CH 13 Learnsmart

Kanji Publishing has the following information available for its San Francisco Division: Sales revenue $20,000,000 Income $169,000 Invested capital Return on Investment 13% Invested capital for the company is Blank______.

$1,300,00 Reason: Correct. ROI = $169,000/invested capital = 13% $169,000 = 13% × invested capital $169,000/13%= invested capital $1,300,000 = invested capital.

Jasmine, Inc., a retailer of fine perfumes, has the following information available about its Southern division: Southern Division Sales Revenue $160,000 Division profit $16,000 Sales margin 10% Invested capital $40,000 Capital Turnover 4 Imputed interest rate 11% The residual income for the Southern division is Blank______.

$11,600 Reason: Correct. Imputed interest charge: $40,000 × 11% = $4,400. Residual income: $16,000 − $4,400 = $11,600.

Invested capital for Jasmine, Inc. was $45,000 at the beginning of June, $46,500 at the beginning of July and $51,000 at the beginning of August. If ROI is being calculated for the month of July, the amount that should be used as invested capital is Blank______.

$48,750 Reason: Correct. ($46,500 + $51,000)/2 = $48,750.

Jasmine, Inc., a retailer of fine perfumes, has the following information available about its Southern division: Southern Division Sales Revenue $160,000 Division profit $22,000 Residual income $15,500 Invested capital $60,000 Capital Turnover 4 ROI Imputed interest charge The imputed interest charge for the Southern division is Blank______. Multiple choice question.

$6,500 Reason: Correct. Imputed interest charge: Division profit − residual income = $22,000 − $15,500 = $6,500.

Kanji Publishing has the following information available for its San Francisco Division: Sales revenue $20,000,000 Income Invested capital $5,800,000 Return on Investment 15% The company's income is Blank______.

$870,000 Reason: Correct. ROI = income/$5,800,000 = 15% income = 15% × 5,800,000 = 870,000.

Jasmine, Inc. has company equity with a market value of $55,000 and $30,000 of debt at 10%. The company's tax rate is 35%. Jasmine's after-tax cost of debt is Blank______.

6.5% Reason: Correct. 10% × (1 − 35%) = 6.5%.

Jasmine, Inc. has company equity with a market value of $55,000 and debt with a market value of $32,000. The after-tax cost of debt is 7% and the cost of equity capital is 9%. Jasmine's weighted average cost of capital rounded to the nearest tenth of a percent is Blank______.

8.3% Reason: Correct. [(7% × 32,000) + (9% × $55,000)]/ ($32,000 + $55,000) = $7,190/$87,000 = 0.08264 = 8.3%.

Another term for gross book value of long-term assets is the _____ _____.

Blank 1: acquisition or historical Blank 2: cost

How much shareholder wealth is being created is explained by added analysis_____ _____.

Blank 1: economic Blank 2: value

Fill in the blank question. The behavior of managers throughout an organization must be directed toward top management's goals in order to obtain _____ _____.

Blank 1: goal Blank 2: congruence

Fill in the blank question. The use of performance measures designed to direct efforts toward organizational objectives is a method designed to obtain _____ _____.

Blank 1: goal Blank 2: congruence

The behavior of managers throughout an organization must be directed toward top management's goals in order to obtain _____ _____ .

Blank 1: goal Blank 2: congruence

Fill in the blank question. Because it incorporates a bias in favor of larger investment centers, _____ _____ should not be used to compare the performance of different-sized centers.

Blank 1: residual Blank 2: income

The amount of profit that remains after subtracting an imputed interest charge is _____ _____.

Blank 1: residual Blank 2: income

When the two factions in the ROI formula are multiplied together, the _____ _____ term cancels out in the denominator and numerator.

Blank 1: sales Blank 2: revenue

Which of the following measures would not be used to evaluate the manager of an investment center?

CPI

True or false: Centralization is often the result of the delegation of decision making as companies grow.

False

True or false: Like ROI, residual income can be used to compare different size investment centers.

False

True or false: When all other factors remain the same and invested capital decreases, return on investment will decrease.

False

True or false: When certain assets are controlled centrally, they are generally not allocated to investment centers.

False

True or false: Because all corporate costs have to be covered by the operations of divisions, corporate costs, interest, and income taxes should always be allocated to divisions when computing investment center profits.

False Reason: Correct. This is an option to make division managers aware of these costs, but not the only option.

Goal congruence is achieved when divisional performance is evaluated using Blank______.

RI

True or false: EVA is an indicator of how much shareholder wealth is being created.

True

True or false: When the gross book value method is used for computing total assets, the effect of depreciation methods does not impact ROI.

True

Which of the following statements is false?

Use of historical cost accounting is required by GAAP for internal reporting purposes.

