ACTG 211: Chatpter 11

A company can increase its return on investment (ROI) by ______.

-reducing operating expenses -increasing sales

Disadvantages of decentralization include ______.

-spreading innovative ideas may be difficult -clashing objectives between departments and the organization -lack of coordination

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______.

20% Reason: Net operating income ÷ Average operating assets = $70,000 ÷ $350,000 = 20%.

ROI is a method used to evaluate ______.

investment centers, but not cost or profit centers

Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $___________

4,000

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 correct?

-The manager may decide to reject the project because it will lower the current ROI earned by his division. -Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.

True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.

True Reason: Decentralized operations often allow the lower-levels of management to make decisions because they are most familiar with the day-to-day operations.

Decision-making authority lies mostly with higher-level managers in strongly ________________organizations.

centralized

Which of the following are disadvantages of decentralization?

-Coordination among departments may be lacking. -Lower-level managers may make decisions without understanding the big picture. -Lower-level managers may have objectives that differ from the objectives of the entire organization.

Which of the following ratios are part of the ROI formula?

-Net operating income ÷ Sales -Net operating income ÷ Sales

Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers?

-Residual income -Return on investment (ROI)

Operating assets include ______.

-inventory -equipment -accounts receivable

ROI can be calculated as ______.

-margin × turnover -net operating income ÷ average operating assets

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $______________.

6,000

Which of the following statements is correct?

A manager might reject a proposal using ROI that the manager would accept using residual income.

Residual income =

NOI - (Average operating assets × Minimum rate of return)

Return on investment =

Net operating income ÷ Average operating assets

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

Which of the following statements is incorrect regarding responsibility accounting? Responsibility accounting holds managers accountable for the revenues and expenses over which they have control. Responsibility accounting links lower-level managers' decisions with the outcomes of those decisions. Responsibility accounting divides the organization into "responsibility centers" to evaluate managers' decisions. Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Net operating income ÷ Average operating assets =

Return on investment

The ROI formula typically uses ______.

average operating assets for the year

Decision-making authority lies mostly with higher-level managers in strongly ______ organizations.

centralized

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

Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.

decentralized, increase

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to ____________ (increase/decrease) from the current level of _______________% to a new return on investment (ROI) of __________%.

increase, 10% , 12%

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

Net operating income is income before __________ and ________________ .

interest and taxes

Residual income is a measure used to evaluate managers of ______ centers.

investment

The manager of a(n) ______________ center has control over costs, revenue, and investments in operating assets.

investment

The manager of a(n)____________ center has control over costs, revenue, and investments in operating assets.

investment

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress _________________ and excessive operating assets which can depress _______________.

margin , turnover

In order to fully understand how a manager's decisions can affect ROI, both ______________ and _______________ should be computed.

margin , turnover

EBIT is another term for ______.

net operating income Earnings Before Interest and Tax

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 net operating income that an investment center earns above the minimum required return on its average operating assets is ______.

residual income

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

Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) center____________.

responsibility

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through ________________ accounting systems.

responsibility

Which of the following is not one of the three primary types of responsibility centers?

sales

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______.

there are fewer managers that must be consulted before a decision is made