ACCT 2120 Final

A dollar received in the future is worth the same as a dollar received today.

False

Avoidable costs are irrelevant costs in decisions.

False

Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well.

False

Fixed costs are sunk costs.

False

In preference decisions, the profitability index and internal rate of return methods will rank projects in the same order of preference.

False

It is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

False

Joint costs should be allocated to the products as part of the analysis to determine if the products should be processed further after the split-off point.

False

Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions.

False

The cost of capital is the average rate of return that the company earns on its investments.

False

The higher the discount rate, the higher the present value of a given future cash flow.

False

The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the internal rate of return.

False

The present value of a cash flow increases as it moves further into the future.

False

The required rate of return is the maximum rate of return that an investment project must yield to the acceptable.

False

Variable costs are always relevant costs in decisions.

False

When dealing with a constrained resource, total contribution margin will be maximized by producing product that has the

Highest contribution margin per unit of constrained resource

The use of the regular MACRS tables instead of the optional MACRS straight line method of depreciation has the effect of

Increasing the present value of the depreciation tax deduction

The determining factor in deciding whether to accept a special order is the

Incremental net income or loss

The determining factor in deciding whether to process after the split-off point or accept a special order is the

Incremental net income or loss

ROI is computed as

Margin * Turnover

Residual income is computed as the excess of actual income over

Minimum required return

The margin is equal to

Net operating income / Sales

The capital budgeting methods that take into account the time value of money are

Net present value and internal rate of return

In a sell or process further decision, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off. III. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?

Only I

Which is the best indicator of the preferred project during the preference decision stage?

Project profitability index

The turnover is equal to

Sales / Average operating assets

A project is analyzed using the net present value method and the total net present value of its cash flows is a positive number. Evaluating whether or not to consider this project further is an example of which type of decision?

Screening

The two levels of decision making in deciding between alternative projects are referred to as

Screening and preference

The best gauge of the long-run profitability of a segment is

Segment margin

A segment's break-even point is computed by

Segment traceable fixed costs / Segment contribution margin ratio

That part of the manufacturing process where joint products can be recognized as separate products is called the

Split off point

An annuity is

The same amount received in multiple year in the future

A cost that would arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared is a

Traceable cost

A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives.

True

A relevant cost is one that differs between alternatives

True

A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

True

Fixed costs may be relevant in a decision.

True

Fixed costs that are traceable to one segment can become common if the company is divided into smaller segments.

True

If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

True

Sunk costs are never relevant in decision making.

True

The Federal tax depreciation method is called MACRS - Modified Accelerated Cost Recovery System

True

The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows.

True

The internal rate of return is the rate of return of an investment project over its useful life.

True

The payback method is most appropriate for projects whose cash flows do not extend far into the future.

True

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products can be recognized as separate products.

True

The term joint cost is used to describe the costs incurred up to the split-off point in a process involving joint products.

True

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource.

True

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.

True

A company has unlimited funds to invest at its discount rate. The company should invest in all projects having:

a net present value greater than zero.

A preference decision in capital budgeting:

is concerned with determining which of several acceptable alternatives is best.

A decrease in the discount rate used in computing the present value

will increase the present value of future cash flows

An increase in the discount rate used in computing present value

will reduce the present value of future cash flows

An increase in the discount rate:

will reduce the present value of future cash flows.

The internal rate of return method assumes that a project's cash flows are reinvested at the:

internal rate of return.

An example of an operating asset is

- Accounts receivable - Inventory

Factors to consider when evaluating whether to keep or drop a segment include

- Contribution margin lost due to dropping the segment - Costs traceable to the segment

When computing the present value, you need to know:

- How much you will receive in the future - When will the future amount be received - The discount rate

All other things the same, which of the following would decrease ROI

- Increase in average operating assets - Decrease in net operating income

The discount rate used by a company in a net present value analysis is a typically based on that company's "cost of capital" which is:

- Interest cost to borrow funds - Dividend cost to issue stock

Examples involving differential analysis include

- Make or buy decisions - Keeping or dropping segment decisions - Accepting special orders

Common costs

- Should not be arbitrarily allocated to segments - Are generally fixed costs - Would not disappear if any particular segment were eliminated

A cost that is not relevant in any decision is

- Unavoidable costs - Sunk costs - Future costs that do not differ in between alternatives

Which of the items listed below are features of MACRS

- Zero salvage value - Half-year convention - Assets useful life is predetermined by the government

Assuming tax rate of 30%, the after-tax amount of a cash revenue or expense item is

1 - 30% of the revenue or cost amount

Assuming a tax rate of 20%, the tax savings resulting from a depreciation deduction is

20% of the depreciation deduction

Assuming a tax rate of 30%, the tax savings resulting from a depreciation deduction is

30% of the depreciation deduction

Automobiles and computers are examples of which class life under MACRS?

5-year class property

Office furniture and fixtures are examples of which class life under MACRS?

7-year class property

A limited resource of some type that restricts the company's ability to satisfy demand is a

Constrained resource

Net operating income is

Earnings before interest and taxes

If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is

equal to 16%.

Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that:

generates the highest contribution margin per stamping machine hour.

Which of the following costs are always irrelevant in decision making?

sunk costs