Accounting Exam 4

Future Value of Annuity of $1

( (1+i)^n - 1)/ i )

Future Value of $1

(1 + i) ^n

Present Value of Annuity of $1

(1/i) ( 1 - ( 1 / ( 1+i)^n))

Present Value of $1

1 / ( 1 + i)^n

Present Value of the Investment's Net Cash Inflows - Initial Investment = 0

Internal Rate of Return (IRR)

Full Years + ( Amount to Complete Recovery in Next Year / Projected Net Cash Inflow in Next Year ) = ?

Payback Period

Initial Investment / Expected Annual Net Cash Inflow = ?

Payback Period

Capital Budgeting Process

1. Identify Potential Capital Investment 2. Estimate future net cash inflows 3. Analyze Potential Investments ( i. Screen out undesirable investments using payback and/or ARR ii. Further analyze investments using NPV and/or IRR) 4. Engage in capital rationing, if necessary, to choose among alternative investments 5. Perform post-audits after making capital investments

Order the Capital Budgeting Process

1. Identify Potential Capital Investments 2. Project Investments' Cash Flow 3. Screen/Analyze Investments using one or more of the methods discussed 4. Budget Capital Investments 5. Make Investments 6. Perform Post-Audits 7. Use Feedback to Reassess Investments Already Made

Methods of NPV

1. Incorporates the time value of money and the asset's inflows over its entire life 2. Indicates whether the asset will earn the company's minimum required rate of return 3. Shows the excess or deficiency of the asset's present value of net cash inflows over the cost of the initial investment 4. The profitability index should be computed for capital rationing decisions when the assets require initial investments Compare to IRR

Methods to IRR

1. Incorporates the time value of money and the asset's net cash inflows over its entire life 2. Computes the project's unique rate of return 3. No additional steps needed for capital rationing decisions when assets require different initial investments Compare to NPV

Methods of Payback Period

1. Simple to Compute 2. Focuses on the time it takes to recover the company's cash investment 3. Ignores any cash flows occurring after the payback period, including any residual value 4. Highlights risks of investments with longer cash recovery periods 5. Ignores the time value of money Compare to ARR

Methods of ARR

1. The only method that focuses on the accrual-based operating income from the investment, rather than cash flows 2. Show the impact of the investment on operating income, which is important to financial statement users 3. Measures the average profitability of the asset over its entire life 4. Ignores the time value money Compare to Payback Period

After identifying potential capital​ investments, the next step in the capital budgeting process is which of the​ following? A.Estimating the future net cash inflows of the investments B.Performing​ post-audits of the capital investments C.Analyzing potential investments through at least one of the four methods D.Engaging in capital rationing

A

The direct material quantity variance can be defined as which of the​ following? A.Standard price x​ (Actual quantity used​ - Standard quantity​ allowed) B.Standard quantity allowed x​ (Actual price​ - Standard​ price) C.Actual price x​ (Actual quantity used​ - Standard quantity​ allowed) D.Actual quantity purchased x​ (Actual price​ - Standard​ price)

A

The internal rate of return is which of the​ following? A.The interest rate that makes the NPV of an investment equal to zero B.The accounting rate of return minus​ 1% C.The internal​ management's minimum required rate of return D.The amount of time it takes to recoup the initial investment

A

Which of the following accurately describes the decision rule that Caesars should follow in regards to investing in capital​ assets? A.If NPV is​ positive, the project earns more than the required rate of​ return, so Caesars should invest. B.If NPV is​ negative, the project earns more than the required rate of​ return, so Caesars should invest. C.If NPV is​ positive, the project earns less than the required rate of​ return, so Caesars should not invest. D.There is not a decision rule listed regarding investing in capital assets that Caesars should follow.

A

Which of the following methods focuses on the operating income an asset generates rather than the net cash inflows it​ generates? A.Accounting rate of return B.Internal rate of return C.Payback period D.Net present value

A

Which of the following methods of analyzing potential capital investments would Caesars Entertainment Corporation use if it wanted to take into account the time value of​ money? A.Net present value and internal rate of return B.Payback period and net present value C.Payback period and accounting rate of return D.Accounting rate of return and internal rate of return

A

Which variance would tell​ Caesars' managers how much of the total labor variance is due to using a different amount of worker hours than​ anticipated? A.Direct Labor Efficiency Variance B.Direct Labor Rate Variance C.Direct Materials Price Variance D.Fixed Overhead Budget Variance

A

Average Annual Operating Income from Asset / Initial Investment = ?

