ACCT 302 Final
Key financial measures used in multiples-based valuation include:
•Earnings i.e. EPS or P/E •Sales •Cash Flow
Division A, which is operating at capacity, produces a component that currently sells in a competitive market for $37 per unit. At the current level of production, the fixed cost of producing this component is $9 per unit and the variable cost is $11 per unit. Division B would like to purchase this component from Division A. The price that Division A should charge Division B for this component is:
$37 per unit
Deferred bonus
(cash and/or stock) earned currently but not paid for two or more years.
EVA®
= EVA® net income − ( Cost of capital × EVA® Invested capital)
Slary
A fixed Payment
If fairness only is considered, if a unit manager's unit is doing well, the unit manager prefers:
A unit-based pool over a firm-wide pool.
The balanced scorecard measures the strategic business unit (SBU)'s performance in all of the following areas except:
Accounting and tax compliance.
In management compensation, the use of the balanced scorecard achieves:
Alignment of manager's incentives and the organization's strategy.
Which of the following is one of the most comprehensive bases of compensation?
Balanced scorecard.
The six steps Ittner and Larcker propose for maximizing the value of nonfinancial measures when using a balanced scorecard include all of the following except:
Base actions on the data.
A bonus plan differs from a salary in terms of:
Base, pool, and payment terms.
Bonus
Based on the achievement of performance goals for the period
Which of the following is not a step to maximize the value of nonfinancial measures, as suggested by Ittner and Larcker?
Benchmark with similar firms.
An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: Fabricating Division: Market price of the subassembly $50 Variable cost of the subassembly $ 20 Excess capacity (in units) 1,000 Assembly Division: Number of units needed 900 What is the natural bargaining range for the two divisions?
Between $20 and $50.
Which one of the following forms of compensation is a based upon the achievement of performance goals for a period?
Bonus
Examines the value of a company, to come up with a dollar amount to represent the company's worth.
Business valuation
The stock option form of bonus payments to managers usually:
Can lose some motivation because of the delay in reward.
A current bonus can consist of:
Cash and/or stock.
Because the full-cost method of transfer pricing includes fixed cost, it can:
Cause sub-optimal short-term decision making.
Which one of the following establishes an "arm's-length price" by using the sales prices of similar products made by unrelated firms?
Comparable-price method
A compensation plan with high salary, low bonus, and competitive benefits is in what phase of the product sales life-cycle?
Decline
EVA is calculated as:
EVA Net Income − (Cost of Capital × EVA Invested Capital).
Reasons for failure to implement the balanced scorecard effectively include all of the following except:
Failure to include SEC reporting responsibilities.
The balanced scorecard is particularly important in difficult economic times because:
Financial measures may be distorted.
Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging managers to make decisions that are in the best interest of the:
Firm as a whole
If an earnings multiplier is not available for a given firm, the multiplier used in an earnings-based method of valuation of a firm is often estimated from comparable:
Firms
All of the following are possible transfer pricing methods used in practice except:
Fixed Cost
What is an advantage of market price transfer pricing method?
Helps to preserve division autonomy.
Payment options
How the bonus is awarded
Base of compensation
How the bonus pay is determined
A firm is decentralized
If it has chosen to delegate a significant amount of responsibility to SBU managers.
The receivables turnover ratio is a measure of:
Liquidity
Controllability
Managers operate in an environment that is influenced by factors beyond the manager's control; there issome degree of uncertainty.
Information asymmetry
Many efforts and decisions made by the manager are not observable to top management, and the manager often possesses information not accessible to top management.
Market value of equity
Market value of equity = Stock price × # Shares outstanding
Market Value Method
Market value of the firm's common equity, directly from the current market value of the firm's shares (market capitalization). = number of shares x share price •Advantages: clarity and objectivity, reflects current value
Any system of compensation:
May encourage unethical behavior.
Discounted cash flow method
Measures the firm's equity value as the discounted present value of its estimated future cash flows.
Multiples-based valuation
Multiples-based valuation = Earnings multiplier × Earnings
Calabria Healthcare supplies prescription drugs to pharmacies. As the management accountant, you are required to analyze the financial statements for this quarter. You already have analyzed the company's two divisions, Name Brand and Generic, and your supervisor wants an analysis of the comparable profitability of the SBUs. The contribution margins are $500,000 and $200,000, respectively; the controllable fixed costs are $200,000 and $50,000; and the noncontrollable fixed costs are $50,000 and $100,000. Assume there are no nontraceable fixed costs. What are the total contributions by profit center (CPC) for the Name Brand and Generic divisions, respectively?
