $23,000. The company's net cash flow for the year is ______.
$141,000
Using the tables from the Appendix, and an interest rate of 8% compounded annually, $5,000 to be received four years from today is equal to ______ today.
$3,675
Calculate the present value of a 10-year, 6% loan with annual payments of $7,500 made at the end of each year using the tables in the appendix.
$55,201
Which of the following statements are true?
-Any capital budgeting technique can be used for screening decisions. -Capital budgeting techniques that use time value of money are superior to those that don't.
Managers are evaluating two independent projects. Project X has a NPV of $282,500 and a profitability index of 2.1. Project Y has a NPV of $320,000 and a profitability index of 1.7. Which of the following statements are correct?
-If funds are limited, Project X should be selected because it has the highest profitability index. -If funds are not limited, the company should consider investing in both projects.
Which of the following statements are true?
-The net present value and internal rate of return methods provide consistent information when making screening decisions. -The net present value method is generally preferred over the internal rate of return method when making preference decisions. -The internal rate of return method makes an assumption about reinvesting cash flows that may not be realistic.
Which of the following statements are true?
-The time value of money should be considered in capital budgeting decisions. -Money is more valuable today than it will be in the future.
Non-discounting methods of evaluating capital investments are ______.
-accounting rate of return -payback
Discounted cash flow methods assume cash flows ______.
-are immediately reinvested in another project -can be projected with 100% certainty
Capital budgeting decisions include ______.
-deciding to replace old equipment -determining which equipment to purchase among available alternatives -purchasing new equipment to reduce cost -acquiring a new facility to increase capacity -choosing to lease or buy new equipment
Major limitations of the accounting rate of return method for evaluating capital investment proposals include that it ______.
-ignores the time value of money -is based on net income instead of net cash flows
Discounted cash flow methods ______.
-incorporate the time value of money -include the profitability index -are generally superior to non-discounting methods
An advantage of IRR as compared to NPV is that IRR ______.
-is generally easier for managers to interpret -makes it easier to compare projects of different sizes
The weighted -average cost of capital ______.
-is how much it costs a company to fund capital projects -should be reflected in the company's discount rate
Sustainability projects ______.
-usually cover a very long time horizon -involve more than economic benefits
Calderon Kitchen Supplies is planning to invest $210,000 in a new product. The product is expected to generate a net present value of $56,700. The project profitability index is ______.
1.27
An investment offers you $750 per year for 20 years starting at the end of this year. At an interest rate of 3.75%, the investment is worth $___ today.
10422
To have $15,000 available for a down payment on a house 5 years from now, you need to invest $___ today at 7% compounded annually.
10695
Given the following asset balances, match the results of vertical analysis with the appropriate balance sheet line items: Cash $20,000; Accounts Receivable $40,000; Inventory $60,000; Property, Plant, and Equipment $80,000.
10; 20; 30; 60; 40
Spicer, Inc. is considering purchasing a piece of equipment that will cost $80,000 and generate the following cash flows: Yr. 1 = $25,000; Yr. 2 = $40,000; and Yr. 3 = $45,000. Using a discount rate of 9% and the tables in Supplement 11A, the net present value rounded to the nearest dollar is $___.
11352
Adele's Inc. is considering investing in a piece of equipment to automate some operations. It will cost $180,000 and last 4 years with no salvage value. Sales are not expected to be impacted, but estimated savings in labor and other costs will be $60,000 per year. Annual depreciation expense will be $45,000. Using a discount rate of 8%, and the tables in Supplement 11A, the net present value of the investment is $___.
18726
After performing a vertical analysis of the balance sheet, Cash was 2%. What can you conclude from this?
2% of Total Assets is Cash.
Sandy's Soda Co. is planning an investment in new cooling equipment that would cost $56,000. The new equipment would save on operating costs over the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is ______ years,
2.6
What percentage of each dollar of sales affected net income given Sales of $120,000; Cost of Goods Sold of $70,000; Operating Expenses of $10,000; Interest Expense of $5,000; Income Tax Expense of $5,000; and Net Income of $30,000?
25%
Studio Films is considering the purchase of some new film equipment that costs $150,000. The new equipment is expected to increase revenues by $115,000 annually. Total annual operating expenses are expected to be $70,000. The accounting rate of return of the equipment is ___%.
30
Poppy's Gumball Co. is planning to invest in a new marketing campaign that would require an initial investment of $85,000. The project is expected to generate net income of $27,200. The accounting rate of return on the project is ______.
32%
Tilly's Travels purchased a new tour bus at a cost of $320,000. The bus is expected to increase cash inflows over the next 5 years as follows: $98,000 in year 1; $87,500 in year 2; $74,500 in year 3; $60,000 in year 4; and $59,000 in year 5. The payback period for the new bus is ___ years.
4
State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 1.2, the present value of the campaign's future cash flows is $___.
42000
Acme, Inc. had net income of $120,000 in 2018 and net income of $126,000 in 2019. The percentage increase in net income was ______.
5%
Spicer Dentistry is considering the purchase of a new x-ray machine. The machine costs $2,400 and has a useful life of 10 years. The new machine is expected to reduce operating costs by $400 per year. The payback period for the x-ray machine is ___ years.