Accounting Rate of Return (ARR)

Total Wages / Actual Direct Labor Hours Used = ?

Actual Direct Labor Wage Rate

Actual Price Paid / # of Something Purchased = ?

Actual Price per Unit

Variable Overhead Rate Variance

Also called the variable overhead spending variance. This variance tells managers whether more or less was spent on variable overhead than they expected would be spent for the hours worked.

Practical Standards

Also known as attainable standards

Average Annual Net Cash Inflow - Annual Depreciation Expense = ?

Average Annual Operating Income from Asset

An​ investment's NPV is calculated as which of the​ following? A.The​ investment's initial investment minus the present value of the investment B.The present value of the net cash inflows from the investment minus the​ investment's initial investment C.The future value of the investment minus the​ investment's initial investment D.The​ investment's initial investment minus the future value of the investment

B

In order to convert the average annual net cash inflow from the asset back to the average annual operating income from the​ asset, one must A.multiply by annual depreciation expense. B.subtract annual depreciation expense. C.add annual depreciation expense. D.divide by annual depreciation expense.

B

The direct labor rate variance can be defined as which of the​ following? A.Standard hours allowed x​ (Actual rate​ - Standard​ rate) B.Actual hours x​ (Actual rate​ - Standard​ rate) C.Standard rate x​ (Actual hours​ - Standard hours​ allowed) D.Actual rate x​ (Actual hours​ - Standard hours​ allowed)

B

What is the first step that Caesars must take in the capital budgeting​ process? A.Estimate future net cash inflows B.Identify potential capital investments C.Analyze potential investments D.Engage in capital rationing in order to choose among alternative investments

B

Which of the following factors does not affect the time value of​ money? A.Number of periods B.Breakeven point C.Interest Rate D.Principal amount

B

Which of the following is not true about the fixed overhead budget​ variance? A.It is sometimes referred to as the fixed overhead spending variance. B.It is the difference between the budgeted fixed overhead and the standard fixed overhead allocated to production. C.It can be either favorable or unfavorable. D.It is the difference between actual fixed overhead and budgeted fixed overhead.

B

Which of the following is not true about the fixed overhead volume​ variance? A.It is partially the result of treating fixed overhead costs as if they were variable for allocating the costs to individual units of production. B.If production volume is greater than originally​ anticipated, the variance will be unfavorable. C.If production volume is lower than originally​ anticipated, then fixed overhead cost would be underallocated. D.It is partially the result of incorrectly estimating the level of activity when calculating the predetermined fixed manufacturing overhead rate.

B

​A(n) _______________ cost is a budget for a single unit of a product. A.Flexible B.Standard C.Actual D.Ideal

B

The direct labor efficiency variance can be defined as which of the​ following? A.Standard hours allowed x​ (Actual rate​ - Standard​ rate) B.Actual hours x​ (Actual rate​ - Standard​ rate) C.Standard rate x​ (Actual hours​ - Standard hours​ allowed) D.Actual rate x​ (Actual hours​ - Standard hours​ allowed)

C

The direct material price variance can be defined as which of the​ following? A.Standard price x​ (Actual quantity used​ - Standard quantity​ allowed) B.Standard quantity allowed x​ (Actual price​ - Standard​ price) C.Actual quantity purchased x​ (Actual price​ - Standard​ price) D.Actual price x​ (Actual quantity used​ - Standard quantity​ allowed)

C

The variable overhead rate variance can be defined as which of the​ following? A.Actual rate x​ (Actual hours​ - Standard hours​ allowed) B.Standard hours allowed x​ (Actual rate​ - Standard​ rate) C.Actual hours x​ (Actual rate​ - Standard​ rate) D.Standard rate x​ (Actual hours​ - Standard hours​ allowed)

C

Which of the following is false with regards to the payback​ period? A.The payback period is the length of time it takes to recover the initial cost of the capital investment. B.All else being​ equal, a shorter payback period is more desirable than a longer payback period. C.It is computed as​ follows, regardless of whether cash flows are equal or​ unequal: Initial investment​ / Expected annual net cash inflow. D.The payback period gives no indication of the​ investment's profitability.

C

Which of the following is not an advantage of using standard​ costs? A.Standards serve as cost benchmarks. B.Standards can simplify bookkeeping. C.Standards can cause unintended behavioral consequences. D.Standards are useful for budgeting.