Name Brand: $250,000; Generic: $50,000
Fringe benefits include all of the following except:
Performance Shares
Which one of the following forms of compensation includes special services and benefits for the employee?
Perk
Which of the following is a liquidity ratio?
Quick Ratio
Book Value Method
Quickest and easiest method and is equivalent to the value that appears on the balance sheet for stockholder's equity. •Advantages: clarity, accessibility, and objectivity •Disadvantage: reflects book value only, not the market value of the firm's assets or liabilities and may not include key intangible assets.
Benefits
Referred to as perks, such as travel, memberships, medical benefits and other extras paid by the firm
Colleen Stevens is the North Carolina senior account manager for a national medical equipment manufacturer. Colleen has overall responsibility for the Southeast sales division. The division employs approximately eight sales representatives. Colleen's representatives sell equipment, but equipment maintenance is provided by the maintenance division, which is coordinated through the national headquarters. Colleen is most likely in charge of which type of strategic business unit (SBU)?
Revenue Center
Which compensation is generally paid currently?
Salary and benefits.
As a firm's strategy changes to respond to different stages of a product's life cycle, compensation:
Should change in response to the new strategy.
Which bonus compensation base might lack controllability?
Stock Price
Firms typically provide benefits (perks) to employees to enhance motivation. Which of the following would not be an example of a perk?
Stock options
Companies use the balanced scorecard to describe strategy in detail through the use of a cause-and-effect diagram which is also known as a(n):
Strategy Map
Expropriation occurs when the government in which a foreign company's investment assets are located:
Takes ownership and control of those assets.
The most likely result of using a negotiated transfer price is that:
The end result might reflect the relative bargaining skills of the negotiating managers.
Performance measurement
The process by which managers at all levels gain information about the performance of tasks within the firm and judge that performance against pre-established criteria as set out in budgets, plans, and goals.
What is a common characteristic of Strategic business units (SBU) in practice?
They use little or no nonfinancial information.
Financial ratio analysis
uses financial statement data to evaluate performance, often in the areas of liquidity and profitability:
One of the most important international tax issues faced by multinational corporations is:
Transfer Pricing
Risk aversion
Uncertainty exposes the manager to risk, so the manager's tolerance for risk (that is risk preferences)needs to be considered
Multiples-based method
Uses a ratio of stock price to some financial measure to determine the value of the firm's equity.
Cost Centers
are a firm's production or support departments that are charged with the responsibility of providing the best quality product or service at the lowest cost
Profit Centers
are created when an SBU both generates revenues and incurs the major portion of the cost for producing these revenues.
firmwide pool
contains the amount of bonus available to all managers; bonuses depend on the firm's performance as a whole.
Controllability
wherever possible, known uncontrollable factors should be excluded from the contract.
budgetary slack
which is the difference between budgeted and expected performance.
principal-agent model,
describes the key elements that a contract must have to achieve the desired objectives.
Revenue Centers
focus on the selling function and are defined either by product line or by geographic area.
Performance shares
grant stock for achieving certain performance goals over two years or more.
To reduce the effect of risk aversion, management compensation plans should:
include a relatively large proportion of salary, with a smaller portion in bonus.
Investment Centers
include assets employed by the SBU as well as profits in the performance evaluation.
Current bonus
•(cash and/or stock) based on current. performance—the most common form of bonus payment.
Risk-sharing
managers are often more risk-averse than top management or the firm's owners. Therefore, it can be mutually beneficial to introduce risk-sharing into the contract, often by way of both fixed and variable components of compensation
Cost shifting
occurs when a department replaces its controllable costs with non controllable costs
A centralized firm
reserves much of the decision-making at the top-management level.
Alignment
the contract should be designed to align the incentives of managers with the goals of top management
Bonus compensation pools
the source from which bonus pay is funded
Bonus compensation can be determined on the basis of (among other bases):
•Stock price. •Strategic performance measures (cost, revenue, profit, or investment center). •Critical success factors identified in the balanced scorecard.
unit-based pool
•based on the performance of the manager's unit; the amount of the bonus for any one manager is independent of the performance of other managers.
Stock options
•confer the right to purchase stock at some future date at a predetermined price.
Enterprise value (E V)
•measure of what the market says a company is worth, but this time in an acquisition. market capitalization + debt - cash
