chapter 10 accnt

Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?

C. It is consistent with how plant and equipment items are reported on the balance sheet.

Consider the following three conditions: I. An increase in sales II. An increase in operating assets III. A reduction in expenses Which of the above conditions provide a way in which a manager can improve return on investment?

C. Only I and III

Residual income:

C. is the net operating income earned above a certain minimum required return on average operating assets.

When used in return on investment (ROI) calculations, operating assets do not include investments in land held for future use and investments in other companies.

TRUE

For the past year, Allargando Company recorded sales of $500,000 and average operating assets of $250,000. What is the margin that Allargando Company needed to earn in order to achieve an ROI of 12%?

A. 6.00% Turnover = Sales ÷ Average operating assets = $500,000 ÷ $250,000 = 2 ROI = Margin × Turnover 12% = Margin × 2 Margin = 12% ÷ 2 = 6%

All other things being the same, which of the following would increase the residual income?

A. Decrease in average operating assets.

Net operating income is defined as:

A. net income plus interest and taxes.

Given the following data: Average operating assets $250,000 Total liabilities $100,000 Sales $600,000 Contribution margin $150,000 Net operating income $30,000 Return on investment (ROI) would be:

B. 12% ROI = Net operating income ÷ Average operating assets = $30,000 ÷ $250,000 = 12%

Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The company's net operating income for the year was:

D. $60,000 ROI = Margin × Turnover 36% = Margin × 2.4 Margin = 36% ÷ 2.4 = 15% Margin = Net operating income ÷ Sales 15% = Net operating income ÷ $400,000 Net operating income = 15% × $400,000 = $60,000

Contribution income statements are used to measure the performance of:

D. both profit centers and investment centers.

A disadvantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.

FALSE

Margin equals net operating income divided by sales.

FALSE

Net operating income is income after interest and taxes.

FALSE

Operating assets include cash, accounts receivable, and inventory but not any depreciable fixed assets.

FALSE

Return on investment is superior to residual income as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole.

FALSE