C

Which of the following is not an advantage that Caesars may experience from using standard​ costing? A.Simplified bookkeeping B.Creates cost benchmarks by which to judge actual costs C.Improved focus on operational performance measures and visual management D.Usefulness in budgeting

C

Which of the following methods of analyzing capital investments factors in the time value of​ money? A.Accounting rate of return B.Payback period C.Internal rate of return D.All of the above methods factor in the time value of money

C

The time value of money depends on which of the following​ factors? A.Number of periods B.Principal amount C.Interest rate D.All of the above

D

When potential capital investments of different size are​ compared, management should choose the one with the A.highest NPV. B.lowest NPV. C.lowest IRR. D.highest profitability index.

D

Which of the following is true about the Direct Labor Rate​ Variance? A.Tells managers how much of the labor variance is due to paying a higher or lower hourly wage rate than anticipated. B.The Human Resources and Production Supervisors are primarily responsible for explaining this variance. C.It is calculated as Actual Hours X​ (Actual Rate​ - Standard​ Rate). D.All of the above.

D

Which of the following is​ true? A.Practical standards are based on ideal conditions. B.Standards should never be updated. C.Ideal standards are based on currently attainable conditions. D.A standard cost is the budgeted cost for one unit.

D

Which of the following methods calculates the​ investment's unique rate of​ return? A.Net present value B.Accounting rate of return C.Payback period D.Internal rate of return

D

Which of the following statements is true about the payback period​ method? A.Payback period​ = Initial investment​ / Expected annual net cash inflow B.All else being​ equal, Caesars would want investments with shorter payback periods. C.Payback period focuses only on profitability. D.Both A and B are correct.

D

Actual Fixed Overhead - Budgeted Fixed Overhead = ?

Fixed MOH Budget Variance

Budgeted Fixed Overhead - Standard Fixed Overhead Allocated to Production = ?

Fixed MOH Volume Variance

How much sold for - Standard cost of input = ?

Gross Profit

Interest Rate that makes NPV = 0

Internal Rate of Return (IRR)

Initial Investment - Residual Value = ?

Depreciable Basis

Standard Rate (SR) * ( Actual Hours (AH) - Standard Hours Allowed (SHA) ) = ?

Direct Labor Efficiency Variance OR Variable Overhead Efficiency Variance

Actual Hours (AH) * ( Actual Rate (AR) - Standard Rate (SR) ) = ?

Direct Labor Variance OR Variable Overhead Rate Variance

Actual Quantity (AQ) *(Actual Price (AP) -Standard Price (SP) ) =? OR (AQ *AP) - (AQ * SP) = ?

Direct Materials Price Variance

Standard Price (SP) *(Actual Quantity (AQ) - Standard Quantity Allowed (SQA) ) = ? OR (AQ * SP) - (SQA * SP) =?

Direct Materials Quantity Variance

Fixed Overhead Budget Variance

Measures the Difference between the actual fixed MOH costs incurred and the budgeted fixed MOH costs

Fixed Overhead Volume Variance

Measures the difference between the budgeted fixed MOH costs and the standard allocated MOH costs.

Present Value - Initial Investment = ?

Net Present Value

Standard Quantity (SQ) * Standard Price (SP) = ?

Standard Cost of Input

Standard Hours Allowed * Standard Rate = ?

Standard Fixed Overhead Allocated to Production

Total Fixed Manufacturing Overhead / ( # of Hours * Total # of Something Expected to Produce) = ?

Standard Price

Total Variable Manufacturing Overhead / ( # Of Hours * Total # of Something Expected to Produce) = ?

Standard Price

Ideal Standards

Standards based on conditions that do not allow for any waste in the production process

Variable Overhead Efficiency Variance

Tells managers how much of the total variable MOH variance is due to using more or less of the allocation base than anticipated for the actual volume of output.

Direct Labor Rate Variance

Tells managers how much of the total variance is due to paying a different hourly wage rate than anticipated

Directs Materials Price Variance

Tells managers how much of the total variance is due to paying a different price than expected for direct materials

Direct Material Quantity Variance

Tells managers how much of the total variance is due to using a different quantity of direct materials than expected

Direct Labor Efficiency Variance

Tells managers how much of the total variance is due to using a greater or lesser amount of time being worked than anticipated

Standard Cost

The budgeted cost for a single unit of product