6
Farm Central is considering the purchase of a larger combine to increase productivity. Combine A costs $210,000 and has a useful life of 10 years. The combine will reduce labor costs by $25,000 per year. The payback period of the combine is ______ years.
8.4
Horizons, Inc. had total assets of $220,000 in 2018 and $240,000 in 2019. The percentage change in total assets was ______ (rounded).
9.1%
Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?
Accounting rate of return
Which of the following is NOT an assumption of discounted cash flow methods?
Cash flow and net income will always be equal.
To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______.
Net Sales Revenue
To perform a vertical analysis of a balance sheet, divide each line item on the statement by ______.
Total Assets
______ analysis is a technique that expresses each financial statement amount as a percentage of another amount on the same financial statement.
Vertical
A project with a positive net present value is ___ and a project with a negative net present value is ___.
acceptable; unacceptable
Net cash flow differs from net income because of ______.
accrual-based accounting
How much net income a potential project is expected to generate as a relative percentage of required investment is told by the ___ of return.
annual rate
Equal interest rates, interest periods, and dollar amounts each interest period are all characteristics of ______.
annuities
A monthly house or car payment is an example of a(n) ___.
annuity
A stream of cash flows that occur uniformly over time is a(n) ______.
annuity
A stream of equal cash flows is called a(n) ___.
annuity
The Copy Center can purchase a new copier for $15,000. It would last for 3 years and have a salvage value of $3,000. Depreciation cost would be $4,000 per year and cash operating costs would equal $1,000 per year. The same copier could be leased for $6,500 per year. Using a discount rate of 7%, and the tables in Supplement 11A, it is best to ___(buy/lease) the copier because the difference in cost is $___.
buy; 1883
A decision to automate equipment should be made by calculating the NPV of the automation's impact on net ______.
cash flow
When the dollar amount of interest earned on a given investment increases every year, ______ interest is in force.
compound
Interest earned on top of interest is called ___.
compounding
The manager of a(n) ___ center does not have control over revenue or the use of investment funds.
cost
To determine if a project is acceptable, compare the internal rate of return to the company's ______.
cost of capital
The discount rate should reflect a company's ___ of ___.
cost; capital
To calculate a year-to-year percentage change in any financial statement line item, you should take the ______, then divide by the prior year's amount, and finally multiply the result by 100.
current year's financial statement amount minus the prior year's amount
In a lease or buy decision, ______ is not relevant to the decision.
depreciation expense
Net present value is the ______.
difference between the present value of a project's cash inflows and the present value of the project's cash outflows
Calculating the present value of money is referred to as ___ cash flows.
discount
The rate applied to future cash flows to reflect the time value of money is called the ___ rate.
discount
Net present value, internal rate of return, and profitability index are referred to as ___ methods because they incorporate the time value of money.
discounted cash flow
The opposite of compounding is ___.
discounting
Often, loan agreements require the borrower to comply with certain requirements, such as maintaining a particular current ratio or limiting future borrowing. To decide if a company has complied with its loan agreements, you should look at its ______.
financial statements
If you have $1,000 now and want to know what it will be worth in 3 years, you are solving a(n) ___ problem.
future value
Analyzing the percent change in Accounts Receivable from one period to the next is an example of ______ analysis.
horizontal
To analyze changes in a company's net income over the last 10 years, you should perform a ______.
horizontal analysis
To analyze changes in a company's sales over the last 5 years, you should perform a ______.
horizontal analysis
Individual financial statement line items from one period to the next are compared in ___ analysis. Each line item is compared to some amount, such as total assets or total revenue, on the same financial statement in ___ analysis. Relationships among various items reported in one or more of the financial statements are analyzed in ___ analysis.
horizontal; vertical; ratio
The accounting rate of return equals ______.
net income/initial investment
Unlike other capital budgeting methods, the accounting rate of return method focuses on ______, rather than ______.
net operating income, cash flows
When deciding between two competing alternatives, the best capital budgeting method to use is the ______.
net present value
Capital investment methods that ignore the time value of money are referred to as ___-___ methods.
non discount
An advantage of IRR over NPV is that it is stated ______.
on a relative basis
A project with a(n) ___ net present value creates economic value for a company whereas a project with a(n) ___ net present value reduces a firm's economic value.
positive; negative
The term discounting cash flows refers to the process of calculating the ______ value of the cash flows.
present
Capital budgeting techniques involve solving ___ problems because of the need to know how much something is worth today.
present value
When prioritizing independent projects when limited investment funds are available, the best capital budgeting method to use is the ______.
profitability index
When resources are limited, mangers should prioritize independent projects based on the ___,
profitability index
The basic premise of the payback method is ______.
projects with shorter payback periods are safer investments than projects with longer payback periods
When analyzing capital investment decisions, managers should perform "what if" or ___ to see whether changing the underlying assumptions would affect the decision.
sensitivity analysis
Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ______.
should be rejected
The discount rate ______.
should reflect the company's cost of capital
Synonyms for the accounting rate of return are the ______ rate of return and the ______ rate of return.
simple, unadjusted
The internal rate of return method indicates ______.
the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows
To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100.
the prior year's amount
The concept that the worth of a dollar changes over time is known as the ___ of ___.
time value; money
The principle that money is more valuable today than it will be in the future is referred to as the ___ of ___.
time; value; money