In order to minimize costs and improve efficiency, some companies control certain assets centrally. The most common assets controlled centrally are Blank______.

accounts receivable cash

Gross book value of long-lived assets is Blank______.

acquisition cost

Net book value of long-lived assets is Blank______.

acquisition cost less accumulated depreciation

The cost of debt is the Blank______.

after-tax cost of interest payments

The definition of invested capital as average total productive assets is used when managers Blank______.

are directed by the company to keep nonproductive assets

When calculating ROI, residual income, and EVA, the amount of invested capital to be used should be the Blank______ the period.

average balance for

The number of sales dollars generated by every dollar of invested capital is Blank______.

capital turnover

In order to minimize costs and improve efficiency, some companies control certain assets centrally. The most common assets controlled centrally are Blank______.

cash accounts receivable

Using net book value of assets to compute ROI Blank______.

causes it to increase over time discourages investments in new equipment can cause a division's assets to become obsolete

In small organizations, decision making authority is usually Blank______.

centralized

When the net book value method is used to calculate total assets, Blank______. Multiple choice question.

comparisons between companies are more meaningful

The key issue in measuring an investment center's income is Blank______.

controllability

As organizations grow, some delegation of decision making becomes necessary which often results in Blank______.

decentralization

Decision making is spread throughout the organization when it is Blank______.

decentralized

Sales margin can be increased by Blank______.

decreasing expenses while holding sales revenue constant decreasing sales revenue while holding income constant

Invested capital is reduced by Blank______.

decreasing inventories

Sales margin can be increased by Blank______.

decreasing sales revenue while holding income constant decreasing expenses while holding sales revenue constant

The key factor in deciding how well the responsibility-accounting system works is the extent to which it Blank______.

directs managers efforts toward organizational goals

Using divisional profit alone as a measure of divisional success Blank______.

does not take into consideration how well divisions employed their invested capital can result in the perception that larger divisions are more successful does not consider the relative size of the divisions

As companies grow, management control systems Blank______. Multiple select question.

establish control guidelines, such as budgets require the use of of more formal information to maintain control

When a manager is directed by top management to maintain nonproductive assets, invested capital should be the average of total assets Blank______.

excluding nonproductive assets

A challenge of a decentralized organization is Blank______.

goal congruence

Using Blank______ book value to measure invested capital eliminates the misleading increase in ROI, residual income, and EVA over time.

gross

Average total assets is used as the measure of invested capital when the manager Blank______.

has control over all assets

Shareholder value analysis is used to determine Blank______.

how a product line affects the value of the firm to shareholders

Assuming no other changes, return on investment will be increased by Blank______.

improving sales margin increasing sales revenue by selling more units

Fill in the blank question. The term _____ means that the interest charge is estimated based upon the firm's minimum required rate of return on invested capital.

imputed

When a manager has authority over all assets, invested capital should be the average of total assets Blank______.

including nonproductive assets

The formula to calculate ROI is Blank______.

income divided by invested capital

Sales margin is Blank______.

income divided by sales revenue

Residual income encourages goal congruence when ROI does not because it Blank______. Multiple choice question.

incorporates the firm's minimum required rate of return on invested capital

Assume a company increases sales price which results in fewer units being sold. Variable cost per unit, total sales revenue and fixed expenses remained unchanged. As a result, sales margin will Blank______.

increase

Assuming no other changes, when capital turnover improves, ROI will Blank______.

increase

Capital turnover can be increased by Blank______.

increasing sale revenue and decreasing invested capital increasing sales revenue while holding invested capital constant reducing invested capital and holding total sales revenue constant

The cost of equity capital is the Blank______.

investment opportunity rate

EVA calculations define invested capital as total assets Blank______.

less current liabilities

To encourage managers to minimize resources tied up and assets and maximize the use of short-term credit to finance operations, invested capital is defined as total assets Blank______.

less current liabilities

Allocating corporate costs, interest and income taxes to an investment center Blank______.

make managers aware of other corporate costs that must be covered

Allocating corporate costs, interest and income taxes to an investment center Blank______. Multiple choice question.

make managers aware of other corporate costs that must be covered

Management participation in setting their own goals to improve organizational performance is Blank______.

management by objective

Goal congruence is achieved when Blank______.

managers of subunits throughout an organization strive to achieve the goals set by top management

Under the management by objectives approach, Blank______.

managers participate in setting goals which they then strive to achieve there is emphasis on obtaining goal congruence managers participate in identifying performance measures related to the goals they have set

Imputed interest rates are based upon the firm's Blank______.

minimum required rate of return on invested capital

An example of goal congruence is when a division manager decides to make a capital investment when the investment ROI is Blank______.

more than the cost of capital, but less than the current division return on investment

New equipment investments should be made if return on investment of the new equipment is Blank______.

more than the cost of capital, but less than the current division return on investment more than both the cost of capital and the current division return on investment

Mangers are discouraged from investing in new equipment when the Blank______ book value is used to value assets.

net

Using Blank______ book value to measure invested capital is more consistent with the definition of income.

net

Another term for acquisition cost less accumulated depreciation is Blank______ value.

net book

Surveys of corporate managers indicate that information based on a current value accounting system would Blank______.

not alter their decisions

When computing profit margin for an investment center, fixed costs traceable to a division should Blank______.

only be deducted if controllable by the division manager

When evaluating an investment center manager's performance, the income measure should be based on Blank______.

only controllable revenues and costs

A common performance measures used to evaluate a manager of an investment center is Blank______.

return on investment

Income divided by invested capital is Blank______.

return on investment

The percentage of each sales dollar that remains as profit after all expenses are covered is Blank______. Multiple choice question.

sales margin

The ROI formula is Blank______.

sales margin × capital turnover

Capital turnover is Blank______.

sales revenue divided by invested capital

Applying the residual income concept to individual product lines is called Blank______ analysis.

shareholder value

The use of ROI as a measure of operational performance focuses on Blank______.

the use of invested capital to general profits

Residual income is expressed as a Blank______.

total dollar amount

The key issue in evaluating a division as a viable economic entity is Blank______.

traceability of costs